operations? If so, what type of guidance would be helpful?
Proposed Rule 17Ad-22(d)(7): Links
    Proposed Rule 17Ad-22(d)(7) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to evaluate the potential sources of
risks that can arise when the clearing agency establishes links either
cross-border or domestically to clear trades, and to ensure that these
risks are managed prudently on an ongoing basis.
    Section 17A(a)(1)(D) of the Exchange Act states that the linking of
all clearance and settlement facilities and the development of uniform
standards and procedures for clearance and settlement will reduce
unnecessary costs and increase the protection of investors and persons
facilitating transactions by and acting on behalf of investors.\66\
Further, Section 17A(b)(3)(F) of the Exchange Act requires that the
rules of a clearing agency foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions.\67\ In the clearance and settlement process, links should
help deepen market liquidity and enable participants to trade in other
markets.\68\ However, by tying the

clearing operations of different clearing agencies together, link
arrangements potentially expose a clearing agency and its members to
the risk management profile of another clearing organization and to the
risk of financial loss if that clearing organization experiences a
default or is otherwise unable to meet its settlement obligations.\69\
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    \66\ 15 U.S.C. 78q-1(a)(1)(D).
    \67\ 15 U.S.C. 78q-1(b)(3)(F).
    \68\ For example, The Depository Trust Company's (``DTC'')
Canadian Link Service allows qualifying DTC participants to clear
and settle valued securities transactions with participants of a
Canadian securities depository. The link is designed to facilitate
cross-border transactions by allowing participants to use a single
depository interface for U.S. and Canadian dollar transactions and
eliminate the need for split inventories. See Exchange Act Release
Nos. 52784 (November 16, 2005), 71 FR 70902 (November 23, 2005) and
55239 (February 5, 2007), 72 FR 6797 (February 13, 2007) (File No.
SR-DTC 2006-15).
    \69\ A clearing agency may be required to enter into a
participant agreement with the other clearing organization as part
of the link arrangement, which includes sharing in the loss
allocations of that clearing organization. See RCCP 4.10.6, supra
note 29.
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    Although the design and operation of each link will present a
unique risk profile, clearing agencies potentially face legal,
operational, credit and liquidity risks from link arrangements. In
addition, because links can create interdependencies, clearing agencies
may be affected by systemic risk if there are deficiencies in these
arrangements. The Commission preliminarily believes that requiring
clearing agencies to evaluate and monitor any link arrangements they
maintain is essential to protect the marketplaces that clearing
agencies serve because the requirement would reduce the likelihood that
such arrangements perpetuate risks that could create disruptions in the
operations of clearing agencies. Accordingly, the Commission is
proposing this rule, which would require clearing agencies to evaluate
and manage the risks associated with its links.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(7). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding evaluating
link arrangements and prudently managing the associated risks on an
ongoing basis sufficiently clear? If not, why not and how might the
rule be stated more clearly?
     How do current practices of clearing agencies with respect
to link arrangements meet or fail to meet the standard that the
Commission proposes to require in this rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices for link arrangements to comply with
the Commission's proposed rule?
     Should the Commission include specific requirements
regarding the clearing agency's responsibility to evaluate a link for,
among other things, the other clearing organization's structure,
financial strength, regulatory and disciplinary history, disaster
recovery, banking relationships and lines of credit, and risk
management controls?
     Should the Commission establish additional requirements
for clearing agencies that create linkages with other parties, such as
information reporting requirements to the Commission? Would such
additional requirements reduce or increase the likelihood that linkages
would be established in appropriate circumstances?
     How could clearing agencies ensure that the laws and
contractual rules governing linked systems support the design of the
link and provide adequate protection to both clearing agencies and
their participants? Are additional rules or requirements needed when a
link is established with a non-U.S. clearing organization?
     Should the Commission place any limits on or promote the
use of linked arrangements in light of potential effects on systemic
risk?
Proposed Rule 17Ad-22(d)(8): Governance
    Proposed Rule 17Ad-22(d)(8) would require clearing agencies 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 Exchange Act applicable to clearing agencies,\70\ to
support the objectives of owners and participants, and to promote the
effectiveness of the clearing agency's risk management procedures.\71\
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    \70\ Section 17A(b)(3)(F) of the Exchange Act requires that the
rules of a clearing agency be designed to protect investors and the
public interest. 15 U.S.C. 78q-1(b)(3)(F).
    \71\ Proposed Rule 17Ad-22(d)(8) would complement other
applicable requirements concerning governance at clearing agencies
that may also separately apply. These other requirements include the
existing regulatory framework of Section 17A of the Exchange Act and
the related requirements contemplated by proposed Rule 17Ad-25, as
well as Section 765 of the Dodd-Frank Act with respect to security-
based swap clearing agencies. See supra Section III.F. (proposing
that clearing agencies be required to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
identify and address existing or potential conflicts of interest).
See also Exchange Act Release No. 63107, 75 FR 65882, supra note 45.
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    Clear and transparent governance arrangements promote
accountability and reliability in the decisions, rules and procedures
of the clearing agency because they provide interested parties (such as
owners, participants, and general members of the public) with
information about how such decisions are made and what the rules and
procedures are designed to accomplish.\72\ The key components of a
clearing agency's governance arrangements include the clearing agency's
ownership structure, the composition and role of its board, the
structure and role of board committees, reporting lines between
management and the board, and the processes that ensure management is
held accountable for the clearing agency's performance.
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    \72\ The Exchange Act currently requires that certain aspects of
a clearing agency's governance arrangements be made clear and
transparent. Section 19(b) of the Exchange Act requires that
clearing agencies, as SROs, file with the Commission any proposed
rule or any proposed change in, addition to, or deletion from the
rules of the clearing agency, accompanied by a concise general
statement of the basis and purpose of the proposed rule change. 15
U.S.C. 78s(b).
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    Governance arrangements have the potential to play an important
role in making sure that clearing agencies fulfill the Exchange Act
requirements that the rules of a clearing agency be designed to protect
investors and the public interest and to support the objectives of
owners and participants. Similarly, governance arrangements may promote
the effectiveness of a clearing agency's risk management procedures by
creating an oversight framework that fosters a focus on the critical
role that risk management plays in promoting prompt and accurate
clearance and settlement.\73\
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    \73\ The role of governance arrangements in promoting effective
risk management has also been a focus of rules recently proposed by
the Commission to mitigate conflicts of interest at security-based
swap clearing agencies. See Exchange Act Release No. 63107, 75 FR
65882, supra note 45.
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    The Commission preliminarily believes that the requirements
regarding governance arrangements contained in proposed Rule 17Ad-
22(d)(8) would be appropriate in the public interest and for the
protection of investors because they would enhance the ability of a
clearing agency to serve the interests of its various constituents and
the interests of the general public while maintaining prudent risk
management processes to promote prompt and accurate clearance and
settlement.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(8). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding clear and
transparent governance arrangements sufficiently clear? If not, why not
and how might the rule be stated more clearly?
     Would the proposed rule require clearing agencies to
change their current

practices with respect to governance arrangements? If so, how? What are
the expected incremental costs to clearing agencies in connection with
adding to or revising their current practices with respect to
governance arrangements in order to implement the Commission's proposed
rule?
     Are there any other requirements that should be included
in the rule to promote clear and transparent governance arrangements,
such as mandating specific board or ownership structures? If so, what
should they be?
     Should the Commission propose more prescriptive
requirements for the governance of all clearing agencies? If so, what
should they be? For example, should the Commission specify certain
reporting lines or board composition?
     How direct should the Commission's role be in the
oversight and monitoring of the composition and activities of clearing
agency boards and board committees? If the Commission's role should be
more direct, what mechanisms or structure would facilitate the
Commission taking such a role? For example, should the Commission
consider any additional requirements related to fiduciary duties to
either enhance mitigation of conflicts or address deficiencies?
Proposed Rule 17Ad-22(d)(9): Information on Services
    Proposed Rule 17Ad-22(d)(9) would require clearing agencies
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide market participants with
sufficient information for them to identify and evaluate the risks and
costs associated with using clearing agencies' services. The types of
information that a clearing agency may disclose, as appropriate, to its
participants to satisfy this requirement include the clearing agency
rulebook,\74\ the costs of its services, a description of netting and
settlement activities the clearing agency provides, procedures relating
to participants' rights and obligations, information regarding the
clearing agency's margin methodology, and information regarding the
``extreme but plausible'' scenarios that the clearing agency uses to
stress test its financial resources. Requiring a clearing agency to
disclose information sufficient for participants to identify risks and
costs associated with using the clearing agency will allow participants
to make informed decisions about the use of the clearing agency and
take appropriate actions to mitigate their risks and costs associated
with the use of the clearing agency. Accordingly, the Commission's
proposed rule is designed to promote participants' understanding of the
risks and costs associated with using a clearing agency's services,
thereby facilitating prompt and accurate clearance and settlement,
safeguarding securities and funds and protecting investors.\75\
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    \74\ Because clearing agencies are SROs, their rules are
published by the Commission and are generally available on each
clearing agency's Web site. Nevertheless, discrete rule proposals
may not necessarily provide a complete picture of a clearing
agency's operations and risk mitigation procedures.
    \75\ See 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(9). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding providing
market participants with sufficient information to identify and
evaluate the risks and costs associated with using the clearing
agency's services sufficiently clear? If not, why not and what would be
a better alternative?
     How do current practices of clearing agencies with respect
to providing market participants with information meet or fail to meet
the requirements in the proposed rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices in order to implement the proposed
requirements?
     Should the Commission consider more detailed requirements
concerning disclosure of certain matters such as pricing information
and the cost of specific services, as well as default and risk
management procedures? Why or why not?
     Should any of the examples of the types of information
that a clearing agency may disclose be specifically required to be
provided by clearing agencies to their participants or to the public?
Proposed Rule 17Ad-22(d)(10): Immobilization and Dematerialization of
Stock Certificates
    Proposed Rule 17Ad-22(d)(10) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to immobilize \76\ and dematerialize
\77\ securities certificates and transfer them by book entry to the
greatest extent possible when the clearing agency provides central
securities depository services.\78\ The Commission preliminarily
believes that the immobilization and dematerialization of securities
and their transfer by book entry would result in reduced costs and
risks associated with securities settlements and custody by removing
the need to hold and transfer many, if not most, physical
certificates.\79\ The Commission also preliminarily believes that the
proposed rule would strengthen the requirement in Section 17A(b)(3)(F)
of the Exchange Act that requires the rules of a clearing agency to
assure the safeguarding of securities and funds that are in the custody
or control of the clearing agency or for which it is responsible.\80\
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    \76\ Immobilization refers to any circumstance where an investor
does not receive a physical certificate upon the purchase of shares
or is required to physically deliver a certificate upon the sale of
shares.
    \77\ Dematerialization is the process of eliminating physical
certificates as a record of security ownership.
    \78\ See proposed Rule 17Ad-22(a)(2) for definition of ``central
securities depository services.'' In the U.S., DTC is currently the
only registered clearing agency that provides central securities
depository services.
    \79\ By concentrating the location of physical securities in a
single central securities depository, clearing agencies are able to
centralize the operations associated with custody and transfer and
reduce costs through economies of scale. Virtually all mutual fund
securities, government securities, options, and municipal bonds in
the U.S. are dematerialized and most of the equity and corporate
bonds in the U.S. market are either immobilized or dematerialized.
While the U.S. markets have made great strides in achieving
immobilization and dematerialization for institutional and broker-
to-broker transactions, many industry representatives believe that
the small percentage of securities held in certificated form impose
unnecessary risk and expense to the industry and to investors. See
Exchange Act Release No. 8398 (March 11, 2004), 69 FR 12921 (March
18, 2004).
    \80\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(10). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding immobilization
and dematerialization of securities certificates and transferring them
by book entry to the greatest extent possible sufficiently clear? If
not, why not and what would be a better alternative?
     How do current practices of clearing agencies regarding
immobilization and dematerialization of securities certificates compare
to the practices that the Commission proposes to require in this rule?
What are the expected incremental costs to clearing agencies in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     What advantages or disadvantages might certificates have
over securities

held in book-entry-only form (e.g., proof of ownership in the event of
a loss of electronic records of ownership)? Under what circumstances,
if any, should the Commission encourage or discourage the use of
physical certifications?
Proposed Rule 17Ad-22(d)(11): Default Procedures
    Proposed Rule 17Ad-22(d)(11) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to make key aspects of their default
procedures publicly available. The Commission preliminarily believes
that this would provide certainty and predictability to market
participants about the measures a clearing agency will take in the
event of a participant default. Key aspects of a clearing agency's
default procedures should generally include the following: (i) The
circumstances in which action may be taken (e.g., what events trigger
mutualization of losses); (ii) who may take those actions (e.g.,
division of responsibilities when clearing agencies operate links to
other clearing agencies); (iii) the scope of the actions that may be
taken (e.g., any limits on the total losses that would be mutualized);
(iv) the mechanisms to address a clearing agency's obligations to non-
defaulting participants (e.g., process for clearing trades guaranteed
by the clearing agency to which a defaulting participant is a party);
and (v) the mechanisms to address the defaulting participant's
obligations to its customers (e.g., process for dealing with defaulting
participants' customer accounts). The proposed rule also would require
that clearing agencies establish default procedures that ensure that
the clearing agency can take timely action to contain losses and
liquidity pressures \81\ and to continue meeting its obligations when
due in the event of a participant default. Default procedures, among
other things, are meant to reduce the likelihood that a default by a
participant, or multiple participants, will disrupt the clearing
agency's operations. By creating a framework of default procedures that
are designed to permit a clearing agency to take actions to contain
losses and liquidity pressures it faces while continuing to meet its
obligations, the clearing agency should be in a better position to
continue providing its services in a manner that promotes accurate
clearance and settlement during times of market stress.
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    \81\ A clearing agency may be able to contain liquidity
pressures it faces by taking actions to secure additional sources of
liquidity or limiting transactions that potentially serve to drain
liquidity resources.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the requirements in
proposed Rule 17Ad-22(d)(11) would increase the possibility that
defaults by participants, should they occur, would proceed in an
orderly and transparent manner. This is because the Commission
preliminarily believes that the proposed rule would help to ensure that
all participants are aware of the default process and are able to plan
accordingly and that clearing agencies would have sufficient time to
take corrective actions to mitigate potential losses.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(11). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule requiring a clearing
agency to establish default procedures and make key aspects of those
default procedures publicly available sufficiently clear? If not, why
not and what would be a better alternative?
     How do current practices of clearing agencies with respect
to default procedures compare to the requirements of the proposed rule?
What are the expected incremental costs to clearing agencies in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
     Should the Commission require specific default procedures
for all clearing agencies, or should clearing agencies have discretion
to create their own default procedures consistent with the proposed
rule? Should the default procedures include a resolution plan if the
clearing agency is unable to obtain sufficient financial resources?
     How much flexibility should a clearing agency have in the
time it takes to manage a default and perform any liquidation of
positions?
Proposed Rule 17Ad-22(d)(12): Timing of Settlement Finality
    Proposed Rule 17Ad-22(d)(12) would require clearing agencies
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure that final settlement occurs
no later than the end of the settlement day and that intraday or real-
time finality is provided where necessary to reduce risks. A clearing
agency would be able to comply with this requirement by having a
reasonable process for facilitating final settlement to occur no later
than the end of the settlement day and for providing intraday or real-
time finality where necessary to reduce risks. Intraday or real-time
finality may be necessary to reduce risk in circumstances where the
lack of intraday or real-time finality may impede the clearing agency's
ability to facilitate prompt and accurate clearance and settlement,
cause the clearing agency's participants to fail to meet their
obligations, or cause significant disruptions in the securities
markets.
    The Commission preliminarily believes that requiring intraday or
real-time finality for settlements, where such requirement is necessary
to reduce risks, would facilitate prompt and accurate clearance and
settlement by providing certainty that a settlement is final and
irrevocable within a timeframe that is commensurate with the level of
risk created by the lack of settlement finality. The risks associated
with lack of settlement finality stem from the undermining of
confidence that transaction obligations will be discharged by the
clearing agency or its participants. Moreover, the Commission
preliminarily believes that settlement finality should occur not later
than the end of the settlement day to limit the volume of outstanding
obligations that are subject to settlement at any one time and thereby
reduce the settlement risk exposure of participants and the clearing
agency.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(12). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding the timing of
settlement finality sufficiently clear? If not, why not and what would
be a better alternative?
     How do current practices of clearing agencies with respect
to settlement finality compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
     What changes, if any, would be created by the requirement
under the proposed rule that final settlement occur no later than the
end of the settlement day? Does the proposed rule affect certain
identifiable categories of market participants differently than others,
such as smaller entities or entities with limited operations in the
U.S.? If so, how?

     Are there operational, legal or regulatory impediments to
intraday or real-time settlement? Will the proposed standard make it
harder for clearing agencies to conduct certain types of business for
which intraday or real-time finality may be difficult? Are any
additional rules or regulations needed to encourage intraday or real-
time finality to reduce risks?
     Are there circumstances when the requirements of intraday,
real-time or end of day settlement finality proposed by the rule are
not feasible or are not beneficial? If so, in what circumstances?
Proposed Rule 17Ad-22(d)(13): Delivery Versus Payment
    Proposed Rule 17Ad-22(d)(13) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to eliminate principal risk by linking
securities transfers to funds transfers to achieve delivery versus
payment (``DVP''). DVP is achieved in the settlement process when the
mechanisms facilitating settlement ensure that delivery occurs if and
only if payment occurs.\82\
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    \82\ See Bank for International Settlements, Delivery Versus
Payment in Securities Settlement Systems (1992), available at http://www.bis.org/publ/cpss06.pdf. Three different DVP models can be
differentiated according to whether the securities and/or funds
transfers are settled on a gross (trade-by-trade) basis or on a net
basis.
---------------------------------------------------------------------------

    Among other things, DVP eliminates the risk that a party would lose
some or its entire principal because payment is made only if securities
are delivered. The Commission preliminarily believes that clearing
agencies should be required to use this payment method in order to
reduce the potential that delivery of the security is not appropriately
matched with payment for a security, thereby impeding the clearing
agency's ability to facilitate prompt and accurate clearance and
settlement. Therefore, the Commission is proposing that clearing
agencies be required to link securities transfers to funds transfers in
a way that achieves DVP.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(13). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding using DVP to
eliminate principal risk by linking securities transfers to funds
transfers sufficiently clear? If not, why not and what would be a
better alternative?
     How do current practices of clearing agencies for linking
securities transfers to funds transfers compare to the practices that
the Commission proposes to require in this rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices in order to implement the Commission's
proposed rule?
     What are the advantages and disadvantages of the proposed
rule mandating a strict DVP standard? Does the proposed rule affect
certain identifiable categories of clearing agencies differently than
others, such as clearing agencies with more diversified post-trade
services as compared to clearing agencies that specialize in fewer
activities?
     Are there operational or legal impediments to implementing
the proposed DVP rule? Would the proposed rule make it more difficult
for clearing agencies to conduct certain types of business that may
require a longer settlement cycle, for reasons outside of the clearing
agency's control? Are any additional rules or regulations needed to
support achievement of the proposed DVP rule?
     Are there circumstances when DVP is not feasible or
practicable? If so, when?
Proposed Rule 17Ad-22(d)(14): Risk Controls To Address Participants'
Failure To Settle
    Proposed Rule 17Ad-22(d)(14) requires clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to institute risk controls, including
collateral requirements and limits to cover the clearing agency's
credit exposure to each participant exposure fully, that ensure timely
settlement in the event that the participant with the largest payment
obligation is unable to settle when the clearing agency provides
central securities depository services \83\ and extends intraday credit
to participants.
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    \83\ See proposed Rule 17Ad-22(a)(2) for definition of ``central
securities depository services.''
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    Clearing agencies that provide central securities depository
services may sometimes extend intraday credit to participants to, among
other things, facilitate timely settlements by providing participants
with an additional tool to meet delivery obligations. If a participant
fails to settle its obligations to the clearing agency, the clearing
agency must cover those obligations to be able to continue to
facilitate prompt and accurate clearance and settlement.
    The Commission preliminarily believes it is important for clearing
agencies that provide central securities depository services to
institute risk controls, including collateral requirements and limits
to cover the clearing agency's credit exposure to each participant
exposure fully, that ensure timely settlement in these circumstances to
address the risk that the participant may fail to settle after credit
has been extended. The Commission also preliminarily believes that
requiring the controls to be designed to withstand the inability of the
participant with the largest payment obligation to settle, in such
circumstances, would reduce the likelihood of disruptions at the
clearing agency by having controls in place to account for the largest
possible loss from any individual participant and thereby help the
clearing agency to provide prompt and accurate clearance and settlement
during times of market stress.\84\
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    \84\ As previously indicated, IOSCO and the CPSS are currently
in the process of revising their existing sets of international
standards which include those related to a clearing agency's ability
to withstand participant failures and to meet payment obligations.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(14). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding risk controls
to ensure timely settlement for a clearing agency providing central
securities depository services sufficiently clear? If not, why not and
what would be a better alternative?
     How do current practices of clearing agencies that provide
central securities depository services compare to the practices that
the Commission proposes to require in this rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices in order to implement the Commission's
proposed rule?
     In addition to collateral requirements and limits on
credit exposure to participants, are there other controls on intra-day
credit that could be effective in managing settlement risk? If so,
should the Commission require the use of any of these other risk
controls?
     What are the advantages and disadvantages of requiring
that controls be designed to withstand a failure to

settle by the participant with the largest payment obligation?
     Should the Commission require that the clearing agency be
able to withstand a settlement failure by more than the largest
participant? For example, should the Commission require the clearing
agency be able to withstand a settlement failure by the participants
with the two largest payment obligations? Why or why not?
Proposed Rule 17Ad-22(d)(15): Physical Delivery Risks
    Proposed Rule 17Ad-22(d)(15) would require clearing agencies
establish, implement, maintain and enforce written policies and
procedures reasonably designed to disclose to their participants the
clearing agency's obligations with respect to physical deliveries.\85\
For example, if a clearing agency (as part of its operations) takes
physical delivery of securities from its participants in return for
payments of cash, then it must inform its participants of the extent of
the clearing agency's obligations to make payment. A statement by the
clearing agency to its participants about the clearing agency's
obligations with respect to physical deliveries, among other things,
would help to ensure that participants have information that is likely
to enhance the participants' understanding of their rights and
responsibilities with respect to using the clearance and settlement
services of the clearing agency. The Commission preliminarily believes
that providing such information to participants would promote a shared
understanding regarding physical delivery practices between the
clearing agency and its participants which could help reduce the
potential for fails and thereby facilitate prompt and accurate
clearance and settlement.
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    \85\ The proposed rule would provide clearing agencies with the
flexibility to determine the method by which the clearing agency
will state this information to its participants. However, the
clearing agencies should take care to develop an approach that
provides sufficient notice to its participants regarding the
clearing agency's obligations.
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    The proposed rule would also require clearing agencies to
reasonably design their operations to identify and manage the risks
that arise in connection with their obligations for physical
deliveries. The risks associated with physical deliveries could stem
from, among other factors, operational limitations with respect to
assuring receipt of physical deliveries and processing of physical
deliveries. The Commission preliminarily believes that requiring
clearing agencies to identify and manage these risks would reduce the
potential that issues will arise as a result of physical deliveries
because the clearing agency will have acted preemptively to deal with
potential issues that may disrupt the clearance and settlement process.
Accordingly, the Commission preliminarily believes this requirement
would help a clearing agency to facilitate prompt and accurate
clearance and settlement consistent with Section 17A of the Exchange
Act.\86\
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    \86\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(15). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding providing
information regarding physical delivery and identifying and managing
risks associated with physical delivery sufficiently clear? If not, why
not and what would be a better alternative?
     How do current practices of clearing agencies with respect
to physical delivery compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
     What type of information would be useful for participants
to receive from a clearing agency regarding the clearing agency's
obligations to participants with respect to physical deliveries? What
are the advantages or disadvantages of including specific disclosure
requirements with respect to any of this information?
     Are there physical delivery obligations that clearing
agencies should not assume or for which the Commission should consider
additional restrictions?

B. Proposed Rule 17Aj-1 Dissemination of Pricing and Valuation
Information by Security-Based Swap Clearing Agencies That Perform
Central Counterparty Services

    The Commission is proposing Rule 17Aj-1 to incorporate requirements
regarding dissemination of pricing and valuation information in the CDS
Clearing Exemption Orders into the Commission's rules for security-
based swap clearing agencies.\87\ Recently, the Commission voted to
extend these temporary conditional exemptions from certain provisions
of the Federal securities laws until July 16, 2011 to continue to
facilitate central clearing of certain CDS.\88\ The proposed rule is
designed in part to continue the existing dissemination requirements
from the CDS Clearing Exemption Orders which would otherwise expire
along with those exemption orders.
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    \87\ See, e.g., the CDS Clearing Exemption Order relating to ICE
Trust. ``[T]his temporary extension is conditioned on ICE Trust,
directly or indirectly, making available to the public on terms that
are fair and reasonable and not unreasonably discriminatory: (i) All
end-of-day settlement prices and any other prices with respect to
Cleared CDS that ICE Trust may establish to calculate mark-to-market
margin requirements for ICE Trust clearing members; and (ii) any
other pricing or valuation information with respect to Cleared CDS
as is published or distributed by ICE Trust.'' Exchange Act Release
No. 63387 (November 29, 2010) 75 FR 75502 (December 3, 2010).
    \88\ The extensions of the temporary conditional exemptions
applied to central clearing of certain CDS by ICE Trust, ICE Clear
Europe, CME and Eurex. See Exchange Act Release Nos. 63389 (November
29, 2010), 75 FR 75520 (December 3, 2010); 63390 (November 29,
2010), 75 FR 75518 (December 3, 2010); 63388 (November 29, 2010), 75
FR 75522 (December 3, 2010); 63387 (November 29, 2010) 75 FR 75502
(December 3, 2010) (extending the CDS Clearing Exemption Orders for
ICE Clear, Eurex, CME and ICE Trust respectively).
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    Proposed Rule 17Aj-1 would require dissemination of pricing and
valuation information by security-based swap clearing agencies that
perform CCP services.\89\ In particular, proposed Rule 17Aj-1 would
require each security-based swap clearing agency that performs CCP
services to make available to the public, on terms that are fair,
reasonable, and not unreasonably discriminatory,\90\ all end-of-day
settlement prices and any other prices for security-based swaps that
the clearing agency may establish to calculate its participants' mark-
to-market \91\ margin requirements and any

other price or valuation information with respect to security-based
swaps as is published or distributed by the clearing agency to its
participants.\92\ The Commission preliminarily believes this
requirement should apply to security-based swap clearing agencies that
perform CCP services because, based on the Commission's oversight
experience pursuant to the CDS Clearing Exemption Orders, price and
valuation information with respect to security-based swaps may often be
limited and such a requirement could help to provide information to
market participants that may otherwise only be available to the
participants of a particular clearing agency. Clearing agencies that
clear standard securities may not face similar limitations on price and
valuation information. As a result, the Commission is proposing this
rule only with respect to security-based swap clearing agencies that
perform CCP services but is requesting comment on whether the rule
should apply more broadly.
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    \89\ Under the proposed rule, security-based swap clearing
agencies would be permitted to use different approaches to make
certain pricing and valuation information available to the public.
For example, some may choose to engage the services of a third-party
vendor while others may make the information directly available
through the clearing agency's Web site or some other means.
    \90\ Proposed Rule 17Aj-1 does not prohibit charges that may be
assessed with respect to security-based swap clearing agencies
making this information available to the public as long as such
charges are fair, reasonable, and not unreasonably discriminatory.
The fair, reasonable, and not unreasonably discriminatory
requirements for open access to information pursuant to proposed
Rule 17Aj-1 are consistent with requirements the Commission adopted
pursuant to the CDS Clearing Exemption Orders as well as in Rule
603(a) of Regulation NMS which requires all exchanges, alternative
trading systems, and other broker-dealers that offer individual data
feeds to make the data available on terms that are fair and
reasonable and not unreasonably discriminatory. See 17 CFR
242.603(a).
    \91\ In this specific context of the margin practices of
security-based swap clearing agencies, the term ``mark-to-market''
refers to the variation margin practices used by a clearing agency
to account for ongoing fluctuations in the market value of its
participants' security-based swap positions.
    \92\ Clearing agencies may destroy or otherwise dispose of
records at the end of five years consistent with Rule 17a-6 of the
Exchange Act. See 17 CFR 240.17a-6.
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    As noted above, the Commission granted the CDS Clearing Exemption
Orders to promote the use of CCPs with respect to CDS.\93\ Section
763(b) of the Dodd-Frank Act provides that certain security-based swap
clearing agencies will be deemed registered for the purpose of clearing
security-based swaps (``Deemed Registered Provision'').\94\ The Deemed
Registered Provision becomes effective on July 16, 2011.\95\ After the
Deemed Registered Provision becomes effective, certain clearing
agencies would no longer need an exemption from registration as a
clearing agency under Section 17A of the Exchange Act in order to clear
security-based swaps.\96\ Proposed Rule 17Aj-1 would require
securities-based swap clearing agencies that perform CCP services, once
registered, to make publicly available the same pricing and valuation
information required by the CDS Clearing Exemption Orders.
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    \93\ See discussion supra in Section I.
    \94\ See Public Law 111-203 Sec.  763(b) (adding new Section
17A(l) to the Exchange Act. Under this Deemed Registered Provision,
eligible clearing agencies will be required to comply with all
requirements of the Exchange Act, and the rules thereunder,
applicable to registered clearing agencies to the extent it clears
security-based swaps after the effective date of the Deemed
Registered Provision, including, for example, the obligation to file
proposed rule changes under Section 19(b) of the Exchange Act.
    \95\ See Public Law 111-203 Sec.  774.
    \96\ ICE Trust, ICE Clear Europe and CME are each eligible for
the Deemed Registered Provision based on the specified criteria in
Section 763(b) of the Dodd-Frank Act. See Exchange Act Release Nos.
63389 (November 29, 2010), 75 FR 75520 (December 3, 2010); 63390
(November 29, 2010), 75 FR 75518 (December 3, 2010); 63388 (November
29, 2010), 75 FR 75522 (December 3, 2010); 63387 (November 29,
2010), 75 FR 75502 (December 3, 2010) (extending the CDS Clearing
Exemption Orders for ICE Clear, Eurex, CME and ICE Trust
respectively).
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    The clearing agencies operating pursuant to the CDS Clearing
Exemption Orders have been generating model end-of-day settlement
prices for CDS, which they in turn provide to clearing members and use
to establish margin requirements for member positions. Pursuant to the
terms of the CDS Clearing Exemption Orders, these clearing agencies
have also made this information available to the public. The Commission
preliminarily believes that public availability of this information and
other related pricing data has helped to improve fairness, efficiency,
and market competition by making available to all market participants
data that may otherwise be available to only a limited subset of market
participants. For example, end-of-day settlement prices generated by
security-based swap clearing agencies represent pricing during the
lifecycle of a security-based swap. As a result, this end-of-day
pricing information would generally not be captured as part of any pre-
or post-trade market data and may therefore provide additional
information for market participants to consider in determining the
value of the same or similar security-based swap positions.
Accordingly, the Commission is proposing Rule 17Aj-1 to incorporate the
current requirements for dissemination of price and valuation
information under the CDS Clearing Exemption Orders.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Aj-1. In addition, the Commission requests comments on
the following specific issues:
     Is the current requirement in the CDS Clearing Exemption
Orders to provide certain pricing information helpful in promoting
price transparency and efficiency in the CDS market? If so, why? If
not, why not? Are there ways in which the requirement could be
improved, for instance to ensure better access to those who may want to
access the information but find it difficult to obtain?
     Have market participants found the standard to make
information available to the public on terms that are fair, reasonable,
and not unreasonably discriminatory sufficiently clear? If not, what
type of additional guidance would be useful? Should it be expanded to
apply to all clearing agencies? Why or why not?
     Is there any other pricing information, such as with
respect to valuation of security-based swaps by clearing agencies, that
the Commission should consider requiring security-based swap clearing
agencies to make available to the public?

C. Proposed Rule 17Ad-23 Clearing Agency Policies and Procedures To
Protect the Confidentiality of Trading Information of Clearing Agency
Participants

    The Commission is proposing Rule 17Ad-23 to require all clearing
agencies to establish, implement, maintain, and enforce written
policies and procedures that are reasonably designed to protect the
confidentiality of transaction information received by the clearing
agency. Such transaction information may include, but is not limited
to, trade data, position data, and any non-public personal information
about a clearing agency participant or any of its participants'
customers. The Commission preliminarily believes that such policies and
procedures would help to limit the potential misuse of confidential
information that could impede prompt and accurate clearance and
settlement and reduce confidence in the operations of the clearing
agency.
    The proposed rule also provides that the required written policies
and procedures shall include, but are not limited to, (a) limiting
access to confidential trading information of clearing members to those
employees of the clearing agency who are operating the system or
responsible for its compliance with applicable laws or rules and (b)
limitations on personal trading by employees and agents of the clearing
agency. This proposed requirement would incorporate certain conditions
under the CDS Clearing Exemption Orders previously granted to security-
based swap clearing agencies related to the confidential treatment of
proprietary information of participants.\97\ As an intermediary in

security transactions, a clearing agency receives confidential
information which, if not protected, could disclose the terms of market
participant's trades, trading strategies, or non-public personal
information. The Commission believes that the requirement that clearing
agencies operating under the CDS Clearing Exemption Orders develop
policies and procedures to limit access to confidential information and
develop standards restricting trading that may be based on confidential
information has contributed to the formation of more robust controls
limiting the potential misuse of confidential information (such as
trading based on non-public information) and therefore preliminarily
believes that it would be appropriate for all clearing agencies to be
subject to these requirements.
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    \97\ See, e.g., CDS Clearing Exemption Order for ICE Trust.
``ICE Trust shall establish and maintain adequate safeguards and
procedures to protect clearing members' confidential trading
information. Such safeguards and procedures shall include: (A)
Limiting access to the confidential trading information of clearing
members to those employees of ICE Trust who are operating the system
or responsible for its compliance with this exemption or any other
applicable rules; and (B) establishing and maintaining standards
controlling employees of ICE Trust trading for their own accounts.
ICE Trust must establish and maintain adequate oversight procedures
to ensure that the safeguards and procedures established pursuant to
this condition are followed.'' Exchange Act Release Nos. 59527
(March 6, 2009), 74 FR 10791 (March 12, 2009), Exchange Act Release
No. 61119 (December 4, 2009), 74 FR 65554 (December 10, 2009) and
Exchange Act Release No. 61662 (March 5, 2010), 75 FR 11589 (March
11, 2010) and 63387 (November 29, 2010), 75 FR 75502 (December 3,
2010).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-23. In addition, the Commission requests comments on
the following specific issues:
     How do clearing agencies currently maintain
confidentiality of the transaction information they receive? How do
those practices compare to what the proposed rule requires? What are
the expected incremental costs to clearing agencies in connection with
adding to or revising their current practices to implement the
Commission's proposed rule?
     Is the current requirement in the CDS Clearing Exemption
Orders helpful in restricting the misuse of confidential information in
the CDS market? If so, why? If not, why not? Are there ways in which
the requirement could be improved, for instance by permitting fewer
restrictions on access to information within a clearing agency?
     In addition to the types of transaction information
discussed, what other kinds of transaction information do clearing
agencies receive? To what extent would this information be non-public?
     How do clearing agencies monitor or restrict their
employees' and agents' trading activities? What are the advantages or
disadvantages of such methods?
     Should the Commission propose any specific restrictions
(such as prohibitions on trading) instead of having clearing agencies
develop their own policies and procedures?
     Should the Commission require the written policies and
procedures of the clearing agency to provide for a clear audit trail of
transaction information that is processed by the clearing agency?
Please explain.
     Instead of applying this proposed rule to all clearing
agencies, should the Commission consider requiring that only certain
types of clearing agencies be subject to this requirement (e.g.,
security-based swap clearing agencies)? Why or why not?

D. Proposed Rule 17Ad-24: Exemption From Clearing Agency Definition for
Certain Registered Securities-Based Swap Dealers and Registered
Security-Based Swap Execution Facilities

    Section 3(a)(23)(B) of the Exchange Act currently excludes from the
definition of clearing agency certain national securities exchanges,
dealers, and certain other entities.\98\ These exclusions are designed
to limit the potential for overlapping or duplicative requirements that
may otherwise be imposed on these regulated entities. Because the Dodd-
Frank Act creates new categories of entities in the security-based swap
markets that may perform functions similar to the functions performed
by the excluded entities under Section 3(a)(23)(B) of the Exchange Act
in the traditional securities markets, the Commission is considering
whether a similar exclusion from the definition of clearing agency may
be warranted.
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    \98\ 15 U.S.C. 78c(a)(23)(B). The term ``clearing agency'' does
not include (i) any Federal Reserve bank, Federal home loan bank, or
Federal land bank; (ii) any national securities exchange or
registered securities association solely by reason of its providing
facilities for comparison of data respecting the terms of settlement
of securities transactions effected on such exchange or by means of
any electronic system operated or controlled by such association;
(iii) any bank, broker, dealer, building and loan, savings and loan,
or homestead association, or cooperative bank if such bank, broker,
dealer, association, or cooperative bank would be deemed to be a
clearing agency solely by reason of functions performed by such
institution as part of customary banking, brokerage, dealing,
association, or cooperative banking activities, or solely by reason
of acting on behalf of a clearing agency or a participant therein in
connection with the furnishing by the clearing agency of services to
its participants or the use of services of the clearing agency by
its participants, unless the Commission, by rule, otherwise provides
as necessary or appropriate to assure the prompt and accurate
clearance and settlement of securities transactions or to prevent
evasion of this title; (iv) any life insurance company, its
registered separate accounts, or a subsidiary of such insurance
company solely by reason of functions commonly performed by such
entities in connection with variable annuity contracts or variable
life policies issued by such insurance company or its separate
accounts; (v) any registered open-end investment company or unit
investment trust solely by reason of functions commonly performed by
it in connection with shares in such registered open-end investment
company or unit investment trust, or (vi) any person solely by
reason of its performing functions described in 15 U.S.C.
78c(a)(25)(E).
---------------------------------------------------------------------------

    The Commission preliminarily believes that exemptions from the
clearing agency definition with respect to registered security-based
swap dealers' and registered security-based swap execution facilities'
activities, which are comparable to functions carved out from the
definition of clearing agency for dealers and exchanges in the
traditional securities markets, is necessary and appropriate, in the
public interest, and is consistent with the protection of investors
because it would mitigate the potential for overlapping or duplicative
requirements consistent with prior exclusions from the definition of
the term clearing agency. Accordingly, pursuant to the Commission's
authority under Section 36 of the Exchange Act,\99\ the Commission is
proposing Rule 17Ad-24 to exempt certain registered security-based swap
dealers and registered security-based swap execution facilities from
the definition of clearing agency.
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes
the Commission to conditionally or unconditionally exempt any
person, security, or transaction, or any class of classes of
persons, securities, or transactions, from any provision or
provisions of the Exchange Act or any rule or regulation thereunder,
by rule, regulation, or order, to the extent that such exemption is
necessary or appropriate in the public interest, and is consistent
with the protection of investors.
---------------------------------------------------------------------------

    Specifically, proposed Rule 17Ad-24 would provide that a registered
security-based swap dealer would not be considered a clearing agency
solely by reason of functions it performs as part of customary dealing
activities, or solely because it acts on behalf of a clearing agency or
a participant in connection with services performed by the clearing
agency. For example, a security-based swap dealer that acts as an
intermediary in making payments or deliveries or both in connection
with transactions in securities as part of its customary dealing
activities would not be considered a clearing agency. The exemptions in
proposed Rule 17Ad-24 for security-based swap dealers mirror exclusions
already applicable to dealers under Section 3(a)(23)(B) of the Exchange
Act.
    In addition, proposed Rule 17Ad-24 provides that a registered
security-based swap execution facility would not be considered a
clearing agency solely because it provides facilities for comparison of
data relating to the terms

of settlement of securities transactions effected on such registered
security-based swap execution facility. The exemptions in proposed Rule
17Ad-24 for security-based swap execution facilities mirror exclusions
applicable to national securities exchanges under Section 3(a)(23)(B)
of the Exchange Act.
    The Commission cautions, however, that security-based swap dealers
and security-based swap execution facilities that engage in clearing
agency activities beyond the scope of the proposed exemptions could be
considered a clearing agency under the broad definition in Section
3(a)(23) of the Exchange Act. Moreover, other participants in the
security-based swap market could also qualify as a clearing agency
given the broad definition of clearing agency under the Exchange Act.
    If a participant in the security-based swap market qualified as a
clearing agency, it would be required to register with the Commission.
Section 763(b) of the Dodd-Frank Act adds a new Section 17A(g) to the
Exchange Act, which directs entities that use instrumentalities of
interstate commerce to perform clearing agency functions for security-
based swaps to register with the Commission. The Commission notes that
the definition of clearing agency under Section 3(a)(23)(A) of Exchange
Act is defined broadly to include any person who:
     Acts as an intermediary in making payments or deliveries
or both in connection with transactions in securities;
     Provides facilities for the comparison of data regarding
the terms of settlement of securities transactions, to reduce the
number of settlements of securities transactions, or for the allocation
of securities settlement responsibilities;
     Acts as a custodian of securities in connection with a
system for the central handling of securities whereby all securities of
a particular class or series of any issuer deposited within the system
are treated as fungible and may be transferred, loaned, or pledged by
bookkeeping entry, without physical delivery of securities certificates
(such as a securities depository); or
     Otherwise permits or facilitates the settlement of
securities transactions or the hypothecation or lending of securities
without physical delivery of securities certificates (such as a
securities depository).\100\
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    \100\ 15 U.S.C. 78c(a)(23)(A).
---------------------------------------------------------------------------

    Based on this broad definition, the Commission preliminarily
believes that certain service providers that facilitate security-based
swap contract management may meet the clearing agency definition. The
Commission preliminarily believes the following activities, if engaged
in by security-based swap market participants, would qualify these
participants as clearing agencies and therefore trigger the statutory
requirement to register as clearing agencies: \101\
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    \101\ The Commission stresses that the functions highlighted
herein are not an exhaustive list and urges each security-based swap
lifecycle event service provider to consider whether its functions
place it within the clearing agency definition.
---------------------------------------------------------------------------

     Collateral Management Activities. Collateral management
involves calculating collateral requirements and facilitating the
transfer of collateral between counterparties. Entities that calculate
net payment obligations among counterparties for security-based swaps
and provide instructions for payments, including with respect to
quarterly interest, credit events, and upfront fees, are likely acting
as an intermediary in making payments or deliveries or both in
connection with transactions in securities. As a result of acting as
such an intermediary in making payments or deliveries or both in
connection with transactions in securities, the Commission
preliminarily believes that these entities would fall within the
definition of a clearing agency \102\ and would generally need to
register.
---------------------------------------------------------------------------

    \102\ See supra note 98 and accompanying text.
---------------------------------------------------------------------------

     Trade Matching Services. ``Matching service'' is the term
that is used to describe the process whereby an intermediary compares
each market participant's trade data regarding the terms of settlement
of securities transactions, in order to reduce the number of
settlements of securities transactions, or to allocate securities
settlement responsibilities. An intermediary that captures trade
information regarding a securities transaction and performs an
independent comparison of that information which results in the
issuance of binding matched terms to the transaction is providing
matching services and falls within the definition of clearing
agency.\103\ As a result of comparing each market participant's trade
data regarding the terms of settlement of securities transactions, in
order to reduce the number of settlements of securities transactions,
or to allocate securities settlement responsibilities, the Commission
preliminarily believes that entities providing these trade ``matching
services'' with respect to security-based swaps would meet the
statutory definition of a clearing agency \104\ and would generally
need to register.\105\ However, the Commission also preliminarily
believes that providing preliminary comparisons, such as those provided
by certain affirmation and novation service providers that are followed
by independent comparisons that result in the issuance of legally
binding matched terms, would generally not fall within the definition
of clearing agency. Similarly, the Commission preliminarily believes
that reconciliation service providers that function solely to permit
parties to reconcile trade information records with their
counterparties would generally not fall within the definition of
clearing agency.
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    \103\ See also Exchange Act Release No. 39829 (April 6, 1998),
63 FR 17943 (April 13, 1998) (File No. S7-10-98) (``A vendor that
provides a matching service will actively compare trade and
allocation information and will issue the affirmed confirmation that
will be used in settling the transaction.'').
    \104\ See supra note 98 and accompanying text.
    \105\ See Exchange Act Release No. 63727 (January 14, 2011) 76
FR 3859 (January 21, 2011) (discussing generally, at footnotes 20
through 22 and the accompanying text, the confirmation process for
security-based swap transactions and the Commission's preliminary
expectations about the role of matching services in that setting).
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     Tear Up/Compression Services (``Tear Up services'').\106\
Based on discussions between the Commission staff and market
participants, the Commission understands that Tear Up service providers
generally operate in the following manner:
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    \106\ Tear-up or multilateral portfolio trade compression
services for OTC derivatives seek to eliminate unnecessary or
duplicative trades from the market while maintaining a market
participant's overall exposure or risk in the market. This allows
dealers to reduce operational risk, freeing up liquidity and
capital. By reducing the gross notional outstanding of OTC
derivatives in normal times, portfolio trade compression provides
effective measures to address the risk associated with
uncoordinated, disorderly close-out transactions in individual
dealers of the positions of a defaulting major dealer. Compression
is offered by several vendors and major market participants are now
engaged in regular compression exercises. See Financial Stability
Board, Implementing OTC Derivatives Market Reforms, (October 25,
2010), available at http://www.Financialstabilityboard.org/publications/r_101025.pdf.
---------------------------------------------------------------------------

    [cir] Tear Up services execute an algorithm seeking to reduce the
gross notional value of trades and the total number of trades but do
not alter the counterparty risk or market risk associated with the
trades beyond specified parameters.
    [cir] When using a Tear Up service, the users send all transactions
they are willing to terminate to the service. Each user sets tolerances
for counterparty exposures it is willing to absorb and how much money
it is willing to pay in trade termination costs. The submitted
transactions are matched using an

algorithm and tolerances specified by the user.
    [cir] The service then proposes terminations across all parties who
participated, including, payments for termination. The users consider
the proposal, check their own records, and, if they choose to accept
the proposal, fax or otherwise notify their acceptance to the service.
If the service receives acceptances from all users, the transaction is
considered binding and the relevant transactions are considered
terminated.
    [cir] The users generally exchange payments and confirmations
outside the service. The Tear Up service will send the completed files
to a third party service provider for matching and the ``torn up''
transactions are terminated in bulk at the security-based swap data
repository. The security-based swap data repository maintains a record
of which parties terminated the ``torn up'' trades.
    The Commission preliminarily believes that a Tear Up service
provider that performs these functions would generally fall within the
definition of clearing agency and would need to register because, among
other activities, it would be acting as an intermediary that provides
facilities for the comparison of data regarding the terms of settlement
of securities transactions, to reduce the number of settlements of
securities transactions, or the allocation of securities settlement
responsibilities.\107\
---------------------------------------------------------------------------

    \107\ See supra note 98 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of the proposed
exemptions from the definition of clearing agency for registered
security-based swap dealers and registered security-based swap
execution facilities in proposed Rule 17Ad-24. The Commission also
requests comments on which activities fall within the definition of
clearing agency, particularly within the context of activities in the
security-based swap market. In addition, the Commission requests
comments on the following specific issues:
     What are the advantages or disadvantages of the Commission
granting the proposed exemptions from the definition of clearing
agency? If there are disadvantages to these proposed exemptions, what
are they and how do they compare to the benefits?
     Under what circumstances are market participants likely to
use the proposed exemptions for registered security-based swap dealers
and registered security-based swap execution facilities? Are there any
additional terms or conditions that the Commission should consider
imposing with respect to the proposed exemptions? Are there any
advantages or disadvantages related to the proposed exemptions that the
Commission should consider?
     Under Section 17A(b)(3)(I) of the Exchange Act, the rules
of a clearing agency should not impose any undue burden on competition.
Should the Commission augment this statutory requirement by adopting
rules that prohibit clearing agencies from entering into certain types
of arrangements? If so, which arrangements, and why? In particular,
should the Commission promulgate rules concerning any revenue sharing
arrangements used by clearing agencies? Please explain why or why not.
Are revenue sharing arrangements common among clearing agencies? How
are they used? Are revenue sharing arrangements a manner of directing
funds to a subset of clearing members, which funds otherwise could
support a general reduction of clearing costs that could be equitably
distributed among members? If the Commission adopts rules regarding
revenue sharing, what aspects of the revenue sharing arrangements
should the rules address and how might the rules be designed to promote
competition and fair access to the clearing agency? If the Commission
promulgates rules regarding certain arrangements, how should the
Commission mitigate the potential risk of unduly limiting the ability
of clearing agencies to develop new commercial arrangements?
     Are there any additional entities for which the Commission
should consider providing exemptions with respect to the definition of
clearing agency, particularly in the context of the security-based swap
market? If so, why would providing such exemptions be necessary or
appropriate in the public interest, and consistent with the protection
of investors? Under what terms and conditions should the Commission
consider providing such exemptions?
     Is there additional information about any of the security-
based swap services described by the Commission that would affect the
consideration of whether these activities trigger the definition of
clearing agency?
     Are there any other security-based swap services that may
fall within the clearing agency definition? If so, what are those
services? Why would they be appropriately classified as clearing agency
functions?
     If a security-based swap clearing agency that does not
provide CCP services is required to register with the Commission as a
clearing agency, are there certain requirements that are applicable or
proposed to be applicable to other clearing agencies that should not
apply to these security-based swap clearing agencies? For example:
    [cir] Should non-CCP security-based swap clearing agencies be
subject to proposed Regulation MC,\108\ which the Commission proposed
on October 14, 2010 to mitigate the potential conflicts of interest
that could exist at certain entities, including security-based swap
clearing agencies, through conditions and structures relating to
ownership, voting, and governance of these entities? Why or why not?
Should proposed Regulation MC apply to some but not all security-based
swap clearing agencies that do not provide CCP services? If so, which
ones?
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    \108\ See Exchange Act Release No. 63107, 75 FR 65882, supra
note 45.
---------------------------------------------------------------------------

    [cir] Should non-CCP security-based swap clearing agencies be
subject to proposed Rule 17Ad-25, which would require clearing agencies
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify and address existing or
potential conflicts of interest? Why or why not? Should proposed Rule
17Ad-25 apply to some but not all security-based swap clearing agencies
that do not provide CCP services? If so, which ones?
    [cir] Should non-CCP security-based swap clearing agencies be
subject to proposed Rule 17Ad-26, which would require each clearing
agency to establish governance standards for its board or board
committee members? Why or why not? Should proposed Rule 17Ad-26 apply
to some but not all security-based swap clearing agencies that do not
provide CCP services? If so, which ones?
     What are the costs associated with requiring the types of
entities described above that do not offer CCP services to register as
a clearing agency and operate as an SRO (including compliance with
ongoing SRO rule filings requirements)? Please consider both the
initial and ongoing costs, and please consider the burdens that such
requirements may place on the ability of these entities to operate in a
commercially viable manner. Are there competitors who might offer
competing services (either in the United States or abroad) without
being subject to these requirements? Are these costs offset by
regulatory requirements or industry commitments to use certain
security-based swap service providers that fall within the definition
of a clearing agency? What implications would registration of these
entities have for the security-based swap

markets more generally, and for the availability of their services to
market participants?

E. Proposed Amendment of Rule 17Ab2-1: Registration of Clearing
Agencies

    The Commission is proposing to amend Rule 17Ab2-1(c) regarding the
registration of clearing agencies. Rule 17Ab2-1(c) currently provides
that, if requested by an applicant, the Commission may grant a
temporary registration providing for exemptions from certain
registration requirements in Section 17A(b)(3) of the Exchange Act.
Prior to the Dodd-Frank Act's amendments to the Exchange Act, the
Commission was not restricted in its ability to grant exemptions from
registration requirements to any category of clearing agencies.
Therefore, the exemptions discussed in Rule 17Ab2-1(c) applied with
respect to all clearing agencies.
    The Dodd-Frank Act amended Section 36 of the Exchange Act and
altered the Commission's authority to provide exemptions from the
registration requirements applicable to security-based swap clearing
agencies pursuant to Section 17A(g) of the Exchange Act.\109\
Accordingly, the Commission proposes to amend Rule 17Ab2-1 to reflect
these changes. Specifically, the proposal would amend Rule 17Ab2-1(c)
to clarify that when granting a temporary registration, the Commission
may do so for ``a specific period of time and may exempt, other than
for purposes of section 17A(g) of the Act, the registrant from one or
more of the requirements * * * ''. The Commission preliminarily
believes this proposed amendment to Rule 17Ab2-1(c), clarifying how the
rule would operate in light of changes to the Commission's exemptive
authority under Section 36 of the Exchange Act with respect to Section
17A(g) of the Exchange Act, is appropriate given the change to the
Commission's exemptive authority under Section 36 of the Exchange Act
effected by the Dodd-Frank Act.\110\
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    \109\ See Section 772 of Public Law 111-203, 124 Stat. 1376
(2010) amending Section 36 of the Exchange Act.
    \110\ Id.
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    The Commission also proposes other technical changes to Rule 17Ab2-
1(c) unrelated to the Dodd-Frank Act that the Commission preliminarily
believes would help in the administration of the rule pertaining to
temporary registrations and would thereby be appropriate in the public
interest, for the protection of investors.\111\ Specifically, the
Commission proposes to amend Rule 17Ab2-1(c) to clarify that the
temporary registration may be issued at the discretion of the
Commission. The Commission preliminarily believes that the ability to
grant a temporary registration provides useful flexibility to further
evaluate whether a clearing agency is meeting required standards before
granting a permanent registration. Operational, resource, internal
control or other issues may only become apparent after a clearing
agency has commenced operations. In addition, the proposal would amend
the current provision indicating that the Commission may grant the
temporary registration for eighteen months or such longer period as the
Commission may provide by order, to state that the Commission may grant
the temporary registration for twenty-four months or such longer period
as the Commission may provide by order.\112\ The Commission
preliminarily believes that the temporary registration process should
explicitly provide greater time to allow the clearing agency to operate
before registration becomes final because doing so would enhance the
Commission's capacity to provide oversight that promotes prompt and
accurate clearance and settlement.
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    \111\ See 15 U.S.C. 78q-1(d).
    \112\ This change would also include a conforming change to the
timing for granting a non-temporary registration.
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Request for Comment
    The Commission generally requests comments on all aspects of the
proposed amendments to Rule 17Ab2-1. In addition, the Commission
requests comments on the following specific issues:
     Are the proposed changes to Rule 17Ab2-1 setting forth the
restrictions on providing exemptions with respect to security-based
swap clearing agencies sufficiently clear?
     Would any additional changes to Rule 17Ab2-1 regarding how
the clearing agency registration requirements apply with respect to
security-based swap clearing agencies be beneficial to market
participants?
     What are the advantages and disadvantages of the proposed
changes to the temporary registration process, such as stating the
temporary registration may be issued at the discretion of the
Commission and the revisions to the timeframe for the temporary
registration?

F. Proposed Rule 17Ad-25: Clearing Agency Procedures To Identify and
Address Conflicts of Interest

    The Commission is proposing Rule 17Ad-25 to require clearing
agencies to establish, implement, maintain and enforce written policies
and procedures reasonably designed to identify and reasonably existing
or potential conflicts of interest.\113\ For example, there may be
actual or potential conflicts of interest between the activities of a
clearing agency and the interests of its participants or board members,
which could affect decision making by officers or directors or actions
by participants in seeking to influence its operations. The proposed
rule also would require the clearing agency's policies and procedures
to be reasonably designed to minimize conflicts of interest in decision
making by the clearing agency.
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    \113\ Proposed Rule 17Ad-25 would complement other applicable
requirements concerning conflicts of interests at clearing agencies
that may also separately apply. These other requirements include the
existing regulatory framework of Section 17A of the Exchange Act and
the conflicts-related requirements contemplated by proposed Rule
17Ad-22(d)(8) as well as Section 765 of the Dodd-Frank Act with
respect to security-based swap clearing agencies. See supra Section
III.A. (proposing that clearing agencies be required to have
governance arrangements that are clear and transparent to fulfill
Exchange Act requirements and to support the objectives of owners
and participants and promote the effectiveness of the clearing
agency's risk management procedures). See also Exchange Act Release
No. 63107, 75 FR 65882, supra note 45.
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    The Commission preliminarily believes it is important for clearing
agencies to evaluate their activities and determine potential sources
for conflicts of interests that exist within their organization and to
reasonably address such conflicts so that they do not disrupt the
clearing agency's ability to facilitate prompt and accurate clearance
and settlement. The Commission also preliminarily believes that
requiring clearing agencies, under proposed Rule 17Ad-25, to have
reasonably designed policies and procedures to minimize conflicts of
interest in decision making by the clearing agency would facilitate the
development of tailored policies and procedures that mitigate conflicts
specific to the clearing agency's business. Moreover, the Commission
preliminarily believes the proposed rule would be useful in
facilitating its oversight of clearing agencies by providing a
documented plan against which the Commission could evaluate a clearing
agency's efforts to mitigate conflicts and potentially provide the
Commission with a better understanding of the potential sources of
conflicts for a specific clearing agency.

Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-25. In addition, the Commission requests comments on
the following specific issues:
     Under the proposal, clearing agencies would be required to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify and address existing or
potential conflicts of interest. Such policies and procedures would
also be required to be reasonably designed to minimize conflicts of
interest in decision making by the clearing agency. Should the
Commission require any specific measures to address conflicts of
interests, such as mandating certain boards or board committee
compositions with respect to all clearing agencies instead of using a
policies and procedures approach? What are the advantages and
disadvantages of a more prescriptive approach?
     What, if any, additional guidance by the Commission would
be helpful regarding how clearing agencies should evaluate their own
activities and determine the potential sources of conflicts?
     Should the Commission consider requiring only certain
types of clearing agencies (e.g., security-based swap clearing
agencies) to be subject to this requirement? Please explain why or why
not. Are there special considerations, such as market concentration,
affecting security-based swap clearing agencies that make it
particularly important for them to establish, implement, maintain and
enforce written policies and procedures to identify and address
existing or potential conflicts of interest? If so, what are those
special considerations and how would this requirement address them? If
not, how would various types of clearing agencies be affected by this
requirement? Would there be advantages to maintaining one requirement
for all clearing agencies? Why or why not?

G. Proposed Rule 17Ad-26: Standards for Board or Board Committee
Directors

    The Commission is proposing Rule 17Ad-26 to require clearing
agencies to establish governance standards for their directors serving
on the board or board committees. The Commission preliminarily believes
that directors serving on the board and board committees of a clearing
agency play a vital 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. Accordingly, the
expertise, diversity of perspectives, conduct and incentives of
directors serving on the board and board committees of a clearing
agency are likely to affect its effective operation. For example, a
lack of expertise by board members or board committee members may deter
them from challenging decisions by management and lessen the potential
that management will escalate appropriate issues for the board's
consideration. In addition, clearing agencies should consider the
extent to which persons who have been found to have violated the
securities laws, or other similar laws or statutes, may not be fit to
serve on the clearing agency's board or board committees. Moreover, a
lack of clear guidance as to the roles and responsibilities of
directors and procedures for assessing their performance may negatively
impact the efficient functioning of the clearing agency.
    Therefore, the Commission is proposing Rule 17Ad-26 to require that
clearing agencies establish and articulate baseline standards for
appointing and retaining their directors, which may help to increase
the potential that directors' actions will benefit the clearing
organization. The proposed rule specifies that the clearing agency's
standards must address the following areas:
     A clear articulation of the roles and responsibilities of
directors serving on the clearing agency's board and any board
committees;
     Director qualifications providing criteria for expertise
in the securities industry, clearance and settlement of securities
transactions, and financial risk management; \114\
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    \114\ The Commission notes that in other contexts under the
Exchange Act certain persons have been required to meet
qualification standards. For example, Section 15(b)(7) requires all
Commission-registered brokers and dealers to meet such standards of
operational capability and all natural persons associated with
registered brokers and dealers to meet such standards of training,
experience, competence, and such other qualifications as the
Commission finds necessary or appropriate in the public interest or
for the protection of investors. See 15 U.S.C. 78o(b)(7). Section
15(b)(7) permits the Commission to rely on the rules of certain SROs
in devising and administering these requirements. For example, the
NASD Rule 1000 series contains registration and qualification
requirements for registered representatives and principals
associated with FINRA-member firms. In addition, NASD Rule 3010
requires all FINRA members to have a supervisory system that
provides for, among other things, reasonable efforts to determine
that all supervisory personnel are qualified by virtue of experience
or training to carry out their assigned responsibilities.
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     Disqualifying factors concerning serious legal misconduct,
including violations of the Federal securities laws; and \115\
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    \115\ The Exchange Act and the rules promulgated thereunder
contain a number of restrictions on the ability of certain
registered entities, including clearing agencies, brokers, dealers,
transfer agents and other SROs, to be associated with persons
subject to a ``statutory disqualification,'' as such term is defined
in Section 3(a)(39) of the Exchange Act. 15 U.S.C. 78c(a)(39). For
example, Section 17A(b)(4) of the Exchange Act provides that a
``registered clearing agency may, and in cases in which the
Commission, by order, directs as appropriate in the public interest
shall, deny participation to any person subject to a statutory
disqualification.'' 12 U.S.C. 78q-1(b)(4).
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     Policies and procedures for the periodic review by the
board or board committees of the performance of individual members.
    The proposed rule would require the clearing agency to clearly
articulate the roles and responsibilities of directors serving on the
clearing agency's board and any board committees. This would involve
the clearing agency setting forth the duties of directors and the
functions within the clearing agency for which they are responsible.
The Commission preliminarily believes that such a delineation of
responsibilities will help to focus directors' efforts to areas that
promote the effective operations of a clearing agency.
    The proposed rule would also require that the clearing agency
establish director qualifications that address the clearing agency's
criteria for expertise in the securities industry, clearance and
settlement of securities transactions and financial risk management
because each of these would have a bearing on the director's ability to
understand the operations and risks of a clearing agency. When
developing these criteria, clearing agencies could consider the
specialized needs of individual board committees, the overall mix of
expertise within the board or on a committee, and the benefits of
having members with different backgrounds (e.g., regulatory, trading,
and risk management experience). The Commission preliminarily believes
that this requirement would be beneficial because it could provide
greater focus within a clearing agency for the selection of directors
that have appropriate expertise, as determined by the clearing agency,
which would facilitate the ability of the clearing agency to provide
prompt and accurate clearance and settlement.
    In addition, the proposed rule would require the development of
disqualifying factors concerning serious legal misconduct, including
violations of the Federal securities laws. For example, a clearing
agency might consider whether to preclude a person

who has had a securities license denied, suspended, revoked or
restricted by a regulatory authority from serving as a director. The
Commission preliminarily believes that such qualification criteria are
important with respect to identifying potential issues that would call
into question the ability of the persons who are responsible for the
governance of the clearing agency to ensure that it complies with
applicable laws and regulations.
    Finally, the proposed rule would require the clearing agency to
establish policies and procedures for the periodic review by the board
or a board committee of the performance of its individual members. As
previously noted, the Commission preliminarily believes that directors
serving on the board or board committees of a clearing agency play a
vital role in creating a framework that supports prompt and accurate
clearance and settlement because of their role in decision-making
processes. Therefore, the Commission preliminarily believes that the
board, or a board committee, should establish policies and procedures
for the periodic review of the performance of the relevant directors.
Such a review should consider the contributions that the directors are
making to the clearing agency and to its ability to operate in an
effective manner. The policies and procedures for such a review, to be
developed by the clearing agency as appropriate given its particular
circumstances, might include self-assessments, peer review procedures,
or the use of internal or external parties or consultants to facilitate
an evaluation of the performance of each relevant director.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-26. In addition, the Commission requests comments on
the following specific issues:
     Are there any additional standards for director or board
committee members that the Commission should consider requiring? Should
any of the requirements in proposed Rule 17Ad-26 be modified or
changed? If so, how?
     How direct should the Commission's role be in the
oversight and monitoring of the composition and activities of clearing
agency boards and board committees? If the Commission's role should be
more direct, what mechanisms or structure would facilitate the
Commission taking such a role? For example, should the Commission
consider any additional requirements related to fiduciary duties to
either enhance mitigation of conflicts or address deficiencies?
     What, if any, additional guidance by the Commission would
be helpful regarding standards for a clearing agency's directors?
     Should the Commission develop more or less prescriptive
requirements regarding standards for directors or board committee
members? What are the advantages or disadvantages of any contemplated
approach?
     The Commission has previously proposed independence
requirements with respect to the board and board committees of
security-based swap clearing agencies. Should the boards of all
clearing agencies consist of a certain proportion of independent
directors? Please explain why or why not.
     Should the Commission require clearing agencies to develop
any limits on the type or amount of compensation that directors may
receive, such as including prohibiting compensation of independent and
other non-management directors from being linked to the business
performance of the clearing agency, or being subject to discretion of
management? Please explain.
     Should the Commission consider requiring only certain
types of clearing agencies (e.g., security-based swap clearing
agencies) to be subject to this requirement? Please explain why or why
not. Are there special considerations, such as market concentration,
affecting security-based swap clearing agencies that make these
governance requirements particularly important for them? If so, what
are those special considerations and how would this requirement address
them? If not, how would clearing agencies that provide different types
of clearing services be affected by the application of this
requirement? Would there be advantages to maintaining one requirement
for all clearing agencies? Why or why not?

H. Proposed Rule 3Cj-1 Designation of Chief Compliance Officer

    The Dodd-Frank Act amended the Exchange Act to require each
clearing agency to appoint a chief compliance officer (``CCO'') and
specifies the CCO's duties.\116\ The Commission is proposing Rule 3Cj-1
to establish requirements concerning a clearing agency's CCO. In
particular, proposed Rule 3Cj-1 would incorporate the duties of a
clearing agency's CCO that are enumerated in Exchange Act Section 3C(j)
\117\ and impose additional requirements.
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    \116\ Public Law 111-203, Sec.  763(a) (adding Exchange Act
Section 3C(j)).
    \117\ Id.
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    Consistent with the requirements under Section 3C(j) of the
Exchange Act, proposed Rule 3Cj-1(a) would require each clearing agency
to designate a CCO. The Commission preliminarily believes that a
clearing agency would not necessarily need to hire an additional person
to serve as its CCO. Instead, a clearing agency could designate an
individual already employed by the clearing agency as its CCO.
    Consistent with the requirements under Section 3C(j) of the
Exchange Act, under proposed Rule 3Cj-1(b), each CCO shall: (1) Report
directly to the board or to a senior officer of the clearing agency;
(2) in consultation with its board or the senior officer of the
registered clearing agency, resolve any conflicts of interest that may
arise; (3) be responsible for administering each policy and procedure
that is required to be established pursuant to Section 3C of the
Exchange Act and rules and regulations thereunder; (4) ensure
compliance with the Exchange Act and the rules and regulations
thereunder; (5) establish policies and procedures for the prompt
remediation of any compliance issues identified by the CCO, and (6)
establish and follow appropriate procedures for the prompt handling of
management response, remediation, retesting, and closing of non-
compliance issues.
    In order to clarify the requirements under Section 3C(j) of the
Exchange Act, the Commission is also proposing (as part of proposed
Rule 3Cj-1(e)) to define the term senior officer for purposes of
proposed Rule 3Cj-1 to include the chief executive officer, or other
equivalent officer. As the chief executive officer is generally the
most senior officer in a clearing agency, the Commission preliminarily
believes that such officer should be identified as the responsible
individual for purposes of the proposed rule because it would help to
promote enhanced focus on compliance issues and thereby potentially
lead to more effective operations at a clearing agency.
    Consistent with the requirements under Section 3C(j) of the
Exchange Act, proposed Rule 3Cj-1(c) would require the CCO to prepare,
sign and submit an annual compliance report that describes (i) the
compliance of the clearing agency with the Federal securities laws and
the rules and regulations thereunder, and (ii) each policy and
procedure of the clearing agency (including the code of ethics and
conflict of interest policies of

the registered clearing agency). Also consistent with the requirements
under Section 3C(j) of the Exchange Act, proposed Rule 3Cj-1(c) would
require the annual compliance report to accompany each appropriate
financial report of the clearing agency that is required to be
furnished to the Commission pursuant to the Exchange Act and the rules
thereunder. Finally, the CCO must certify under penalty of law that the
compliance report is accurate and complete.
    In addition, to clarify and enhance the requirements under Section
3C(j) of the Exchange Act, the Commission is proposing to require that
each annual compliance report:
     Be submitted to the board of directors and audit committee
(or equivalent bodies) of the clearing agency promptly after the date
of execution of the required certification and prior to filing of the
report with the Commission;
     Be filed with the Commission in a tagged data format in
accordance with the instructions contained in the EDGAR Filer Manual,
as described in Rule 301 of Regulation S-T; \118\ and
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    \118\ The term ``tag'' (including the term ``tagged'') refers to
an identifier that highlights specific information submitted to the
Commission that is in the format required by the EDGAR Filer Manual,
as described in Rule 301 of Regulation S-T. See 17 CFR 32.301. The
term ``EDGAR Filer Manual'' is defined in Rule 11 of Regulation S-T
as ``the current version of the manual prepared by the Commission
setting out the technical format requirements for an electronic
submission.'' See 17 CFR 232.11. If the Commission adopts Rule 3Cj-1
as proposed, it is possible that clearing agencies might be required
to file the annual compliance report in paper until such time as an
electronic filing system is operational and capable of receiving the
annual compliance report. The Commission would notify clearing
agencies as soon as the electronic filing system can accept filings
of annual compliance reports.
---------------------------------------------------------------------------

     Be filed with the Commission within 60 days after the end
of the fiscal year covered by such report.
    The Commission preliminarily believes it would be appropriate to
require that the annual compliance report be submitted to the board of
directors and audit committee (or equivalent bodies) prior to filing of
the report with the Commission because it would help to focus attention
at senior levels of the clearing agency on the contents of the report
that is being filed with the Commission. This in turn could help to
promote a robust compliance program at the clearing agency by ensuring
appropriate attention and response at the Board level.
    In addition, the Commission preliminarily believes that it would be
appropriate for clearing agencies to file the report with the
Commission in a tagged data format in accordance with the instructions
contained in the EDGAR Filer Manual in order to provide an electronic
system for submitting this report that builds on an existing framework
for filings to the Commission. This in turn should help to ease the
potential administrative burdens on clearing agencies. As previously
noted, the proposed rule would also require that the annual compliance
report be filed with the Commission within 60 days after the end of the
fiscal year covered by such report. The report would be subject to
public availability and the Commission anticipates making such report
available through its EDGAR system. The Commission preliminarily
believes such time frame would be appropriate because it should give
clearing agencies adequate time to review and draft a report based on
actions that occurred during the prior year, while also limiting the
potential that the information would be stale and thus not be as useful
in the Commission's oversight of the clearing agency.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 3Cj-1. In addition, the Commission requests comments on
the following specific issues:
     Is the definition of ``senior officer'' appropriate? If
not, is it over-inclusive or under-inclusive and how should it be
defined?
     Should the Commission include in its proposed rule a
requirement that a CCO's compensation must be approved by the board?
     Should the Commission include in its proposed rule a
requirement that a CCO may only be removed by action of the board?
     Are there other measures that would further enhance the
independence and effectiveness of a CCO and that should be prescribed
in a rule, such as requiring that a CCO not perform any other
functions?
     Should the Commission impose any additional duties on a
CCO of a clearing agency?
     Should the Commission provide guidance in its proposed
rules about the CCO's procedures for the remediation of non-compliance
issues?
     What is the likely effect of the Commission's proposed
rule on the development of the financial markets? Would the proposed
rule impede the establishment of clearing agencies?
     Does requiring the compliance report to be filed annually
with the Commission within sixty days after the end of the fiscal year
covered by such report give a clearing agency enough time to prepare
the report? Should the Commission consider a longer or short time
frame? Please explain.
     Should the Commission require submission of the CCO
compliance report to the board before or after submission to the
Commission? How would submission of the compliance report to the board
before or after submission to the Commission affect the board's review
of the compliance report?
     Should the Commission prescribe any specific method of
review by the board with respect to the CCO compliance report? For
example, should the Commission require that (i) the CCO compliance
report include, as appropriate, recommended actions to be taken by the
clearing agency to improve compliance or correct any compliance
deficiencies, (ii) the board review any such recommendations and
determine whether to approve them, and (iii) the clearing agency notify
the Commission if the board declines to approve such recommendations,
or approves different actions than those recommended in the CCO
compliance report? What are the advantages and disadvantages of such an
approach? Should clearing agencies be required to have the CCO report
directly to the board instead of also permitting reporting to a senior
officer of the clearing agency? What would be the advantages and
disadvantages of requiring the CCO to report to the board?

IV. General Request for Comments

    The Commission seeks comment on all aspects of the proposed rules
with respect to clearing agencies. The Commission particularly requests
comment from the point of view of investors, entities that are
registered as clearing agencies, are likely to become registered
clearing agencies, entities operating platforms that currently trade or
clear security-based swaps, broker-dealers, and financial institutions.
    Title VII requires that the SEC consult and coordinate to the
extent possible with the CFTC for the purposes of assuring regulatory
consistency and comparability, to the extent possible, and states that
in adopting rules, the CFTC and SEC shall treat functionally or
economically similar products or entities in a similar manner. In the
process of developing the proposed rules the Commission staff has
consulted with the CFTC staff.
    The CFTC is adopting rules related to derivatives clearing
organizations (``DCO'') in connection with Section 725

of the Dodd-Frank Act.\119\ Understanding that the Commission and the
CFTC regulate different products and markets, and as such,
appropriately may be proposing alternative regulatory requirements, we
request comments on the effect of any differences between the
Commission and CFTC approaches to the regulation of clearing agencies
and DCOs respectively. Specifically, would the regulatory approaches
under the Commission's proposed rulemaking pursuant to Sections 17A(d),
17A(j) and 3C(j) under the Exchange Act and the CFTC's proposed
rulemaking pursuant to Section 725 of the Dodd-Frank Act result in
duplicative or inconsistent requirements for market participants
subject to both regulatory regimes or result in gaps between those
regimes? If so, in what ways do commenters believe that such
duplication, inconsistencies, or gaps should be minimized? Do
commenters believe the approaches proposed by the Commission and the
CFTC to govern clearing agencies and DCOs are comparable? If not, why?
Do commenters believe there are approaches that would result in more
comparable treatment? If so, what are they and what would be the
advantages and disadvantages of adopting such approaches? Do commenters
believe that it would be appropriate for the Commission to adopt an
approach proposed by the CFTC that differs from our proposal? If so,
which one?
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    \119\ See 75 FR 63113 (October 14, 2010) and 75 FR 77576
(December 13, 2010).
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    Commenters should, when possible, provide the Commission with
empirical data to support their views. Commenters suggesting
alternative approaches should provide comprehensive proposals,
including any conditions or limitations that they believe should apply,
the reasons for their suggested approaches, and their analysis
regarding why their suggested approaches would satisfy the statutory
mandates of the Exchange Act with respect to clearing agencies.

V. Paperwork Reduction Act

    Certain provisions of the proposed rules would impose new
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\120\ Accordingly, the
Commission has submitted the information to the Office of Management
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5
CFR 1320.11. The title of the new collection of information is Clearing
Agency Standards for Operation and Governance. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid OMB
control number.
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    \120\ 44 U.S.C. 3501 et seq.
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A. Summary of Collection of Information

1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
    Proposed Rule 17Ad-22(b)(1) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(1) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to measure its credit exposures to its
participants at least once each day, and limit its exposures to
potential losses from defaults by its participants in normal market
conditions so that the operations of the clearing agency would not be
disrupted and non-defaulting participants would not be exposed to
losses that they cannot anticipate or control.
b. Margin Requirements
    Proposed Rule 17Ad-22(b)(2) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(2) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to: (i) Use margin requirements to limit
its credit exposures to participants in normal market conditions; (ii)
use risk-based models and parameters to set margin requirements; and
(iii) review the models and parameters at least monthly.
c. Financial Resources
    Proposed Rule 17Ad-22(b)(3) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(3) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to maintain sufficient financial
resources to withstand, at a minimum, a default by the participant to
which it has the largest exposure in extreme but plausible market
conditions, and if the clearing agency provides CCP services for
security-based swaps then a default by the two participants to which it
has the largest exposures in extreme but plausible market conditions;
provided that if a participant controls another participant or is under
common control with another participant, then the affiliated
participants shall be collectively deemed to be a single participant.
d. Model Validation
    Proposed Rule 17Ad-22(b)(4) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(4) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for an annual model
validation consisting of evaluating the performance of the clearing
agency's margin models and the related parameters and assumptions
associated with such models by a qualified person who does not perform
functions associated with the clearing agency's margin models (except
as part of the annual model validation) and does not report to such a
person.
e. Non-Dealer Access
    Proposed Rule 17Ad-22(b)(5) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(5) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide the opportunity for a person
that does not perform any dealer or security-based swap dealer services
to obtain membership at the clearing agency to clear securities for
itself or on behalf of other persons.
f. Portfolio Size and Transaction Volume Thresholds Restrictions
    Proposed Rule 17Ad-22(b)(6) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(6) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have membership standards that do not
require that participants maintain a portfolio of any minimum size or
that participants maintain a minimum transaction volume.
g. Net Capital Restrictions
    Proposed Rule 17Ad-22(b)(7) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(7) would require a clearing agency that provides CCP services to
establish,

implement, maintain and enforce written policies and procedures
reasonably designed to provide a person that maintains net capital
equal to or greater than $50 million with the ability to obtain
membership at the clearing agency, with any net capital requirements
being scalable so that they are proportional to the risks posed by the
participant's activities to the clearing agency. The proposed rule also
permits a clearing agency to provide for a higher net capital
requirement (i.e., higher than $50 million) as a condition for
membership at the clearing agency if the clearing agency demonstrates
to the Commission that such a requirement is necessary to mitigate
risks that could not otherwise be effectively managed by other
measures, such as scalable limitations on the transactions that the
participants may clear through the clearing agency, and the Commission
approves the higher net capital requirement as part of a rule filing or
clearing agency registration application.
h. Record of Financial Resources
    Proposed Rule 17Ad-22(c)(1) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(c)(1) would require that each fiscal quarter (based on calculations
made as of the last business day of the clearing agency's fiscal
quarter), or at any time upon Commission request, a clearing agency
that performs CCP services shall calculate and maintain a record of the
financial resources necessary to meet the requirement in proposed Rule
17Ad-22Ad-22(b)(3) and sufficient documentation to explain the
methodology it uses to compute such financial resource requirement.
i. Annual Audited Financial Report
    Proposed Rule 17Ad-22(c)(2) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed rule 17Ad-
22(c)(2) would require a clearing agency to post on its Web site an
annual financial report which must (i) be a complete set of financial
statements of the clearing agency for the most recent two fiscal years
and be prepared in accordance with U.S. GAAP, except that for a
clearing agency that is a corporation or other organization
incorporated or organized under the laws of any foreign country the
financial statements may be prepared according to U.S. GAAP or IFRS,
(ii) be audited in accordance with standards of the Public Company
Accounting Oversight Board by a registered public accounting firm that
is qualified and independent in accordance with rule 2-01 of Regulation
S-X (17 CFR 210.2-01), (iii) include a report of the registered public
accounting firm that complies with paragraphs (a) through (d) of Rule
2-02 of Regulation S-X (17 CFR 210.2-02).
j. Transparent and Enforceable Rules and Procedures
    Proposed Rule 17Ad-22(d)(1) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(1) would require clearing agencies 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.
k. Participation Requirements
    Proposed Rule 17Ad-22(d)(2) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(2) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to require participants to have sufficient financial resources
and robust operational capacity to meet obligations arising from
participation in the clearing agency. Clearing agencies would also be
required to have procedures in place to monitor that participation
requirements are met on an ongoing basis, and to have participation
requirements that are objective, publicly disclosed, and permit fair
and open access.
l. Custody of Assets and Investment Risk
    Proposed Rule 17Ad-22(d)(3) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(3) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to hold assets in a manner that minimizes risk of loss or
delay in access to them and to invest assets in instruments with
minimal credit, market, and liquidity risks.
m. Identification and Mitigation of Operational Risk
    Proposed Rule 17Ad-22(d)(4) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(4) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to: (i) Identify sources of operational risk and minimize them
through the development of appropriate systems, controls, and
procedures; (ii) implement systems that are reliable, resilient and
secure, and have adequate, scalable capacity; and (iii) have business
continuity plans that allow for timely recovery of operations and
fulfillment of a clearing agency's obligations.
n. Money Settlement Risks
    Proposed Rule 17Ad-22(d)(5) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(5) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to employ money settlement arrangements that eliminate or
strictly limit the clearing agency's settlement bank risks, that is,
its credit and liquidity risks from the use of banks to effect money
settlements with its participants, and require funds transfers to the
clearing agency to be final when effected.
o. Cost-Effectiveness
    Proposed Rule 17Ad-22(d)(6) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(6) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to be cost-effective in meeting the requirements of
participants while maintaining safe and secure operations.
p. Links
    Proposed Rule 17Ad-22(d)(7) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(7) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to evaluate the potential sources of risks that can arise when
the clearing agency establishes links either cross-border or
domestically to clear trades and ensure that the risks are managed
prudently on an ongoing basis.
q. Governance
    Proposed Rule 17Ad-22(d)(8) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(8) would require clearing agencies 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.
r. Information on Services
    Proposed Rule 17Ad-22(d)(9) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(9) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide market participants with sufficient information for
them to identify and evaluate the risks and costs associated with using
their services.
s. Immobilization and Dematerialization of Stock Certificates
    Proposed Rule 17Ad-22(d)(10) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(10) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to immobilize or dematerialize securities certificates and
transfer them by book entry to the greatest extent possible if the
clearing agency performs central securities depository services.
t. Default Procedures
    Proposed Rule 17Ad-22(d)(11) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(11) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to make key aspects of the clearing agency's default
procedures publicly available and to establish default procedures that
ensure that the clearing agency can take timely action to contain
losses and liquidity pressures and to continue meeting its obligations
in the event of a participant default.
u. Timing of Settlement Finality
    Proposed Rule 17Ad-22(d)(12) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(12) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to ensure that final settlement occurs no later than the end
of the settlement day and that intraday or real-time finality is
provided where necessary to reduce risks.
v. Delivery Versus Payment
    Proposed Rule 17Ad-22(d)(13) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(13) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to eliminate principal risk linking securities transfers to
funds transfers in a way that achieves DVP.
w. Risk Controls To Address Participants' Failure To Settle
    Proposed Rule 17Ad-22(d)(14) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(14) would require clearing agencies that perform central
securities depository services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
institute risk controls when the clearing agency extends intraday
credit to participants, including collateral requirements and limits to
cover the clearing agency's credit exposure to each participant fully,
and that ensure timely settlement in the event that the participant
with the largest payment obligation is unable to settle. If a
participant controls another participant or is under common control
with another participant, then the affiliated participants shall be
collectively deemed to be a single participant.
x. Physical Delivery Risks
    Proposed Rule 17Ad-22(d)(15) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(15) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to state to its participants the clearing agency's obligations
with respect to physical deliveries. Clearing agencies would also be
required to identify and manage the risks that arise in connection with
these obligations.
2. Dissemination of Pricing and Valuation Information by Security-Based
Swap Clearing Agencies That Perform Central Counterparty Services
    Proposed Rule 17Aj-1 contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Aj-1 is
designed to preserve the information dissemination requirement from the
CDS Clearing Exemption Orders.\121\ The proposed rule would require
every security-based swap clearing agency that performs CCP services to
make available to the public all end-of-day settlement prices and any
other prices with respect to security-based swaps that it may use to
calculate mark-to-market \122\ margin requirements for its
participants. Proposed Rule 17Aj-1 also would require every security-
based swap clearing agency that performs CCP services to make available
to the public any other pricing or valuation information with respect
to security-based swaps that it otherwise publishes or makes available
to its participants. Proposed Rule 17Aj-1 would not require that this
information be made available to the public free of charge. Instead, it
would require that the information be provided to the public on terms