Standards adopting release, supra note 31, at 66248-49.
    \142\ See 17 CFR 240.17Ad-22(d)(11).
---------------------------------------------------------------------------

    In addition to meeting these requirements, the Commission
understands that registered clearing agencies also specify actions to
be taken when their resources are insufficient to cover losses faced by
the registered clearing agency.\143\ These actions may include
assessment rights on clearing members, forced allocation, and contract
termination.
---------------------------------------------------------------------------

    \143\ See David Elliot, Central Counterparty Loss-Allocation
Rules, at tbl. 1A (Bank of England Financial Stability Paper No. 20,
Apr. 2013), available at http://www.bankofengland.co.uk/research/Documents/fspapers/fs_paper20.pdf (noting the loss-allocation rules
applied at the end of a clearing agency waterfall).
---------------------------------------------------------------------------

b. Financial Risk Management
    Registered clearing agencies that provide CCP services have a
variety of options available to mitigate the financial risks to which
they are exposed. While the manner in which a CCP chooses to mitigate
these financial risks depends on the precise nature of the CCP's
obligations, a common set of procedures have been implemented by

many CCPs to manage credit and liquidity risks. Broadly, these
procedures enable CCPs to manage their risks by reducing the likelihood
of member defaults, limiting potential losses and liquidity pressure in
the event of a member default, implementing mechanisms that allocate
losses across members, and providing adequate resources to cover losses
and meet payment obligations as required.
    Registered clearing agencies that provide CCP services must be able
to effectively measure their credit exposures in order to properly
manage those exposures. A CCP faces the risk that its exposure to a
member can change as a result of a change in prices, positions, or
both. CCPs can ascertain current credit exposures to each member by, in
some cases, marking each member's outstanding contracts to current
market prices and, to the extent permitted by their rules and supported
by law, by netting any gains against any losses. Rule 17Ad-22 includes
certain requirements related to financial risk management by CCPs,
including requirements to measure credit exposures to members and to
use margin requirements to limit these exposures. These requirements
are general in nature and provide registered clearing agencies
flexibility to measure credit risk and set margin. Within the bounds of
Rule 17Ad-22, CCPs may employ models and choose parameters that they
conclude are appropriate to the markets they serve.
    The current practices of registered clearing agencies that provide
CCP services generally include the following procedures: (1) Measuring
credit exposures at least once a day; (2) setting margin coverage at a
99% confidence level over some set period; (3) using risk-based models;
(4) establishing a fund that mutualizes losses of defaults by one or
more participants that exceed margin coverage; (5) maintaining
sufficient financial resources to withstand the default of at least the
largest participant family,\144\ and (6), in the case of security-based
swap transactions, maintaining enough financial resources to be able to
withstand the default of their two largest participant families.\145\
---------------------------------------------------------------------------

    \144\ See, e.g., IMF, Publication of Financial Sector Assessment
Program Documentation--Detailed Assessment of Observance of the
National Securities Clearing Corporation's Observance of the CPSS-
IOSCO Recommendations for Central Counterparties, at 10 (May 2010),
available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf (assessing NSCC's observance of Recommendation 5 from
the RCCP that a CCP should maintain sufficient financial resources
to withstand, at a minimum, the default of a participant to which it
has the largest exposure in extreme but plausible market conditions;
also noting that NSCC began evaluating itself against this standard
in 2009 and has backtesting results to support that it maintained
sufficient liquidity to cover the failure of the largest affiliated
family 99.98% of the time during the period from January through
April 2009); IMF, Publication of Financial Sector Assessment Program
Documentation--Detailed Assessment of Observance of the Fixed Income
Clearing Corporation--Government Securities Division's Observance of
the CPSS-IOSCO Recommendations for Central Counterparties, at 9-10
(2010), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10130.pdf (finding that FICC's Government Securities Division
observed the requirement to maintain enough financial resources to
meet the default of its largest participant in extreme but plausible
market conditions).
    \145\ See, e.g., CFTC-SEC Staff Roundtable on Clearing of Credit
Default Swaps, at 123 (Oct. 2010), available at<EMAIL_ADDRESS>(Stan Ivanov of ICE stating,
``[A]t ICE we look at two simultaneous defaults of the two biggest
losers upon extreme conditions. . . .''); see also ICE, CDS Client
Clearing Overview, at 8 (Aug. 2013), available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Client_Clearing_Overview.pdf (noting that the
guaranty fund covers the simultaneous default of the two largest
clearing members); CME Rulebook, Ch. 8H, Rule 8H07, available at
http://www.cmegroup.com/rulebook/CME/I/8H/8H.pdf.
---------------------------------------------------------------------------

i. Credit Risk
    Rule 17Ad-22(b)(1) requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to measure their
credit exposures at least once per day.\146\ Several CCPs have policies
and procedures designed to require measuring credit exposures multiple
times per day.
---------------------------------------------------------------------------

    \146\ See 17 CFR 240.17Ad-22(b)(1).
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(3) requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
sufficient financial resources to withstand, at a minimum, a default by
the participant family to which it has the largest exposure in extreme
but plausible market conditions.\147\ It further requires CCPs for
security-based swaps to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
additional financial resources sufficient to withstand, at a minimum, a
default by the two participant families to which it has the largest
exposures in extreme but plausible market conditions, in its capacity
as a CCP for security-based swaps.\148\ Accordingly, the Commission
notes that Rule 17Ad-22(b)(3) imposes a ``cover two'' requirement on
CCPs for security-based swaps in order to protect such CCPs from the
extreme jump-to-default risk and nonlinear payoffs associated with the
nature of the financial products they clear and the participants in the
markets they serve. Meanwhile, CCPs that clear products other than
security-based swaps are subject to a ``cover one'' requirement.\149\
Rule 17Ad-22(b)(3) also states that such policies and procedures may
provide that additional financial resources be maintained by the CCP in
combined or separately maintained funds.\150\
---------------------------------------------------------------------------

    \147\ See 17 CFR 240.17Ad-22(b)(2).
    \148\ See id.
    \149\ See CCA Standards adopting release, supra note 7, at 105-
112 (discussing the requirements for ``cover one'' and ``cover
two'').
    \150\ See id.
---------------------------------------------------------------------------

    Under existing rules, CCPs collect contributions from their members
for the purpose of establishing guaranty or clearing funds to mutualize
losses under extreme but plausible market conditions. Currently, the
guaranty funds or clearing funds consist of liquid assets and their
sizes vary depending on a number of factors, including the products the
CCP clears and the characteristics of CCP members. In particular, the
guaranty funds for CCPs that clear security-based swaps are relatively
larger, as measured by the size of the fund as a percentage of the
total and largest exposures, than the guaranty or clearing funds
maintained by CCPs for other financial instruments. CCPs generally take
the liquidity of collateral into account when determining member
obligations. Applying haircuts to assets posted as margin, among other
things, mitigates the liquidity risk associated with selling margin
assets in the event of a participant default.
    ICC recently modified its policies and procedures related to stress
testing frameworks indicating that the modifications were designed to
ensure that it meets regulatory requirements under Rule 17Ad-
22(b)(3).\151\
---------------------------------------------------------------------------

    \151\ See Self-Regulatory Organizations; ICE Clear Credit LLC;
Notice of Filing of Amendment 1 and Order Approving Proposed Rule
Change, as modified by Amendment 1 Thereto, to Update and Formalize
the ICC Stress Testing Framework, Exchange Act Release No. 34-77982
(June. 2, 2016).
---------------------------------------------------------------------------

ii. Collateral and Margin
    Rule 17Ad-22(b)(2) requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to use margin
requirements to limit their exposures to participants.\152\ This margin
can also be used to reduce a CCP's losses in the event of a participant
default.
---------------------------------------------------------------------------

    \152\ See 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    Registered clearing agencies that provide CCP services take
positions as substituted counterparties once their

trade guarantee goes into effect. Therefore, if a counterparty whose
obligations the registered clearing agency has guaranteed defaults, the
covered clearing agency may face market risk, which can take one of two
forms. First, a covered clearing agency is subject to the risk of
movement in the market prices of the defaulting member's open
positions. Where a seller defaults and fails to deliver a security, the
covered clearing agency may need to step into the market to buy the
security in order to complete settlement and deliver the security to
the buyer. Similarly, where a buyer defaults, the covered clearing
agency may need to meet payment obligations to the seller. Thus, in the
interval between when a member defaults and when the covered clearing
agency must meet its obligations as a substituted counterparty in order
to complete settlement, market price movements expose the covered
clearing agency to market risk. Second, the covered clearing agency may
need to liquidate non-cash margin collateral posted by the defaulting
member. The covered clearing agency is therefore exposed to the risk
that erosion in market prices of the collateral posted by the
defaulting member could result in the covered clearing agency having
insufficient financial resources to cover the losses in the defaulting
member's open positions.
    To manage their exposure to market risk resulting from fulfilling a
defaulting member's obligations, registered clearing agencies compute
margin requirements using inputs such as portfolio size, volatility,
and sensitivity to various risk factors that are likely to influence
security prices. Moreover, since the size of price movements is, in
part, a function of time, registered clearing agencies may limit their
exposure to market risk by marking participant positions to market
daily and, in some cases, more frequently. CCPs also use similar
factors to determine haircuts applied to assets posted by members in
satisfaction of margin requirements. To manage market risk associated
with collateral liquidation, CCPs consider the current prices of assets
posted as collateral and price volatility, asset liquidity, and the
correlation of collateral assets and a member's portfolio of open
positions. Further, because CCPs need to value their margin assets in
times of financial stress, their rulebooks may include features such as
market-maker domination charges that increase clearing fund obligations
regarding open positions of members in securities in which the member
serves as a dominant market maker. The reasoning behind this charge is
that, should a member default, liquidity in products in which the
member makes markets may fall, leaving these positions more difficult
to liquidate for non-defaulting participants.
    Rule 17Ab-22(b)(2) also requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide for
risk-based models and parameters to set margin requirements.\153\ The
generally recognized standard for such models and parameters is, under
normal market conditions, price movements that produce changes in
exposures that are expected to breach margin requirements or other risk
controls only 1% of the time (i.e., at a 99% confidence interval) over
a designated time horizon.\154\ Currently, CCPs use margin models to
ensure coverage at a single-tailed 99% confidence interval. Losses
beyond this level are typically covered by the CCP's guaranty fund.
This standard comports with existing international standards for bank
capital requirements, which require banks to measure market risks at a
99% confidence interval when determining regulatory capital
requirements.\155\
---------------------------------------------------------------------------

    \153\ See id.
    \154\ See 17 CFR 240.17Ad-22(a)(4).
    \155\ See BCBS, International Convergence of Capital Measurement
and Capital Standards: A Amended Framework (June 2004), available at
http://www.bis.org/publ/bcbs107.pdf; see also Darryll Hendricks &
Beverly Hirtle, New Capital Rule Signals Supervisory Shift
(Secondary Mortgage Mkts, Sept. 1998), available at http://www.freddiemac.com/finance/smm/july98/pdfs/hen_hirt.pdf.
    Prior to this standard, banks measured value-at-risk using a
range of confidence intervals from 90-99%. See BCBS, An Internal
Model-Based Approach to Market Risk Capital Requirements, at 12
(Apr. 1995), available at http://www.bis.org/publ/bcbs17.pdf. When
determining the minimum quantitative standards for calculating risk
measurements, the BCBS noted then the importance of specifying ``a
common and relatively conservative confidence level,'' choosing the
99% confidence interval over other less conservative measures. See
id.
    Since its adoption in 1998, the standard has become a generally
recognized practice of banks to quantify credit risk as the worst
expected loss that a portfolio might incur over an appropriate time
horizon at a 99% confidence interval. See Kenji Nishiguchi, Hiroshi
Kawai & Takanori Sazaki, Capital Allocation and Bank Management
Based on the Quantification of Credit Risk, at 83 (FRBNY Econ.
Policy Rev., Oct. 1998), available at http://www.newyorkfed.org/research/epr/98v04n3/9810nish.pdf; Jeff Aziz & Narat Charupat,
Calculating Credit Exposure and Credit Loss: A Case Study, at 34
(Sept. 1998), available at http://www.bis.org/bcbs/ca/alrequse98.pdf.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(2) also requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to review such
margin requirements and the related risk-based models and parameters at
least monthly.\156\ CCPs are accordingly required to establish a model
validation process that evaluates the adequacy of margin models,
parameters, and assumptions. Additionally, CCPs are required to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for an annual model
validation consisting of evaluating the performance of the CCPs' margin
models and the related parameters and assumptions associated with such
models by a qualified person who is free from influence from the
persons responsible for the development or operation of the models
being validated.\157\
---------------------------------------------------------------------------

    \156\ See 17 CFR 240.17Ad-22(b)(2).
    \157\ See 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

    To meet resource requirements under Rule 17Ad-22(b)(3),\158\ ICC
recently adjusted its risk calculations and models to account for
accumulation of wrong-way risk at the portfolio level.\159\
---------------------------------------------------------------------------

    \158\ See Self-Regulatory Organizations; ICE Clear Credit LLC;
Notice of Filing of Proposed Rule Change, Exchange Act Release No.
34-75119 (June 8, 2015) at note 7.
    \159\ See Self-Regulatory Organizations; ICE Clear Credit LLC;
Notice of Filing of Amendments No. 1 and 2 and Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by
Amendments No. 1 and 2, to Revise the ICC Risk Management Framework,
Exchange Act Release No. 34-75887 (Sept. 10, 2015).
---------------------------------------------------------------------------

iii. Liquidity Risk
    In addition to credit risk and the aforementioned market risk,
registered clearing agencies also face liquidity or funding risk.
Currently, covered clearing agencies have varying degrees of formality
with respect to their standards and practices relating to liquidity
shortfalls. To complete the settlement process, registered clearing
agencies that employ netting rely on incoming payments from
participants in net debit positions in order to make payments to
participants in net credit positions. If a participant does not have
sufficient funds or securities in the form required to fulfill a
payment obligation immediately when due (even though it may be able to
pay at some future time), or if a settlement bank is unable to make an
incoming payment on behalf of a participant, a registered clearing
agency may face a funding shortfall. Such funding shortfalls may occur
due to a lack of financial resources necessary to meet delivery or
payment obligations, however even registered clearing agencies that do
hold sufficient financial resources to meet their obligations may not
carry those in the

form required for delivery or payments to participants.
    A registered clearing agency that provides CCP services may hold
additional financial resources to cover potential funding shortfalls in
the form of collateral. As noted above, CCPs may take the liquidity of
collateral into account when determining member obligations. Applying
haircuts to illiquid assets posted as margin mitigates the liquidity
risk associated with selling margin assets in the event of participant
default. Some registered CCPs also arrange for liquidity provision from
other financial institutions using lines of credit. Additionally, some
registered clearing agencies enter into prearranged funding agreements
with their members pursuant to their rules. For example, members of one
registered clearing agency are obligated to enter into repurchase
agreements against securities that would have been delivered to a
defaulting member.
    ICC has disclosed a liquidity management program that includes
stress testing of liquidity requirements to meet settlement obligations
over a range of different horizons under extreme but plausible market
conditions.\160\ ICC also reports that its liquidity resources include
cash, U.S. Treasury securities, and committed repurchase
agreements.\161\
---------------------------------------------------------------------------

    \160\ See ICE Clear Credit Disclosure Framework, note 145 supra,
at 18.
    \161\ See id.
---------------------------------------------------------------------------

c. Settlement
    Rule 17Ad-22(d)(5) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to employ money settlement arrangements
that eliminate or strictly limit the clearing agency's settlement bank
risks and require funds transfers to the clearing agency to be final
when effected.\162\ Rule 17Ad-22(d)(12) further requires a registered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to ensure that final
settlement occurs no later than the end of the settlement day.\163\
Accordingly, for example, certain registered clearing agencies have
policies and procedures that provide for final settlement of securities
transfers no later than the end of the day of the transaction. Rule
17Ad-22(d)(15) also requires a registered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to state to its participants the clearing agency's
obligations with respect to physical deliveries and identify and manage
the risks from these obligations.\164\
---------------------------------------------------------------------------

    \162\ See 17 CFR 240.17Ad-22(d)(5).
    \163\ See 17 CFR 240.17Ad-22(d)(12).
    \164\ See 17 CFR 240.17Ad-22(d)(15).
---------------------------------------------------------------------------

d. CSDs and Exchange-of-Value Settlement Systems
i. CSDs
    Rule 17Ad-22(d)(10) requires a registered clearing agency that
provides CSD services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
securities in an immobilized or dematerialized form for transfer by
book entry to the greatest extent possible. Currently, some securities,
such as mutual fund securities and government securities, are issued
primarily or solely on a dematerialized basis. Dematerialized shares do
not exist as physical certificates but are held in book entry form in
the name of the owner (which, where the master security holder file is
not maintained on paper due to the use of technology, is also referred
to as electronic custody). Other types of securities may be issued in
the form of one or more physical security certificates, which could be
held by the CSD to facilitate immobilization. Alternatively, securities
may be held by the beneficial owner in record name, in the form of
book-entry positions, where the issuer offers the ability for a
security holder to hold through the direct registration system. Whether
immobilization occurs at the CSD or through direct registration depends
on what is provided for by the issuer.
    When a trade occurs, the depository's accounting system credits one
participant account and debits another participant account.
Transactions between counterparties in dematerialized shares are
recorded by the registrar responsible for maintaining the paper or
electronic register of security holders, such as by a transfer agent,
and reflected in customer accounts.
    Registered CSDs currently reconcile ownership positions in
securities against CSD ownership positions on the security holders list
daily, mitigating the risk of unauthorized creation or deletion of
shares.
ii. Exchange-of-Value Settlement Systems
    Rule 17Ad-22(d)(13) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to eliminate principal risk by linking
securities transfers to funds transfers in a way that achieves delivery
versus payment,\165\ which serves to link obligations by conditioning
the final settlement of one upon the final settlement of the other. One
registered clearing agency, for example, operates a Model 2 DVP system
that provides for gross securities transfers during the day followed by
an end-of-day net funds settlement. Under the rules governing the
clearing agency's system, the delivering party in a DVP transaction is
assured that it will be paid for the securities once they are credited
to the receiving party's securities account. DVP eliminates the risk
that a buyer would lose the purchase price of a security purchased from
a defaulting seller or that a seller would lose the sold security
without receiving payment for a security acquired by a defaulting
buyer.
---------------------------------------------------------------------------

    \165\ See 17 CFR 240.17Ad-22(d)(13); see also Clearing Agency
Standards adopting release, supra note 31, at 66256.
---------------------------------------------------------------------------

    For example, one registered clearing agency has rules governing its
continuous net settlement (``CNS'') system, under which it becomes the
counterparty for settlement purposes at the point its trade guarantee
attaches, thereby assuming the obligation of its members that are
receiving securities to receive and pay for those securities, and the
obligation of members that are delivering securities to make the
delivery. Unless the clearing agency has invoked its default rules, it
is not obligated to make those deliveries until it receives from
members with delivery obligations deliveries of such securities;
rather, deliveries that come into CNS ordinarily are promptly
redelivered to parties that are entitled to receive them through an
allocation algorithm. Members are obligated to take and pay for
securities allocated to them in the CNS process. These rules also
provide mechanisms to allow receiving members a right to receive high
priority in the allocation of deliveries, and also permit a member to
buy-in long positions that have not been delivered to it by the close
of business on the scheduled settlement date.
e. Default Management
i. Participant-Default Rules and Procedures
    Rule 17Ad-22(d)(11) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to make key aspects of its default
procedures publicly available and establish default procedures that
ensure it can take timely action to contain losses and

liquidity pressures and to continue meeting its obligations in the
event of a participant default. The rules of registered clearing
agencies typically state what constitutes a default, identify whether
the board or a committee of the board may make that determination, and
describe what steps the clearing agency may take to protect itself and
its members. In this regard, registered clearing agencies typically
attempt, among other things, to hedge and liquidate a defaulting
member's positions. Rules of registered clearing agencies also include
information about the allocation of losses across available financial
resources. The registered clearing agency the Commission anticipates
will fall within the definition of covered clearing agency as a result
of the proposed amendments conduct testing of its default procedures at
least annually, including participation by clearing members.
ii. Segregation and Portability
    No rule under the Exchange Act currently requires a registered
clearing agency through its written policies and procedures to enable
the portability of positions of a member's customers and the collateral
provided in connection therewith. Additionally, no rule under the
Exchange Act currently requires a registered clearing agency through
its written policies and procedures to protect the positions of a
member's customers from the default or insolvency of the member.\166\
---------------------------------------------------------------------------

    \166\ See CCA Standards adopting release, supra note 7, at 189-
193 (discussing existing rules applicable to registered broker-
dealers that address customer security positions and funds in cash
securities and listed option markets, thereby promoting segregation
and portability at the broker-dealer level).
---------------------------------------------------------------------------

    ICC maintains rules and procedures that facilitate the segregation
and portability of positions of a clearing member's customers and the
collateral provided to it with respect to those positions.\167\ ICC's
rules are designed to comply with the CFTC's requirements addressing
custody, segregation, and investment of customer margin provided in
respect of cleared swaps. ICC thus segregates customer funds pursuant
to the ``legally segregated, operationally commingled'' (``LSOC'')
model found under Part 22 of the CFTC Regulations.\168\ Under the LSOC
model if a customer defaults, ICC may apply clearing member funds and
defaulting customer funds to cover losses, but may not use collateral
provided by non-defaulting customers. Additionally, under ICC rules,
each clearing member that carries customer positions must, upon request
of a customer, transfer or novate that customers position to one or
more other clearing members designated by the customer, subject to the
consent of the transferee; satisfaction by the customer of any margin
requirements imposed by the transferor on any positions remaining at
the transferor; and the completion of all required transfer
documentation.\169\
---------------------------------------------------------------------------

    \167\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 26.
    \168\ See id.
    \169\ See id.
---------------------------------------------------------------------------

f. General Business and Operational Risk Management
i. General Business Risk
    Business risk refers to the risks and potential losses arising from
a registered clearing agency's administration and operation as a
business enterprise that are neither related to member default nor
separately covered by financial resources designated to mitigate credit
or liquidity risk. While Rule 17Ad-22 sets forth requirements for
registered clearing agencies to identify, monitor, and mitigate or
eliminate a broad array of risks through written policies and
procedures, no rule under the Exchange Act expressly requires a
registered clearing agency through its written policies and procedures
to identify, monitor, and manage general business risk or to meet a
capital requirement. Registered clearing agencies currently have
certain internal controls in place to mitigate business risk. Some
clearing agencies, for instance, have policies and procedures that
identify an auditor who is responsible for examining accounts, records,
and transactions, as well as other duties prescribed in the audit
program. Other registered clearing agencies allow members to
collectively audit the books of the clearing agency on an annual basis,
at their own expense.
    ICC maintains financial resources that, pursuant to regulation as a
SIDCO by the CFTC,\170\ are sufficient to cover twelve months of
operating costs.\171\ ICC has publicly stated its belief that an
orderly wind-down of its business would take between six and twelve
months.\172\
---------------------------------------------------------------------------

    \170\ See 17 CFR 39.39(d).
    \171\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 27.
    \172\ See id.
---------------------------------------------------------------------------

ii. Custody and Investment Risks
    Registered clearing agencies face default risk from commercial
banks that they use to effect money transfers among participants, to
hold overnight deposits, and to safeguard collateral. Rule 17Ad-
22(d)(3) requires a registered clearing agency to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to (i) hold assets in a manner that minimizes risk of loss or
delay in its access to them; and (ii) invest assets in instruments with
minimal credit, market, and liquidity risks.\173\ Registered clearing
agencies currently seek to minimize the risk of loss or delay in access
by holding assets that are highly liquid (e.g., cash, U.S. Treasury
securities, or securities issued by a U.S. government agency) and by
engaging banks to custody the assets and facilitate settlement.
Typically, registered clearing agencies take steps to ensure that
assets held in custody are protected from claims from the custodian's
creditors using trust accounts or equivalent arrangements.
Additionally, designated clearing agencies may have access to credit at
a Federal Reserve Bank or other relevant central bank, to the extent
such services are not already available as the result of other laws and
regulations.\174\
---------------------------------------------------------------------------

    \173\ See 17 CFR 240.17Ad-22(d)(3).
    \174\ See CCA Standards adopting release, supra note 7, at 159
(discussing the requirements under Rule 17Ad-22(e)(7)(iii)).
---------------------------------------------------------------------------

    ICC's Treasury Operations Policies and Procedures provide for the
use of a Federal Reserve Account, the use of a committed repurchase
facility and outside investment managers to invest guarantee fund and
margin cash.\175\
---------------------------------------------------------------------------

    \175\ See ``Self-Regulatory Organizations; ICE Clear Credit LLC;
Order Approving Proposed Rule Change to Revise the ICC Treasury
Operations Policies and Procedures'' Exchange Act Release No. 34-
74456 (Mar. 6, 2015).
---------------------------------------------------------------------------

iii. Operational Risk
    Operational risk refers to a broad category of potential losses
arising from deficiencies in internal processes, personnel, and
information technology. Registered clearing agencies face operational
risk from both internal and external sources, including human error,
system failures, security breaches, and natural or man-made disasters.
Rule 17Ad-22(d)(4) requires a registered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify sources of operational risk and to
minimize those risks through the development of appropriate systems,
controls and procedures.\176\ It also requires a registered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to (i) implement systems that are
reliable and secure, and have adequate, scalable capacity; and (ii)
have business continuity plans that

allow for timely recovery of operations and fulfillment of a clearing
agency's obligations.\177\
---------------------------------------------------------------------------

    \176\ See 17 CFR 240.17Ad-22(d)(4).
    \177\ See id.
---------------------------------------------------------------------------

    As a result, registered clearing agencies have developed and
currently maintain plans to ensure the safeguarding of securities and
funds, the integrity of automated data processing systems, and the
recovery of securities, funds, or data under a variety of loss or
destruction scenarios.\178\ These plans may include turning operations
over to a secondary site that is located a sufficient distance from the
primary location to ensure a distinct geographic risk profile. In
addition, registered clearing agencies generally maintain an internal
audit department to review the adequacy of their internal controls,
procedures, and records with respect to operational risks. Some
registered clearing agencies also engage independent accountants to
perform an annual study and evaluation of the internal controls
relating to their operations.\179\
---------------------------------------------------------------------------

    \178\ Many of these practices had been previously developed
pursuant to other Commission requirements. See CCA Standards
adopting release, supra note 7, at 19-21, 181-182, 294-295
(discussing related requirements under Regulation SCI).
    \179\ See, e.g., NSCC, Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Nov. 2011),
available at http://www.dtcc.com/legal/policy-and-compliance.aspx.
---------------------------------------------------------------------------

    The Commission adopted Regulation SCI in November 2014, in part, to
reduce the occurrence of systems issues, and enhance resiliency when
systems problems do occur at certain SROs, such as registered clearing
agencies. In particular, Regulation SCI requires that clearance and
settlement systems be designed to accomplish end-of-day settlement on
the day of a wide-scale disruption. Accordingly, Regulation SCI
requires registered clearing agencies to have policies and procedures
in place for business continuity as well as disaster recovery plans
that include maintaining sufficiently resilient and geographically
diverse backup and recovery capabilities that are reasonably designed
to achieve two-hour resumption of critical SCI systems following a
wide-scale disruption.\180\
---------------------------------------------------------------------------

    \180\ See 17 CFR 242.1001(a)(2).
---------------------------------------------------------------------------

g. Access
i. Access and Participation Requirements
    Rule 17Ad-22(b)(5) requires a registered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide the
opportunity for a person that does not perform any dealer or security-
based swap dealer services to obtain membership on fair and reasonable
terms at the clearing agency to clear securities for itself or on
behalf of other persons.\181\ Rule 17Ad-22(b)(6) requires a registered
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to have membership standards that do not require participants
to maintain a portfolio of any minimum size or a minimum transaction
volume.\182\ Rule 17Ad-22(b)(7) requires a registered clearing agency
that provides CCP services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to provide
a person that maintains net capital equal or greater than $50 million
with the ability to obtain membership at the clearing agency, provided
such persons are able to comply with reasonable membership standards,
with higher net capital requirements permissible subject to Commission
approval.\183\
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    \181\ See 17 CFR 240.17Ad-22(b)(5).
    \182\ See 17 CFR 240.17Ad-22(b)(6).
    \183\ See 17 CFR 240.17Ad-22(b)(7).
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    In addition, Rule 17Ad-22(d)(2) requires a registered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the clearing agency, have
procedures in place to monitor that participation requirements are met
on an ongoing basis, and have participation requirements that are
objective and publicly disclosed, and permit fair and open access.\184\
Typically, a registered clearing agency's rulebook requires applicants
for membership to provide certain financial and operational information
prior to being admitted as a member and on an ongoing basis as a
condition of continuing membership. Registered clearing agencies review
this information to ensure that the applicant has the operational
capability to meet the other demands of interfacing with the clearing
agency. In particular, registered clearing agencies typically require
that an applicant demonstrate that it has adequate personnel capable of
handling transactions with the clearing agency and adequate physical
facilities, books and records, and procedures to fulfill its
anticipated commitments to, and to meet the operational requirements
of, the clearing agency and other members with necessary promptness and
accuracy. As a result, an applicant needs to demonstrate that it has
adequate personnel capable of handling transactions with the clearing
agency and adequate physical facilities, books and records, and
procedures to conform to conditions or requirements in these areas that
the clearing agency reasonably may deem necessary for its protection.
Registered clearing agencies have published these requirements on their
Web sites.
---------------------------------------------------------------------------

    \184\ See 17 CFR 240.17Ad-22(d)(2).
---------------------------------------------------------------------------

    Registered clearing agencies use an ongoing monitoring process to
help them understand relevant changes in the financial condition of
their members and to mitigate credit risk exposure of the clearing
agency to its members. The risk management staff analyzes financial
statements filed with regulators, as well as information obtained from
other SROs and gathered from various financial publications, so that
the clearing agency may evaluate, for instance, whether members
maintain sufficient financial resources and robust operational capacity
to meet their obligations as participants in the clearing agency
pursuant to existing Rule 17Ad-22(d)(2)(i).
    Table 1 contains membership statistics for the registered clearing
agencies likely to be affected by the proposed rule amendment.\185\
Current membership generally reflects features of cleared markets. The
decision to become a clearing member depends on the products being
cleared, the structure of these asset markets as well as the current
state of regulation for cleared markets.
---------------------------------------------------------------------------

    \185\ See supra Part III.B.
---------------------------------------------------------------------------

ii. Tiered Participation Arrangements
    Tiered participation arrangements occur when clearing members
(direct participants) provide access to clearing services to third
parties (indirect participants). No rule under the Exchange Act
currently requires a registered clearing agency through its written
policies and procedures to identify, monitor, and manage material risks
arising from tiered participation arrangements. The Commission
understands, however, that certain registered clearing agencies have
policies and procedures currently in place in order to identify,
monitor, or manage such arrangements. Specifically, such clearing
agencies rely on information gathered from, and distributed by, direct
participants in order to manage these tiered participation
arrangements. For example, under some covered clearing

agencies' rules, direct participants generally have the responsibility
to indicate to the clearing agency whether a transaction submitted for
clearing represents a proprietary or customer position. Such rules
further require direct participants to calculate, and notify the
clearing agency of the value of, each customer's collateral. Direct
participants also communicate with indirect participants regarding the
clearing agency's margin and other requirements.
    ICC does not currently have tiered participation arrangements.\186\
---------------------------------------------------------------------------

    \186\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 32.
---------------------------------------------------------------------------

iii. Links
    Rule 17Ad-22(d)(7) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to evaluate the potential sources of
risks that can arise when the clearing agency establishes links either
cross-border or domestically to clear or settle trades, and ensure that
the risks are managed prudently on an ongoing basis.\187\
---------------------------------------------------------------------------

    \187\ See 17 CFR 240.17Ad-22(d)(7).
---------------------------------------------------------------------------

    Each registered clearing agency is linked to other clearing
organizations, trading platforms, and service providers. For instance,
a link between U.S. and Canadian clearing agencies allows U.S. members
to clear and settle valued securities transactions with participants of
a Canadian securities depository. The link is designed to facilitate
cross-border transactions by allowing members to use a single
depository interface for U.S. and Canadian dollar transactions and
eliminate the need for split inventories.\188\ Registered clearing
agencies that provide CCP services currently establish links to allow
members to realize collateral and other operational efficiencies. ICC
does not offer inter-operability links with other CCPs.
---------------------------------------------------------------------------

    \188\ See Exchange Act Release No. 34-52784 (Nov. 16, 2005), 71
FR 70902 (Nov. 23, 2005); Exchange Act Release No. 34-55239 (Feb. 5,
2007), 72 FR 6797 (Feb. 13, 2007).
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h. Efficiency
i. Efficiency and Effectiveness
    Rule 17Ad-22(d)(6) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to require the clearing agency to be
cost-effective in meeting the requirements of participants while
maintaining safe and secure operations.\189\ Registered clearing
agencies have procedures to control costs and to regularly review
pricing levels against operating costs. These clearing agencies may use
a formal budgeting process to control expenditures, and may review
pricing levels against their costs of operation during the annual
budget process. Registered clearing agencies also analyze workflows in
order to make recommendations to improve their operating efficiency.
---------------------------------------------------------------------------

    \189\ See 17 CFR 240.17Ad-22(d)(6).
---------------------------------------------------------------------------

ii. Communication Procedures and Standards
    Although no rule under the Exchange Act expressly requires a
registered clearing agency through its written policies and procedures
to use or accommodate relevant internationally accepted communication
procedures and standards, the Commission believes that registered
clearing agencies already use these standards. Registered clearing
agencies typically rely on electronic communication with market
participants, including members. For example, some registered clearing
agencies have rules in place stating that clearing members must
retrieve instructions, notices, reports, data, and other items and
information from the clearing agency through electronic data retrieval
systems. Some registered clearing agencies have the ability to rely on
signatures transmitted, recorded, or stored through electronic,
optical, or similar means. Other clearing agencies have policies and
procedures that provide for certain emergency meetings using telephonic
or other electronic notice.
i. Transparency
    Transparency requirements and disclosures by registered clearing
agencies serve to limit the size of potential information asymmetries
between registered clearing agencies, their members, and market
participants. Rule 17Ad-22(d)(9) requires a registered clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide market participants with
sufficient information for them to identify and evaluate risks and
costs associated with using the clearing agency's services.\190\
Information regarding the operations and services of each registered
clearing agency can be viewed publicly either on the clearing agency's
Web site or a Web site maintained by an affiliate of the clearing
agency. Because registered clearing agencies are SROs,\191\ they must
file with the Commission any proposed rule or any proposed change, in
addition to, or deletion from its rules, and the Commission reviews all
proposed rule changes and publishes them for comment.\192\
---------------------------------------------------------------------------

    \190\ See 17 CFR 240.17Ad-22(d)(9).
    \191\ See supra Part I.A.1.
    \192\ See supra notes 17-18.
---------------------------------------------------------------------------

    Besides providing market participants with information on the risks
and costs associated with their services, registered clearing agencies
regularly provide information to their members to assist them in
managing their risk exposures and potential funding obligations. Some
of these disclosures may be common to all members--such as information
about the composition of clearing fund assets--while other disclosures
that concern particular positions or obligations may only be made to
individual members.
    As required by CFTC regulations,\193\ ICC completes and publicly
discloses its responses to the Disclosure Framework for Financial
Market Infrastructures published by the CPMI-IOSCO. Besides a
principle-by-principle narrative disclosure describing the registered
clearing agency's approach to observing the PFMI, the public disclosure
also includes an executive summary, a summary of major changes since
the last update of the disclosure, and a general background on the
registered clearing agency that includes descriptions of the registered
clearing agency and the markets it serves, the registered clearing
agency's general organization, legal and regulatory framework, and
systems design and operations.\194\
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    \193\ See 17 CFR 39.37.
    \194\ See ICE Clear Credit Disclosure Framework, supra note 145,
at 2.
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C. Consideration of Benefits, Costs, and the Effect on Competition,
Efficiency, and Capital Formation

    The discussion below sets forth the potential economic effects
stemming from the proposed amendments to Rule 17Ad-22(a) and considers
the effects of the rules on efficiency, competition, and capital
formation. The aggregate economic effects arising from the proposed
amendments arise from two sources, the proposed amendments' likely
effects on existing registered clearing agencies and the proposed
amendments' likely effects on clearing agencies that may register with
the Commission in the future. In this section, we consider the
potential benefits, costs, and likely effects on efficiency,
competition, and capital formation that may arise from these two
sources separately. As discussed below, the Commission acknowledges
that, when viewed in isolation, the economic effects related to
existing registered

clearing agencies are likely to be low in magnitude. Nevertheless, when
taken together with the economic effects related to future registrants,
the Commission preliminarily believes that the economic effects of the
proposed amendments could be substantial, particularly insofar as they
subject future registrants that are CCPs, CSDs, and SSSs, and are thus
likely to play critical roles in the clearance and settlement system,
to the enhanced requirements in Rule 17Ad-22(e).
1. Economic Effects Related to Registered Clearing Agencies
    As noted above, the Commission anticipates that, as a result of the
proposed amendments to Rule 17Ad-22(a), one additional registered
clearing agency, ICC, would meet the definition of covered clearing
agency. The Commission preliminarily believes that the addition of ICC
as a covered clearing agency will incrementally extend the systemic
benefits of risk management discussed in the CCA Standards adopting
release. These benefits consist of improved financial stability,\195\ a
reduction in the ambiguity associated with holding cleared assets in
the presence of credit and settlement risk, and a reduction in market
fragmentation arising from different requirements across regulatory
regimes.\196\ The Commission preliminarily believes that the extension
of these benefits will likely be incremental and only appear to the
extent that the proposed amendments would result in changes to ICC
policies and procedures because, as mentioned above, ICC is also
regulated as a SIDCO by the CFTC \197\ and because Rule 17Ad-22(e) is
consistent with comparable regulatory provisions adopted by the
CFTC.\198\ The following section attempts to estimate particular
benefits that could accrue to ICC and its members as a result of ICC
being more likely to qualify as a QCCP under the proposed rules.\199\
The sections that follow also discuss the costs and the effect on
efficiency, competition and capital formation of ICC becoming a covered
clearing agency.
---------------------------------------------------------------------------

    \195\ See CCA Standards adopting release, supra note 7, at 376-
380.
    \196\ See CCA Standards adopting release, supra note 7, at 302-
317.
    \197\ See supra Part III.B.1.
    \198\ See infra Part III.C.1.b.
    \199\ The BCBS capital framework, as well as the rules adopted
by the FRB and Office of the Comptroller of the Currency consistent
with that framework, applies lower risk weights of two or four
percent to indirect exposures of banks to QCCPs. See Capital
Requirements for Bank Exposures to Central Counterparties (Apr.
2014), available at http://www.bis.org/publ/bcbs282.pdf (``BCBS
capital framework''); See also Regulatory Capital Rules: Regulatory
Capital, Implementation of Basel III, Capital Adequacy, Transition
Provisions, Prompt Corrective Action, Standardized Approach for
Risk-weighted Assets, Market Discipline and Disclosure Requirements,
Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital
Rule, 76 FR 62017, 62099 (Oct. 11, 2013), at 62103.
---------------------------------------------------------------------------

a. Benefits
    Pursuant to the proposed amendments ICC will be more likely to
qualify as a QCCP with respect to cleared security-based swap
transactions in non-U.S. jurisdictions that have adopted the BCBS
capital framework's QCCP definition. Under the BCBS capital framework,
a QCCP is defined as an entity operating as a CCP that is prudentially
supervised in a jurisdiction where the relevant regulator has
established, and publicly indicated that it applies to the CCP on an
ongoing basis, domestic rules and regulations that are consistent with
the PFMI. Because Rule 17Ad-22(e) is consistent with the PFMI, the
Commission preliminarily believes that foreign bank clearing members as
well as foreign banks clearing indirectly through clearing members of
ICC may benefit from its qualification as a QCCP. In particular ICC's
qualification as a QCCP would result in its foreign bank clearing
members and foreign bank indirect participants facing lower capital
requirements with respect to cleared security-based swap transactions
because, under the BCBS capital framework, capital requirements for
bank exposures to QCCPs are lower than capital requirements for bank
exposures to non-qualifying CCPs for these products. Moreover, ICC's
non-U.S. bank clearing members may experience lower capital
requirements with respect to cleared security-based swap transactions
relative to the baseline in which foreign banking regulators do not
determine ICC to be a QCCP. \200\
---------------------------------------------------------------------------

    \200\ The Commission notes that benefits to bank clearing
members may be contingent upon regulators in other jurisdictions
taking action to recognize the QCCP status of the registered
clearing agency that will become a covered clearing agency due to
the proposed amendments.
---------------------------------------------------------------------------

    The BCBS capital framework affects capital requirements for bank
exposures to central counterparties in two important ways. The first
relates to trade exposures, defined under the BCBS capital framework as
the current and potential future exposure of a clearing member or
indirect participant in a CCP arising from OTC derivatives, exchange-
traded derivatives transactions, and securities financing transactions.
If these exposures are held against a QCCP, they will be assigned a
risk weight of 2%. In contrast, exposures against non-qualifying CCPs
do not receive lower capital requirements relative to bilateral
exposures and are assigned risk weights between 20% and 100%, depending
on counterparty credit risk. Second, the BCBS capital framework imposes
a cap on risk weights applied to default fund contributions, limiting
risk-weighted assets (subject to a 1250% risk weight) to a cap of 20%
of a clearing member's trade exposures against a QCCP. This is in
contrast to treatment of exposures against non-qualifying CCPs, which
are uncapped and subject to a 1250% risk weight. Because QCCP status
generally impacts capital treatment, any benefits of ICC attaining QCCP
status will likely accrue at least in part, to its foreign clearing
members or its foreign indirect participants subject to the BCBS
capital framework with respect to their cleared security-based swap
transactions.\201\ As a result of lower risk weights applied to
exposures and a cap on capital requirements against default fund
obligations, ICC's qualification as a QCCP may, for those of its
clearing members that are subject to the BCBS capital framework, lead
to an improved capital position relative to bank members of non-QCCPs
with respect to their cleared security-based swap transactions. This
may lower funding costs for bank members of QCCPs.
---------------------------------------------------------------------------

    \201\ For a discussion of the effects of QCCP status on
competition between bank and non-bank clearing members, see CCA
Standards adopting release, supra note 7, at 317-322.
---------------------------------------------------------------------------

    In quantifying the benefits of achieving QCCP status, the
Commission based its estimate on publicly available information with
regard to ICC. To estimate the upper bound for the potential benefits
accruing to bank clearing members at ICC as a result of its QCCP
status, the Commission identified a sample of 15 bank clearing members
at ICC and, for each bank, collected information about total assets,
risk weighted assets, net income and tier one capital ratio at the
holding company level for 2015.\202\ The Commission then allocated
trade exposures and default fund exposures across the sample of

bank clearing members based on the level of risk-weighted assets.\203\
The Commission measured the impact on risk-weighted assets for non-U.S.
bank clearing members under two different capital treatment regimes.
The first regime is in the absence of QCCP status, assuming a 100% risk
weight applied to trade exposures and 1250% risk weight applied to
default fund exposures for non-U.S. members. In the second regime, ICC
obtains QCCP status, and banks are allowed to apply a 2% risk weight to
trade exposures and a 1250% risk weight to default fund exposures up to
a total exposure cap of 20% of trade exposures.\204\ If ICC is
determined to be a QCCP, then the increase in risk weighted assets will
be smaller in magnitude, implying a smaller adjustment at lower cost.
The Commission estimates that benefits associated with ICC obtaining
QCCP status stemming from lower capital requirements against trade
exposures to QCCPs as a result of the adopted rules to have an upper
bound of $12.9 million per year, or approximately 0.01% of the total
2015 net income reported by bank clearing members at ICC.\205\
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    \202\ The Commission used the set of entities it identified as
banks on ICC's member list, available at https://www.theice.com/clear-credit/participants. For U.S. bank holding companies, 2015
total assets, risk weighted assets, net income, and tier 1 capital
ratios were collected from Y-9C reports available at the National
Information Center, https://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx. For non-U.S. bank holding companies, Commission staff
obtained corresponding data from financial statements and
supplementary financial materials posted to bank Web sites. Where
necessary, values were converted back to U.S. dollars at December
31, 2015 exchange rates obtained from the Federal Reserve, http://www.federalreserve.gov/releases/h10/hist/.
    \203\ For example, one bank in the sample, with 5.06% of total
risk-weighted assets, was assigned 5.06% of the total trade and
default fund exposures while another bank in the sample, with 3.51%
of total risk weighted assets, was assigned 3.51% of these
exposures. Because trade exposures of ICC members against ICC are
nonpublic, the Commission used the balance of ICC margin deposits
and deposits in lieu of margin held at ICC, $14.2 billion, as a
proxy for trade exposures. ICC's 2015 clearing fund deposits were
valued at $1.56 billion. See ICC, 2015 Annual Report, available at
https://www.theice.com/publicdocs/regulatory_filings/ICE_Clear_Credit_Financial_Statements_2014_2015.pdf
    \204\ The BCBS capital framework allows banks to compute default
fund exposures in two ways. Method 1 involves computing capital
requirements for each member proportional to its share of an
aggregate capital requirement for all clearing members in a scenario
where to average clearing members default. The Commission currently
lacks data necessary to compute default fund exposures under this
approach, instead we use Method 2, which caps overall exposure to a
QCCP at 20% of trade exposures. See BCBS capital framework, supra
note 199, Annex 4, paras. 121-25 (outlining two methods for
computing default fund exposures).
    \205\ The Commission first quantified the benefits related to
ICC's attaining QCCP status for ICC's bank clearing members and bank
indirect participants with respect to all reported exposures. Over
the period March 2009 through August 2016 the gross notional value
of security-based swap transactions cleared by ICE Clear Credit
comprised 9% of the total value of all CDS transactions cleared
(see: https://www.theice.com/clear-credit). Based on this
information the Commission arrived at the benefits to ICC's bank
clearing members and bank indirect participants from ICC's attaining
QCCP status with respect to security-based swap transactions by
multiplying the total benefits by 0.09.
---------------------------------------------------------------------------

    The Commission's analysis is limited in several respects and relies
on several assumptions about the nature of trade exposures to ICC.
First, a limitation of our proxy for trade exposures and our use of
ICC's clearing fund is that the account balances include deposits by
bank clearing members, who would experience lower capital requirements
under the BCBS capital framework, and non-bank clearing members who
would not. As a result, the Commission assumes, for the purposes of
establishing an upper bound for the benefits to market participants
that are associated with QCCP status for ICC under the adopted rules,
that the balance of both ICC's margin account and ICC's default fund
are attributable only to bank clearing members. Additionally, we assume
an extreme case where, in the absence of QCCP status, trade exposures
against a CCP would be assigned a 100% risk weight, causing the largest
possible shock to risk-weighted assets for affected banks.
    Lower capital requirements on trade exposures to ICC would produce
effects in the real economy only under certain conditions. First,
agency problems, taxes, or other capital market imperfections could
result in banks targeting a particular capital structure. Second,
capital constraints on bank clearing members subject to the BCBS
capital framework must bind so that higher capital requirements on bank
clearing members subject to the BCBS capital framework in the absence
of QCCP status would cause these banks to exceed capital constraints if
they chose to redistribute capital to shareholders or invest capital in
projects with returns that exceed their cost of capital in the absence
of QCCP status for ICC for security-based swap clearing. Using publicly
available data, however, it is not currently possible to determine
whether capital constraints will bind for bank clearing members when
rules applying the BCBS capital framework come into force, so to
estimate an upper bound for the effects of QCCP status on bank clearing
members we assume that tier one capital constraints for all bank
clearing members of ICC would bind in an environment with zero weight
placed on bank exposures to CCPs.\206\
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    \206\ The Commission notes that, at present, no bank in its
sample of bank clearing members of ICC is bound by capital
requirements under the BCBS capital framework. For U.S. bank holding
companies tier 1 capital ratios were collected from Y-9C reports
available at the National Information Center, https://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx. For non-U.S. bank holding companies,
Commission staff obtained corresponding data from financial
statements and supplementary financial materials posted to bank Web
sites. The Commission used data from 2013-2016 for its sample of
U.S. bank clearing members, and from 2012-2015 for non-U.S. bank
clearing members and assumed no bank-specific countercyclical
capital buffers for these banks. This suggests a minimum tier 1
capital ratio of 10.5%, exceeding the BCBS capital framework's
minimum by 2.0%.
---------------------------------------------------------------------------

    For the purposes of quantifying potential benefits from QCCP
status, the Commission has also assumed that banks choose to adjust to
new capital requirements by deleveraging. In particular, the Commission
assumed that banks would respond by reducing risk-weighted assets
equally across all risk classes until they reach the minimum tier one
capital ratio under the Basel framework of 8.5%. We measure the ongoing
costs to each non-U.S. bank by multiplying the implied change in total
assets by each bank's return on assets, estimated using up to 12 years
of annual financial statement data.\207\
---------------------------------------------------------------------------

    \207\ This data has been taken from Compustat. Due to data
limitations, for certain banks a shorter window was used for this
calculation. The minimum sample window was nine years.
---------------------------------------------------------------------------

    The BCBS capital framework for exposures to CCPs yields additional
benefits for QCCPs that the Commission is currently unable to quantify
due to lack of data concerning client clearing arrangements by banks.
For client exposures to clearing members, the BCBS capital framework
allows participants to reflect the shorter close-out period of cleared
transactions in their capitalized exposures. The BCBS capital
framework's treatment of exposures to CCPs also applies to client
exposures to CCPs through clearing members. This may increase the
likelihood that bank clients of bank clearing members that are subject
to the BCBS capital framework share some of the benefits of QCCP
status.
    Furthermore, the fact that the BCBS capital framework applies to
bank clearing members may have important implications for competition
and concentration. While Rule 17Ad-22(e) may extend lower capital
requirements against exposures to QCCPs to the QCCP's non-U.S. bank
clearing members, the benefits of QCCP status will still be limited to
bank clearing members. However, the costs associated with compliance
with Rule 17Ad-22(e) may be borne by all clearing members, regardless
of whether or not they are supervised as banks. A potential consequence
of this allocation of costs and benefits may be a ``crowding out'' of
members of QCCPs that are not banks and that will not experience
benefits with respect to the BCBS capital framework. This may result in
an unintended consequence of an increased concentration of clearing
activity among ICC's bank clearing members. This increased
concentration could mean that each of the remaining

clearing members becomes more important from the standpoint of systemic
risk transmission since, for example, clearing agencies would have
fewer non-defaulting members to take on defaulting members' portfolios,
and clearing agencies that rely on clearing members to participate in
default auctions would hold auctions with fewer participants.
    The Commission preliminarily believes that the benefits of ICC
attaining QCCP status may depend on whether foreign bank clearing
members of ICC are currently able to shift their clearing business from
ICC to alternative clearing agencies that serve similar markets. In
this regard, the Commission notes that ICC and ICEEU have several
overlapping members and ICC clears all the contracts that ICEEU clears.
Thus in a situation where ICEEU is a QCCP while ICC is not, common
foreign bank members of the two agencies may obtain many of the
benefits of ICC having QCCP status by moving their clearing business to
ICEEU.
    However, under such a scenario, the benefits of ICC having QCCP
status for security-based swaps would not be fully realized for a
number of reasons. First, not all clearing members of ICC are also
clearing members of ICEEU. These members will not be able to move their
clearing business to ICEEU. Second, ICEEU only clears a subset of the
contracts that ICC does. Thus even common foreign bank members of ICC
and ICEEU may not be able to move their entire clearing business from
ICC to ICEEU. The Commission therefore preliminarily believes that the
extent to which foreign bank clearing members of ICC could obtain QCCP
benefits by moving their clearing business from ICC to ICEEU is
limited.
b. Costs
    As noted above, ICC is a SIDCO that is also regulated by the CFTC.
Based on its consultation and coordination with other regulators, the
Commission believes Rule 17Ad-22(e) is consistent and comparable, where
possible and appropriate, with the rules and policy statements adopted
by the FRB and the rules adopted by the CFTC, as each of the three rule
sets are intended to be consistent with the headline principles in the
PFMI. The Commission's rules differ from those requirements adopted by
the CFTC and FRB in terms of the specific portions of the key
considerations and explanatory text in the PFMI that are, or are not,
referenced or emphasized.
    Because of the abovementioned similarities between the CFTC's
regulatory regime for SIDCOs and Rule 17Ad-22(e), the Commission
preliminarily believes that, at the time of this proposal, ICC's
policies and procedures are already likely to be in compliance with
many of the requirements in Rule 17Ad-22(e). The Commission further
notes that ICC's principle-by-principle summary narrative disclosure
suggests that it would be unlikely to need to make significant changes
to its operations, policies, and procedures in order to comply with
Rule 17Ad-22(e).\208\
---------------------------------------------------------------------------

    \208\ See ICE Clear Credit Disclosure Framework, supra note 145.
---------------------------------------------------------------------------

    In light of the abovementioned similarity between the CFTC's
regulatory regime for SIDCOs and Rule 17Ad-22(e), the Commission
preliminarily believes the economic costs that ICC will bear as a
result of the proposed amendments will be related to the establishment,
implementation and maintenance of certain policies and procedures under
Rule 17Ad-22(e). We preliminarily estimate these costs will at most
include one-time costs of approximately $667,917 \209\ and annual costs
of approximately $146,249.\210\
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    \209\ Calculated as ((Assistant General Counsel for 440 hours at
$440 per hour) + (Chief Compliance Officer for 146 hours at $501 per
hour) + (Chief Financial Officer for 50 hours at $501 per hour) +
(Compliance Attorney for 377 hours at $345 per hour) + (Computer
Operations Department Manager for 344 hours at $416 per hour) +
(Financial Analyst for 70 hours at $259 per hour) + (Senior Business
Analyst for 85 hours at $259 per hour) + (Senior Programmer for 75
hours at $313 dollars per hour) + (Senior Risk Management Specialist
for 114 hours at $338 per hour)) = $667,917.
    \210\ Calculated as ((Administrative Assistant for 20 hours at
$76 per hour) + (Compliance Attorney for 279 hours at $345 per hour)
+ (Computer Operations Department Manager for 12 hours at $416 per
hour) + (Risk Management Specialist for 183 hours at $188 per hour)
+ (Senior Business Analyst for 22 hours at $259 per hour) + (Senior
Risk Management Specialist for 10 hours at $338 per hour)) =
$146,249 per year. To monetize the internal costs the Commission
staff used data from the SIFMA publications, Management and
Professional Earnings in the Security Industry--2013, and Office
Salaries in the Securities Industry--2013, modified by the
Commission staff to account for an 1800 hour work-year and
multiplied by 5.35 (professionals) or 2.93 (office) to account for
bonuses, firm size, employee benefits and overhead. These figures
have been adjusted for inflation using data published by the Bureau
of Labor Statistics. Commission staff also estimated an hourly rate
for a Chief Financial Officer. The Web site www.salary.com reports
that median CFO annual salaries in 2016 were $306,789. A Grant
Thornton LLP survey estimated that in 2016 public company CFOs will
receive an average annual salary of $303,975. Using an approximate
midpoint of these two estimates of $305,000 per year, and dividing
by an 1800-hour work year and multiplying by the 5.35 factor which
normally is used to include benefits but here is used as an
approximation to offset the fact that New York salaries are
typically higher than the rest of the country, the result is $906
per hour.
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c. Effects on Efficiency, Competition, and Capital Formation
    The proposed amendments do not alter the covered clearing agency
status of DTC, FICC, NSCC and OCC. The Commission preliminarily
believes that the proposed amendments will not change the behavior of
market participants associated with these entities and will therefore
not generate any economic benefits or costs for these entities.
Further, even though the proposed amendments do not alter the covered
clearing agency status of ICEEU, the Commission preliminarily believes
that they are likely to generate economic effects for this entity. This
is because ICC clears all security-based transactions that are cleared
by ICEEU. Because the proposed amendments are likely to result in
uniform regulatory requirements for similar risks at both clearing
agencies, they could potentially cause business to shift from ICEEU to
ICC. This could translate into a loss of economies of scale for ICEEU
which, in turn, would result in higher clearing fees and higher
transaction costs in cleared products.
2. Economic Effects Related to Future Registrants
    Besides affecting the application of Rule 17Ad-22 to the existing
set of registered clearing agencies, the proposed amendments to Rule
17Ad-22 would, if adopted, affect the regulation of clearing agencies
that register with the Commission in the future. In particular, under
the proposed revision to Rule 17Ad-22(a)(5), any clearing agency that
provides the services of a CCP, CSD, or SSS would be a covered clearing
agency. This means that covered clearing agencies would no longer be
limited to those that have been designated as systemically important by
the FSOC or are involved in activities that meet the definition of
activities with a complex risk profile, nor would clearing agencies for
which the CFTC is the supervisory agency under the Clearing Supervision
Act be excluded.
    Because the Commission is unable to predict with any precision the
number of clearing agencies likely to register in the future, much less
the number that are likely to be CCPs, CSDs, or SSSs, it is unable to
quantify the aggregate economic effects that would flow as a result of
the effect of the proposed amendments to Rule 17Ad-22(a) on future
registrants. The Commission notes, however, that it preliminarily
believes that the proposed amendments would generally increase the
likelihood Rule 17Ad-22(e) would apply to a new registrant. Where
possible, the

Commission has attempted to estimate the benefits and costs it would
expect the proposed amendments to Rule 17Ad-22(a) to have on a single
new registrant.
a. Benefits
    The Commission preliminarily believes that a benefit of the
proposed amendments may be that they reduce the costs that potential
entrants into the market for clearance and settlement services could
expect to face to determine whether they would face regulation as
covered clearing agencies. Under the proposed amendments, any
registered clearing agency that expects to provide the services of a
CCP, CSD, or SSS would also expect to be subject to Rule 17Ad-22(e)
without requiring additional information about FSOC designation or a
Commission determination that its activities have a more complex risk
profile. To the extent that this reduces the need for potential
entrants that engage in those services to assess whether they are
likely to be regulated as covered clearing agencies, the proposed
amendments could reduce the costs associated with registration. The
Commission preliminarily believes that a reasonable estimate of cost
reduction a single registrant is likely to experience is $3,382,
attributable to reduced legal expenses associated with determining
whether or not the registrant will also be regulated as a covered
clearing agency.\211\
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    \211\ The Commission calculated this reduction in costs as
((Assistant General Counsel for 2 hours at $440 per hour) +
(Compliance Attorney for 3 hours at $300 per hour) + (Outside
Counsel for 5 hours at $400 per hour)) = $3,382.
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    In the absence of the proposed amendments, without designation by
the FSOC or a Commission determination, a registered clearing agency
would be subject to Rule 17Ad-22(d). The proposed amendments increase
the likelihood that new entrants into the market for clearance and
settlement services would be subject to Rule 17Ad-22(e). Generally, to
the extent that the requirements under Rule 17Ad-22(e) impose higher
risk management standards on potential entrant CCPs, CSDs, and SSSs
than they would impose on themselves while subject to Rule 17Ad-22(d),
the Commission preliminarily believes the proposed amendments to Rule
17Ad-22(a) may improve financial stability. As discussed in the CCA
Standards adopting release, some of this increased stability may come
as a result of lower activity as Rule 17Ad-22(e) causes participants of
these new entrants to internalize a greater proportion of the costs
that their activity imposes on the financial system, reducing the costs
of default, conditional on a default event occurring.\212\ Increased
stability may also come as a result of the higher risk management
standards at potential entrants effectively lowering the probability
that either the entrant clearing agencies or their members default.
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    \212\ See CCA Standards adopting release, supra note 7, at 380.
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b. Costs
    In the absence of the proposed amendments, without designation by
the FSOC or a Commission determination, a registered clearing agency
would be subject to Rule 17Ad-22(d). To the extent that requirements
under Rule 17Ad-22(e) would impose additional costs on potential
entrants who would otherwise be regulated under Rule 17Ad-22(d), the
Commission believes that the proposed amendments may impose additional
costs on potential entrants.
    In the CCA Standards adopting release,\213\ the Commission
estimated specific costs that registered clearing agencies would bear
related to holding sufficient qualifying liquid resources under Rule
17Ad-22(e)(7). These estimates depended on information about the
current operation of registered clearing agencies that are subject to
Rule 17Ad-22(e) and so the Commission is unable to provide precise
estimates of costs associated with these requirements that potential
entrants may bear as a result of the proposed amendments to Rule 17Ad-
22(a). However if a potential entrant resembles the average covered
clearing agency, the Commission would expect compliance with Rule 17Ad-
22(e)(7) to cost the entrant between $24 million and $40 million.\214\
In addition, the Commission estimates the startup compliance costs
associated with policies and procedures for a potential entrant that is
not a CSD to be substantially similar to the costs estimated in the CCA
Standards adopting release, $608,578.\215\ Furthermore, Rules 17Ad-
22(e)(3), (4), (6), (7), (15) and (21) all include elements of review
by either a covered clearing agency's board or its management on an
ongoing basis. The Commission estimates the cost of ongoing review for
these adopted rules at approximately $39,376 per year for a potential
entrant, as estimated in the CCA Standards adopting release.\216\
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    \213\ See id. at 346.
    \214\ To arrive at this range, the Commission divided the
maximum and minimum costs associated with compliance estimated in
the CCA Standards adopting release by 5 covered clearing agencies.
See id.
    \215\ The total initial cost for an entrant that is not a CSD
and does engage in activities with a more complex risk profile was
calculated as follows: ((Assistant General Counsel for 428 hours at
$467 per hour) + (Compliance Attorney for 365 hours at $310 per
hour) + (Administrative Assistant for 2 hours at $72 per hour) +
(Computer Operations Department Manager for 300 hours at $361 per
hour) + (Senior Business Analyst for 85 hours at $245 per hour) +
(Senior Risk Management Specialist for 114 hours at $249 per hour) +
(Chief Compliance Office for 102 hours at $441 per hour) + (Senior
Programmer for 53 hours at $282 per hour) + (Chief Financial Officer
for 50 hours at $892 per hour) + (Financial Analyst for 70 hours at
$245 per hour)) = $592,215. Because only Rule 17Ad-22(e)(11) applies
solely to CSDs and many of the other parts of Rule 17Ad-22(e) do not
apply to CSDs, the Commission believes the initial cost of an
entrant that is a CSD would be lower.
    \216\ To estimate the cost of board review, the Commission used
a recent report by Bloomberg stating that the average director works
250 hours and earns $251,000, resulting in an estimated $1000 per
hour for board review. As a proxy for the cost of management review,
the Commission is estimating $461 per hour, based upon the Director
of Compliance cost data from the SIFMA table, see infra note 778.
The Commission estimates the total cost of review for each clearing
agency as follows: ((Board Review for 32 hours at $1000 per hour) +
(Management Review for 16 hours at $461 per hour)) = $39,376. The
Commission requests comment on this estimate.
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c. Effects on Efficiency, Competition, and Capital Formation
    The Commission preliminarily believes there are unlikely to be
substantial direct effects on efficiency and capital formation from the
proposed amendments' impact on potential entrants. The Commission
acknowledges, however, that there are potential effects on competition
that may arise from how the proposed amendments would affect the
regulatory treatment of registered clearing agencies and the barriers
to entry into the market for services provided by CCPs, CSDs, and SSSs.
    The proposed amendments would likely result in more consistent
regulatory treatment of firms that provide similar services to
securities markets. By imposing Rule 17Ad-22(e) on all CCPs, CSDs, and
SSSs, regardless of FSOC designation or their engagement in activities
with a more complex risk profile, the proposed amendments to Rule 17Ad-
22(a) would mitigate the risk that registered clearing agencies with
similar businesses would be subject to substantially different
regulatory regimes. The Commission preliminarily believes that more
uniform treatment under the proposed amendments may provide a more
level playing field for CCPs, CSDs, and SSSs. By contrast, in the
absence of the proposed amendments, an entrant CCP, CSD, or SSS, that
did not engage in activity with a more complex risk profile could
initially receive a

competitive advantage by being regulated under 17Ad-22(d) until
becoming a designated clearing agency because they may internalize less
of the risk they pose to the financial system.
    On the other hand, as discussed in the CCA Standards adopting
release, costs resulting from regulation under Rule 17Ad-22(e) as a
result of the proposed amendments to Rule 17Ad-22(a) may have the
effect of raising already high barriers to entry.\217\ As the potential
entry of new clearing agencies becomes more remote, existing clearing
agencies may be able to reduce service quality, restrict the supply of
services, or increase fees above marginal cost in an effort to earn
economic rents from participants in cleared markets.\218\
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    \217\ See CCA Standards adopting release, supra note 7, at 317-
318.
    \218\ See, e.g., Clearing Agency Standards adopting release,
supra note 31, at 66263 n.481.
---------------------------------------------------------------------------

3. Alternatives
    As an alternative to the proposed approach, the Commission
considered alternative definitions of ``covered clearing agency.''
Specifically, the Commission considered more limited definitions that
would not have included CSDs or SSSs along with CCPs within the
definition. An alternative approach that included only CCPs within the
definition of ``covered clearing agency'' would still include ICC in
the set of covered clearing agencies. The Commission preliminarily
believes that such an approach compares unfavorably to the proposed
approach because, as discussed in Parts II.A.1 and 2, CSDs perform a
critical role in the U.S. securities settlement markets by helping to
reduce risk and by providing transparency to the markets and, hence, it
is appropriate to apply enhanced requirements under Rule 17Ad-22(e) to
CSDs.
    Similarly, the Commission could have proposed to exclude SSSs from
the definition of covered clearing agency. This would have no effect on
the set of registered entities that would be covered clearing agencies
and no effect on the immediate economic effects of the proposed
amendments. However, this could potentially mean that an entrant
clearing agency that solely performs the functions of an SSS would be
subject only to Rule 17Ad-22(d). As above, the Commission preliminarily
believes that it is appropriate to apply enhanced requirements under
Rule 17Ad-22(e) to SSSs because of the critical role they play in the
national system for clearance and settlement.

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain
requirements on federal agencies in connection with the conducting or
sponsoring of any ``collection of information.'' \219\ An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number. Further, 44 U.S.C. 3507(a) provides that, before adopting or
revising a collection of information requirement, an agency must, among
other things, publish notice in the Federal Register stating that the
agency has submitted the proposed collection of information to the
Office of Management and Budget (``OMB'') and setting forth certain
required information, including (i) a title for the collection of
information; (ii) a summary of the collection of information; (iii) a
brief description of the need for the information and the proposed use
of the information; (iv) a description of the likely respondents and
proposed frequency of response to the collection of information; (v) an
estimate of the paperwork burden that shall result from the collection
of information; and (vi) notice that comments may be submitted to the
agency and director of OMB.\220\
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    \219\ See 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
    \220\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR
1320.5(a)(1)(iv).
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    Certain provisions of Rule 17Ad-22(e) impose collection of
information requirements under the PRA. The Commission submitted these
collections of information to the OMB for review in accordance with 44
U.S.C. 3507 and 5 CFR 1320.11. Because the Commission is proposing to
revise the respondents under Rule 17Ad-22(e) to account for the
proposed amendment to the definition of ``covered clearing agency'' and
related amendments, the Commission will use the same title and control
number: ``Clearing Agency Standards for Operation and Governance,'' OMB
Control No. 3235-0695.

A. Summary of Collection of Information and Use of Information \221\
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    \221\ In addition to the discussion of the purposes of the
collections of information set forth in Part IV.A, the Commission
notes that the policies and procedures would also be used by the
Commission as part of its ongoing efforts to monitor and enforce
compliance with the federal securities laws through, among other
things, examinations and inspections.
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1. Rule 17Ad-22(e)(1)
    Rule 17Ad-22(e)(1) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for a well-founded, clear, transparent
and enforceable legal basis for each aspect of its activities in all
relevant jurisdictions.\222\
---------------------------------------------------------------------------

    \222\ See 17 CFR 240.17Ad-22(e)(1); CCA Standards adopting
release, supra note 7, at 463.
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    The purpose of this collection of information is to reduce the
potential for legal risk at covered clearing agencies, such as the risk
that participants face legal uncertainty due to a lack of clarity or
completeness regarding conflicts with applicable laws.
2. Rule 17Ad-22(e)(2)
    Rules 17Ad-22(e)(2)(i) through (iii) require a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to provide for governance
arrangements that are clear and transparent, clearly prioritize the
safety and efficiency of the covered clearing agency, and support the
public interest requirements of Section 17A of the Exchange Act, and
the objectives of owners and participants. Rules 17Ad-22(e)(2)(iv) and
(v) require a covered clearing agency to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
establish that the board of directors and senior management have
appropriate experience and skills to discharge their duties and
responsibilities and to specify clear and direct lines of
responsibility. Rule 17Ad-22(e)(2)(vi) requires a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to consider the interests of
participants' customers, securities issuers and holders, and other
relevant stakeholders of the clearing agency.\223\
---------------------------------------------------------------------------

    \223\ See 17 CFR 240.17Ad-22(e)(2); CCA Standards adopting
release, supra note 7, at 463.
---------------------------------------------------------------------------

    The purpose of this collection of information is to prioritize the
safety and efficiency of covered clearing agencies, to help ensure that
each covered clearing agency's governance arrangements consider the
interests of relevant stakeholders, to promote the establishment of
boards of directors at covered clearing agencies that are composed of
qualified members with clear and direct lines of responsibility, and to
promote accountability of the board of directors and senior management.
3. Rule 17Ad-22(e)(3)
    Rule 17Ad-22(e)(3) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain a sound risk management

framework for comprehensively managing legal, credit, liquidity,
operational, general business, investment, custody, and other risks
that arise in or are borne by the covered clearing agency. Rule 17Ad-
22(e)(3)(i) requires a covered clearing agency to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide for risk management policies, procedures, and
systems designed to identify, measure, monitor, and manage the range of
risks that arise in or are borne by the covered clearing agency, and
subject them to review on a specified periodic basis and approval by
the board of directors annually. Rule 17Ad-22(e)(3)(ii) requires a
covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to ensure it
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. Rule 17Ad-
22(e)(iii) requires a covered clearing agency to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide risk management and internal audit personnel with
sufficient authority, resources, independence from management, and
access to the board of directors. Rule 17Ad-22(e)(3)(iv) requires a
covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide risk
management and internal audit personnel with oversight by and a direct
reporting line to a risk management committee and an independent audit
committee of the board of directors, respectively. Rule 17A-22(e)(3)(v)
requires a covered clearing agency to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
provide for an independent audit committee.\224\
---------------------------------------------------------------------------

    \224\ See 17 CFR 240.17Ad-22(e)(3); CCA Standards adopting
release, supra note 7, at 464.
---------------------------------------------------------------------------

    The purpose of this information collection is to enhance each
covered clearing agency's ability to identify, monitor, and manage the
risks that covered clearing agencies face, including by subjecting the
relevant policies and procedures to regular review, and to facilitate
an orderly recovery and wind-down process in the event that a covered
clearing agency is unable to continue operating as a going concern.
4. Rule 17Ad-22(e)(4)
    Rule 17Ad-22(e)(4) requires a covered clearing agency to 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 exposures arising
from its payment, clearing, and settlement processes.
    Rule 17Ad-22(e)(4)(i) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to maintain sufficient financial
resources to cover its credit exposure to each participant fully with a
high degree of confidence. Rule 17Ad-22(e)(4)(ii) requires a covered
clearing agency that provides CCP services, and that is ``systemically
important in multiple jurisdictions'' or ``a clearing agency involved
in activities with a more complex risk profile,'' to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain additional financial resources, to the
extent not already maintained pursuant to Rule 17Ad-22(e)(4)(i), at a
minimum level necessary to enable it to cover a wide range of
foreseeable stress scenarios, including but not limited to the default
of the two participant families that would potentially cause the
largest aggregate credit exposure for the covered clearing agency in
extreme but plausible market conditions. Meanwhile, Rule 17Ad-
22(e)(4)(iii) requires a covered clearing agency that is not subject to
Rule 17Ad-22(e)(4)(ii) to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
additional financial resources, to the extent not already maintained
pursuant to Rule 17Ad-22(e)(4)(i), at the minimum to enable it to cover
a wide range of foreseeable stress scenarios, including the default of
the participant family that would potentially cause the largest
aggregate credit exposure for the covered clearing agency in extreme
but plausible market conditions. Rule 17Ad-22(e)(4)(iv) requires a
covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to include
prefunded financial resources, exclusive of assessments for additional
guaranty fund contributions or other resources that are not prefunded,
when calculating the financial resources available to meet the
standards under Rules 17Ad-22(e)(4)(i) through (iii), as applicable.
Rule 17Ad-22(e)(4)(v) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to maintain the financial resources required under
proposed Rules 17Ad-22(e)(4)(ii) and (iii), as applicable, in combined
or separately maintained clearing or guaranty funds.
    Rule 17Ad-22(e)(4)(vi) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to test the sufficiency of its total
financial resources available to meet the minimum financial resource
requirements under Rules 17Ad-22(e)(4)(i) through (iii), as applicable,
by conducting stress testing of its total financial resources at least
once each day using standard predetermined parameters and assumptions.
Rule 17Ad-22(e)(4)(vi) also requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to conduct a comprehensive analysis on
at least a monthly basis of the existing stress testing scenarios,
models, and underlying parameters and assumptions, and consider
modifications to ensure they are appropriate for determining the
covered clearing agency's required level of default protection in light
of current market conditions. When the products cleared or markets
served by a covered clearing agency display high volatility or become
less liquid, or when the size or concentration of positions held by the
entity's participants increases significantly, the proposed rule would
require a covered clearing agency to have policies and procedures for
conducting comprehensive analyses of stress testing scenarios, models,
and underlying parameters and assumptions more frequently than monthly.
Rule 17Ad-22(e)(4)(vi) also requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for the reporting of the
results of this analysis to the appropriate decision makers at the
covered clearing agency, including its risk management committee or
board of directors, and to require the use of the results to evaluate
the adequacy of and to adjust its margin methodology, model parameters,
and any other relevant aspects of its credit risk management policies
and procedures, in supporting compliance with the minimum financial
resources requirements in Rules 17Ad-22(e)(4)(i) through (iii), as
applicable.
    Rule 17Ad-22(e)(4)(vii) requires a covered clearing agency to
establish, implement, maintain and enforce

written policies and procedures reasonably designed to require a model
validation for its credit risk models not less than annually or more
frequently as may be contemplated by the covered clearing agency's risk
management policies and procedures.
    Rule 17Ad-22(e)(4)(viii) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to address allocation of credit losses
the covered clearing agency may face if its collateral and other
resources are insufficient to fully cover its credit exposures,
including the repayment of any funds the covered clearing agency may
borrow from liquidity providers.
    Rule 17Ad-22(e)(4)(ix) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to describe the covered clearing
agency's process to replenish any financial resources it may use
following a default or other event in which use of such resources is
contemplated.\225\
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    \225\ See 17 CFR 240.17Ad-22(e)(4); CCA Standards adopting
release, supra note 7, at 464-466.
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    The purpose of this information collection is to identify and limit
credit exposures to participants and to satisfy all of its settlement
obligations in the event of a participant default, to address the
allocation of credit losses if collateral and other resources are
insufficient to fully cover its credit exposures following a
participant default, and to describe the covered clearing agency's
process to replenish financial resources following such a default.
5. Rule 17Ad-22(e)(5)
    Rule 17Ad-22(e)(5) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to limit the assets it accepts as collateral to
those with low credit, liquidity, and market risks, and also require
policies that set and enforce appropriately conservative haircuts and
concentration limits if the covered clearing agency requires collateral
to manage its own or its participants' credit exposures. In addition,
Rule 17Ad-22(e)(5) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to include a not-less-than-annual review of the
sufficiency of a covered clearing agency's collateral haircuts and
concentration limits.\226\
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    \226\ See 17 CFR 240.17Ad-22(e)(5); CCA Standards adopting
release, supra note 7, at 466-467.
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    The purpose of the information collection is to enable a covered
clearing agency to be able to maintain sufficient collateral by using
appropriately conservative haircuts and concentration limits.
6. Rule 17Ad-22(e)(6)
    Rule 17Ad-22(e)(6) requires a covered clearing agency that provides
CCP services to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that is monitored by management on an ongoing basis and
regularly reviewed, tested, and verified. Rule 17Ad-22(e)(6)(i)
requires a covered clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to result in a margin system that, at a
minimum, considers and produces margin levels commensurate with the
risks and particular attributes of each relevant product, portfolio,
and market. Rule 17Ad-22(e)(6)(ii) requires a covered clearing agency
that provides CCP services to establish implement, maintain and enforce
written policies and procedures reasonably designed to ensure that the
margin system would mark participant positions to market and collect
margin, including variation margin or equivalent charges if relevant,
at least daily, and include the authority and operational capacity to
make intraday margin calls in defined circumstances. Rule 17Ad-
22(e)(6)(iii) requires a covered clearing agency that provides CCP
services to establish, implement, maintain and enforce written policies
and procedures reasonably designed to calculate margin sufficient to
cover its potential future exposure to participants in the interval
between the last margin collection and the close out of positions
following a participant default. Rule 17Ad-22(e)(6)(iv) requires a
covered clearing agency that provides CCP services to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to ensure that it uses reliable sources of timely
price data and uses procedures and sound valuation models for
addressing circumstances in which pricing data are not readily
available or reliable. Rule 17Ad-22(e)(6)(v) requires a covered
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to ensure the use of an appropriate method for measuring
credit exposure that accounts for relevant product risk factors and
portfolio effects across products.
    Rule 17Ad-22(e)(6)(vi) requires a covered clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to establish a
risk-based margin system that is monitored by management on an ongoing
basis. Rule 17Ad-22(e)(6)(vi) also requires a covered clearing agency
that provides CCP services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
regularly review, test, and verify its risk-based margin system by
conducting backtests of its margin model at least once each day using
standard predetermined parameters and assumptions. Rule 17Ad-
22(e)(6)(vi) also requires a covered clearing agency that provides CCP
services to establish, implement, maintain and enforce written policies
and procedures reasonably designed to regularly review, test, and
verify its risk-based margin system by conducting a sensitivity
analysis of its margin model and a review of its parameters and
assumptions for backtesting on at least a monthly basis, and
considering modifications to ensure the backtesting practices are
appropriate for determining the adequacy of the covered clearing
agency's margin resources. Rule 17Ad-22(e)(6)(vi) also requires a
covered clearing agency that provides CCP services to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to regularly review, test, and verify its risk-
based margin system by conducting a sensitivity analysis of its margin
model and a review of its parameters and assumptions for backtesting
more frequently than monthly during periods of time when the products
cleared or markets served display high volatility or become less
liquid, and when the size or concentration of positions held by the
covered clearing agency's participants increases or decreases
significantly. Rule 17Ad-22(e)(6)(vi) also requires a covered clearing
agency that provides CCP services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
regularly review, test, and verify its risk-based margin system by
reporting the results of its analyses above to appropriate decision
makers at the covered clearing agency, including but

not limited to, its risk management committee or board of directors,
and using these results to evaluate the adequacy of and adjust its
margin methodology, model parameters, and any other relevant aspects of
its credit risk management framework.
    Finally, Rule 17Ad-22(e)(6)(vii) requires a covered clearing agency
that provides CCP services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to requires
a model validation for the covered clearing agency's margin system and
related models to be performed not less than annually, or more
frequently as may be contemplated by the covered clearing agency's risk
management framework established pursuant to Rule 17Ad-22(e)(3).\227\
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    \227\ See 17 CFR 240.17Ad-22(e)(6); CCA Standards adopting
release, supra note 7, at 467-468.
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    The purpose of the information collection is to enable a covered
clearing agency to be able to collect sufficient margin subject to
regular sensitivity analysis, monthly backtesting, and an annual model
validation.
7. Rule 17Ad-22(e)(7)
    Rule 17Ad-22(e)(7) requires a covered clearing agency to 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 it, by meeting, at a
minimum, the ten requirements specified in the rule.
    Rule 17Ad-22(e)(7)(i) requires that a covered clearing agency's
policies and procedures be reasonably designed to ensure that it
maintains sufficient liquid resources in all relevant currencies to
effect same-day and, where appropriate, intraday and multiday
settlement of payment obligations with a high degree of confidence
under a wide range of potential stress scenarios that includes the
default of the participant family that would generate the largest
aggregate payment obligation for it in extreme but plausible market
conditions.
    Rule 17Ad-22(e)(7)(ii) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure that it holds qualifying
liquid resources sufficient to meet the minimum liquidity resource
requirement in each relevant currency for which the covered clearing
agency has payment obligations owed to clearing members.
    Rule 17Ad-22(e)(7)(iii) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure it uses accounts and services
at a Federal Reserve Bank, pursuant to Section 806(a) of the Clearing
Supervision Act, or other relevant central bank, when available and
where determined to be practical by the board of directors of the
covered clearing agency, to enhance its management of liquidity risk.
    Rule 17Ad-22(e)(7)(iv) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure it undertakes due diligence to
confirm that it has a reasonable basis to believe each of its liquidity
providers, whether or not such liquidity provider is a clearing member,
has sufficient information to understand and manage the liquidity
provider's liquidity risks, and the capacity to perform as required
under its commitments to provide liquidity.
    Rule 17Ad-22(e)(7)(v) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure that the covered clearing
agency maintains and, on at least an annual basis, tests with each
liquidity provider, to the extent practicable, its procedures and
operational capacity for accessing each type of relevant liquidity
resource.
    Rule 17Ad-22(e)(7)(vi)(A) through (C) requires a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to determine the amount and
regularly test the sufficiency of the liquid resources held for
purposes of meeting the minimum liquid resource requirement of Rule
17Ad-22(e)(7)(i) by (A) conducting stress testing of its liquidity
resources at least once each day using standard and predetermined
parameters and assumptions; (B) conducting a comprehensive analysis of
the existing stress testing scenarios, models, and underlying
parameters and assumptions used in evaluating liquidity needs and
resources, and considering modifications to ensure they are appropriate
for determining the covered clearing agency's identified liquidity
needs and resources in light of current and evolving market conditions
at least once each month; and (C) conducting a comprehensive analysis
of the existing stress testing scenarios, models, and underlying
parameters and assumptions used in evaluating liquidity needs and
resources more frequently when products cleared or markets served
display high volatility or become less liquid, when the size or
concentration of positions held by participants increases
significantly, or in other circumstances described in the covered
clearing agency's policies and procedures. Rule 17Ad-22(e)(7)(vi)(D)
also requires a covered clearing agency to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to result in reporting the results of the analyses performed
under Rules 17Ad-22(e)(7)(vi)(B) and (C) to appropriate decision
makers, including the risk management committee or board of directors,
at the covered clearing agency for use in evaluating the adequacy of
and adjusting its liquidity risk management framework.
    Rule 17Ad-22(e)(7)(vii) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to result in performing an annual or
more frequent model validation of its liquidity risk models.
    Rule 17Ad-22(e)(7)(viii) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to address foreseeable liquidity
shortfalls that would not be covered by its liquid resources and seek
to avoid unwinding, revoking, or delaying the same-day settlement of
payment obligations.
    Rule 17Ad-22(e)(7)(ix) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to describe its process for replenishing
any liquid resources that it may employ during a stress event.
    Rule 17Ad-22(e)(7)(x) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure that it, at least once a year,
evaluates the feasibility of maintaining sufficient liquid resources at
a minimum in all relevant currencies to effect same-day and, where
appropriate, intraday and multiday settlement of payment obligations
with a high degree of confidence under a wide range of foreseeable
stress scenarios that includes, but is not limited to, the default of
the two participant families that would potentially cause the largest
aggregate credit exposure for the covered clearing agency in extreme
but plausible market conditions if the covered clearing agency provides
CCP services and is either systemically important in multiple
jurisdictions or a

clearing agency involved in activities with a more complex risk
profile.\228\
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    \228\ See 17 CFR 240.17Ad-22(e)(7); CCA Standards adopting
release, supra note 7, at 468-471.
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    The purpose of this information collection is to identify and limit
liquidity risk so that a covered clearing agency can satisfy its
settlement obligations on an ongoing and timely basis by holding a
sufficient amount of qualifying liquid resources and performing regular
stress testing of its liquid resources. It is also to help ensure that
a covered clearing agency addresses foreseeable liquidity shortfalls
and can replenish any liquid resources that it may employ in a stress
event. It is also to help ensure that a covered clearing agency manages
the risks posed by its liquidity providers.
8. Rule 17Ad-22(e)(8)
    Rule 17Ad-22(e)(8) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to define the point at which settlement is final to
be no later than the end of the day on which the payment or obligation
is due and, where necessary or appropriate, either intraday or in real
time.\229\
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    \229\ See 17 CFR 240.17Ad-22(e)(8); CCA Standards adopting
release, supra note 7, at 471.
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    The purpose of this information collection is to promote consistent
standards of timing and reliability in the settlement process.
9. Rule 17Ad-22(e)(9)
    Rule 17Ad-22(e)(9) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to conduct its money settlements in central bank
money, where available and determined to be practical by the board of
directors of the covered clearing agency, and minimizes and manages
credit and liquidity risk arising from conducting its money settlements
in commercial bank money if central bank money is not used by the
covered clearing agency.\230\
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    \230\ See 17 CFR 240.17Ad-22(e)(9); CCA Standards adopting
release, supra note 7, at 471.
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    The purpose of this information collection is to promote
reliability in a covered clearing agency's settlement operations.
10. Rule 17Ad-22(e)(10)
    Rule 17Ad-22(e)(10) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to establish and maintain transparent
written standards that state its obligations with respect to the
delivery of physical instruments and operational practices that
identify, monitor, and manage the risk associated with such physical
deliveries.\231\
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    \231\ See 17 CFR 240.17Ad-22(e)(10); CCA Standards adopting
release, supra note 7, at 472.
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    The purpose of this information collection is to provide a covered
clearing agency's participants with the information necessary to
evaluate the risks and costs associated with participation in the
covered clearing agency.
11. Rule 17Ad-22(e)(11)
    Rule 17Ad-22(e)(11)(i) requires a covered clearing agency that
provides 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 and prevent the unauthorized creation
or deletion of securities, and conduct periodic and at least daily
reconciliation of securities issues it maintains. 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.\232\
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    \232\ See 17 CFR 240.17Ad-22(e)(11); CCA Standards adopting
release, supra note 7, at 472.
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    The purpose of this information collection is to reduce securities
transfer processing costs and the risks associated with securities
settlement and custody, as well as increase the speed and efficiency of
the settlement process.
12. Rule 17Ad-22(e)(12)
    Rule 17Ad-22(e)(12) requires a covered clearing agency, for
transactions that involve the settlement of two linked obligations, to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to eliminate principal risk by
conditioning the final settlement of one obligation upon the final
settlement of the other, regardless of whether the covered clearing
agency settles on a gross or net basis and when finality occurs.\233\
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    \233\ See 17 CFR 240.17Ad-22(e)(12); CCA Standards adopting
release, supra note 7, at 472.
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    The purpose of this information collection is to promote the
elimination of principal risk in transactions with linked obligations.
13. Rule 17Ad-22(e)(13)
    Rule 17Ad-22(e)(13) requires a covered clearing agencies providing
CCP services to establish, implement, maintain and enforce written
policies and procedures reasonably designed to ensure that the covered
clearing agency has the authority and operational capacity to take
timely action to contain losses and liquidity demands and continue to
meet its obligations by, at a minimum, requiring the covered clearing
agency's participants and, when practicable, other stakeholders to
participate in the testing and review of its default procedures,
including any close-out procedures, at least annually and following
material changes thereto.\234\
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    \234\ See 17 CFR 240.17Ad-22(e)(13); CCA Standards adopting
release, supra note 7, at 472-473.
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    The purpose of this information collection is to facilitate the
functioning of a covered clearing agency in the event that a
participant fails to meet its obligations, as well as limit the extent
to which a participant's failure can spread to other participants or
the covered clearing agency itself.
14. Rule 17Ad-22(e)(14)
    Rule 17Ad-22(e)(14) requires a covered clearing agency that is a
security-based swap clearing agency or a complex risk profile clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to enable the segregation and
portability of positions of a member's customers and the collateral
provided to the covered clearing agency with respect to those
positions, and effectively protect such positions and related
collateral from the default or insolvency of that member.\235\
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    \235\ See 17 CFR 240.17Ad-22(e)(14); CCA Standards adopting
release, supra note 7, at 473-474.
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    The purpose of this information collection is to facilitate the
safe and effective holding and transfer of customers' positions and
collateral in the event of a participant's default or insolvency.
15. Rule 17Ad-22(e)(15)
    Rule 17Ad-22(e)(15) requires a covered clearing agency to
establish, implement, maintain and enforce

written policies and procedures reasonably designed to identify,
monitor, and manage its 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 and
services as a going concern if those losses materialize. Rule 17Ad-
22(e)(15)(i) requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to determine the amount of liquid net assets funded
by equity based upon its general business risk profile and the length
of time required to achieve a recovery or orderly wind-down, as
appropriate, of its critical operations and services if such action is
taken. Rule 17Ad-22(e)(15)(ii) requires a clearing agency to establish,
implement, maintain and enforce written 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)(ii). Rule 17Ad-