[Federal Register Volume 79, Number 58 (Wednesday, March 26, 2014)]
[Proposed Rules]
[Pages 16865-16975]
[FR Doc No: 2014-05806]

Vol. 79

Wednesday,

No. 58

March 26, 2014

Part II

Securities and Exchange Commission

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17 CFR Part 240

Standards for Covered Clearing Agencies; Proposed Rule

Federal Register / Vol. 79 , No. 58 / Wednesday, March 26, 2014 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-71699; File No. S7-03-14]
RIN 3235-AL48

Standards for Covered Clearing Agencies

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') proposes to amend Rule 17Ad-22 and add Rule 17Ab2-2
pursuant to Section 17A of the Securities Exchange Act of 1934
(``Exchange Act'') and the Payment, Clearing, and Settlement
Supervision Act of 2010 (``Clearing Supervision Act''), adopted in
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (``Dodd-Frank Act''). Among other things, the proposed
rules would establish standards for the operation and governance of
certain types of registered clearing agencies that meet the definition
of a ``covered clearing agency.''

DATES: Submit comments on or before May 27, 2014.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-03-14 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Kevin M. O'Neill, Deputy Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090. All submissions should refer to File Number S7-03-14.
    To help us process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml).
    Comments are also available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.

FOR FURTHER INFORMATION CONTACT: Katherine Martin, Senior Special
Counsel; Stephanie Park, Special Counsel; Mark Saltzburg, Special
Counsel; Matthew Lee, Attorney-Adviser; and Abraham Jacob, Attorney-
Adviser; Office of Clearance and Settlement, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-7010, at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: The Commission proposes to amend Rule 17Ad-
22 to add new Rule 17Ad-22(e) to establish requirements for risk
management, operations, and governance of registered clearing agencies
that meet the definition of a ``covered clearing agency.'' Covered
clearing agencies would include registered clearing agencies that (i)
have been designated as systemically important by the Financial
Stability Oversight Council (``FSOC'') and for which the Commission is
the supervisory agency, pursuant to the Clearing Supervision Act
(``designated clearing agencies''), (ii) provide central counterparty
(``CCP'') services for security-based swaps or are involved in
activities the Commission determines to have a more complex risk
profile, where in either case the Commodity Futures Trading Commission
(``CFTC'') is not the supervisory agency for such clearing agency as
defined in Section 803(8) of the Clearing Supervision Act, or (iii) are
otherwise determined to be covered clearing agencies by the Commission.
The Commission also proposes to add new Rule 17Ad-22(f) to codify the
Commission's statutory authority and new Rule 17Ab2-2 to establish
procedures for making determinations regarding covered clearing
agencies under proposed Rule 17Ad-22(e). The Commission also proposes
to amend existing Rule 17Ad-22(d) to limit its application to clearing
agencies other than covered clearing agencies and to revise existing
Rule 17Ad-22(a) to add 15 new definitions. The Commission has begun,
and intends to continue, consultation with the FSOC and the Board of
Governors of the Federal Reserve System (``the Board'') and has
considered the relevant international standards as required by Section
805(a)(2)(A) of the Clearing Supervision Act.\1\
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    \1\ See Committee on Payment and Settlement Systems and
Technical Committee of the International Organization of Securities
Commissions (``CPSS-IOSCO''), Principles for Financial Market
Infrastructures (Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf (``PFMI Report'').
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Table of Contents

I. Current Regulatory Framework for Clearing Agencies
    A. Section 17A of the Exchange Act
    B. OTC Swaps Clearing and the Dodd-Frank Act
    1. Title VII of the Dodd-Frank Act
    2. Title VIII of the Dodd-Frank Act
    C. Rule 17Ad-22 Under the Exchange Act
    D. Relevant International Standards
II. Discussion of the Proposed Amendments to Rule 17AD-22 and
Proposed Rule 17AB2-2
    A. Overview
    1. Scope of Proposed Rule 17Ad-22(e)
    2. Role of Written Policies and Procedures
    3. Frequency of Review Required Under Certain Policies and
Procedures
    4. Anticipated Impact of Proposed Rule 17Ad-22(e)
    5. General Request for Comments
    B. Proposed Rule 17Ad-22(e)
    1. Proposed Rule 17Ad-22(e)(1): Legal Risk
    2. Proposed Rule 17Ad-22(e)(2): Governance
    3. Proposed Rule 17Ad-22(e)(3): Framework for the Comprehensive
Management of Risks
    a. Policies and Procedures Requirements, Periodic Review, and
Annual Board Approval
    b. Recovery and Orderly Wind-Down Plans
    c. Risk Management and Internal Audit
    d. Request for Comments
    4. Proposed Rules 17Ad-22(e)(4) Through (7): Financial Risk
Management
    a. Overview of Financial Risks Faced by Clearing Agencies
    b. Current Financial Risk Management Requirements for CCPs
    c. Proposed Rule 17Ad-22(e)(4): Credit Risk
    i. Prefunded Financial Resources
    ii. Combined or Separately Maintained Clearing or Guaranty Funds
    iii. Testing the Sufficiency of Financial Resources
    iv. Annual Conforming Model Validation
    d. Proposed Rule 17Ad-22(e)(5): Collateral
    e. Proposed Rule 17Ad-22(e)(6): Margin
    i. Active Management of Model Risk
    ii. Collection of Margin
    iii. Ninety-Nine Percent Confidence Level
    iv. Price Data Source
    v. Method for Measuring Credit Exposure
    vi. Backtesting and Sensitivity Analysis
    vii. Annual Conforming Model Validation
    f. Proposed Rule 17Ad-22(e)(7): Liquidity Risk
    i. Sufficient Liquid Resources
    ii. Qualifying Liquid Resources
    iii. Access to Account Services at a Federal Reserve Bank or
Other Relevant Central Bank
    iv. Liquidity Providers

    v. Maintenance and Annual Testing of Liquidity Provider
Procedures and Operational Capacity
    vi. Testing the Sufficiency of Liquid Resources
    vii. Annual Conforming Model Validation
    viii. Address Liquidity Shortfalls and Seek To Avoid Unwinding
Settlement
    ix. Replenishment of Liquid Resources
    x. Feasibility Analysis for ``Cover Two''
    g. Request for Comments
    5. Proposed Rule 17Ad-22(e)(8): Settlement Finality
    6. Proposed Rule 17Ad-22(e)(9): Money Settlements
    7. Proposed Rule 17Ad-22(e)(10): Physical Delivery Risks
    8. Proposed Rule 17Ad-22(e)(11): Central Securities Depositories
    a. Controls To Safeguard the Rights of Securities Issuers and
Holders and Prevent the Unauthorized Creation or Deletion of
Securities
    b. Periodic and at Least Daily Reconciliation of Securities
Maintained
    c. Protect Assets Against Custody Risk
    d. Request for Comments
    9. Proposed Rule 17Ad-22(e)(12): Exchange-of-Value Settlement
Systems
    10. Proposed Rule 17Ad-22(e)(13): Participant-Default Rules and
Procedures
    a. Address Allocation of Credit Losses
    b. Describe Replenishment of Financial Resources
    c. Test Default Procedures Annually and Following Material
Changes
    d. Request for Comments
    11. Proposed Rule 17Ad-22(e)(14): Segregation and Portability
    12. Proposed Rule 17Ad-22(e)(15): General Business Risk
    a. Determining Liquid Net Assets for Recovery and an Orderly
Wind-Down
    b. Requirements for Liquid Net Assets
    c. Plan for Raising Additional Equity
    d. Request for Comments
    13. Proposed Rule 17Ad-22(e)(16): Custody and Investment Risks
    14. Proposed Rule 17Ad-22(e)(17): Operational Risk Management
    15. Proposed Rule 17Ad-22(e)(18): Access and Participation
Requirements
    16. Proposed Rule 17Ad-22(e)(19): Tiered Participation
Agreements
    17. Proposed Rule 17Ad-22(e)(20): Links
    18. Proposed Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    19. Proposed Rule 17Ad-22(e)(22): Communication Procedures and
Standards
    20. Proposed Rule 17Ad-22(e)(23): Disclosure of Rules, Key
Procedures, and Market Data
    a. Comprehensive Public Disclosure
    b. Updates to the Comprehensive Public Disclosure
    c. Request for Comments
    C. Proposed Rule 17Ab2-2
    1. Determination That a Registered Clearing Agency is a Covered
Clearing Agency
    2. Determination That a Covered Clearing Agency is Systemically
Important in Multiple Jurisdictions
    3. Determination That a Clearing Agency Has a More Complex Risk
Profile
    4. Request for Comments
    D. Proposed Rule 17Ad-22(f)
    E. Proposed Amendment to Rule 17Ad-22(d)
III. Paperwork Reduction Act
    A. Overview and Organization
    B. Summary of Collection of Information and Proposed Use of
Information for Proposed Rule 17Ad-22(e) and Proposed Rule 17Ab2-2
    1. Proposed Rules 17Ad-22(e)(1) Through (3): General
Organization
    a. Proposed Rule 17Ad-22(e)(1)
    b. Proposed Rule 17Ad-22(e)(2)
    c. Proposed Rule 17Ad-22(e)(3)
    2. Proposed Rules 17Ad-22(e)(4) Through (7): Financial Risk
Management
    a. Proposed Rule 17Ad-22(e)(4)
    b. Proposed Rule 17Ad-22(e)(5)
    c. Proposed Rule 17Ad-22(e)(6)
    d. Proposed Rule 17Ad-22(e)(7)
    3. Proposed Rules 17Ad-22(e)(8) Through (10): Settlement
    a. Proposed Rule 17Ad-22(e)(8)
    b. Proposed Rule 17Ad-22(e)(9)
    c. Proposed Rule 17Ad-22(e)(10)
    4. Proposed Rules 17Ad-22(e)(11) Through (12): CSDs and
Exchange-of-Value Settlement Systems
    a. Proposed Rule 17Ad-22(e)(11)
    b. Proposed Rule 17Ad-22(e)(12)
    5. Proposed Rules 17Ad-22(e)(13) Through (14): Default
Management
    a. Proposed Rule 17Ad-22(e)(13)
    b. Proposed Rule 17Ad-22(e)(14)
    6. Proposed Rules 17Ad-22(e)(15) Through (17): General Business
and Operational Risk Management
    a. Proposed Rule 17Ad-22(e)(15)
    b. Proposed Rule 17Ad-22(e)(16)
    c. Proposed Rule 17Ad-22(e)(17)
    7. Proposed Rules 17Ad-22(e)(18) Through (20): Access
    a. Proposed Rule 17Ad-22(e)(18)
    b. Proposed Rule 17Ad-22(e)(19)
    c. Proposed Rule 17Ad-22(e)(20)
    8. Proposed Rules 17Ad-22(e)(21) Through (22): Efficiency
    a. Proposed Rule 17Ad-22(e)(21)
    b. Proposed Rule 17Ad-22(e)(22)
    9. Proposed Rule 17Ad-22(e)(23): Disclosure
    10. Proposed Rule 17Ab2-2
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden for Proposed
Rule 17Ad-22(e)
    1. Proposed Rules 17Ad-22(e)(1) Through (3): General
Organization
    a. Proposed Rule 17Ad-22(e)(1)
    b. Proposed Rule 17Ad-22(e)(2)
    c. Proposed Rule 17Ad-22(e)(3)
    2. Proposed Rules 17Ad-22(e)(4) Through (7): Financial Risk
Management
    a. Proposed Rule 17Ad-22(e)(4)
    b. Proposed Rule 17Ad-22(e)(5)
    c. Proposed Rule 17Ad-22(e)(6)
    d. Proposed Rule 17Ad-22(e)(7)
    3. Proposed Rules 17Ad-22(e)(8) Through (10): Settlement
    a. Proposed Rule 17Ad-22(e)(8)
    b. Proposed Rule 17Ad-22(e)(9)
    c. Proposed Rule 17Ad-22(e)(10)
    4. Proposed Rules 17Ad-22(e)(11) Through (12): CSDs and
Exchange-of-Value Settlement Systems
    a. Proposed Rule 17Ad-22(e)(11)
    b. Proposed Rule 17Ad-22(e)(12)
    5. Proposed Rules 17Ad-22(e)(13) Through (14): Default
Management
    a. Proposed Rule 17Ad-22(e)(13)
    b. Proposed Rule 17Ad-22(e)(14)
    6. Proposed Rules 17Ad-22(e)(15) Through (17): General Business
and Operational Risk Management
    a. Proposed Rule 17Ad-22(e)(15)
    b. Proposed Rule 17Ad-22(e)(16)
    c. Proposed Rule 17Ad-22(e)(17)
    7. Proposed Rules 17Ad-22(e)(18) Through (20): Access
    a. Proposed Rule 17Ad-22(e)(18)
    b. Proposed Rule 17Ad-22(e)(19)
    c. Proposed Rule 17Ad-22(e)(20)
    8. Proposed Rules 17Ad-22(e)(21) Through (22): Efficiency
    a. Proposed Rule 17Ad-22(e)(21)
    b. Proposed Rule 17Ad-22(e)(22)
    9. Proposed Rule 17Ad-22(e)(23): Disclosure
    10. Total Burden for Proposed Rule 17Ad-22(e)
    E. Total Annual Reporting and Recordkeeping Burden for Proposed
Rule 17Ab2-2
    F. Collection of Information is Mandatory
    G. Confidentiality
    H. Request for Comments
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Overview
    2. Current Regulatory Framework for Clearing Agencies
    a. Basel III Capital Requirements
    b. Other Regulatory Efforts
    3. Current Practices
    a. General Organization
    i. Legal Risk
    ii. Governance
    iii. Framework for the Comprehensive Management of Risks
    b. Financial Risk Management
    i. Credit Risk
    ii. Collateral and Margin
    iii. Liquidity Risk
    c. Settlement
    d. CSDs and Exchange-of-Value Settlement Systems
    i. CSDs
    ii. Exchange-of-Value Settlement Systems
    e. Default Management
    i. Participant-Default Rules and Procedures
    ii. Segregation and Portability
    f. General Business and Operational Risk Management
    i. General Business Risk
    ii. Custody and Investment Risks
    iii. Operational Risk
    g. Access
    i. Access and Participation Requirements
    ii. Tiered Participation Arrangements
    iii. Links
    h. Efficiency
    i. Efficiency and Effectiveness
    ii. Communication Procedures and Standards
    i. Transparency
    4. Determinations by the Commission
    C. Consideration of Benefits, Costs, and the Effect on
Competition, Efficiency, and Capital Formation
    1. General Economic Considerations

    a. Systemic Risk
    b. Discretion
    c. Market Integrity
    d. Concentration
    e. Qualifying CCP Status and Externalities on Clearing Members
    2. Effect on Competition, Efficiency, and Capital Formation
    a. Competition
    b. Efficiency
    c. Capital Formation
    3. Effect of Proposed Amendments to Rule 17Ad-22 and Proposed
Rule 17Ab2-2
    a. Proposed Rule 17Ad-22(e)
    i. Proposed Rule 17Ad-22(e)(1): Legal Risk
    ii. Proposed Rule 17Ad-22(e)(2): Governance
    iii. Proposed Rule 17Ad-22(e)(3): Comprehensive Framework for
the Management of Risks
    iv. Proposed Rules 17Ad-22(e)(4) Through (7): Financial Risk
Management
    (1) Proposed Rule 17Ad-22(e)(4): Credit Risk
    (2) Proposed Rule 17Ad-22(e)(5): Collateral
    (3) Proposed Rule 17Ad-22(e)(6): Margin
    (4) Proposed Rule 17Ad-22(e)(7): Liquidity Risk
    (5) Testing and Validation of Risk Models
    v. Proposed Rules 17Ad-22(e)(8) Through (10): Settlement and
Physical Delivery
    vi. Proposed Rule 17Ad-22(e)(11): CSDs
    vii. Proposed Rule 17Ad-22(e)(12): Exchange-of-Value Settlement
Systems
    viii. Proposed Rule 17Ad-22(e)(13): Participant-Default Rules
and Procedures
    ix. Proposed Rule 17Ad-22(e)(14): Segregation and Portability
    x. Proposed Rule 17Ad-22(e)(15): General Business Risk
    xi. Proposed Rule 17Ad-22(e)(16): Custody and Investment Risks
    xii. Proposed Rule 17Ad-22(e)(17): Operational Risk Management
    xiii. Proposed Rules 17Ad-22(e)(18) Through (20): Membership
Requirements, Tiered Participation, and Linkages
    (1) Proposed Rule 17Ad-22(e)(18): Member Requirements
    (2) Proposed Rule 17Ad-22(e)(19): Tiered Participation
Arrangements
    (3) Proposed Rule 17Ad-22(e)(20): Links
    xiv. Proposed Rule 17Ad-22(e)(21): Efficiency and Effectiveness
    xv. Proposed Rule 17Ad-22(e)(22): Communication Procedures and
Standards
    xvi. Proposed Rule 17Ad-22(e)(23): Disclosure of Rules, Key
Procedures, and Market Data
    b. Proposed Rule 17Ab2-2
    c. Proposed Rule 17Ad-22(f)
    d. Quantifiable Costs and Benefits
    D. Request for Comments
V. Regulatory Flexibility Act Certification
    A. Registered Clearing Agencies
    B. Certification
VI. Small Business Regulatory Enforcement Fairness Act
VII. Statutory Authority and Text of Amended Rule 17AD-22 and
Proposed Rule 17AB2-2

I. Current Regulatory Framework for Clearing Agencies

A. Section 17A of the Exchange Act

    When Congress added Section 17A to the Exchange Act as part of the
Securities Acts Amendments of 1975, it directed the Commission to
facilitate the establishment of a national system for the prompt and
accurate clearance and settlement of securities transactions.\2\ In
Section 17A of the Exchange Act, Congress directed the Commission to
have due regard for the public interest, the protection of investors,
the safeguarding of securities and funds, and maintenance of fair
competition among brokers and dealers, clearing agencies, and transfer
agents.\3\ The Commission's ability to achieve these goals and its
supervision of securities clearance and settlement systems is based
upon the regulation of clearing agencies registered with the Commission
(``registered clearing agencies''). Clearing agencies are broadly
defined under the Exchange Act and undertake a variety of functions.\4\
One such function is to act as a CCP, which is an entity that
interposes itself between the counterparties to a trade.\5\ Over the
years, registered clearing agencies have become an essential part of
the infrastructure of the U.S. securities markets.\6\ Registered
clearing agencies help reduce the costs and increase the safety and
efficiency of securities trading and are required to be structured to
manage and reduce counterparty risk.\7\
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    \2\ See 15 U.S.C. 78q-1; Report of the Senate Committee on
Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at 4 (1975)
(urging that ``[t]he Committee believes the banking and security
industries must move quickly toward the establishment of a fully
integrated national system for the prompt and accurate processing
and settlement of securities transactions'').
    \3\ See 15 U.S.C. 78q-1(a)(2)(A).
    \4\ Section 3(a)(23)(A) of the Exchange Act defines the term
``clearing agency'' to mean any person who acts as an intermediary
in making payments or deliveries or both in connection with
transactions in securities or who provides facilities for the
comparison of data regarding the terms of settlement of securities
transactions, to reduce the number of settlements of securities
transactions, or for the allocation of securities settlement
responsibilities. Such term also means any person, such as a
securities depository, who acts as a custodian of securities in
connection with a system for the central handling of securities
whereby all securities of a particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred, loaned or pledged by bookkeeping entry without physical
delivery of securities certificates, or otherwise permits or
facilitates the settlement of securities transactions or the
hypothecation or lending of securities without physical delivery of
securities certificates. See 15 U.S.C. 78c(a)(23)(A).
    \5\ See id.; see also Exchange Act Release No. 34-68080 (Oct.
22, 2012), 77 FR 66219, 66221-22 (Nov. 2, 2012) (``Clearing Agency
Standards Release''). An entity that acts as a CCP for securities
transactions is a clearing agency as defined in the Exchange Act and
is required to register with the Commission. For further discussion
of the economic effects of CCPs, see infra notes 19, 563, and
accompanying text.
    \6\ See Risk Management Supervision of Designated Clearing
Entities (July 2011), Report by the Commission, the Board & CFTC to
the Senate Committees on Banking, Housing & Urban Affairs and
Agriculture in fulfillment of Section 813 of Title VIII of the Dodd-
Frank Act, at 3 (stating that designated clearing entities ``play a
vital role in the proper functioning of financial markets and are
increasingly important given the mandated central clearing of
certain swaps and security-based swaps that is required by the
[Dodd-Frank] Act'') (``Risk Management Supervision Report'').
    \7\ See id. at 12 (describing the risk management practices of
designated clearing entities and the economic and legal incentives
for sound risk management).
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    Section 17A of the Exchange Act and Rule 17Ab2-1 require entities
to register with the Commission prior to performing the functions of a
clearing agency.\8\ Under the statute, the Commission is not permitted
to grant registration unless it determines that the rules and
operations of the clearing agency meet the standards set forth in
Section 17A of the Exchange Act.\9\ If the Commission registers a
clearing agency, the Commission oversees the clearing agency to
facilitate compliance with the Exchange Act using various tools that
include, among other things, the rule filing process for self-
regulatory organizations (``SROs'') and on-site examinations by
Commission staff.\10\ The Commission also oversees registered clearing
agencies through regular contact, including onsite visits, by
Commission staff with clearing agency senior management and other
personnel and ongoing interactions of Commission staff with the
registered

clearing agencies regarding current and expected proposed rule changes
under Section 19(b) of the Exchange Act.
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    \8\ See 15 U.S.C. 78q-1(b) and 17 CFR 240.17Ab2-1 thereunder;
see also infra notes 20-23 and accompanying text (noting that the
Dodd-Frank Act also added new paragraphs (g), (i), and (j) to
Section 17A of the Exchange Act to establish requirements for any
entity that performs the functions of a clearing agency for
security-based swaps).
    \9\ A clearing agency can be registered with the Commission only
if the Commission makes a determination that the clearing agency
satisfies the requirements set forth in Section 17A(b)(3)(A) through
(I) of the Exchange Act. See 15 U.S.C. 78q-1(b)(3)(A) through (I).
In 1980, the Commission published a statement of the views and
positions of the Commission staff regarding the requirements of
Section 17A in its Announcement of Standards for the Registration of
Clearing Agencies. See Exchange Act Release No. 34-16900 (June 17,
1980), 45 FR 41920 (June 23, 1980).
    \10\ Under the Clearing Supervision Act, the supervisory agency
must consult annually with the Board regarding the scope and
methodology of on-site examinations of designated FMUs, and those
examinations may include participation by the Board, if requested.
See infra note 32 and accompanying text; see also 15 U.S.C. 78u(a)
(providing the Commission with authority to initiate and conduct
investigations to identify potential violations of the federal
securities laws); 15 U.S.C. 78s(h) (providing the Commission with
authority to institute civil actions seeking injunctive and other
equitable remedies and/or administrative proceedings).
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B. OTC Swaps Clearing and the Dodd-Frank Act

    The Commission drew on its experience regulating clearing agencies
to address recent developments in the over-the-counter (``OTC'')
derivatives markets. In December 2008, the Commission acted to
facilitate the central clearing of credit default swaps (``CDS'') by
permitting certain entities that performed CCP services to clear and
settle CDS on a temporary, conditional basis.\11\ Consequently, some
CDS transactions were centrally cleared prior to the enactment of the
Dodd-Frank Act.
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    \11\ The Commission authorized five entities to clear CDS. See
Exchange Act Release Nos. 60372 (July 23, 2009), 74 FR 37748 (July
29, 2009), 61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010) and
63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 2010) (CDS clearing by
ICE Clear Europe Limited); 60373 (July 23, 2009), 74 FR 37740 (July
29, 2009), 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010) and
63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 2010) (CDS clearing by
Eurex Clearing AG); 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19,
2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009), 61803
(Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) and 63388 (Nov. 29,
2010), 75 FR 75522 (Dec. 3, 2010) (CDS clearing by Chicago
Mercantile Exchange, Inc.); 59527 (Mar. 6, 2009), 74 FR 10791 (Mar.
12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), 61662
(Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010) and 63387 (Nov. 29,
2010), 75 FR 75502 (Dec. 3, 2010) (CDS clearing by ICE Trust US
LLC); 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (temporary CDS
clearing by LIFFE A&M and LCH.Clearnet Ltd.) (collectively ``CDS
clearing exemption orders''). LIFFE A&M and LCH.Clearnet Ltd.
allowed their orders to lapse without seeking renewal.
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    On July 21, 2010, President Barack Obama signed the Dodd-Frank Act
into law.\12\ The Dodd-Frank Act was enacted, among other reasons, to
promote the financial stability of the United States by improving
accountability and transparency in the financial system.\13\ It is
intended, among other things, to bolster the existing regulatory
structure and provide regulatory tools to address risks in the OTC
derivatives markets, which have experienced dramatic growth in recent
years and are capable of affecting significant sectors of the U.S.
economy.\14\
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    \12\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376
(2010).
    \13\ See id.
    \14\ From their beginnings in the early 1980s, the notional
value of these markets grew to approximately $693 trillion globally
by June 2013. See Bank for International Settlements (``BIS''),
Statistical Release: OTC Derivatives Statistics at End-June 2013, at
2 (Nov. 2013), available at http://www.bis.org/publ/otc_hy1311.pdf.
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1. Title VII of the Dodd-Frank Act
    Title VII of the Dodd-Frank Act (``Title VII'') provides the
Commission and the CFTC with enhanced authority to regulate certain OTC
derivatives in response to the 2008 financial crisis.\15\ Title VII
provides that the CFTC will regulate ``swaps,'' the Commission will
regulate ``security-based swaps,'' and both the CFTC and the Commission
will regulate ``mixed swaps.'' \16\ Title VII provides the Commission
with new regulatory authority over security-based swaps by requiring,
among other things, that security-based swaps generally be cleared and
that clearing agencies for security-based swaps register with the
Commission.
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    \15\ See Dodd-Frank Act, 124 Stat. at 1641-1802.
    \16\ Section 712(d) of the Dodd-Frank Act provides that the
Commission and the CFTC, in consultation with the Board, shall
further define the terms ``swap,'' ``security-based swap,'' ``swap
dealer,'' ``security-based swap dealer,'' ``major swap
participant,'' ``major security-based swap participant,'' ``eligible
contract participant,'' and ``security-based swap agreement.'' 124
Stat. at 1644. The Commission and the CFTC jointly adopted rules to
further define the terms ``swap dealer,'' ``security-based swap
dealer,'' ``major swap participant,'' ``major security-based swap
participant,'' and ``eligible contract participant,'' as well as
rules to further define the terms ``swap,'' ``security-based swap,''
and ``security-based swap agreement'' and to govern the regulation
of mixed swaps. See Exchange Act Release Nos. 34-67453 (July 18,
2012), 77 FR 48208 (Aug. 13, 2012); 34-66868 (Apr. 27, 2012), 77 FR
30596 (May 23, 2012).
---------------------------------------------------------------------------

    The swap and security-based swap markets traditionally have been
characterized by privately negotiated transactions entered into by two
counterparties, in which each assumes the credit risk of the other
counterparty.\17\ Title VII amended the Exchange Act to require that
transactions in security-based swaps be cleared through a clearing
agency if they are of a type that the Commission determines must be
cleared, unless an exemption from mandatory clearing applies.\18\ When
structured and operated appropriately, clearing agencies may improve
the management of counterparty risk in security-based swap markets and
may provide additional benefits, such as the multilateral netting of
trades.\19\
---------------------------------------------------------------------------

    \17\ See, e.g., Exchange Act Release No. 34-60372 (July 23,
2009), 74 FR 37748 (July 29, 2009), at 37748 n.2 (discussing credit
default swaps).
    \18\ See 15 U.S.C. 78c-3; see also Exchange Act Release No. 34-
67286 (June 28, 2012), 77 FR 41602 (July 13, 2012) (adopting rules
establishing a process for submissions for review of security-based
swaps for mandatory clearing); Exchange Act Release No. 34-63556
(Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010) (proposing an end-user
exception to the mandatory clearing requirement).
    \19\ See Stephen G. Cecchetti, Jacob Gyntelberg & Marc
Hollanders, Central Counterparties for Over-the-Counter Derivatives,
BIS Q. Rev., Sept. 2009, at 46, available at http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf (stating that the structure of a CCP
``has three clear benefits. First, it improves the management of
counterparty risk. Second, it allows the CCP to perform multilateral
netting of exposures as well as payments. Third, it increases
transparency by making information on market activity and
exposures--both prices and quantities--available to regulators and
the public'') (emphasis omitted); see also Exchange Act Release No.
34-60372, supra note 17, at 37749 (discussing the benefits of using
well-regulated CCPs to clear transactions in credit default swaps).
But see infra note 563 and accompanying text (discussing the limits
of clearing through central counterparties).
---------------------------------------------------------------------------

    Title VII also added new provisions to the Exchange Act that
require entities performing the functions of a clearing agency with
respect to security-based swaps (``security-based swap clearing
agencies'') to register with the Commission and require the Commission
to adopt rules with respect to security-based swap clearing
agencies.\20\ Specifically, new Section 17A(j) requires the Commission
to adopt rules governing security-based swap clearing agencies, and new
Section 17A(i) gives the Commission authority to promulgate rules that
establish standards for security-based swap clearing agencies.\21\
Compliance with any such rules is a prerequisite to the registration of
a clearing agency that clears security-based swaps with the Commission
and is also a condition to maintain its continued registration.\22\
Section 17A(i) also provides that the Commission, in establishing
clearing agency standards and in its oversight of clearing agencies,
may conform such standards and such oversight to reflect evolving
international standards.\23\ Before commencing any rulemaking
regarding, among other things, security-based swap clearing agencies,
Title VII provides that the Commission shall consult and coordinate, to
the extent possible, with the CFTC and the prudential regulators for
the purpose of assuring regulatory consistency and comparability, to
the extent possible.\24\
---------------------------------------------------------------------------

    \20\ See 15 U.S.C. 78q-1(g); Dodd-Frank Act, Sec. 763(b), Public
Law 111-203, 124 Stat. 1376, 1768 (2010) (adding paragraph (g) to
Section 17A of the Exchange Act). Pursuant to Section 774 of the
Dodd-Frank Act, the requirement in Section 17A(g) of the Exchange
Act for security-based swap clearing agencies to be registered with
the Commission took effect on July 16, 2011. See 124 Stat. at 1802.
    \21\ See 15 U.S.C. 78q-1(i), (j); Dodd-Frank Act, Sec. 763(b),
124 Stat. at 1768-69 (adding paragraphs (i) and (j) to Section 17A
of the Exchange Act).
    \22\ See supra note 9 (describing the requirements under Section
17A(b)(3) of the Exchange Act, 15 U.S.C. 78q-1(b)(3)).
    \23\ See 15 U.S.C. 78q-1(i) (stating that, in establishing
standards for security-based swap clearing agencies, and in the
exercise of its oversight of such a clearing agency pursuant to this
title, the Commission may conform such standards or oversight to
reflect evolving United States and international standards).
    \24\ See Dodd-Frank Act, Sec. 712(a)(2), 124 Stat. at 1641-42.
---------------------------------------------------------------------------

    Title VII further provides that some of the entities that the
Commission permitted to clear and settle CDS on a temporary,
conditional basis prior to the

July 21, 2010 enactment of the Dodd-Frank Act are deemed under the
Dodd-Frank Act to be registered clearing agencies (the ``deemed
registered provision'').\25\ As a result, the Chicago Mercantile
Exchange, Inc. (``CME''), ICE Clear Credit LLC (``ICE''), and ICE Clear
Europe LLC (``ICEEU'') became clearing agencies deemed registered with
the Commission on July 16, 2011, solely for the purpose of clearing
security-based swaps.
---------------------------------------------------------------------------

    \25\ See 15 U.S.C. 78q-1(l). The deemed registered provision
applies to certain depository institutions that cleared swaps as
multilateral clearing organizations and certain derivatives clearing
organizations (``DCOs'') that cleared swaps pursuant to an exemption
from registration as a clearing agency before the date of enactment
of the Dodd-Frank Act. Under the deemed registered provision, such a
clearing agency is deemed registered for the purpose of clearing
security-based swaps and is therefore required to comply with all
requirements of the Exchange Act, and the rules thereunder,
applicable to registered clearing agencies, including, for example,
the obligation to file proposed rule changes under Section 19(b) of
the Exchange Act. See infra note 96 (describing the requirements in
Section 19(b) of the Exchange Act).
---------------------------------------------------------------------------

2. Title VIII of the Dodd-Frank Act
    The Clearing Supervision Act, adopted in Title VIII of the Dodd-
Frank Act (``Title VIII''), provides for enhanced regulation of
financial market utilities (``FMUs''), such as clearing agencies that
manage or operate a multilateral system for the purpose of
transferring, clearing, or settling payments, securities, or other
financial transactions among financial institutions or between
financial institutions and the FMU.\26\ The enhanced regulatory regime
in Title VIII applies only to FMUs that the FSOC designates as
systemically important (or likely to become systemically important) in
accordance with Section 804 of the Clearing Supervision Act.\27\ On
July 11, 2011, the FSOC published a final rule concerning its authority
to designate FMUs as systemically important.\28\
---------------------------------------------------------------------------

    \26\ The definition of ``financial market utility'' in Section
803(6) of the Clearing Supervision Act contains a number of
exclusions that include, but are not limited to, certain designated
contract markets, registered futures associations, swap data
repositories, swap execution facilities, national securities
exchanges, national securities associations, alternative trading
systems, security-based swap data repositories, security-based swap
execution facilities, brokers, dealers, transfer agents, investment
companies and futures commission merchants. See 12 U.S.C.
5462(6)(B).
    \27\ Pursuant to Section 803(9) of the Clearing Supervision Act,
an FMU is systemically important if the failure of or a disruption
to the functioning of such FMU could create or increase the risk of
significant liquidity or credit problems spreading among financial
institutions or markets and thereby threaten the stability of the
U.S. financial system. See 12 U.S.C. 5462(9).
    \28\ See 76 FR 44763 (July 27, 2011). Under Section 804 of the
Clearing Supervision Act, the FSOC has the authority, on a non-
delegable basis and by a vote of no fewer than two-thirds of the
members then serving, including the affirmative vote of its
chairperson, to designate those FMUs that the FSOC determines are,
or are likely to become, systemically important. See 12 U.S.C. 5463.
The FSOC may, using the same procedures as discussed above, rescind
such designation if it determines that the FMU no longer meets the
standards for systemic importance. Before making either
determination, the FSOC is required to consult with the Board and
the relevant supervisory agency (as determined in accordance with
Section 803(8) of the Clearing Supervision Act). See id. Finally,
Section 804 of the Clearing Supervision Act sets forth the
procedures for giving entities a 30-day notice and the opportunity
for a hearing prior to a designation or rescission of the
designation of systemic importance. See id.
---------------------------------------------------------------------------

    Section 806(e) of the Clearing Supervision Act requires FMUs
designated as systemically important to file 60 days advance notice of
changes to its rules, procedures, or operations that could materially
affect the nature or level of risk presented by the FMU (``Advance
Notice'').\29\ In addition, Section 806(e) requires each supervisory
agency to adopt rules, in consultation with the Board, that define and
describe when a designated FMU is required to file an Advance Notice
with its supervisory agency.\30\ The Commission published a final rule
concerning the Advance Notice process for designated clearing agencies
on June 28, 2012.\31\ In evaluating an Advance Notice filed with the
Commission, the Commission would assess, among other things, the
consistency of the Advance Notice with the rules proposed herein, if
adopted.
---------------------------------------------------------------------------

    \29\ See 12 U.S.C. 5465(e)(1)(A).
    \30\ Section 803(8) of the Clearing Supervision Act defines the
term ``supervisory agency'' in reference to the primary regulatory
authority for the FMU. For example, it provides that the Commission
is the supervisory agency for any FMU that is a registered clearing
agency. See 12 U.S.C. 5462(8). To the extent that an entity is both
a clearing agency registered with the Commission and registered with
another agency, such as a DCO registered with the CFTC, the statute
requires the two agencies to agree on one agency to act as the
supervisory agency, and if the agencies cannot agree on which agency
has primary jurisdiction, the FSOC shall decide which agency is the
supervisory agency for purposes of the Clearing Supervision Act. See
12 U.S.C. 5462(8).
    \31\ See Exchange Act Release No. 34-67286 (June 28, 2012), 77
FR 41602 (July 13, 2012).
---------------------------------------------------------------------------

    The Clearing Supervision Act also provides for enhanced
coordination between the Commission, the Board, and the CFTC by
facilitating examinations and information sharing. Under Section 807 of
the Clearing Supervision Act, the Commission and the CFTC must consult
annually with the Board regarding the scope and methodology of any
examination of a designated FMU, and the Board is authorized to
participate in any such examination.\32\ Section 809 of the Clearing
Supervision Act authorizes the Commission, the Board, and the CFTC to
disclose to each other copies of examination reports or similar reports
regarding any designated FMU.\33\ It further authorizes the Commission,
the Board, and the CFTC to promptly notify each other of material
concerns about a designated FMU and share appropriate reports,
information, or data relating to such concerns.\34\ Section 813 of the
Clearing Supervision Act requires the Commission and the CFTC to
coordinate with the Board to develop risk management supervision
programs for designated clearing agencies.\35\
---------------------------------------------------------------------------

    \32\ See 12 U.S.C. 5466.
    \33\ See 12 U.S.C. 5468.
    \34\ See id.
    \35\ See 12 U.S.C. 5472; see also Risk Management Supervision
Report, supra note 6.
---------------------------------------------------------------------------

    Section 805(a) of the Clearing Supervision Act \36\ also provides
that the Commission may prescribe risk management standards governing
the operations related to payment, clearing, and settlement activities
(``PCS activities'') of designated FMUs for which it acts as the
supervisory agency, in consultation with the FSOC and the Board and
taking into consideration relevant international standards and existing
prudential requirements.\37\
---------------------------------------------------------------------------

    \36\ 12 U.S.C. 5464(a).
    \37\ See 12 U.S.C. 5464(a)(2) (stating that these regulations
may govern the operations related to payment, clearing, and
settlement activities of such designated clearing entities, and the
conduct of designated activities by such financial institutions).
PCS activities are defined in Section 803(7) of the Clearing
Supervision Act. See 12 U.S.C. 5462(7).
---------------------------------------------------------------------------

    On July 18, 2012, the FSOC designated as systemically important the
following registered clearing agencies: CME, The Depository Trust
Company (``DTC''), Fixed Income Clearing Corporation (``FICC''), ICE,
National Securities Clearing Corporation (``NSCC''), and The Options
Clearing Corporation (``OCC'').\38\ Under the Clearing Supervision Act,
the Commission is the supervisory agency for DTC, FICC, NSCC, and
OCC.\39\ The

Commission jointly regulates DTC with the Board and OCC with the
CFTC.\40\ The Commission also jointly regulates CME and ICE with the
CFTC, which serves as their supervisory agency.\41\
---------------------------------------------------------------------------

    \38\ See U.S. Treasury Dep't, Financial Stability Oversight
Council Makes First Designations in Effort To Protect Against Future
Financial Crises (July 18, 2012), http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx; see also 12 U.S.C. 5321
(establishing the FSOC and designating its voting and non-voting
members); 12 U.S.C. 5463 (describing the designation of systemic
importance by the FSOC); supra note 28 (describing the process by
which the FSOC would make or rescind a designation of systemic
importance). Section 804 of the Clearing Supervision Act, 12 U.S.C.
5463, further sets forth procedures that give entities 30 days
advance notice and an opportunity for a hearing prior to being
designated as systemically important. See FSOC, 2012 Annual Report,
at app. A, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \39\ See supra note 30 (discussing designation as the
supervisory agency); see also FSOC, 2013 Annual Report, at 99-101,
113 (further discussing the same), available at http://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf.
    \40\ As a member of the U.S. Federal Reserve System and a
limited purpose trust company under New York State banking law, DTC
is subject to regulation by the Board.
    \41\ In addition, the Commission jointly regulates ICEEU, which
is not currently designated as systemically important by the FSOC,
with the CFTC and the Bank of England.
---------------------------------------------------------------------------

C. Rule 17Ad-22 Under the Exchange Act

    On October 22, 2012, the Commission adopted Rule 17Ad-22 under the
Exchange Act.\42\ Through Rule 17Ad-22, the Commission sought to
strengthen the substantive regulation of registered clearing agencies,
promote the safe and reliable operation of registered clearing
agencies, and improve efficiency, transparency, and access to
registered clearing agencies by establishing minimum requirements with
due consideration given to observed practices and international
standards.\43\ At that time, the Commission noted that the
implementation of Rule 17Ad-22 would be an important first step in
developing the regulatory changes contemplated by Titles VII and VIII
of the Dodd-Frank Act.\44\ Rule 17Ad-22 requires all registered
clearing agencies to establish, implement, maintain and enforce written
policies and procedures that are reasonably designed to meet certain
minimum requirements for their operations and risk management practices
on an ongoing basis.\45\ These requirements are designed to work in
tandem with the SRO rule filing process and the requirement in Section
17A of the Exchange Act that the Commission must make certain
determinations regarding a clearing agency's rules and operations for
purposes of initial and ongoing registration.\46\ Rule 17Ad-22 does not
apply to entities that are operating pursuant to an exemption from
registration as a clearing agency granted by the Commission,\47\ and it
does not give particular consideration to issues relevant to clearing
agencies designated as systemically important FMUs.
---------------------------------------------------------------------------

    \42\ See Clearing Agency Standards Release, supra note 5.
    \43\ See id. at 66225, 66263-64.
    \44\ See Clearing Agency Standards Release, supra note 5, at
66225.
    \45\ Rules 17Ad-22(b)(1) through (4) contain several
requirements that address risk management practices by registered
clearing agencies that provide CCP services. Rules 17Ad-22(b)(5)
through (7) establish certain requirements regarding access to
registered clearing agencies that provide CCP services. Rule 17Ad-
22(c) requires that a registered clearing agency providing CCP
services calculate and maintain a record of its financial resources
and requires each registered clearing agency to publish annual
audited financial statements. Rule 17Ad-22(d) sets forth certain
minimum standards for the operations of registered clearing agencies
providing CCP or central securities depository (``CSD'') services.
See infra Part 0 (discussing the current requirements for CCPs under
Rule 17Ad-22); see also Clearing Agency Standards Release, supra
note 5 (adopting the existing standards under Rule 17Ad-22).
    \46\ See supra note 9 (describing the requirements under Section
17A(b)(3) of the Exchange Act, 15 U.S.C. 78q-1(b)(3)) and infra note
96 (further describing the Commission's framework for regulation of
SROs and the SRO rule filing process).
    \47\ See, e.g., Exchange Act Release No. 34-44188 (Apr. 17,
2001), 66 FR 20494 (Apr. 23, 2011) (the Omgeo exemption); Exchange
Act Release No. 34-39643 (Feb. 11, 1998), 63 FR 8232 (Feb. 18, 1998)
(the Euroclear exemption); Exchange Act Release No 34-38328 (Feb.
24, 1997), 62 FR 9225 (Feb. 28, 1997) (the Clearstream exemption).
---------------------------------------------------------------------------

D. Relevant International Standards

    In proposing amendments to Rule 17Ad-22, the Commission considered
international standards, as required by Section 805(a) of the Clearing
Supervision Act, that are relevant to its supervision of covered
clearing agencies.\48\ CPSS-IOSCO published in April 2012 the PFMI
Report \49\ to replace previous standards applicable to clearing
agencies contained in two earlier reports: Recommendations for
Securities Settlement Systems (2001) (``RSSS'') and Recommendations for
Central Counterparties (2004) (``RCCP'') (collectively ``CPSS-IOSCO
Recommendations'').\50\ Commission staff participated in the
development and drafting of the PFMI Report,\51\ and the Commission
believes that the standards set forth in the PFMI Report are generally
consistent with the requirements applicable to clearing agencies set
forth in the Exchange Act.\52\ Regulatory authorities around the world
are in various stages of updating their regulatory regimes to adopt
measures that are in line with the standards set forth in the PFMI
Report.\53\ The rule

proposals set forth below are a continuation of the Commission's active
efforts to foster the development of the national clearance and
settlement system.
---------------------------------------------------------------------------

    \48\ See supra note 36. In addition, the Basel Committee on
Banking Supervision (``BCBS''), the international body that sets
standards for the regulation of banks, published in July 2012 the
Capital Requirements for Bank Exposures to Central Counterparties
(``Basel III capital requirements''). The Basel III capital
requirements set forth interim rules governing the capital charges
arising from bank exposures to CCPs related to OTC derivatives,
exchange-traded derivatives, and securities financing transactions
(which term, as used throughout this release, refers generally to
repurchase agreements and securities lending). Among other things,
the Basel III framework imposes lower capital requirements on CCPs
that obtain ``qualifying CCP'' (``QCCP'') status and would apply
QCCP status only to CCPs that are subject to a regulatory framework
consistent with the standards set forth in the PFMI Report. See
BCBS, Capital Requirements for Bank Exposures to Central
Counterparties (July 2012), available at http://www.bis.org/publ/bcbs227.pdf (setting forth he interim requirements set forth in this
report, currently under revision by the BCBS, in consultation with
CPSS and IOSCO). See also BCBS, Capital Treatment of Bank Exposures
to Central Counterparties: Consultative Document (rev. July 2013),
available at http://www.bis.org/publ/bcbs253.pdf; BIS, Basel III: A
Global Regulatory Framework for More Resilient Banks and Banking
Systems (rev. June 2011), available at http://www.bis.org/publ/bcbs189.htm (``Basel III framework''). The Basel III capital
requirements are one component of the Basel III framework.
    \49\ See supra note 1.
    The PFMI Report defines a ``financial market infrastructure''
(``FMI'') as a multilateral system among participating institutions,
including the operator of the system, used for the purposes of
clearing, settling, or recording payments, securities, derivatives,
or other financial transactions. See id. at 7; FMIs include CCPs,
CSDs, securities settlement systems (``SSSs''), and trade
repositories (``TRs''). Cf. 12 U.S.C. 5462(6)(B), supra note 30
(defining ``financial market utility'' under the Clearing
Supervision Act).
    The PFMI Report presumes that all CSDs, SSSs, CCPs, and TRs are
systemically important in their home jurisdiction. See PFMI Report,
supra note 1, at 131 & n.177 (noting the ``presumption . . . that
all CSDs, SSSs, CCPs, and TRs are systemically important because of
their critical roles in the markets they serve,'' but also noting
that ultimately ``national law will dictate the criteria to
determine whether an FMI is systemically important'').
    The Commission notes that the PFMI Report's definition of
``financial market infrastructure'' is consistent with the
Commission's prior use of the term. See Study of Unsafe and Unsound
Practices of Brokers and Dealers, H.R. Doc. No. 231, 92d Cong., 1st
Sess. 13 (1971) (defining ``financial market infrastructure'' as a
multilateral system among participating institutions, including the
operator of the system, used for the purposes of clearing, settling,
or recording payments, securities, derivatives, or other financial
transactions).
    \50\ The CPSS-IOSCO Recommendations are available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD123.pdf and http://www.iosco.org/library/pubdocs/pdf/IOSCPD176.pdf.
    The Board applies these standards in its supervisory process and
expects systemically important FMUs, as determined by the Board and
subject to its authority, to complete a self-assessment against the
standards set forth in the policy. See Financial Market Utilities,
77 FR 45907 (Aug. 2, 2012) (the Board adopting Regulation HH for
FMUs) (``Reg. HH''); Policy on Payments System Risk, 72 FR 2518
(Jan. 12, 2007).
    The Board has proposed to amend the standards in Regulation HH
to replace the current standards for payment systems with standards
based those set forth in the PFMI Report. It has also proposed to
amend its Policy on Payments System Risk. See infra note 53.
    \51\ Commission staff co-chaired the Editorial Team, a working
group within CPSS-IOSCO that drafted both the consultative and final
versions of the PFMI Report.
    \52\ See 15 U.S.C. 78q-1; 15 U.S.C. 78s(b).
    \53\ See CPSS-IOSCO, Implementation Monitoring of PFMIs--Level 1
Assessment Report (Aug. 2013), available at http://www.bis.org/publ/cpss111.pdf (describing efforts by various jurisdictions to adopt
standards for FMIs in line with the PFMI Report) (``PFMI
Implementation Monitoring Report''); see also Reg. HH, supra note
50; Financial Market Utilities, 79 FR 3665 (Jan. 22, 2014) (the
Board proposing to amend Reg. HH) (``proposed Reg. HH''); Policy on
Payment System Risk, 79 FR 2838 (Jan. 16, 2014) (the Board proposing
to amend its Federal Reserve Policy on Payments System Risk)
(``proposed PSR Policy''); Derivatives Clearing Organizations and
International Standards, 78 FR 72475 (Dec. 2, 2013) (CFTC adopting
rules for DCOs in line with international standards) (``DCO Int'l
Standards Release''); Enhanced Risk Management Standards for
Systemically Important Derivatives Clearing Organizations, 78 FR
49663 (Aug. 15, 2013) (CFTC adopting rules for systemically
important DCOs) (``SIDCO Release''); Derivatives Clearing
Organization General Provisions and Core Principles, 76 FR 69334
(Nov. 8, 2011) (CFTC adopting rules for DCOs); (``DCO Principles
Release'').
    In addition, the Board and the Office of the Comptroller of the
Currency have adopted rules implementing the material elements of
the BCBS interim framework for capitalization of bank exposures to
CCPs. See 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) (``Regulatory Capital
Rules''). The Board also noted the ongoing international discussions
on this topic and stated that it intends to revisit its rules once
the Basel III capital framework is revised. See id. The Board and
the Office of the Comptroller of the Currency's final rules define
``QCCP'' to mean, among other things, a designated FMU under the
Clearing Supervision Act. See 12 CFR 217.2; see also Regulatory
Capital Rules, supra, at 62100.
---------------------------------------------------------------------------

II. Discussion of the Proposed Amendments to Rule 17Ad-22 and Proposed
Rule 17Ab2-2

    The Commission is proposing to amend Rule 17Ad-22 and add Rule
17Ab2-2 pursuant to Section 17A of the Exchange Act and the Clearing
Supervision Act to provide a new regulatory framework for ``covered
clearing agencies,'' as defined below.
    Generally, Section 17A directs the Commission to facilitate the
establishment of a national system for the prompt and accurate
clearance and settlement of securities transactions, having due regard
for the public interest, the protection of investors, the safeguarding
of securities and funds, and the maintenance of fair competition among
brokers and dealers.\54\ It further requires that a clearing agency be
so organized and have the capacity and rules designed to, among other
things, facilitate the prompt and accurate clearance and settlement of
securities transactions, and to comply with the provisions of the
Exchange Act and the rules and regulations thereunder.\55\ In
establishing a regulatory framework for clearance and settlement, the
Exchange Act requires that a registered clearing agency's rules not
impose any burden on competition not necessary or appropriate in the
furtherance of the purposes of the Exchange Act.\56\
---------------------------------------------------------------------------

    \54\ See 15 U.S.C. 78q-(a)(2)(A).
    \55\ See 15 U.S.C. 78q-1(a)(3)(A), (F).
    \56\ See 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Consistent with these statutory objectives, the Commission
previously adopted Rule 17Ad-22(d) to establish minimum requirements
for registered clearing agencies and indicated that it might consider
further rulemaking at a later date.\57\ In furtherance of the
provisions of Section 17A of the Exchange Act and the Clearing
Supervision Act described above and as previously considered by the
Commission, the Commission is proposing Rule 17Ad-22(e) to establish
new requirements for covered clearing agencies, which the Commission
preliminarily believes are appropriate given the risks that their size,
operation, and importance pose to the U.S. securities markets, the
risks inherent in the products they clear, and the goals of Title VII
and the Exchange Act.\58\ In connection with its supervision of
registered clearing agencies under Section 17A of the Exchange Act,
including after the adoption of Rule 17Ad-22,\59\ the Commission has
considered whether enhanced requirements for covered clearing agencies
could contribute to the stability of U.S. securities markets, as
described further in Part IV, and has determined to issue this proposal
for comment.
---------------------------------------------------------------------------

    \57\ See Clearing Agency Standards Release, supra note 5, at
66224-25.
    \58\ See id. (contemplating future Commission action on clearing
agency standards).
    \59\ See Clearing Agency Standards Release, supra note 5, at
66227 (stating that Rule 17Ad-22 generally codifies existing
practices that reflect the CPSS-IOSCO Recommendations published in
2001 and 2004).
---------------------------------------------------------------------------

    The Commission has preliminarily chosen to retain Rule 17Ad-22(d)
and to continue to apply it to registered clearing agencies that are
not covered clearing agencies.\60\ The Commission preliminarily
believes that retaining Rule 17Ad-22(d) ensures that clear,
comprehensive, and transparent standards for registered clearing
agencies that are not covered clearing agencies will continue to exist
and, because they are narrower in scope, would thereby provide a more
flexible regime for new entrants seeking to establish and operate
registered clearing agencies, consistent with the continuing
development of the national system for clearance and settlement, than
would otherwise be the case with a single regime under proposed Rule
17Ad-22(e).
---------------------------------------------------------------------------

    \60\ See infra Part 0 (discussing the proposed language amending
Rule 17Ad-22(d) to apply to registered clearing agencies that are
not covered clearing agencies).
---------------------------------------------------------------------------

    The Commission notes that it is not proposing to alter the existing
requirements under Rule 17Ad-22(b), which establishes risk-management
and participant access requirements for registered clearing agencies
that perform CCP services for security-based swaps, or Rule 17Ad-22(c),
which requires registered clearing agencies that provide CCP services
to maintain a record of financial resources and all registered clearing
agencies to post on their Web sites annual audited financial
statements.\61\ These requirements continue to be appropriate for all
registered clearing agencies because they promote prompt and accurate
clearance and settlement of securities and security-based swap
transactions. Notably, Rule 17Ad-22(b) reduces the likelihood, in a
participant default scenario, that losses from default would disrupt
the operations of the clearing agency, and Rule 17Ad-22(c) provides an
additional layer of information about the activities and financial
strength of a registered clearing agency that market participants may
find useful in assessing their use of the registered clearing agency's
services while also assisting the Commission in its oversight of
registered clearing agencies' compliance with Rule 17Ad-22 by providing
a clear record of the method used by the clearing agency to, among
other things, maintain sufficient financial resources.\62\
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    \61\ The standards in Rules 17Ad-22(b) and (c) were also adopted
by the Commission in 2012. See 17 CFR 240.17Ad-22(b), (c); see also
Clearing Agency Standards Release, supra note 5.
    The Commission is proposing to revise Rule 17Ad-22(a) to account
for new proposed definitions. See proposed revision of Rule 17Ad-
22(a), infra Part 0. The existing definitions in 17 CFR 240.17Ad-
22(a) would be renumbered to account for new terms. In addition, the
definition of ``participant family'' would be amended to include
references to its use in proposed paragraphs (e)(4) and (e)(7). See
proposed Rule 17Ad-22(a)(13), infra Part 0.
    \62\ See Exchange Act Release No. 34-64017 (Mar. 3, 2011), 76 FR
14474, 14477-83 (Mar. 16, 2011); see also Clearing Agency Standards
Release, supra note 5, at 66244.
---------------------------------------------------------------------------

A. Overview

    The Commission is proposing Rule 17Ad-22(e) to establish
requirements for covered clearing agencies with respect to general
organization,\63\ financial risk management,\64\ settlement,\65\ CSDs
and exchange-of-

value settlement systems,\66\ default management,\67\ general business
risk and operational risk management,\68\ access,\69\ efficiency,\70\
and transparency.\71\ The discussion below provides greater detail
regarding each respective requirement in proposed Rule 17Ad-22(e).
Several aspects of proposed Rule 17Ad-22(e) are similar to existing
Rule 17Ad-22(d),\72\ but in general the Commission preliminarily notes
that certain requirements under proposed Rule 17Ad-22(e) would require
covered clearing agencies to consider and adopt policies and procedures
more closely tailored to the risks that are posed by covered clearing
agencies, which the Commission preliminarily identified as appropriate
in connection with its experience in supervising registered clearing
agencies under Section 17A of the Exchange Act, including since the
adoption of Rule 17Ad-22.
---------------------------------------------------------------------------

    \63\ See infra Parts 0-0 (discussing proposed Rules 17Ad-
22(e)(1) (legal risk), 17Ad-22(e)(2) (governance), and 17Ad-22(e)(3)
(framework for the comprehensive management of risk)).
    \64\ See infra Part 0 (discussing proposed Rules 17Ad-22(e)(4)
(credit risk), 17Ad-22(e)(5) (collateral), 17Ad-22(e)(6) (margin),
and 17Ad-22(e)(7) (liquidity risk)).
    \65\ See infra Parts 0-0 (discussing proposed Rules 17Ad-
22(e)(8) (settlement finality), 17Ad-22(e)(9) (money settlements),
and 17Ad-22(e)(10) (physical delivery risks)).
    \66\ See infra Parts 0-0 (discussing proposed Rules 17Ad-
22(e)(11) (CSDs) and 17Ad-22(e)(12) (exchange-of-value settlement
systems)).
    \67\ See infra Parts 0-0 (discussing proposed Rules 17Ad-
22(e)(13) (participant-default rules and procedures) and 17Ad-
22(e)(14) (segregation and portability)).
    \68\ See infra Parts 0-0 (discussing proposed Rules 17Ad-
22(e)(15) (general business risk), 17Ad-22(e)(16) (custody and
investment risk), and 17Ad-22(e)(17) (operational risk management)).
    \69\ See infra Parts 0-0 (discussing proposed Rules 17Ad-
22(e)(18) (access and participation requirements), 17Ad-22(e)(19)
(tiered participation arrangements), and 17Ad-22(e)(20) (links)).
    \70\ See infra Parts 0-0 (discussing proposed Rules 17Ad-
22(e)(21) (efficiency and effectiveness) and 17Ad-22(e)(22)
(communication procedures and standards)).
    \71\ See infra Part 0 (discussing proposed Rule 17Ad-22(e)(23)
(disclosure of rules, key procedures, and market data)).
    \72\ See infra Part 0 (discussing the anticipated impact of
proposed Rule 17Ad-22(e) given the existing requirements for
registered clearing agencies under Rule 17Ad-22).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the requirements of
proposed Rule 17Ad-22(e) would help promote governance, operations, and
risk management practices more closely tailored to the risks raised by
registered clearing agencies that have been designated systemically
important, are engaged in activities with a more complex risk profile,
or are determined to be covered clearing agencies by the Commission,
consistent with Section 17A of the Exchange Act. The Commission
preliminarily believes these requirements would also enable consistent
supervision of designated FMUs and would reflect the Commission's
consideration of international standards, as contemplated by Section
17A(i) and the Clearing Supervision Act.\73\ While the Commission has
made its own determination to issue the proposed rules for comment, the
Commission preliminarily believes that generally updating its rules,
where appropriate, to take into account the standards set forth in the
PFMI Report would contribute to the efforts of regulators around the
world, described above,\74\ to implement consistent standards for
FMIs.\75\ The Commission also preliminarily believes that Rule 17Ad-
22(e) would provide an additional benefit of providing support for a
determination by foreign bank regulators that covered clearing agencies
providing CCP services for derivatives and securities financing
transactions meet the requirements for QCCP status under the Basel III
framework and could therefore help reduce competitive frictions among
CCPs in different jurisdictions.
---------------------------------------------------------------------------

    \73\ See supra Part 0, in particular notes 36-37 and
accompanying text (discussing the requirements under Section 17A(i)
of the Exchange Act, 15 U.S.C. 78q-1(i), and Section 805(a) of the
Clearing Supervision Act, 12 U.S.C. 5464(a)).
    \74\ See supra note 53 and accompanying text.
    \75\ See infra Part 0 (further discussing the economic effects
of obtaining QCCP status under the Basel III capital requirements);
see also supra note 48.
---------------------------------------------------------------------------

    Part II.A first discusses the scope of proposed Rule 17Ad-22(e),
the role that written policies and procedures play in framing the
proposed rule, and the reasons for imposing certain frequency of review
requirements throughout the proposed rules. It then discusses the
anticipated impact of the proposed rules given the existing
requirements applicable to registered clearing agencies under Rules
17Ad-22(b) through (d), with which a covered clearing agency must
already be in compliance.
    Part II.B next discusses the proposed rules under Rule 17Ad-22(e).
Finally, Parts II.C, D, and E discuss, in turn, proposed Rule 17Ab2-2,
proposed Rule 17Ad-22(f), and the proposed amendment to Rule 17Ad-
22(d).
1. Scope of Proposed Rule 17Ad-22(e)
    The Commission is proposing to add four terms to Rule 17Ad-22(a) to
identify the registered clearing agencies that would be subject to
proposed Rule 17Ad-22(e). First, the Commission is proposing to add
Rule 17Ad-22(a)(9) to define ``financial market utility'' (``FMU'') as
defined in Section 803(6) of the Clearing Supervision Act.\76\ Second,
the Commission is proposing Rule 17Ad-22(a)(8) to define ``designated
clearing agency.'' \77\ A designated clearing agency would mean a
clearing agency registered with the Commission under Section 17A of the
Exchange Act that has been designated as a systemically important FMU
by the FSOC and for which the Commission is the supervisory agency as
defined in Section 803(8) of the Clearing Supervision Act.\78\ Third,
the Commission is proposing to add Rule 17Ad-22(a)(4) to define
``clearing agency involved in activities with a more complex risk
profile'' \79\ to mean a clearing agency registered with the Commission
under Section 17A of the Exchange Act that either (i) provides central
counterparty services for security-based swaps or (ii) has been
determined by the Commission to be involved in activities with a more
complex risk profile (``complex risk profile clearing agency''), either
at the time of its initial registration or upon a subsequent
determination by the Commission pursuant to proposed Rule 17Ab2-2.\80\
Fourth, the Commission is proposing to add Rule 17Ad-22(a)(7) to define
a ``covered clearing agency'' as a designated clearing agency, a
complex risk profile clearing agency, or any clearing agency determined
to be a covered clearing agency by the Commission pursuant to proposed
Rule 17Ab2-2.\81\
---------------------------------------------------------------------------

    \76\ See proposed Rule 17Ad-22(a)(9), infra Part 0; see also 12
U.S.C. 5462(6) (defining ``financial market utility'' pursuant to
the Clearing Supervision Act); supra note 26 (providing further
explanation of ``financial market utility'').
    \77\ See proposed Rule 17Ad-22(a)(8), infra Part 0.
    \78\ Rule 17Ad-22 does not currently apply to entities operating
pursuant to an exemption from clearing agency registration. The
proposed amendments to Rule 17Ad-22 would not broaden the scope of
Rule 17Ad-22 to an entity operating pursuant to an exemption from
registration as a clearing agency granted by the Commission.
    \79\ See proposed Rule 17Ad-22(a)(4), infra Part 0.
    \80\ The Commission is proposing Rule 17Ab2-2 to establish a
process for making determinations regarding clearing agencies
involved in activities with a more complex risk profile. See infra
Part 0 (further discussing the purpose, scope, and application of
proposed Rule 17Ab2-2) and Part 0 (proposed text of Rule 17Ab2-2).
     The Commission is also proposing Rule 17Ad-22(a)(16) to define
``security-based swap'' to mean security-based swap as defined in
Section 3(a)(68) of the Exchange Act, 15 U.S.C. 78c(a)(68). See
infra Part 0.
    \81\ See proposed Rule 17Ad-22(a)(4), infra Part 0.
---------------------------------------------------------------------------

    The Commission preliminarily believes there could be several
different bases under which registered clearing agencies would be
required to comply with proposed Rule 17Ad-22(e). For instance, because
DTC, FICC, NSCC, and OCC are registered clearing agencies pursuant to
Section 17A of the Exchange Act and are designated clearing agencies
for which the Commission is the supervisory agency under the Clearing
Supervision Act,\82\

they would be covered clearing agencies under proposed Rule 17Ad-
22(a)(7) and would be subject to the requirements for covered clearing
agencies in proposed Rule 17Ad-22(e). In addition, because ICEEU
provides CCP services for security-based swaps and has been deemed
registered with the Commission as a security-based swap clearing
agency,\83\ it would be a complex risk profile clearing agency under
proposed Rule 17Ad-22(a)(4) and also subject to the requirements for
covered clearing agencies proposed in Rule 17Ad-22(e).
---------------------------------------------------------------------------

    \82\ See supra Part 0.
    \83\ See supra note 41 and accompanying text.
---------------------------------------------------------------------------

    By comparison, CME and ICE would not be subject to the proposed
requirements for covered clearing agencies in Rule 17Ad-22(e) because
(i) they have been designated as systemically important FMUs under
Section 804 of the Clearing Supervision Act; \84\ (ii) they are each
dually registered with the Commission and the CFTC as a clearing agency
and DCO, respectively; and (iii) the CFTC is their supervisory agency
under the Clearing Supervision Act.\85\ The Commission preliminarily
believes that, because CME and ICE would be subject to the CFTC's
requirements for systemically important DCOs,\86\ applying proposed
Rule 17Ad-22(e) to them could impose duplicative requirements. Given
the Commission's existing regulatory authority under Section 17A(l) of
the Exchange Act,\87\ however, CME and ICE would remain subject to the
continuing requirements for registered clearing agencies in Rules 17Ad-
22(b) through (d).
---------------------------------------------------------------------------

    \84\ See 12 U.S.C. 5463.
    \85\ See supra Part 0; see also FSOC, 2013 Annual Report, supra
note 39, at 100.
    \86\ See supra note 41 and accompanying text.
    \87\ See 15 U.S.C. 78q-1(l).
---------------------------------------------------------------------------

    Two dormant clearing agencies, the Stock Clearing Corporation of
Philadelphia (``SCCP'') and the Boston Stock Exchange Clearing
Corporation (``BSECC''), have not been designated systemically
important by the FSOC and are not involved in activities with a more
complex risk profile.\88\ Accordingly, each would also remain subject
to the requirements in Rules 17Ad-22(b) through (d).
---------------------------------------------------------------------------

    \88\ In 2008, NASDAQ OMX Group, Inc. acquired SCCP and BSECC.
See Exchange Act Release No. 34-58324 (Aug. 7, 2008), 73 FR 46936
(Aug. 12, 2008) (order approving acquisition of BSECC); Exchange Act
Release No. 34-58180 (July 17, 2008), 73 FR 42890 (July 23, 2008)
(order approving acquisition of SCCP).
    Both SCCP and BSECC are currently registered with the Commission
as clearing agencies but conduct no clearing or settlement
activities. See Exchange Act Release No. 34-63629 (Jan. 3, 2011), 76
FR 1473 (Jan. 10, 2011); Exchange Act Release No. 34-63268 (Nov. 8,
2010), 75 FR 69730 (Nov. 15, 2010).
---------------------------------------------------------------------------

    Further, proposed Rule 17Ab2-2 would provide the Commission
flexibility to determine that the operations or circumstances of a
registered clearing agency, including a registered clearing agency that
is exempt from certain requirements applicable to registered clearing
agencies generally, warrant designation as a covered clearing
agency.\89\ It would also provide flexibility to make determinations
regarding newly registered clearing agencies.
---------------------------------------------------------------------------

    \89\ See infra Parts 0 and 0 (discussing determinations under
proposed Rule 17Ab2-2 and providing rule text, respectively).
---------------------------------------------------------------------------

    The Commission preliminarily believes the requirements proposed in
Rule 17Ad-22(e) aid the regulation of covered clearing agencies by, as
noted above, establishing requirements more closely tailored to the
risks they pose to the U.S. securities markets. For example, designated
clearing agencies are systemically important because of their
significance to the U.S. financial system and the risk that the failure
of, or a disruption to, their functioning would increase the risk of
significant liquidity or credit problems spreading among financial
institutions, thereby threatening the stability of the U.S. financial
system.\90\ Similarly, the Commission preliminarily believes that
complex risk profile clearing agencies, such as those providing CCP
services for security-based swaps, subject the U.S. securities markets
to a material level of systemic risk due to the nature of the products
that they clear.\91\ The requirements proposed in Rule 17Ad-22(e) are
intended to ensure that covered clearing agencies have robust policies
and procedures that help promote sound governance, operations, and risk
management.
---------------------------------------------------------------------------

    \90\ See supra note 27 and accompanying text.
    \91\ See generally Gov't Accountability Office, Systemic Risk:
Regulatory Oversight and Recent Initiatives to Address Risk Posed by
Credit Default Swaps (Mar. 2009), available at http://www.gao.gov/new.items/d09397t.pdf.
---------------------------------------------------------------------------

    As noted above,\92\ the Commission preliminarily believes that
establishing separate rules for covered clearing agencies and
registered clearing agencies that are not covered clearing agencies is
appropriate given the Commission's goals to facilitate the development
of a national system for the prompt and accurate clearance and
settlement of securities consistent with Section 17A of the Exchange
Act and to mitigate systemic risk consistent with Titles VII and VIII
of the Dodd-Frank Act.\93\ In this regard, the Commission intends that
Rule 17Ad-22(d) would continue to provide minimum requirements for the
operation and governance of registered clearing agencies that also
facilitate the entrance of new participants, as appropriate, into the
market for clearance and settlement services.\94\ The Commission
preliminarily believes that Rule 17Ad-22(e) would establish new
requirements for established participants in the market for clearance
and settlement services commensurate to the risks that their size,
operation, and importance pose to the U.S. securities markets.\95\
---------------------------------------------------------------------------

    \92\ See supra notes 54-61 and accompanying text.
    \93\ See supra notes 2, 13-14, and accompanying text (noting the
goals of, respectively, Section 17A of the Exchange Act and the
Dodd-Frank Act).
    \94\ See supra note 43 and accompanying text (noting the
Commission's intent in adopting Rule 17Ad-22 in the Clearing Agency
Standards Release).
    \95\ See supra note 44 and accompanying text (noting further
that the requirements adopted under Rule 17Ad-22 constituted an
important first step to enhance the substantive regulation of
registered clearing agencies pursuant to the Dodd-Frank Act); see
also infra Part 0 (addressing systemic risk in the context of
discussing the general economic considerations undertaken by the
Commission in proposing Rule 17Ad-22(e)).
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on
all aspects of the scope of proposed Rule 17Ad-22(e), the relationship
between proposed Rule 17Ad-22(e) and Rule 17Ad-22(d), and on proposed
Rules 17Ad-22(a)(4), (7), (8), and (9). In addition, the Commission
requests comments on the following specific issues:
     Is the scope of proposed Rule 17Ad-22(e) appropriate? Why
or why not? Is the scope sufficiently clear? Why or why not? Has the
Commission provided sufficient guidance regarding the scope of the
proposed rule? Are there aspects of the scope of the proposed rule for
which the Commission should consider providing additional guidance? If
so, please explain.
     Given that all non-dormant registered clearing agencies
would either be covered clearing agencies subject to Commission
supervision or be subject to CFTC regulation as designated clearing
entities for which the CFTC is the supervisory agency, should the
Commission replace the existing requirements under Rule 17Ad-22(d) with
the requirements proposed under Rule 17Ad-22(e)? Why or why not?
     Is the Commission's proposed definition of ``financial
market utility'' appropriate and sufficiently clear given the proposed
requirements? Why or why not? Should the definition be modified? If so,
how? Is there an

alternative definition the Commission should consider?
     Is the Commission's proposed definition of ``designated
clearing agency'' appropriate and sufficiently clear given the
requirements proposed? Why or why not? Should the definition be
modified? If so, how? Is there an alternative definition the Commission
should consider?
     Is the Commission's proposed definition of ``clearing
agency involved in activities with a more complex risk profile''
appropriate and sufficiently clear given the requirements proposed? Why
or why not? Should the definition be modified? If so, how? Is there an
alternative definition the Commission should consider?
     Is the Commission's proposed definition of ``covered
clearing agency'' appropriate and sufficiently clear given the
requirements proposed? Why or why not? Should the definition be
modified? If so, how? Is there an alternative definition the Commission
should consider?
     Are the requirements in proposed Rule 17Ad-22(e)
necessary, or do the existing provisions in Rule 17Ad-22(d) already
sufficiently address the issues identified in this release as
justification for increased regulation?
2. Role of Written Policies and Procedures
    Proposed Rule 17Ad-22(e) would require covered clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, fulfill the
requirements set forth in paragraphs (e)(1) through (23) of the
proposed rule. The Commission preliminarily believes that this approach
would facilitate the Commission's supervision of covered clearing
agencies, is appropriate given their role as SROs,\96\ and is
consistent with the approach taken by the Commission elsewhere in Rule
17Ad-22.\97\ The Commission preliminarily believes that, by requiring
written policies and procedures and, where appropriate, their
disclosure, proposed Rule 17Ad-22(e) should help promote the
development of improved standards for clearing agencies by allowing
market participants to compare certain of the operations of covered
clearing agencies with those of other clearing entities, which choose
to make their policies and procedures publicly available or are
required to do so by equivalent regulatory standards.\98\
---------------------------------------------------------------------------

    \96\ Registered clearing agencies are SROs as defined in Section
3(a)(26) of the Exchange Act, 15 U.S.C. 78c(a)(26). After a clearing
agency has been registered with the Commission, the clearing agency,
as an SRO, must submit most proposed rule changes to the Commission,
for approval pursuant to Rule 19b-4 under the Exchange Act. A stated
policy, practice, or interpretation of an SRO, such as a clearing
agency's written policies and procedures, would generally be deemed
to be a proposed rule change. See 17 CFR 240.19b-4.
    \97\ See Clearing Agency Standards Release, supra note 5, at
66228-29 (describing the scope of Rule 17Ad-22 at adoption).
    \98\ Compare proposed Rule 17Ad-22(e)(23), infra Part 0
(requiring public disclosure of, among other things, a covered
clearing agency's rules, policies, and procedures) with proposed
Reg. HH, supra note 53, at 3666-67, 3686-88, 3693 (the Board
proposing disclosure requirements intended to be in line with the
PFMI Report in Sec. 234.3(a)(23)); DCO Int'l Standards Release,
supra note 53, at 72493-94, 72521 (CFTC adopting disclosure
requirements intended to be in line with the PFMI Report in Sec.
39.37).
---------------------------------------------------------------------------

    The Commission is proposing to require policies and procedures
developed by each covered clearing agency to fulfill the requirements
of proposed Rule 17Ad-22(e) because the Commission preliminarily
believes that it is important to allow covered clearing agencies enough
flexibility to use their market experience and understanding of their
institutions to shape the rules, policies, and procedures implementing
proposed Rule 17Ad-22(e). This proposed approach is consistent with the
Commission's established approach for supervising SROs, and the
Commission preliminarily believes continuing this practice under Rule
17Ad-22(e) will allow the Commission to continue to perform its
supervisory function through the SRO rule filing process under Section
19(b) of the Exchange Act and Rule 19b-4,\99\ periodic inspections and
examinations, other monitoring of the activities of registered clearing
agencies, and other established supervisory processes. Because of the
importance the Commission gives to both maintaining clearing agency
flexibility and to existing oversight mechanisms, the Commission
preliminarily believes that the proposed approach is appropriate.
---------------------------------------------------------------------------

    \99\ See supra note 96 (describing requirements for SROs under
the Exchange Act and Rule 19b-4).
---------------------------------------------------------------------------

    The Commission anticipates that a covered clearing agency's rules,
policies, and procedures will need to evolve over time so that it can
adequately respond to changes in technology, legal requirements, the
needs of its members and their customers, trading volumes, trading
practices, linkages between financial markets, and the financial
instruments traded in the markets that a covered clearing agency
serves. Accordingly, the Commission preliminarily believes that covered
clearing agencies should continually evaluate and make appropriate
updates and improvements to their operations and risk management
practices to facilitate prompt and accurate clearance and settlement.
3. Frequency of Review Required Under Certain Policies and Procedures
    Many of the policies and procedures requirements proposed in Rule
17Ad-22(e) specify a frequency of review. Generally, the proposed
regularity of review falls into three categories-- daily, monthly, or
annually--and is based on the Commission's understanding of the current
review practices generally at covered clearing agencies. The
Commission's rationale for these differences is as follows:
     Daily: For those activities that the Commission
understands to be directly related to the day-to-day operations of a
covered clearing agency,\100\ such as activities related to the
calculation and collection of margin, the Commission preliminarily
believes that a covered clearing agency should undertake a daily review
and make decisions on a daily basis;
---------------------------------------------------------------------------

    \100\ See proposed Rules 17Ad-22(e)(4)(vi)(A); 17Ad-
22(e)(6)(ii); 17Ad-22(e)(6)(vi)(A); 17Ad-22(e)(7); 17Ad-
22(e)(7)(vi)(A); and 17Ad-22(e)(11)(ii), infra Part 0.
---------------------------------------------------------------------------

     Monthly: For those activities that the Commission
understands to coincide with and complement the review and reporting
cycles of the governance structures related to the risk management
function of the covered clearing agency,\101\ the Commission
preliminarily believes that a covered clearing agency should undertake
a monthly review; based on its supervisory experience, the Commission
notes that well-functioning risk management committees of the board and
similar management committees or other board or management committees
commonly meet or receive reports and other risk management information
from management on a monthly basis and the monthly requirement would be
consistent with such meeting and reporting frequency;
---------------------------------------------------------------------------

    \101\ See proposed Rules 17Ad-22(e)(4)(vi)(B); 17Ad-
22(e)(4)(vi)(C); 17Ad-22(e)(6)(vi)(B); 17Ad-22(e)(6)(vi)(C); 17Ad-
22(e)(7)(vi)(B); and 17Ad-22(e)(7)(vi)(C), infra Part 0.
---------------------------------------------------------------------------

     Annually: For those activities that are less integral to
day-to-day operations, involve issues that merit review of information
collected over longer time periods, or require more high-level review
and consideration by, for example, the full board of directors of a
clearing agency,\102\ the Commission

preliminarily believes that a covered clearing agency should undertake
an annual review; additionally, the Commission preliminary believes
that an annual cycle is appropriate in certain instances because other
major reviews such as auditing of the financial statements of
registered clearing agencies and their disclosure are required to occur
on an annual basis.
---------------------------------------------------------------------------

    \102\ See proposed Rules 17Ad-22(e)(3)(i); 17Ad-22(e)(4)(vii);
17Ad-22(e)(5); 17Ad-22(e)(6)(vii); 17Ad-22(e)(7)(v); 17Ad-
22(e)(7)(vii); 17Ad-22(e)(7)(x); 17Ad-22(e)(13)(iii); and 17Ad-
22(e)(15)(iii), infra Part 0.
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on
all aspects of the frequency of review that would be required to be
included in a covered clearing agency's policies and procedures under
each of the requirements in proposed Rule 17Ad-22(e). In addition, the
Commission requests comments on whether its assessment of daily,
monthly, and annual activities at covered clearing agencies is accurate
and appropriate given the proposed rules. The Commission also requests
comment on what factors should be considered in determining the nature,
timing, and extent of the required reviews and whether other
frequencies of review might be appropriate under some or all of the
proposed rules.
4. Anticipated Impact of Proposed Rule 17Ad-22(e)
    Based on the Commission's experience supervising registered
clearing agencies, and given the current requirements applicable to
registered clearing agencies under Rule 17Ad-22, the Commission
preliminarily anticipates that the degree of changes that covered
clearing agencies may need to make to their policies and procedures to
satisfy the proposed requirements of Rule 17Ad-22(e) would vary among
the particular provisions of the proposed rule and depend in part on
the business model and operations of the clearing agency itself, as
discussed below. The Commission preliminarily believes that, for the
provisions in its proposal where a similar existing requirement has
been identified, covered clearing agencies may need to make only
limited changes to update their policies and procedures, and the table
below provides summary information regarding the Commission's
preliminary assessment of the impact of the proposed rules:

----------------------------------------------------------------------------------------------------------------
          Proposed requirement                                     Existing requirement
----------------------------------------------------------------------------------------------------------------
Rule 17Ad-22(e)(1).....................  Rule 17Ad-22(d)(1).
Rule 17Ad-22(e)(2).....................  Rule 17Ad-22(d)(8).
Rule 17Ad-22(e)(3).....................  None.
Rule 17Ad-22(e)(4).....................  Rules 17Ad-22(b)(1), (b)(3), (d)(14).\103\
Rule 17Ad-22(e)(5).....................  None.
Rule 17Ad-22(e)(6).....................  Rules 17Ad-22(b)(2), (b)(4).\104\
Rule 17Ad-22(e)(7).....................  None.
Rule 17Ad-22(e)(8).....................  Rule 17Ad-22(d)(12).
Rule 17Ad-22(e)(9).....................  Rule 17Ad-22(d)(5).
Rule 17Ad-22(e)(10)....................  Rule 17Ad-22(d)(15).
Rule 17Ad-22(e)(11)....................  Rule 17Ad-22(d)(10).
Rule 17Ad-22(e)(12)....................  Rule 17Ad-22(d)(13).
Rule 17Ad-22(e)(13)....................  Rule 17Ad-22(d)(11).
Rule 17Ad-22(e)(14)....................  None.
Rule 17Ad-22(e)(15)....................  None.
Rule 17Ad-22(e)(16)....................  Rule 17Ad-22(d)(3).
Rule 17Ad-22(e)(17)....................  Rule 17Ad-22(d)(4).
Rule 17Ad-22(e)(18)....................  Rules 17Ad-22(b)(5) through (7), (d)(2).
Rule 17Ad-22(e)(19)....................  None.
Rule 17Ad-22(e)(20)....................  Rule 17Ad-22(d)(7).
Rule 17Ad-22(e)(21)....................  Rule 17Ad-22(d)(6).
Rule 17Ad-22(e)(22)....................  None.
Rule 17Ad-22(e)(23)....................  Rule 17Ad-22(d)(9).
----------------------------------------------------------------------------------------------------------------

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    \103\ The Commission notes that requirements under Rules 17Ad-
22(b) apply only to registered clearing agencies that provide CCP
services, the ``cover two'' requirement under Rule 17Ad-22(b)(3)
applies only to registered clearing agencies that provide CCP
services for security-based swaps, and requirements under Rule 17Ad-
22(d)(14) apply only to registered clearing agencies that provide
CSD services. See infra Part 0 (discussing, among other things, the
relationship between existing requirements under Rule 17Ad-22 and
proposed Rule 17Ad-22(e)(4)); see also 17 CFR 240.17Ad-22; Clearing
Agency Standards Release, supra note 5.
    \104\ The Commission notes that the relevant requirement in Rule
17Ad-22(b)(4) concerns policies and procedures regarding an annual
model validation for margin models while proposed Rule 17Ad-22(e)(6)
would impose, in addition to requiring policies and procedures
regarding an annual model validation for margin models, additional
requirements that do not appear in Rule 17Ad-22(b)(4). See infra
Part 0 (discussing the requirements under proposed Rule 17Ad-
22(e)(6)).
---------------------------------------------------------------------------

    With respect to the provisions in its proposal where no similar
existing requirement has been identified, the Commission preliminarily
anticipates that covered clearing agencies may need to make more
extensive changes to their policies and procedures (or implement new
policies and procedures), and may need to take other steps, to satisfy
the proposed requirements of Rule 17Ad-22(e).
    For further discussion of the anticipated impact and costs and
benefits of proposed Rule 17Ad-22(e), see Part IV.C.
5. General Request for Comments
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(e) and on all aspects of the definitions included
in proposed Rule 17Ad-22(a), as discussed in more detail in Part
II.B.\105\ In addition, the Commission requests comments on the
following issues:
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    \105\ Part 0 also contains additional requests for comments on
each proposed rule regarding particular issues specific to each
proposed rule.
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     Is each aspect of proposed Rules 17Ad-22(e)(1) through
(23), including any terms used therein, sufficiently clear given the
proposed requirements? Why or why not? Has the Commission provided
sufficient guidance as to the meaning of each provision of the proposed
rules? Are there aspects of the proposed rules for which the Commission
should consider providing additional guidance? If so, please explain.
     Are the Commission's definitions in proposed Rule 17Ad-
22(a) accurate, appropriate, and sufficiently clear? Why or why not?
Should the definitions be

modified? If so, how? Should the Commission adopt alternative
definitions than those proposed? Are there additional terms used in
Rule 17Ad-22(e) that should be defined? Please explain.
     Is the Commission's use of certain terms it believes to be
commonly understood (e.g., ``high degree of confidence'' or ``due
diligence'') appropriate and accurate? Why or why not?
     Would the proposed rules require covered clearing agencies
to change their current practices? If so, how? What are the expected
costs and benefits to covered clearing agencies in connection with
adding or revising their current practices with respect to the
implementation of the Commission's proposed rules? \106\
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    \106\ For a complete discussion of the anticipated economic
effect of the proposed rules, see Part 0.
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     Should the Commission consider an alternative approach
with respect to written policies and procedures included in the
proposed rules? Why or why not? If so, what alternative approaches
should the Commission consider? Please explain in detail.
     Should the Commission's proposed rules be less or more
prescriptive? Why or why not? If so, what alternative approaches should
the Commission consider? Please explain in detail.
     Are there any other factors that the Commission should
take into consideration with respect to the requirements of the
proposed rules?
     Should there be a phase-in period with respect to any of
the requirements of proposed Rule 17Ad-22(e)? If so, what should the
phase-in periods be? What facts and circumstances should the Commission
consider in evaluating whether to adopt a potential phase-in period?
Please explain in detail.
     Could the proposed rules affect the ability of covered
clearing agencies to compete for certain types of business either
within the United States or internationally? If so, how? Please provide
specific examples and data.
     Are there significant operational or legal impediments to
implementing the proposed rules? Would the proposed rules impact the
ability of covered clearing agencies to clear certain products? Are any
additional rules or regulations needed to facilitate compliance with
the proposed rules?
     Are there any requirements under existing Rule 17Ad-22
that could be viewed as being consistent with the PFMI standards
without being supplemented or replaced by new requirements in proposed
Rule 17Ad-22(e)? Please explain in detail.

B. Proposed Rule 17Ad-22(e)

1. Proposed Rule 17Ad-22(e)(1): Legal Risk
    Proposed Rule 17Ad-22(e)(1) would require 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.\107\ Rule 17Ad-22(d)(1)
currently requires a registered clearing agency's policies and
procedures to meet substantially the same requirement.\108\ Because the
requirements under Rule 17Ad-22(d)(1) and proposed Rule 17Ad-22(e)(1)
are substantially the same, the Commission anticipates that covered
clearing agencies may need to make only limited changes to update their
policies and procedures to comply with the proposed rule.\109\
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    \107\ See proposed Rule 17Ad-22(e)(1), infra Part 0.
    The Commission preliminarily believes that (i) the United States
is the relevant jurisdiction for covered clearing agencies that
perform the functions of a clearing agency in the United States for
purposes of Rule 17Ad-22(e)(1), and (ii) that covered clearing
agencies operating in multiple jurisdictions would be required to
address any conflicts of laws issues that they may encounter.
    \108\ Rule 17Ad-22(d)(1) requires a registered clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well-founded,
transparent, and enforceable legal framework for each aspect of its
activities in all relevant jurisdictions. See 17 CFR 240.17Ad-
22(d)(1); see also Clearing Agency Standards Release, supra note 5,
at 66245-46.
    \109\ See supra Part 0.
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    Consistent with the Exchange Act requirements discussed above,\110\
the Commission is proposing Rule 17Ad-22(e)(1) to require that a
covered clearing agency have a legal basis for each aspect of its
activities in all relevant jurisdictions. The legal framework for a
particular clearing agency may cover a broad array of areas and issues,
in particular including but not limited to its (i) organizational and
governance documents, such as its charter, bylaws, and any charters for
board and management committees; \111\ (ii) rules, policies, and
procedures,\112\ including those regarding settlement finality,
netting,\113\ default of a member, margin, collateral,\114\ payments,
obligations to the participant or default fund, eligibility and
participation requirements for members, and recovery and wind-down
plans; (iii) contracts (notably including with service providers,
settlement banks and liquidity providers); (vi) its use of novation or
similar legal devices; \115\ and (vii) service restrictions that may be
imposed on participants such as restrictions on activities or access.
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    \110\ See notes 54-56 and accompanying text; see also Parts 0
and 0 (generally discussing the regulatory framework under Section
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \111\ The role of governance arrangements in promoting effective
risk management has also been a focus of rules proposed by the
Commission to mitigate conflicts of interest at certain registered
clearing agencies. See Exchange Act Release No. 34-64017 (Mar. 3,
2011), 76 FR 14472 (Mar. 16, 2011) (proposing Rule 17Ad-23 to
address conflicts of interest and Rule 17Ad-26 to require standards
for board members or board committee directors at registered
clearing agencies); Exchange Act Release No. 34-63107 (Oct. 14,
2010), 75 FR 65881, 65893 (Oct. 26, 2010) (proposing Regulation MC
to mitigate conflicts of interest at security-based swap clearing
agencies).
    \112\ See supra note 96 (describing the requirements in Section
19(b) of the Exchange Act).
    \113\ Netting offsets obligations between or among participants
in the netting arrangement, thereby reducing the number and value of
payments or deliveries needed to settle a set of transactions.
Netting can reduce potential losses in the event of a participant
default and may reduce the probability of a default. Netting
arrangements can differ as to both timing and the parties to the
arrangement: (i) Certain netting arrangements net payments or other
contractual obligations resulting from market trades (or both) on a
continuous basis, while others close-out payments or obligations
when an event such as insolvency occurs; and (ii) netting
arrangement may net obligations bilaterally among two parties or
multilaterally among multiple parties.
    \114\ Collateral arrangements may involve either a pledge or a
title transfer. Therefore, regarding pledged assets, a covered
clearing agency would examine the degree of legal certainty that a
pledge has been validly created in the relevant jurisdiction and, as
appropriate, validly perfected. Regarding transfer of title to
assets, a covered clearing agency would examine the degree of legal
certainty that the transfer is validly created in the relevant
jurisdiction and will be enforced.
    \115\ Novation enables a clearing agency to act as a CCP. In
novation, the original contract between the buyer and seller is
discharged and two new contracts are created, one between the CCP
and the buyer and the other between the CCP and the seller. The CCP
thereby assumes the original parties' contractual obligations to
each other. Legal certainty regarding novation may reinforce market
participants' confidence regarding CCP support for or guarantee of
the transaction.
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    In addition, the Commission is proposing to add Rule 17Ad-22(a)(20)
to define ``transparent'' to mean, for proposed Rules 17Ad-22(e)(1),
(2), and (10), that relevant documentation is disclosed, as
appropriate, to the Commission and other relevant authorities, clearing
members and customers of clearing members, the owners of the covered
clearing agency, and the public, to the extent consistent with other
statutory and Commission requirements.\116\ In proposing this

definition, the Commission recognizes that certain types of
information, such as confidential information, may not be appropriate
for public disclosure or disclosure to certain third parties.
Confidential information might include, for instance, policies and
procedures with respect to the security of information technology or
other critical systems or governance arrangements relating to the
creation of special advisory committees by the board of directors. With
regard to public disclosures contemplated by proposed Rule 17Ad-
22(a)(20), a covered clearing agency could comply with the proposed
requirement by posting the relevant documentation to a covered clearing
agency's Web site. The Commission preliminarily believes that these
disclosures would support a participant's ability to evaluate the risks
associated with participating in the covered clearing agency. For
example, disclosures that facilitate market participants' understanding
of the legal basis for a covered clearing agency's activities and its
governance arrangements may encourage participation in the covered
clearing agency (with respect to prospective clearing members) and may
encourage trading in the United States that would result in clearance
and settlement through the covered clearing agency (with respect to
prospective investors).
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    \116\ See proposed Rule 17Ad-22(a)(20), infra Part 0; see also
Parts 0 and 0 (discussing proposed Rules 17Ad-22(e)(2) and (10),
respectively).
    Separately, the Commission has proposed rules to require
policies and procedures to protect the confidentiality of trading
information and procedures. See Exchange Act Release No. 34-64017
(Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (proposing Rule 17Ad-
23).
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    As was the case when the Commission considered Rule 17Ad-22(d)(1),
where a clearing agency is faced with significant uncertainty regarding
legal risk, the Commission preliminary believes this uncertainty may
undermine a covered clearing agency's ability to provide prompt and
accurate clearance and settlement, to safeguard securities and funds
and to provide fair procedures, as required under Section 17A of the
Exchange Act. For example, where a covered clearing agency's procedures
addressing a participant default and establishing a security interest
in collateral lack clarity or there is significant uncertainty
regarding enforceability, there is a risk the clearing agency may face
claims to void, stay or reverse its actions, which could be made by a
bankruptcy trustee or other type of receiver in an insolvency of a
participant, undermining the clearing agency's ability to safeguard
securities and funds. As a similar example, if covered clearing agency
netting activities are voided or reversed on legal grounds, which could
involve a participant's insolvency, clearing and settlement could be
disrupted as participant accounts are rebalanced. Also, for example, if
a covered clearing agency's plan for recovery and wind-down is subject
to legal uncertainty, the covered clearing agency or governmental
authorities may be delayed in or prevented from taking appropriate
actions, resulting in disorder that may undermine the provision of
prompt and accurate clearance and settlement.\117\
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    \117\ Issues addressed in such wind-down plans may include
termination, netting, and the transfer of securities positions and
assets.
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    Therefore, like Rule 17Ad-22(d)(1), the Commission preliminarily
believes that proposed Rule 17Ad-22(e)(1) would support the
effectiveness of a covered clearing agency's risk management procedures
in two ways. First, by imposing requirements addressing legal risk, it
would continue to promote effective risk management at covered clearing
agencies. Second, the proposed rule would reinforce covered clearing
agency policies and procedures regarding risks other than legal risk,
including, among others, credit, liquidity, operational, and general
business risk.\118\
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    \118\ Cf. PFMI Report, supra note 1, at 21-25 (discussing
Principle 1, legal basis).
---------------------------------------------------------------------------

    Request for Comments. The Commission generally requests comments on
all aspects of proposed Rule 17Ad-22(e)(1) and proposed Rule 17Ad-
22(a)(20). In addition, the Commission requests comments on the
following specific issues:
     Should the proposed rule include more specific
requirements based on the type of business or the types of services
offered by covered clearing agencies and/or whether the covered
clearing agency operates in multiple jurisdictions? If so, are there
any considerations, such as those concerning compliance with
regulations in other jurisdictions, the Commission should take into
account for covered clearing agencies operating in multiple
jurisdictions?
     Should the Commission adopt more prescriptive or less
prescriptive rules to define how covered clearing agencies would
provide for a well-founded, clear, transparent, and enforceable legal
basis? Why or why not? If so, what would those rules be?
     Should the Commission require a covered clearing agency to
maintain documentation to demonstrate the legal adequacy of the
mechanisms at the clearing agency that are in place to handle
participant defaults? If so, what kinds of documentation should the
Commission require?
     In proposing Rule 17Ad-22(a)(20), has the Commission taken
the right approach with respect to requiring public disclosures? Why or
why not? Should the Commission adopt rules that would require either
more or less disclosure? Why or why not?
     What should be the minimum level of public disclosure
required of a covered clearing agency? What information should a
covered clearing agency be permitted to withhold? What form should that
disclosure take? What content should be required? Please explain in
detail.
2. Proposed Rule 17Ad-22(e)(2): Governance
    Proposed Rules 17Ad-22(e)(2)(i) through (iv) would 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 in Section 17A of the
Exchange Act and the objectives of owners and participants.\119\ The
proposed rule contains requirements similar to those currently
applicable to registered clearing agencies under Rule 17Ad-22(d)(8),
but the proposed rule also requires that a covered clearing agency's
policies and procedures provide for governance arrangements that
clearly prioritize the safety and efficiency of the covered clearing
agency.\120\
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    \119\ See proposed Rule 17Ad-22(e)(2), infra Part 0. Proposed
Rule 17Ad-22(e)(2) would complement other requirements that may
apply separately, including requirements in proposed Rules 17Ad-25
and 17Ad-26, and requirements for security-based swap clearing
agencies under Section 765 of the Dodd-Frank Act, 12 U.S.C. 8343.
See supra note 111 (noting rules proposed by the Commission to
address potential conflicts of interest).
    \120\ Specifically, Rule 17Ad-22(d)(8) requires a registered
clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to have
governance arrangements that are clear and transparent to fulfill
the public interest requirements in Section 17A of the Exchange Act
applicable to clearing agencies, to support the objectives of owners
and participants, and to promote the effectiveness of the clearing
agency's risk management procedures. See 17 CFR 240.17Ad-22(d)(8);
see also Clearing Agency Standards Release, supra note 5, at 66251-
52.
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    Governance arrangements are critical to the sound operation of
SROs, including covered clearing agencies.\121\ The Exchange Act
explicitly conditions clearing agency registration on a clearing agency
having rules that (i) assure a fair representation of shareholders or
members and participants in the selection of its directors and
administration of affairs, (ii) facilitate prompt and accurate

clearance and settlement, (iii) protect investors and the public
interest, (iv) do not permit unfair discrimination in the use of the
clearing agency by participants and (v) provide certain fair procedures
regarding participants and other interested parties.\122\ Accordingly,
the proper functioning of registered clearing agencies pursuant to the
requirements of the Exchange Act is premised on the existence of a
well-organized and operating governance function.
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    \121\ See supra Part 0 and note 96 (describing the Commission's
framework for regulation of SROs and the SRO rule filing process).
    \122\ See 15 U.S.C. 78q-1(a)(3)(F), (H).
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    Consistent with these requirements and the Exchange Act
requirements discussed above,\123\ the Commission preliminarily
believes that the governance requirements proposed in Rule 17Ad-
22(e)(2) are appropriate because governance arrangements are
fundamental to the functioning of a covered clearing agency pursuant to
Section 17A of the Exchange Act.\124\ Consistent with the Commission's
statutory mandate under the Exchange Act, the proposed rule would
specify that governance arrangements also be consistent with the public
interest requirements in Section 17A of the Exchange Act as applicable
to clearing agencies. Because a covered clearing agency's decisions can
have widespread impact, affecting multiple market participants,
financial institutions, markets, and jurisdictions, the Commission
preliminarily believes it is important that each covered clearing
agency place a high priority on the safety and efficiency of its
operations and explicitly support the objectives of owners and
participants. In addition, supporting the public interest is a broad
concept that includes, for example, contributing to the ongoing
development of the U.S. financial system, in particular the national
clearance and settlement system contemplated by Section 17A of the
Exchange Act, and protecting investors and fostering fair and efficient
markets. The Commission believes that, by supporting the public
interest, market participants can develop common processes that help
reduce uncertainty in the market, such as industry standards and market
protocols related to clearance and settlement that facilitate a common
understanding and interactions among clearing agencies and their
members. The Commission preliminarily believes that covered clearing
agencies, as SROs, are appropriately positioned to determine, based on
their experience in providing clearance and settlement services and
based on information obtained from their members and other
stakeholders, as appropriate in the circumstances, what governance
arrangements appropriately support the public interest requirements in
Section 17A applicable to clearing agencies consistent with the
expectations of such stakeholders,\125\ balancing the potentially
competing viewpoints of the various stakeholders. The Commission also
preliminarily believes that mechanisms through which a covered clearing
agency could support the objectives of owners and participants could
potentially include representation on the board of directors, user
committees, and various public consultation processes.
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    \123\ See notes 54-56 and accompanying text; see also Parts 0
and 0 (generally discussing the regulatory framework under Section
17A of the Exchange Act, as amended by the Dodd-Frank Act).
    \124\ See 15 U.S.C. 78q-1(a)(2)(A).
    \125\ See supra note 95 (describing requirements for SROs under
the Exchange Act and Rule 19b-4).
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    As with Rule 17Ad-22(d)(8), the Commission preliminarily believes
that requiring policies and procedures for clear and transparent
governance arrangements support accountability in the decisions, rules,
policies, and procedures of the covered clearing agency. Such policies
and procedures requirements for governance arrangements provide owners,
participants, and, if applicable, general members of the public, with
an opportunity to comment on or otherwise provide input to governance
arrangements and, in turn, provide a covered clearing agency with the
opportunity to balance the potentially competing viewpoints of various
stakeholders in its decision making.\126\ Similarly, these policies and
procedures requirements for governance arrangements may promote the
effectiveness of a covered clearing agency's risk management procedures
by fostering a focus on the critical role that risk management plays in
promoting prompt and accurate clearance and settlement.\127\
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    \126\ See id.
    \127\ See supra note 111 (discussing rules proposed by the
Commission to mitigate conflicts of interest at clearing agencies as
part of efforts to promote sound risk management and governance
arrangements).
---------------------------------------------------------------------------

    In addition, proposed Rule 17Ad-22(e)(2)(iv) would require that the
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide for
governance arrangements establishing that the board of directors and
senior management have appropriate experience and skills to discharge
their duties and responsibilities.\128\ The Commission preliminarily
believes that these aspects of a covered clearing agency's governance
framework are particularly important and that establishing requirements
in these areas would be appropriate given the risks that a covered
clearing agency's size, operation, and importance pose to the U.S.
securities markets.\129\
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    \128\ See proposed Rule 17Ad-22(e)(2), infra Part 0.
    \129\ For a discussion of current practices at registered
clearing agencies regarding boards of directors and senior
management, and the anticipated impact of the proposed requirements
for governance, see Parts 0 and 0, respectively.
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    The Commission preliminarily believes that directors serving on the
board and board committees of a clearing agency play an important role
in creating a framework that supports prompt and accurate clearance and
settlement because of their role in the decision-making process within
a clearing agency. Additionally, the Commission preliminarily believes
that a covered clearing agency's senior management has an important
role in ensuring, under the board's direction, that the clearing
agency's activities are consistent with the objectives, strategy, and
risk tolerance of the clearing agency, as determined by the board.
Accordingly, the expertise and skills of senior management and
directors serving on the board of a covered clearing agency are likely
to affect its effective operation. For example, a lack of expertise by
board members may deter them from challenging decisions by management
and lessen the potential that management would escalate appropriate
issues to the board for the board's consideration. Similarly, board
members and management should not have conflicts of interests that
could undermine the decision-making process within a covered clearing
agency or interfere with fair representation and equitable treatment of
clearing members or other market participants by a covered clearing
agency.
    The Commission believes that covered clearing agencies are well
positioned to determine which individuals would have the appropriate
experience, skills, incentives and integrity to discharge their duties
and responsibilities that reflect the particular characteristics of
each covered clearing agency. Accordingly, the Commission preliminarily
believes that the proposed requirement for policies and procedures
would provide the covered clearing agency with a process to evaluate
the expertise and skills of board members and senior management,
consistent with the particular circumstances of the covered

clearing agency. Such policies and procedures may include provisions
requiring the covered clearing agency to consider, for example, the
specific qualifications, experience, competence, character, skills,
incentives, integrity or other relevant attributes to support a
conclusion that an individual nominee can appropriately serve as a
board member or on senior management. Such policies and procedures
could also include, among other things, requirements as to industry
experience relevant to the services provided by the covered clearing
agency, educational background, the absence of a criminal or
disciplinary record, or other factors relevant to the qualifications of
nominees being considered.
    Request for Comments. The Commission generally requests comments on
all aspects of proposed Rule 17Ad-22(e)(2). In addition, the Commission
requests comments on the following specific issues:
     Should the Commission require a covered clearing agency's
policies and procedures to provide for governance arrangements that
prioritize the safety and efficiency of the covered clearing agency?
Why or why not?
     The Commission is not proposing at this time to require a
covered clearing agency's policies and procedures provide for
governance arrangements that also support the objectives of
participants' customers, securities issuers and holders, and other
stakeholders. Should the Commission consider such a requirement? Why or
why not? Are existing protections under the Exchange Act, such as those
in Section 17A(b)(3)(H) (requiring clearing agency rules to provide
fair procedures to persons with respect to access to services offered
by the clearing agency),\130\ Section 17A(b)(5)(B) (establishing
requirements for clearing agencies when determining whether a person
may be prohibited or limited with respect to services offered),\131\
and Section 19(d)(2) (persons aggrieved by SRO actions may apply to the
Commission for review) \132\ already satisfactory or would additional
Commission governance requirements also be appropriate? What would be
the possible advantages and disadvantages of expanding the scope of
proposed Rule 17Ad-22(e)(2)(iii) to require covered clearing agency
policies and procedures to consider the interests of persons other than
owners and participants?
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    \130\ See 15 U.S.C. 78q-1(b)(3)(H).
    \131\ See 15 U.S.C. 78q-1(b)(5)(B).
    \132\ See 15 U.S.C. 78s(d)(2).
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     Should the Commission require a covered clearing agency's
policies and procedures to provide for governance arrangements
establishing that the board of directors and senior management have
appropriate experience and skills to discharge their duties and
responsibilities? Why or why not? Has the Commission provided
sufficient guidance on what ``experience and skills'' would require?
Why or why not?
     Are there any other requirements that should be included
in the rule to promote clear and transparent governance arrangements?
     The Commission is not proposing at this time to require a
covered clearing agency's policies and procedures provide for
governance arrangements to ensure that lines of responsibility and
accountability at the covered clearing agency are clear and direct.
Should the Commission consider such a requirement? Why or why not?
     The Commission is not proposing at this time to require a
covered clearing agency's policies and procedures provide for
governance arrangements that ensure major decisions of the board of
directors are disclosed to the public. Should the Commission consider
such a requirement? Why or why not?
     Should there be a phase-in period for covered clearing
agencies to comply with proposed Rule 17Ad-22(e)(2), such as until the
next annual meeting of shareholders of the covered clearing agency or
other time period? Why or why not?
     Are the governance requirements in proposed Rule 17Ad-
22(e)(2) necessary to achieve the benefits discussed in Part
IV.C.3.a.ii? Why or why not? For example, how and why would particular
features of the proposed rules, such as expectations that directors and
officers of covered clearing agencies have certain skills and
experience, contribute to greater market stability and reduced risk of