[Federal Register Volume 76, Number 51 (Wednesday, March 16, 2011)]
[Proposed Rules]
[Pages 14472-14539]
[FR Doc No: 2011-5182]

Vol. 76

Wednesday,

No. 51

March 16, 2011

Part II

Securities and Exchange Commission

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17 CFR Part 240

Clearing Agency Standards for Operation and Governance; Proposed Rule

Federal Register / Vol. 76, No. 51 / Wednesday, March 16, 2011 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-64017; File No. S7-08-11]
RIN 3235-AL13

Clearing Agency Standards for Operation and Governance

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: In accordance with Section 763 of Title VII (``Title VII'') of
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank Act''), Section 805 of Title VIII (``Title VIII'') of the
Dodd-Frank Act, and Section 17A of the Securities Exchange Act of 1934
(``Exchange Act''), the Securities and Exchange Commission (``SEC'' or
``Commission'') is proposing rules regarding registration of clearing
agencies and standards for the operation and governance of clearing
agencies. The proposed rules are designed to enhance the regulatory
framework for the supervision of clearing agencies.

DATES: Comments should be submitted on or before April 29, 2011.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-8-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F St., NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-8-11. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F St., NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.

FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Assistant Director;
Peter Curley, Attorney Fellow; Andrew Blake, Special Counsel; Michael
Milone, Special Counsel; Alison Duncan, Attorney-Adviser; Marta
Chaffee, Branch Chief; and Andrew Bernstein, Attorney-Adviser, Office
of Clearance and Settlement, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-7010 at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: The Commission is proposing seven new rules
and an amendment to an existing rule related to clearing agencies,
including security-based swap clearing agencies. The proposed rules are
designed to enhance the regulatory framework for the supervision of
clearing agencies. Specifically, the Commission is proposing to: (1)
Identify certain minimum standards for all clearing agencies; (2)
require dissemination of pricing and valuation information by security-
based swap clearing agencies that perform central counterparty
services; (3) require all clearing agencies to have adequate safeguards
and procedures to protect the confidentiality of trading information of
clearing agency participants; (4) exempt certain security-based swap
dealers and security-based swap execution facilities from the
definition of a clearing agency; (5) amend rules concerning
registration of clearing agencies to account for security-based swap
clearing agencies and to make other technical changes; (6) require all
clearing agencies to have procedures that identify and address
conflicts of interest; (7) require standards for all members of
clearing agency boards of directors or committees; and (8) require all
clearing agencies to designate a chief compliance officer.

I. Introduction

    On July 21, 2010, President Barack Obama signed the Dodd-Frank Act
into law.\1\ The Dodd-Frank Act was enacted to, among other things,
promote the financial stability of the United States by improving
accountability and transparency in the financial system.\2\ Title VII
of the Dodd-Frank Act provides the Commission and the Commodity Futures
Trading Commission (``CFTC'') with the authority to regulate over-the-
counter (``OTC'') derivatives in light of the recent financial crisis,
which demonstrated the need for enhanced regulation of the OTC
derivatives market. The Dodd-Frank Act is intended to bolster the
existing regulatory structure and to provide the Commission and the
CFTC with effective regulatory tools to oversee the OTC derivatives
market, which has grown exponentially in recent years and is capable of
affecting significant sectors of the U.S. economy.\3\
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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Id. at Preamble.
    \3\ See 156 Cong. Rec. 5878 (daily ed. July 15, 2010) (statement
of Sen. Dodd).
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    The Dodd-Frank Act provides that the CFTC will regulate ``swaps,''
the Commission will regulate ``security-based swaps,'' and the CFTC and
the Commission will jointly regulate ``mixed swaps.'' \4\ The Dodd-
Frank Act amends the Exchange Act to require, among other things, the
following: (1) Transactions in security-based swaps must be cleared
through a clearing agency if they are of a type that the Commission
determines must be cleared, unless an exemption from mandatory clearing
applies; (2) transactions in security-based swaps must be reported to a
registered security-based swap data repository or the Commission; and
(3) if a security-

based swap is subject to a clearing requirement, it must be traded on a
registered trading platform, i.e., a security-based swap execution
facility or exchange, unless no facility makes such security-based swap
available for trading.\5\
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    \4\ The Commission and the CFTC, in consultation with the Board
of Governors of the Federal Reserve System (``Federal Reserve''),
shall jointly further define the terms ``swap,'' ``security-based
swap,'' ``swap dealer,'' ``security-based swap dealer,'' ``major
swap participant,'' ``major security-based swap participant,''
``eligible contract participant,'' and ``security-based swap
agreement.'' Public Law 111-203 Sec.  712(d). Except for the term
``eligible contract participant'', these terms are defined in
Sections 721 and 761 of the Dodd-Frank Act. Public Law 111-203
Sec. Sec.  721, 761. The term ``eligible contract participant,'' is
defined in Section 1a(18) of the Commodity Exchange Act (``CEA''), 7
U.S.C. 1a(18), as re-designated and amended by Section 721 of the
Dodd-Frank Act. Public Law 111-203 Sec.  721. Further, Sections
721(c) and 761(b) of the Dodd-Frank Act respectively require the
CFTC to adopt rules to further define the terms ``swap,'' ``swap
dealer,'' ``major swap participant,'' and ``eligible contract
participant,'' and permit the Commission to adopt rules to further
define the terms ``security-based swap,'' ``security-based swap
dealer,'' ``major security-based swap participant,'' and ``eligible
contract participant,'' with regard to security-based swaps, for the
purpose of including transactions and entities that have been
structured to evade Title VII of the Dodd-Frank Act. Public Law 111-
203 Sec. Sec.  721(c), 761(b). Finally, Section 712(a) of the Dodd-
Frank Act provides that the Commission and CFTC, after consultation
with the Federal Reserve, shall jointly prescribe regulations
regarding ``mixed swaps,'' as may be necessary to carry out the
purposes of Title VII. Public Law 111-203 Sec.  712(a). Consistent
with the Dodd-Frank statutory structure described above, the
Commission and CFTC have proposed rules to define these terms. See
Exchange Act No. 63452 (December 7, 2010), 75 FR 80174 (December 21,
2010).
    \5\ Section 761 of the Dodd-Frank Act adds Section 3(a)(77) to
the Exchange Act, which defines the term ``security-based swap
execution facility'' to mean ``a trading system or platform in which
multiple participants have the ability to execute or trade security-
based swaps by accepting bids and offers made by multiple
participants in the facility or system, through any means of
interstate commerce, including any trading facility that (A)
facilitates the execution of security-based swaps between persons;
and (B) is not a national securities exchange.'' See Public Law 111-
203 Sec.  761. The decision of a security-based swap execution
facility or exchange to list a security-based swap contract for
trading may not be sufficient to establish that the contract is
``made available for trading'' by that security-based swap execution
facility or exchange and therefore cannot be traded in the over-the-
counter market. See Exchange Act Release No. 63825 (February 2,
2011), 76 FR 10948 (February 28, 2011). The Dodd-Frank Act amends
the CEA to provide for a similar regulatory framework with respect
to transactions in swaps regulated by the CFTC.
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    Beginning in December of 2008, the Commission acted to facilitate
the clearing of OTC security-based swaps by permitting certain clearing
agencies to clear credit default swaps (``CDS'') on a temporary
conditional basis.\6\ Consequently, a significant volume of security-
based swaps in the form of CDS transactions are centrally cleared
today, and the Commission oversees those activities pursuant to the CDS
Clearing Exemption Orders.\7\
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    \6\ The Commission authorized five entities to clear credit
default swaps. See Exchange Act Release Nos. 60372 (July 23, 2009),
74 FR 37748 (July 29, 2009), 61973 (April 23, 2010), 75 FR 22656
(April 29, 2010) and 63389 (November 29, 2010), 75 FR 75520
(December 3, 2010) (CDS clearing by ICE Clear Europe Limited); 60373
(July 23, 2009), 74 FR 37740 (July 29, 2009), 61975 (April 23,
2010), 75 FR 22641 (April 29, 2010) and 63390 (November 29, 2010),
75 FR 75518 (December 3, 2010), (CDS clearing by Eurex Clearing AG);
59578 (March 13, 2009), 74 FR 11781 (March 19, 2009), 61164
(December 14, 2009), 74 FR 67258 (December 18, 2009), 61803 (March
30, 2010), 75 FR 17181 (April 5, 2010) and 63388 (November 29,
2010), 75 FR 75522 (December 3, 2010) (CDS clearing by Chicago
Mercantile Exchange Inc.); 59527 (March 6, 2009), 74 FR 10791 (March
12, 2009), 61119 (December 4, 2009), 74 FR 65554 (December 10,
2009), 61662 (March 5, 2010), 75 FR 11589 (March 11, 2010) and 63387
(November 29, 2010) 75 FR 75502 (December 3, 2010) (CDS clearing by
ICE Trust US LLC); 59164 (December 24, 2008), 74 FR 139 (January 2,
2009) (temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.)
(collectively, ``CDS Clearing Exemption Orders''). LIFFE A&M and
LCH.Clearnet Ltd. allowed their order to lapse without seeking
renewal.
    \7\ Most cleared CDS transactions have cleared at ICE Trust US
LLC (``ICE Trust'') or ICE Clear Europe Limited (``ICE Clear
Europe''). However, Eurex Clearing AG (``Eurex'') and the Chicago
Mercantile Exchange Inc. (``CME'') are also authorized to operate
pursuant to the CDS Clearing Exemption Orders. As of October 8,
2010, ICE Trust had cleared approximately $7.1 trillion notional
amount of CDS contracts based on indices of securities and
approximately $490 billion notional amount of CDS contracts based on
individual reference entities or securities. As of October 8, 2010,
ICE Clear Europe had cleared approximately [euro]3.09 trillion
notional amount of CDS contracts based on indices of securities and
approximately [euro]560 billion notional amount of CDS contracts
based on individual reference entities or securities. See https://www.theice.com/marketdata/reports/ReportCenter.shtml. The Commission
has obtained data from The Depository Trust and Clearing Corporation
on new and assigned CDS trades in United States Dollars during the
month of November 2010 for ICE Trust. Cleared CDS trades represented
a small fraction of total trades. Specifically, cleared trades were
5.24% by notional amount of all new or assigned single name trades,
and 20.69% by notional amount of all new or assigned index trades.
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II. Prescribed Rulemaking for Clearing Agencies

A. Title VII of Dodd-Frank Act

    Title VII of the Dodd-Frank Act added new provisions to the
Exchange Act that require clearing agencies that clear security-based
swaps (``security-based swap clearing agencies'') to register with the
Commission \8\ and require the Commission to adopt rules with respect
to security-based swap clearing agencies.\9\
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    \8\ Public Law 111-203 Sec.  763(b) (adding subparagraph (g) to
Section 17A of the Exchange Act. Pursuant to Section 774 of the
Dodd-Frank Act, the requirement in Section 17A(g) of the Exchange
Act for securities-based swap clearing agencies to be registered
with the Commission takes effect on July 16, 2011).
    \9\ Public Law 111-203 Sec.  763(b) (adding subparagraphs (i)
and (j) to Section 17A of the Exchange Act).
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    Specifically, new Section 17A(j) of the Exchange Act requires the
Commission to adopt rules governing security-based swap clearing
agencies.\10\ New Section 17A(i) of the Exchange Act also gives the
Commission authority to promulgate rules that establish standards for
security-based swap clearing agencies.\11\ Compliance with any such
rules is a prerequisite to the registration of a clearing agency with
the Commission and is also a condition to the maintenance of that
security-based swap clearing agency's continued registration.\12\
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    \10\ Public Law 111-203 Sec.  763(b) (adding subparagraph (j) to
Section 17A of the Exchange Act). See also Public Law 111-203 Sec.
774 of the Dodd-Frank Act (requiring that the provisions of Title
VII take effect on the later of 360 days after the date of the
enactment or, to the extent a provision of Title VII requires a
rulemaking, not less than 60 days after publication of the final
rule or regulation implementing such provision).
    \11\ Public Law 111-203 Sec.  763(b) (adding subparagraph (i) to
Section 17A of the Exchange Act).
    \12\ Under the Exchange Act, a clearing agency can be registered
with the Commission only if the Commission makes a determination
that the clearing agency satisfies the requirements set forth in
paragraphs (A) through (I) of Section 17A(b)(3) of the Exchange Act.
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B. Payment, Clearing, and Settlement Supervision Act of 2010

    Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing,
and Settlement Supervision Act of 2010 (``Clearing Supervision Act''),
establishes an enhanced supervisory and risk control system for
systemically important clearing agencies and other financial market
utilities (``FMUs'').\13\ It provides that the Commission may prescribe
regulations containing risk management standards, taking into
consideration relevant international standards and existing prudential
requirements, for any designated clearing entities it regulates.\14\
The Council has not to date made any designations with respect to
whether any FMU is, or is likely to become, systemically important;
\15\ however, the

Commission believes it is beneficial to consider the requirements of
the Clearing Supervision Act in its proposed rules for clearing
agencies because the Clearing Supervision Act may apply to one or more
clearing agencies in the future and the Commission preliminarily
believes that its goals are consistent with the goals of Section 17A of
the Exchange Act. Specifically, Congress recognized in the Clearing
Supervision Act that the operation of multilateral payment, clearing or
settlement activities may reduce risks for clearing participants and
the broader financial system, while at the same time creating new risks
that require multilateral payment, clearing or settlement activities to
be well-designed and operated in a safe and sound manner.\16\ The
Clearing Supervision Act is designed, in part, to provide a regulatory
framework to help deal with such risk management issues, which is
generally consistent with the Exchange Act requirement that clearing
agencies be organized in a manner so as to facilitate prompt and
accurate clearance and settlement, safeguard securities and funds and
protect investors.\17\
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    \13\ See supra note 1. Under Section 803 of the Clearing
Supervision Act, clearing agencies may be FMUs. Therefore, the
Commission may be the Supervisory Agency of a clearing agency that
is designated as systemically important (``designated clearing
entities'') by the Financial Stability Oversight Council
(``Council''). See 12 U.S.C. 5463. The definition of ``FMU,'' which
is contained in Section 803(6) of the Clearing Supervision Act,
contains a number of exclusions including, but not limited to,
designated contract markets, registered futures associations, swap
data repositories, swap execution facilities, national securities
exchanges, national securities associations, alternative trading
systems, security-based swap data repositories, security-based swap
execution facilities, brokers, dealers, transfer agents, investment
companies and futures commission merchants. 12 U.S.C. 5462(6)(B).
The designation of systemic importance hinges on a determination by
the Council that the failure of, or a disruption to, the functioning
of the FMU could create, or increase, the risk of significant
liquidity or credit problems spreading among financial institutions
or markets and thereby threaten the stability of the financial
system of the United States. See 12 U.S.C. 5463(a)(2)(A)-(E). The
designation of an FMU is significant, in part, because it will
subject such designated entity to heightened oversight consistent
with the terms of the Clearing Supervision Act. For example, the
Clearing Supervision Act requires the Supervisory Agency to examine
at least once annually any FMU that the Council has designated as
systemically important. The Commission intends to conduct such
annual statutory cycle examinations on the Commission's fiscal year
basis. The Commission staff anticipates conducting the first annual
statutory cycle examination of any designated FMU for which it is
the Supervisory Agency in the annual cycle following such
designation.
    \14\ See Section 805(a)(2) of the Clearing Supervision Act.
Those regulations may govern ``(A) the operations related to
payment, clearing, and settlement activities of such designated
clearing entities; and (B) the conduct of designated activities by
such financial institutions.'' 12 U.S.C. 5464(a)(2).
    \15\ See 12 U.S.C 5321 (among other things establishing the
Council and designating its voting and nonvoting members. In
accordance with Section 804 of the Clearing Supervision Act, the
Council has the authority, on a non-delegable basis and by a vote of
not fewer than two-thirds of the members then serving, including the
affirmative vote of its chairperson, to designate those FMUs that
the Council determines are, or are likely to become, systemically
important. The Council may, using the same procedures as discussed
above, rescind such designation if it determines that the FMU no
longer meets the standards for systemic importance. Before making
either determination, the Council is required to consult with the
Federal Reserve and the relevant Supervisory Agency as determined in
accordance with Section 803(8) of the Clearing Supervision Act). See
also Section 804 setting forth the procedures for giving entities 30
days advance notice and the opportunity for a hearing prior to being
designated as systemically important. 12 U.S.C. 5463.
    \16\ 12 U.S.C. 5461(a)(2).
    \17\ See 15 U.S.C. 78q-1(b)(3)(A).
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C. Section 17A of Exchange Act

    As noted above, in addition to the new authority provided to the
Commission under Titles VII and VIII of the Dodd-Frank Act, the
Commission has existing authority over clearing agencies under the
Exchange Act. For example, entities are required to register with the
Commission pursuant to Section 17A of the Exchange Act \18\ and Rule
17Ab2-1,\19\ prior to performing the functions of a clearing agency.
Under this registration system, the Commission is not permitted to
grant registration unless it determines that the rules and operations
of the clearing agency meet the standards set forth in Section 17A.\20\
If a clearing agency is granted registration, the Commission oversees
the clearing agency to facilitate compliance with the Exchange Act
through the rule filing process for self-regulatory organizations
(``SROs'') and through on-site examinations by Commission staff.
Section 17A also gives the Commission authority to adopt rules for
clearing agencies as necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Exchange Act and prohibits a registered clearing agency
from engaging in any activity in contravention of these rules and
regulations.\21\
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    \18\ See 15 U.S.C. 78q-1(b). See also Public Law 111-203 Sec.
763(b) (adding subparagraph (g) to Section 17 of the Exchange Act).
    \19\ See 17 CFR 240.17b2-1.
    \20\ Specifically, Sections 17A(b)(3)(A)-(I) identify
determinations that the Commission must make about the rules and
structure of a clearing agency prior to granting registration. See
15 U.S.C. 78q-1(b)(3)(A)-(I). The staff of the Commission provided
guidance on meeting the requirements of Section 17A in its
Announcement of Standards for the Registration of Clearing Agencies.
See Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920
(June 23, 1980).
    \21\ See 15 U.S.C. 78q-1(d).
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III. Proposed Rules Governing Clearing Agencies

    The Commission is proposing several new rules that would set
standards for the operation and governance of clearing agencies. As
noted above, the Dodd-Frank Act specifically gives the Commission
authority to regulate security-based swaps \22\ and to adopt
regulations addressing risk management standards for designated
clearing entities that the Commission regulates. In addition to
considering this specific directive in formulating the proposed rules,
the Commission preliminarily believes that applying certain rules to
all clearing agencies would promote financial stability, one of the
goals of the Dodd-Frank Act, by facilitating prompt and accurate
clearance and settlement of all securities transactions consistent with
Section 17A of the Exchange Act while promoting the Dodd-Frank Act's
stated aims of accountability and transparency.
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    \22\ See supra note 4.
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    The types of clearing agencies that are subject to the proposed
rules can be divided into four different categories: (i) Clearing
agencies that offer central counterparty (``CCP'') services for
transactions in securities that are not security-based swaps, (ii)
clearing agencies that offer CCP services for transactions in
securities that are security-based swaps; (iii) clearing agencies that
provide non-CCP services for transactions in securities that are not
security-based swaps; and (iv) clearing agencies that provide non-CCP
services for transactions in securities that are security-based swaps.
The table below illustrates how the proposed rules would apply to
different types of clearing agencies. In general, as illustrated in
column ``A'' in the table, clearing agencies offering CCP services
(regardless of whether they offer those services for transactions in
securities that are or are not security-based swaps) would be subject
to most of the proposed rules.\23\ Clearing agencies that offer only
non-CCP services would only be subject to certain of the proposed
rules, depending on whether they offer those services for transactions
in securities that are not security-based swaps (as illustrated in
column ``B'' in the table) \24\ or that are security-based swaps (as
illustrated in column ``C'' in the table).
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    \23\ As noted in the table, proposed Rule 17Aj-1 would only
apply to CCPs for security-based swap transactions.
    \24\ Within this category, as illustrated in column ``B'', the
proposed rules distinguish between clearing agencies that provide
central securities depository services, and those that do not.

                                                   Application of Proposed Rules to Clearing Agencies
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                                                    A  CCP Clearing Services for
                                                   Securities that are or are not    B  Non-CCP Clearing Services in    C Non-CCP Clearing Services for
                                                   Security-Based Swaps (``SBS'')      Securities that are not SBS          Securities that are SBS
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17Ad-22(b)(1): Measurement and management of                                [cir]   .................................  .................................
 credit exposures..............................
17Ad-22(b)(2): Margin requirements.............                             [cir]   .................................  .................................
17Ad-22(b)(3): Financial resources.............                             [cir]   .................................  .................................
17Ad-22(b)(4): Model validation................                             [cir]   .................................  .................................

17Ad-22(b)(5): Non-dealer access...............                             [cir]   .................................  .................................
17Ad-22(b)(6): Portfolio size and transaction                               [cir]   .................................  .................................
 volume thresholds restrictions................
17Ad-22(b)(7): Net capital restrictions........                             [cir]   .................................  .................................
17Ad-22(c)(1): Records of financial resources..                             [cir]   .................................  .................................
17Ad-22(c)(2): Audited financial statements....                             [cir]                              [cir]                              [cir]
17Ad-22(d)(1): Transparent and enforceable                                  [cir]                              [cir]                              [cir]
 rules.........................................
17Ad-22(d)(2): Participation requirements......                             [cir]                              [cir]                              [cir]
17Ad-22(d)(3): Custody of assets and investment                             [cir]                              [cir]                              [cir]
 risk..........................................
17Ad-22(d)(4): Identification and mitigation of                             [cir]                              [cir]                              [cir]
 operational risk..............................
17Ad-22(d)(5): Money settlement risks..........                             [cir]                              [cir]                              [cir]
17Ad-22(d)(6): Cost-effectiveness..............                             [cir]                              [cir]                              [cir]
17Ad-22(d)(7): Links...........................                             [cir]                              [cir]                              [cir]
17Ad-22(d)(8): Governance......................                             [cir]                              [cir]                              [cir]
17Ad-22(d)(9): Information on services.........                             [cir]                              [cir]                              [cir]
17Ad-22(d)(10): Immobilization and               .................................              Would Only Apply to Cle.................................
 dematerialization of stock certificates.......                                               Agencies that Provide Central
                                                                                Securities Depository (``CSD'')
                                                                                Services
17Ad-22(d)(11): Default procedures.............                             [cir]                              [cir]                              [cir]
17Ad-22(d)(12): Timing of settlement finality..                             [cir]                              [cir]   .................................
17Ad-22(d)(13): Delivery versus payment........                             [cir]                              [cir]   .................................
17Ad-22(d)(14): Controls to address              .................................              Would Only Apply to Cle.................................
 participants' failure to settle...............                                               Agencies that Provide CSD
                                                                                Services
17Ad-22(d)(15): Physical delivery risks........                             [cir]                              [cir]   .................................
17Aj-1: Dissemination of pricing and valuation               Would Only Apply to Cle.................................  .................................
 information...................................            Agencies that Provide CCP
                                                                 Services for SBS
17Ad-23: Policies and procedures to protect                                 [cir]                              [cir]                              [cir]
 confidentiality of trading information of
 participants..................................
Amendments to Rule 17Ab2-1: Registration of                                 [cir]                              [cir]                              [cir]
 clearing agencies.............................
17Ad-25: Procedures to identify and address                                 [cir]                              [cir]                              [cir]
 conflicts of interests........................
17Ad-26: Standards for board or board committee                             [cir]                              [cir]                              [cir]
 directors.....................................
3Cj-1: Designation of chief compliance officer.                             [cir]                              [cir]                              [cir]
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A. Proposed Rule 17Ad-22 Standards for All Clearing Agencies

    The Commission is proposing Rule 17Ad-22 to augment the statutory
requirements under the Exchange Act by establishing minimum
requirements regarding how clearing agencies must maintain effective
risk management procedures and controls as well as meet the statutory
requirements under the Exchange Act on an ongoing basis. For a clearing
agency to be registered under Section 17A, it must have the ability to
facilitate the prompt and accurate clearance and settlement of
transactions, safeguard investor funds and securities, remove
impediments to and perfect the mechanism of a national clearance and
settlement system, and generally protect investors.\25\ Also, the
clearing agency's rules must provide adequate access to qualified
participants, fair representation of shareholders and participants,
equitable pricing, fair discipline of participants, and must not impose
any undue burden on competition.\26\ Section 17A of the Exchange Act
explicitly provides the Commission with discretion to update the rules
for clearing agencies consistent with the Exchange Act.\27\ Further,
Section 805(a) of the Dodd-Frank Act directs the Commission to take
into consideration relevant international standards and existing
prudential requirements for clearing agencies that are designated as
FMUs.\28\ The current international standards most relevant to risk
management of clearing agencies are the standards developed by the
Technical Committee of the International Organization of Securities
Commissions (``IOSCO'') and the Committee on Payment and Settlement
Systems (``CPSS'') of the Bank for International Settlements that are
contained in the following reports: Recommendations for Securities
Settlement Systems (2001) (``RSSS''), and Recommendations for Central
Counterparties (2004) (``RCCP'') (collectively ``CPSS-IOSCO
Recommendations'').\29\
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    \25\ See 15 U.S.C. 78q-1.
    \26\ See id.
    \27\ See id.
    \28\ 12 U.S.C. 5464(a)(1).
    \29\ The complete RSSS and RCCP Reports are available on the Web
site of the Bank for International Settlements at http://www.bis.org/publ/cpss46.htm and http://www.bis.org/publ/cpss64.htm
respectively.
     The RSSS and RCCP Reports were drafted by IOSCO and CPSS
(``Task Force''). The Task Force consisted of securities regulators
and central bankers from 19 countries (i.e., Australia, Belgium,
Brazil, China, Czech Republic, France, Germany, Hong Kong, India,
Italy, Japan, Malaysia, Mexico, The Netherlands, Saudi Arabia,
Singapore, Spain, England, and the United States) and the European
Union. The U.S. representatives on the Task Force included staff
from the Commission, the Federal Reserve, and the CFTC. The Federal
Reserve has incorporated the RSSS and RCCP, as well as the Core
Principles for Systemically Important Payment Systems, in its
Federal Reserve Policy on Payment System Risk. The Federal Reserve
applies these standards in its supervisory process and expects
systemically important systems, as determined by the Federal Reserve
and subject to its authority, will complete a self-assessment
against the standards set forth in the policy. See Policy on Payment
System Risk, 72 FR 2518 (January 12, 2007).
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    The Commission preliminarily believes that certain aspects of the
CPSS-IOSCO Recommendations should be made to clearly apply to clearing
agencies and that such application would further the objectives and
principles for clearing agencies under the Exchange Act and the Dodd-
Frank Act, including those that are related to sound risk management
practices and to fair and open access. These international standards
were formulated by securities regulators and central banks to promote
sound risk-management practices and encourage the safe design and
operation of entities that provide clearance and settlement services.
The Commission is proposing Rule 17Ad-22 (which is consistent with the
CPSS-IOSCO Recommendations but reflects modifications designed to
tailor the proposed rule to the Exchange Act and the U.S. clearance and
settlement system) because the Commission preliminarily believes that
the rule would help to facilitate prompt and accurate clearance and
settlement, safeguard securities and funds and protect investors.\30\
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    \30\ See 15 U.S.C. 78q-1(d).
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    The Commission preliminarily believes that the adoption of proposed
Rule 17Ad-22, which is based on the CPSS-IOSCO Recommendations, and the
application of this rule to all clearing agencies would have several
important benefits, including providing a robust framework for
assessing and addressing the risks within clearing agencies. The
Commission requests comment on proposed Rule 17Ad-22 and the
consideration of the CPSS-IOSCO Recommendations in connection with the
proposed rule. The Commission also requests comment on whether the
proposed rules are properly tailored to assess and address the risks at
clearing agencies and whether they are sufficiently clear to enable
clearing agencies to reasonably determine whether they are in
compliance with the rules or whether the Commission should provide
additional guidance.\31\
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    \31\ Several clearing agencies have published their evaluations
of their compliance with the CPSS-IOSCO Recommendations on their Web
sites. See http://www.dtcc.com/legal/compliance/assessments.php. In
addition, several clearing agencies, as part of requests for the CDS
Clearing Exemption Orders, have represented to the Commission that
they met the standards set forth in the RCCP. See supra note 6.
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    The Commission notes that IOSCO and the CPSS are currently in the
process of revising their existing sets of international standards.\32\
This review is intended to strengthen and clarify the CPSS-IOSCO
Recommendations, as well as the CPSS's existing standards for payment
systems entitled: Core Principles for Systemically Important Payment
Systems. The Commission may, as international standards evolve,
consider additional modifications to its rules as the Commission
determines is appropriate based on its own experience and the
requirements under the Exchange Act.
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    \32\ In December 2009, IOSCO and CPSS began a comprehensive
review of existing standards for FMUs, which includes the RSSS and
RCCP. This review intends to strengthen and clarify the standards
based on experience with the standards since their publication and
specifically from lessons learned during the recent financial
crisis.
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    Proposed Rule 17Ad-22 contains certain additional requirements that
are not addressed or contemplated by international standards. For
clearing agencies that perform CCP services, these additional
requirements are found in the following proposed rules: (1) Rule 17Ad-
22(b)(3), which would require heightened financial resources for
clearing agencies that provide CCP services for securities that are
security-based swaps; (2) Rule 17Ad-22(b)(5), which would prohibit
membership restrictions based on dealer status; (3) Rule 17Ad-22(b)(6),
which would prohibit membership restrictions based on minimum volume
and transaction thresholds; (4) Rule 17Ad-22(b)(7), which would
prohibit restrictions on clearing agency membership based on minimum
net capital requirements of $50 million or more; and (5) Rule 17Ad-
22(c)(1), which would require calculation and maintenance of records of
the clearing agency's financial resources. \33\
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    \33\ Proposed Rule 17Ad-22(c)(2) would apply to all clearing
agencies and require them to post annual audited financial reports
on their Web sites.
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    In addition, the Commission is proposing additional rules for all
clearing agencies (whether or not they offer CCP services) that are not
addressed or contemplated by the international standards. These
proposed rules would: (1) Require dissemination of pricing and
valuation information by security-based swap clearing agencies that
perform CCP services (Proposed Rule 17Aj-1); (2) require all clearing
agencies to have adequate safeguards and procedures to protect the
confidentiality of trading information of

clearing agency participants (Proposed Rule 17Ad-23); (3) exempt
certain security-based swap dealers and security-based swap execution
facilities from the definition of a clearing agency (Proposed Rule
17Ad-24); (4) amend rules concerning registration of clearing agencies
to account for security-based swap clearing agencies and to make other
technical changes (Rule 17Ab2-1); (5) require all clearing agencies to
have procedures that identify and address conflicts of interest
(Proposed Rule 17A-25); (6) require clearing agencies to set standards
for all members of their boards of directors or committees (Proposed
Rule 17Ad-26); and (7) require all clearing agencies to designate a
chief compliance officer (Proposed Rule 3Cj-1).
1. Proposed Rule 17Ad-22(a)
    Proposed Rule 17Ad-22(a) contains five definitions. Proposed Rule
17Ad-22(a)(1) would define CCP as a clearing agency that interposes
itself between counterparties to securities transactions to act
functionally as the buyer to every seller and as the seller to every
buyer. Proposed Rule 17Ad-22(a)(2) would define ``central securities
depository services'' to mean services of a clearing agency that is a
securities depository as described in Section 3(a)(23) of the Exchange
Act.\34\ Proposed Rule 17Ad-22(a)(3) would define ``participant'', for
the limited purposes of proposed Rules 17Ad-22(b)(3) and 17Ad-
22(d)(14), to mean that if a participant controls another participant,
or is under common control with another participant, then the
affiliated participants shall be collectively deemed to be a single
participant. Proposed Rule 17Ad-22(a)(4) would define ``normal market
conditions'', for the limited purposes of proposed Rules 17Ad-22(b)(1)
and (2), to mean conditions in which the expected movement of the price
of cleared securities would produce changes in a clearing agency's
exposures to its participants that would be expected to breach margin
requirements or other risk control mechanisms only one percent of the
time. Proposed Rule 17Ad-22(a)(5) would define ``net capital'', for the
limited purposes of proposed Rule 17Ad-22(b)(7), to have the same
meaning as set forth in Rule 15c3-1 under the Exchange Act for broker-
dealers or any similar risk adjusted capital calculation for all other
prospective clearing members.\35\
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    \34\ [Clearing agency] also means any person, such as a
securities depository, who (i) acts as a custodian of securities in
connection with a system for the central handling of securities
whereby all securities of a particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred, loaned, or pledged by bookkeeping entry without
physical delivery of securities certificates, or (ii) otherwise
permits or facilitates the settlement of securities transactions or
the hypothecation or lending of securities without physical delivery
of securities certificates. 15 U.S.C. 78c(a)(23).
    \35\ As appropriate, the clearing agency would develop risk
adjusted capital calculations for prospective clearing members that
are not broker-dealers.
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    The Commission preliminarily believes that these five proposed
definitions would be consistent with the common meaning of these terms
as understood in the clearance and settlement industry. In addition,
the Commission preliminarily believes the definition of ``normal market
conditions'' would be consistent with international use of that term in
the context of clearing agency risk management.\36\ The Commission
intends for these definitions to provide clearing agencies with
appropriate guidance to determine when requirements under proposed Rule
17Ad-22 would apply. The Commission requests comment on the proposed
definitions, including whether any additional clarification would be
helpful.
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    \36\ In the context of the RCCP, ``normal market conditions''
means conditions in which the expected movement of the price of
cleared securities would produce changes in a clearing agency's
exposures to its participants that would be expected to breach
margin requirements or other risk control mechanisms only one
percent of the time. See CPSS Publications Recommendations for
Central Counterparties, (November 2004), available at http://www.bis.org/publ/cpss64.htm.
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2. Proposed Rule 17Ad-22(b)
    Proposed Rule 17Ad-22(b) would set forth standards that are
applicable to clearing agencies that provide CCP services.
Specifically, the proposed rule would provide standards with respect to
measurement and management of credit exposures, margin requirements,
financial resources, and annual evaluations of the performance of the
clearing agency's margin models. The proposed rule would also require
membership access to clearing agencies for persons that are not dealers
or security-based swap dealers, prohibit the use of minimum portfolio
size and minimum volume transaction thresholds as a condition for
membership at a clearing agency, and permit membership access to a
clearing agency by persons with net capital equal to or greater than
$50 million. The discussion below provides greater detail regarding
each respective standard covered in proposed Rule 17Ad-22(b). The
proposed rule is designed to address risks and participant membership
structures that are specifically linked to the provision of services
associated with a clearing agency interposing itself between
counterparties to securities transactions and acting functionally as
the buyer to every seller and the seller to every buyer (i.e., CCP
services). Accordingly, the Commission preliminarily believes that
these requirements would not need to apply to clearing agencies that do
not provide CCP services because they would not be engaged in
activities that the proposed rule is designed to address.
    The Commission preliminarily believes that proposed Rule 17Ad-22(b)
would provide standards designed to help ensure sound risk management
practices at clearing agencies providing CCP services. Further, the
Commission preliminarily believes that the requirements of proposed
Rule 17Ad-22(b) would help ensure that the rules, policies and
procedures of a clearing agency providing CCP services will be designed
to promote fair and open access, to promote the prompt and accurate
clearance and settlement of securities transactions, and 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.
Proposed Rule 17Ad-22(b)(1): Measurement and Management of Credit
Exposures
    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 \37\ 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.
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    \37\ See supra note 36.
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    The Commission preliminarily believes that measurement and
management of credit exposures can, among other things, reduce the
likelihood in a participant default scenario that losses from default
would disrupt the operations of the clearing agency and its non-
defaulting participants and adversely affect the functioning of the
clearing agency. A clearing agency providing CCP services faces the
risk that its exposures to participants can change dramatically as a
result of changes in prices, in positions, or both. Adverse price

movements can rapidly increase exposures to participants, and
participants may rapidly change or concentrate their positions through
new trading. If not appropriately measured and managed, such results
could lead to significant liabilities accruing at the clearing agency.
    Recognizing that the risks that clearing agencies are likely to
face will change over time, the Commission is proposing that a clearing
agency providing CCP services be required to measure its credit
exposures to its participants at least once each day. The Commission
preliminarily believes this is the minimum frequency of measurement
that would permit a clearing agency to effectively consider the risks
it faces because of the potential for significant changes to the risk
profiles of its participants to change on a daily basis.
    In addition to requiring clearing agencies to take steps to measure
their credit exposures to participants, the proposed rule would also
require clearing agencies to limit their exposures to potential losses
from participant defaults. By collecting sufficient margin and having
other resources in place to account for losses arising under normal
market conditions, the Commission expects that a clearing agency would
be able to limit its exposures to potential losses from defaults by its
participants. The Commission preliminarily believes that the proposed
rule should thereby help ensure prompt and accurate clearance and
settlement.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(1). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding measurement
and management of credit exposures sufficiently clear? If not, why not
and what would be a better alternative?
     How do current practices of clearing agencies providing
CCP services with respect to measurement and management of credit
exposures compare to the practices that the Commission proposes to
require in this rule? What are the expected incremental costs to
clearing agencies providing CCP services in connection with adding to
or revising their current practices in order to implement the
Commission's proposed rule?
     Should the Commission require clearing agencies acting as
CCPs to use any specific confidence level for limiting potential losses
under the proposed rule when clearing certain products, or to use
minimum amounts of market data when calculating credit exposures? Why
or why not?
     What level of discretion should the Commission allow
clearing agencies providing CCP services to exercise when measuring and
managing credit exposure? Are there circumstances when such discretion
should be limited?
     Is it more difficult for clearing agencies providing CCP
services and their participants to anticipate and control losses
associated with certain types of financial products compared to others?
If so, how should the Commission take this into account when
establishing rules for clearing agency standards? For example, should
the Commission require additional risk management measures to be
applied by clearing agencies providing CCP services when judging the
risks associated with financial products that trade infrequently or
when valuation models for the product are not yet broadly accepted in
the financial market? Why or why not?
     Extremely illiquid security-based swap products may be
difficult to clear under a conventional CCP clearing model because it
may be difficult to value them with a degree of accuracy that allows
the CCP to properly manage the risk of those positions. Should the
Commission explore developing alternatives to the requirements
contained in proposed Rule 17Ad-22(b)(1) based on the liquidity of
products a clearing agency clears? What effect would any such
requirements have on the potential development of alternative clearing
models for highly-illiquid products that would convey some of the
benefits of clearing (such as centralized holding of collateral by a
third-party custodian, daily adjustment of variation margin amounts,
daily posting and return of variation margin, independent valuation of
positions, and prompt close-out of positions held by a defaulting
market participant)?
     Should the Commission consider requiring clearing agencies
that provide CCP services to measure exposures to participants more or
less frequently than a minimum of once daily?
Proposed Rule 17Ad-22(b)(2): Margin Requirements
    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; \38\ (ii) use risk-based models and parameters to
set margin requirements; and (iii) review the models and parameters at
least monthly.
---------------------------------------------------------------------------

    \38\ See supra note 36.
---------------------------------------------------------------------------

    The Commission preliminarily believes that use of margin
requirements by clearing agencies providing CCP services to collect
assets (e.g., cash or securities) from its participants as a way to
limit exposures to participants in normal market conditions would,
among other things, provide the clearing agency with assets it could
readily use to limit losses incurred by a participant in the event of a
default. By limiting its credit exposure in this manner, a clearing
agency providing CCP services would be less likely to be subject to
disruptions in its operations as a result of a participant default,
thereby promoting prompt and accurate clearance and settlement.
    The Commission also preliminarily believes that risk-based models
and parameters should be used to set margin requirements because they
permit a clearing agency providing CCP services to tailor the amount of
margin collected to the needs of the clearing agency. Specifically,
models and parameters for collecting margin that account for the risks
the clearing agency providing CCP services faces when transacting with
a participant may be more likely to result in effective and efficient
margin requirements because the level of margin collected would be
commensurate with the level of risk presented by the participant to the
clearing agency.
    In addition, the Commission preliminarily believes that the review
of these models and parameters should be required to occur at least
monthly. Market conditions and risks are constantly changing and
therefore the models and parameters used by a clearing agency providing
CCP services to set margin may not accurately reflect the needs of a
clearing agency if they are permitted to remain static. The Commission
recognizes, however, that there may be benefits to maintaining some
stability with respect to margin levels in order to limit operational
difficulties. Accordingly, the Commission is proposing that clearing
agencies providing CCP services be required to review their models and
parameters at least monthly because the Commission preliminarily
believes that such time frame would limit the potential that such
parameters or models will become stale while also providing the
clearing agency flexibility to maintain some stability with respect

to determinations for margin requirements.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(2). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding margin
requirements sufficiently clear? If not, why not and what would be a
better alternative?
     How do current practices of clearing agencies regarding
margin requirements 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?
     Should the Commission require clearing agencies providing
CCP services to impose any special margin or intraday margin
requirements in certain circumstances? Are there circumstances when
special margin or intraday margining would not be appropriate? Why or
why not?
     Should the Commission allow clearing agencies providing
CCP services to exercise significant discretion when establishing
margin practices? Why or why not? Are there circumstances when such
discretion should be limited? Is there a risk that clearing agencies
providing CCP services may lower margin standards to compete for
business? If so, how should the Commission take such factors into
account when establishing rules for clearing agencies providing CCP
services?
     Should the Commission consider requiring a clearing agency
that provides CCP services to review its margin model and parameters
more or less frequently than at least monthly?
Proposed Rule 17Ad-22(b)(3): Financial Resources
    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, provided that a security-based swap
clearing agency shall maintain sufficient financial resources to
withstand, at a minimum, a default by the two participants to which it
has the largest exposures in extreme but plausible market
conditions.\39\
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    \39\ See proposed Rule 17Ad-22(a)(3), supra Section II.A.1
(defining ``participant'' for purposes of proposed Rule 17Ad-
22(b)(3)).
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring a clearing
agency, other than a security-based swap clearing agency, that provides
CCP services 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 would, among other
things, reduce the likelihood that a default would create losses that
would disrupt the operations of the clearing agency and adversely
affect the clearing agency's non-defaulting participants. However, the
Commission preliminarily believes that security-based swap clearing
agencies that provide CCP services face additional risk-management
challenges because of factors unique to the security-based swaps
market, such as more limited historical information on pricing and the
jump-to-default risk \40\ associated with certain security-based swaps,
such as CDS. The Commission preliminarily believes that to promote
prompt and accurate clearance and settlement and maintain higher levels
of financial resources to account for these risks, it is important for
security-based swap clearing agencies that provide CCP services to be
able to withstand a default by the two participants to which the
clearing agency has its largest exposures in extreme but plausible
market conditions. Moreover, the Commission expects that when a
clearing agency that provides CCP services determines what level of
financial resources would be sufficient to account for exposures in
extreme but plausible market conditions, the clearing agency would
consider potential losses that would be greater than those resulting
from observed periods of significant volatility or disturbances.
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    \40\ Jump-to-default risk relates to the possibility of a
reference entity unexpectedly experiencing a credit event over a
short period resulting in significant changes in the value of any
CDS contracts written on that particular reference entity. For
example, a seller of a CDS could be collecting regular premiums with
little expectation that the reference entity may default. However,
if that reference entity suddenly experiences a credit event, it
will trigger an unexpected obligation on the protection seller to
pay a lump sum, dependent on the size of the contract, to the
protection buyer. See generally Darrell Duffie and Haoxiang Zhu,
Does a Central Clearing Counterparty Reduce Counterparty Risk?
(Stanford Univ. 2010), available at http://www.stanford.edu/~duffie/
DuffieZhu.pdf.
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Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(3). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding requiring
clearing agencies providing CCP services to maintain sufficient
financial resources sufficiently clear? If not, why not and what would
be a better alternative?
     Should the Commission require all clearing agencies
providing CCP services, instead of only those clearing security-based
swaps, to maintain sufficient financial resources to withstand a
default by the two participants to which it has the largest exposures
in extreme but plausible market conditions? Should all or any subset of
clearing agencies be required to maintain sufficient financial
resources based on more or less than two participant defaults? For
example, should the financial resources requirements be different for
certain clearing agencies, such as security-based swap clearing
agencies or those designated as systemically important under the
Clearing Supervision Act? Should the Commission require that financial
resources be measured based on a different standard than resources
needed to withstand default by a certain number of participants, such
as a percentage of the total business conducted by the clearing agency?
     How do current practices of clearing agencies pertaining
to financial resources 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?
     Are the financial resources standards for clearing
agencies providing CCP services proposed by the Commission sufficient
for the proper functioning of a clearing agency? Should a clearing
agency providing CCP services be able to mutualize losses during a
default using financial resources designed to cover price movements?
Should the Commission establish more specific rules? For example,
should the Commission establish standards for the level of clearing
agency resources maintained in a guarantee fund as opposed to a margin
fund, or should clearing agencies providing CCP services be given
discretion to manage the composition of their financial resources as
they see fit? Why or why not? Should the Commission establish more
prescriptive requirements concerning the financial resources of certain
clearing agencies providing CCP services, such as those

that clear security-based swaps or those that are designated as
systemically important under the Clearing Supervision Act?
     Should the Commission provide additional guidance
regarding what constitutes ``extreme but plausible market conditions''?
Does allowing clearing agencies providing CCP services discretion to
interpret this term create uncertainty or introduce more risk into the
financial system than might otherwise be the case?
     What are clearing agencies' providing CCP services and
their participants' incentives to maintain financial resources to
withstand the foreseeable consequences of participant defaults? Are
there identifiable circumstances in which these self-interested
incentives may vary? For example, do clearing agencies providing CCP
services with public shareholders have different incentives than
clearing agencies providing CCP services that are member-owned? Can the
capital structure of the clearing agency providing CCP services and the
order in which losses are suffered by defaulting parties, surviving
participants and any public shareholders affect the level of risk
accepted by the clearing agency? If so, how should the Commission take
these factors into account when establishing rules for clearing
agencies providing CCP services?
Proposed Rule 17Ad-22(b)(4): Model Validation
    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 process 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 a person who performs these functions.\41\
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    \41\ Any person responsible for supervising the operation of the
clearing agency's margin model would be viewed as performing the
functions associated with the clearing agency's margin model and
could not therefore have supervisory authority over the person
conducting the model validation.
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    The Commission preliminarily believes that clearing agencies that
provide CCP services need to have a qualified person conduct a review
of models that are used to set margin levels, along with related
parameters and assumptions, in order to assure that the models perform
in a manner that facilitates prompt and accurate clearance and
settlement of transactions. In determining whether a person is
qualified to conduct the model validation, clearing agencies providing
CCP services could consider several factors, including the person's
experience in validating margin models, expertise in risk management
generally, and understanding of the clearing agency's operations and
procedures.
    In addition, the Commission is proposing that the person conducting
the model validation be a 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 a person who
performs these functions. The Commission preliminarily believes that a
review by a person who is not involved in the day-to-day operation of
the margin model is important to identify potential vulnerabilities or
limitations and to promote a critical evaluation of the model. This is
because a person involved in the functions related to the model's
operation, or someone who reports to such a person, may be less likely
to critically evaluate the margin model because of preconceived views
or a desire not to find issues with a model that they help to
operate.\42\ The Commission preliminarily believes that the person
validating the clearing agency's margin model should be sufficiently
free from outside influences so that he or she can be completely candid
in their assessment of the model.
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    \42\ Proposed Rule 17Ad-22(b)(4), however, would not prevent a
person conducting the model validation from being employed by the
clearing agency if the conditions in the proposed rule are
satisfied. For example, a qualified member of the internal audit
function that operates under a separate reporting line may be able
to provide the model validation.
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    Finally, the Commission is proposing that the model validation be
conducted on an annual basis. The Commission preliminarily believes
that conducting the model validation on an annual basis would provide a
sufficiently frequent evaluation period because model performance
ordinarily would not be expected to vary significantly over short
periods but should be re-evaluated as market conditions change.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(4). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule requiring clearing
agencies to provide for a model validation sufficiently clear? If not,
why not and what would be a better alternative?
     What are the advantages and disadvantages of requiring an
annual model validation? Should a more or less frequent model
validation be required? Should the model validation be specifically
triggered as a result of any material change in the clearing agency,
such as the introduction of new products or the addition of portfolio
margining arrangements with other clearing agencies?
     Should the Commission place more or less stringent
restrictions on the type of person who is permitted to conduct the
model validation? For example, should the Commission prescribe any
specific qualifications that the person conducting the model validation
should have? Should the Commission require an outside consultant be
engaged to conduct the model validation? Should persons that perform
functions associated with the clearing agency's margin model be able to
conduct the model validation?
     Does the proposal provide sufficient or excessive
separation of the person conducting the model validation from the
persons who develop and administer the model? In either case, please
explain. Should the Commission adopt additional requirements to help
ensure that the persons conducting the model validation are free from
retaliation and influence? If so, please explain. What costs or burdens
might such additional requirements impose on the effective validation
of models?
Proposed Rule 17Ad-22(b)(5): Non-Dealer Member Access
    Proposed Rule 17Ad-22(b)(5) requires 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 \43\ or
security-based swap dealer \44\ services to

obtain membership on fair and reasonable terms at the clearing agency
in order to clear securities for itself or on behalf of other persons.
Dealer and security-based swap dealer services generally involve
services designed to facilitate securities transactions by buying and
selling securities for a person's own account. The Commission
preliminarily believes that requiring clearing agencies that perform
CCP services to allow persons who are not dealers or security-based
swap dealers to become members of the clearing agency will promote more
competition in and access to clearing through facilitating indirect
clearing arrangements, commonly referred to as correspondent clearing.
Correspondent clearing is an arrangement between a current participant
of a clearing agency and a non-participant that desires to use the
clearing agency for clearance and settlement services.
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    \43\ The term ``dealer'' is defined in Section 3(a)(5) of the
Exchange Act and means any person engaged in the business of buying
and selling securities for such person's own account through a
broker or otherwise. The definition contains an exception for a
person that buys or sells securities for such person's own account,
either individually or in a fiduciary capacity, but not as a part of
a regular business. There is also an exception for banks engaging in
certain specified activities. See 15 U.S.C. 78c(a)(5) for the
complete definition.
    \44\ Pursuant to Section 761 of the Dodd-Frank Act, the term
``security-based swap dealer'' is added as Section 3(a)(71) of the
Exchange Act, 15 U.S.C. 78c(a), and generally means any person who
(A) holds itself out as a dealer in security-based swaps; (B) makes
a market in security-based swaps; (C) regularly enters into
security-based swaps with counterparties as an ordinary course of
business for its own account; or (D) engages in any activity causing
it to be commonly known in the trade as a dealer or market maker in
security-based swaps. See Public Law 111-203, Section 761 for the
complete definition. See also Exchange Act Release No. 63452
(December 7, 2010), 75 FR 80174 (December 21, 2010), supra note 4.
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    The Commission has previously noted that in situations where direct
access to clearing agencies is limited by reasonable participation
standards firms that do not meet these standards may still be able to
access clearing agencies through correspondent clearing arrangements
with direct participants.\45\ Such a process would involve the non-
participant entering into a correspondent clearing arrangement with a
participant so that the transaction may be submitted by the participant
to the clearing agency. Thus, the success of correspondent clearing
arrangements depends on the willingness of participants to enter into
such arrangements with non-participant firms which may act as direct
competitors to the participants in the participants' capacity as
dealers or security-based swap dealers in the market for buying or
selling the relevant securities. Given that participants that are
dealers or security-based swap dealers may have an incentive to
restrict clearing access to potential competitors, correspondent
clearing arrangements may not be readily established without providing
participants that do not provide dealer or security-based swap dealer
services with the ability to become members of a clearing agency and
thereby help develop correspondent clearing arrangements.
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    \45\ See Exchange Act Release No. 63107 (October 14, 2010), 75
FR 65882 (October 26, 2010) (Ownership Limitations and Governance
Requirements for Security-Based Swap Clearing Agencies, Security-
Based Swap Execution Facilities, and National Securities Exchanges
with Respect to Security-Based Swaps under Regulation MC).
---------------------------------------------------------------------------

    At the same time, the Commission recognizes that persons who are
not dealers or security-based swap dealers may fail to meet other
standards for membership at a clearing agency, such as the operational
capabilities required for direct participation. Proposed Rule 17Ad-
22(b)(5) would not prohibit clearing agencies that provide CCP services
from taking these factors into account when establishing membership
criteria for non-dealers. Rather, the proposal would prohibit clearing
agencies that provide CCP services from denying membership on fair and
reasonable terms to otherwise qualified persons solely by virtue of the
fact that they do not perform any dealer or security-based swap dealer
services.
    The Commission preliminarily believes that the incentives of
persons who do not provide dealer or security-based swap dealer
services to promote access at the clearing agency that provides CCP
services would not be limited by a desire to restrict competition in
the market for buying or selling the relevant securities. Accordingly,
the Commission preliminarily believes that permitting such persons to
become members of a clearing agency that provides CCP services may
foster the development of correspondent clearing arrangements that
would allow dealers and security-based swap dealers, who may otherwise
not be able to meet reasonable participation standards of a clearing
agency, to obtain access to the clearing agency through correspondent
clearing arrangements. The Commission preliminarily believes this would
be beneficial because it could result in greater competition in and
access to clearing.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(5). In addition, the Commission requests
comments on the following specific issues:
     In addition to prohibiting denial of membership based on
whether a person provides dealer or security-based swap dealer services
as a way to facilitate greater indirect access to clearing, should the
Commission consider other measures to promote access to clearing at
clearing agencies that provide CCP services, including any requirements
designed to promote greater direct access to clearing (e.g., adding
specific membership categories)?
     Should clearing agencies that provide CCP services be
required to have policies and procedures that are designed to promote
membership by non-dealers? If so, what would be the advantages and
disadvantages of requiring the clearing agency to periodically measure
its performance against the objectives contained in such policies and
procedures, and who within the clearing agency should be responsible
for conducting such a review (for instance the chief compliance
officer)?
     Is the Commission's proposed rule requiring clearing
agencies that provide CCP services 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 sufficiently clear?
If not, why not?
     Should the Commission consider more prescriptive
regulations to specify the criteria that clearing agencies should use
to grant membership privileges to persons that do not perform any
dealer or security-based swap dealer services to clear securities for
themselves or on behalf of other persons? Please explain why or why
not.
     What are the potential advantages and disadvantages of
having persons that do not provide dealer or security-based swap dealer
services as members of a clearing agency?
     If a clearing agency that provides CCP services does not
have rules that facilitate correspondent clearing, should the
Commission consider requiring that clearing agency to justify to the
Commission why its rules do not facilitate correspondent clearing? What
would be the advantages and disadvantages of such a requirement? What
are the potential reasons why a clearing agency may not have rules that
facilitate correspondent clearing arrangements?
     Should the Commission consider limiting the proposed
requirement for providing membership access to persons who do not
provide dealer or security-based swap dealer services to a certain
category of clearing agencies, such as security-based swap clearing
agencies that provide CCP services or those designated as systemically
important? Please explain why or why not. In particular, are there
special considerations, such as market concentration, affecting
security-based swap clearing agencies that provide CCP services that
make access to those clearing agencies for non-dealers particularly
important? If not, why not? If so, what are those considerations and
how would this requirement address

them? Do any similar considerations exist, or is there a potential that
similar considerations could exist in the future, with respect to
clearing agencies that clear securities other than security-based
swaps? Would there be any advantages or disadvantages to maintaining
one standard for all clearing agencies that provide CCP services?
Please explain.
Proposed Rule 17Ad-22(b)(6): Portfolio Size and Transaction Volume
Thresholds Restrictions
    Proposed Rule 17Ad-22(b)(6) prohibits a clearing agency that
provides CCP services from having membership standards that require
that participants maintain a portfolio of any minimum size or that
participants maintain a minimum transaction volume. The Commission
notes that the proposed rule would not prohibit a clearing agency that
provides CCP services from considering portfolio size and transaction
volume as one of several factors when reviewing a potential
participant's operations. Rather, the proposed rule would prohibit the
establishment of minimum portfolio sizes or transaction volumes that by
themselves would act as barriers to participation by new participants
in clearing. Such minimum thresholds would not function as a good
indicator of whether a participant is able to meet its obligations to a
clearing agency.\46\ This is because new participants to a clearing
agency that provides CCP services that do not initially intend to
transact in substantial size or volume may nevertheless have the
operational and financial capacity to perform the activities that other
participants are able to perform. Therefore, the Commission
preliminarily believes that the proposed rule may help to facilitate
the requirement in Section 17A of the Exchange Act that the rules of a
clearing agency permit fair and open access.\47\
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    \46\ Proposed Rule 17Ad-22(b)(6) would not prohibit a clearing
agency from imposing maximums portfolio sizes or transaction volume
amounts.
    \47\ See infra note 59.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(6). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule prohibiting clearing
agencies that provide CCP services from having membership standards
that require participants to maintain a portfolio of any minimum size
or to meet a minimum transaction volume threshold sufficiently clear?
If not, why not?
     What are the potential advantages and disadvantages of
prohibiting clearing agency membership standards from requiring
participants to maintain a minimum portfolio size or meet a minimum
transaction volume threshold? Please explain.
     Should the Commission consider imposing the proposed
requirements on all clearing agencies, rather than only those that
provide CCP services? Why or why not?
     Should the Commission consider prohibiting only security-
based swap clearing agencies that provide CCP services from having
membership standards that require participants to maintain a minimum
portfolio size or to maintain a minimum transaction volume? Please
explain why or why not. In particular, are there special considerations
affecting security-based swap clearing agencies that provide CCP
services that make it particularly important to prevent use of these
specific criteria in their membership standards? If so, what are those
special considerations and how would this requirement address them? If
not, in what ways would such a requirement impact the operations of
security-based swap clearing agencies that provide CCP services and
other types of clearing agencies? Would there be advantages to
maintaining one standard for all clearing agencies that provide CCP
services? Why or why not?
Proposed Rule 17Ad-22(b)(7): Net Capital Restrictions
    Proposed Rule 17Ad-22(b)(7) requires 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 \48\ equal to or greater than $50 million
with the opportunity 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. This means that while a clearing agency that provides
CCP services could not restrict access to the clearing agency solely
because a participant does not have a net capital level above $50
million, the clearing agency's policies and procedures could be
reasonably designed to limit the activities of the participant in
comparison to the activities of other participants that maintained a
higher net capital level. For example, as a way to help make its
requirements scalable, a clearing agency may elect to place limits on
its potential exposure to participants operating at certain net capital
thresholds by restricting the maximum size of the portfolio such
participants are permitted to maintain at the clearing agency. The
Commission preliminarily believes that persons that maintain a net
capital level of $50 million would have sufficient net capital to be
able to participate at some level in a clearing agency that provides
CCP services, provided that they are able to comply with other
reasonable membership standards. Based on broker-dealer reporting data
available to the Commission, the $50 million threshold for net capital
is a standard that only approximately 4% of the total number of broker-
dealers could satisfy. Accordingly, the Commission preliminarily
believes that prohibitions on membership access that are based solely
on persons having net capital equal to or greater than $50 million
could introduce unnecessary barriers to clearing access. The Commission
also preliminarily believes that the proposed rule would facilitate
sound risk management practices by the clearing agencies by encouraging
the clearing agencies to examine and articulate the benefits of higher
net capital requirements as a result of having clearing agencies
develop scalable membership standards that link the nature and degree
of participation with the potential risks posed by the participant.\49\
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    \48\ Proposed Rule 17Ad-22(a)(5) would define ``net capital'',
for the limited purposes of proposed Rule 17Ad-22(b)(7), to have the
same meaning as set forth in Rule 15c3-1 under the Exchange Act for
broker-dealers or any similar risk adjusted capital calculation for
all of other prospective clearing members.
    \49\ The Commission notes there are examples of capital-related
requirements that differentiate among types of participants. For
instance, the Fixed Income Clearing Corporation has maintained a $50
million net worth requirement and $10 million excess net capital
requirement for its Category 1 Dealer Netting Members and a $25
million net worth requirement and $10 million excess net capital
requirement for its Category 2 Dealer Netting Members.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(b)(7) 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. The Commission preliminarily
believes that by providing a method for clearing agencies to impose
higher net capital requirements in circumstances where such
requirements are necessary to mitigate risks, the proposed rule would
provide appropriate flexibility for risk management purposes.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(7). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule limiting the ability of
clearing agencies that provide CCP services to deny membership access
to participants with $50 million or more in net capital sufficiently
clear? If not, why not?
     What are advantages or disadvantages of requiring a
clearing agency that provides CCP services to provide a person that
maintains a 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?
     Should the Commission consider a higher or lower threshold
for net capital than the proposed $50 million amount? Please explain
and describe the rationale for the desired threshold amount.
     Should the Commission consider providing for the
adjustment of the $50 million net capital threshold to reflect
inflation, deflation or other factors? If so, how should the Commission
make such adjustment?
     Would access to clearing agencies that provide CCP
services by dealers or security-based swap dealers that are not
currently members of such clearing agencies be significantly improved
as a result of the proposed requirement?
     Are there any difficulties that clearing agencies that
provide CCP services may encounter in implementing a system that seeks
to scale net capital to the risk that a participant brings to a
clearing agency? Would clearing agencies be able to effectively model
such risks to prevent the potential of significant losses above the
amounts of margin collected? How would clearing agencies seek to limit
the activities of participants to prevent the risk of significant
losses above the amounts of margin collected?
     Does the proposal, to permit 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, provide sufficient flexibility to be able to
address potential risk management concerns? Would the proposal lead to
higher or lower levels of risk at clearing agencies? Please explain.
     Should the Commission consider requiring only security-
based swap clearing agencies that provide CCP services to be subject to
this requirement? Please explain why or why not. In particular, are
there special considerations affecting security-based swap clearing
agencies that provide CCP services, such as market concentration, that
make it particularly important for a person that maintains net capital
equal to or greater than $50 million to have the ability to obtain
membership? If so, what are those special considerations and how would
this requirement address them? If not, in what ways would this
requirement impact the operations of security-based swap clearing
agencies that provide CCP services and other clearing agencies? Would
there be any advantages or disadvantages to maintaining one requirement
for all clearing agencies that provide CCP services? Please explain.
3. Proposed Rule 17Ad-22(c)
    Proposed Rule 17Ad-22(c)(1) would provide 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 central counterparty services shall
calculate and maintain a record \50\ of the financial resources
necessary to meet its requirement in proposed Rule 17Ad-22(b)(3) and
sufficient documentation to explain the methodology it uses to compute
such financial resource requirement.
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    \50\ See Exchange Act Rule 17a-1 (17 CFR 240.17a-1). Clearing
agencies may destroy or otherwise dispose of records at the end of
five years consistent with Exchange Act Rule 17a-6 (17 CFR 240.17a-
6).
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    The Commission preliminarily believes that it would be appropriate
to require clearing agencies that provide CCP services to make these
calculations quarterly or at any time based on the request of the
Commission because this proposed requirement would provide a periodic
update of the financial resources that are needed as market conditions
change, while also providing flexibility for the Commission to request
such calculations on a real-time basis, which may be useful during
periods of market stress or other circumstances where more timely
information is desired. These calculations and related documentation
should help the Commission in its oversight of clearing agencies'
compliance with proposed Rule 17Ad-22(b)(3) by providing a clear record
of the method used by the clearing agency providing CCP services to
maintain sufficient financial resources.
    Proposed Rule 17Ad-22(c)(2) would require a clearing agency to post
on its Web site an annual audited financial report. Each financial
report would be required to (i) be a complete set of financial
statements of the clearing agency for the most recent two fiscal years
of the clearing agency and be prepared in accordance with U.S.
generally accepted accounting principles (``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
International Financial Reporting Standards as issued by the
International Accounting Standards Board (``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); and (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). The Commission preliminarily
believes that requiring the posting of the clearing agency's audited
annual financial report would provide an additional layer of
information about the activities and financial strength of the clearing
agency that market participants may find useful in assessing their use
of the clearing agency's services.\51\
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    \51\ The requirements of proposed Rule 17Ad-22(c)(2) concerning
the audited annual financial report would apply individually to each
respective clearing agency.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(c). In addition, the Commission requests comments
on the following specific issues:
     Is the Commission's proposed rule regarding calculating
and maintaining a record of the financial resources necessary pursuant
to proposed Rule 17Ad-22(b)(3) sufficiently clear? If not,

why not and what would be a better alternative?
     How do current practices by clearing agencies providing
CCP services compare to the practices that the Commission proposes
requiring in this rule with respect to determining needed financial
resources? What are the expected incremental costs to clearing agencies
that provide CCP services in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
     Should the Commission require calculation of the financial
resources related information more or less frequently than quarterly?
Why or why not?
     Should the Commission require any other financial
statements of a clearing agency to be posted on its Web site, such as
quarterly financial statements?
     What are the advantages and disadvantages of permitting a
financial report to be in compliance with IFRS as an alternative to
U.S. GAAP? If the Commission adopts the proposal to permit certain
clearing agencies to report using IFRS as published by the IASB, should
the Commission require a reconciliation to U.S. GAAP for specified
accounts? If so, what accounts or items would be most useful to
participants and other regulators? Would permitting only clearing
agencies that are incorporated or organized under the laws of any
foreign country to report under IFRS create any incentives for changing
jurisdictions of incorporation or organization? If it is permitted,
should we exclude certain clearing agencies, such as those who fall
within one or more of the following categories: (i) Those whose
financial reports have not been audited by an independent public
accountant inspected by the PCAOB, (ii) those who have not received a
``clean'' audit opinion, or (iii) those who have previously had to
correct a material error in their financial statements?
4. Proposed Rule 17Ad-22(d)
    Proposed Rule 17Ad-22(d) would set forth certain standards that
relate to clearance and settlement processes. The areas addressed
include: (1) Transparent and enforceable rules and procedures; (2)
participation requirements; (3) custody of assets and investment risk;
(4) operational risk; (5) money settlement risk; (6) cost-
effectiveness; (7) links; (8) governance; (9) information on services;
(10) immobilization and dematerialization of stock certificates; (11)
default procedures; (12) timing of settlement finality; (13) delivery
versus payment; (14) risk controls to address participants' failures to
settle; and (15) physical delivery risks. The discussion below provides
greater detail regarding each respective standard covered in proposed
Rule 17Ad-22(d).
Proposed Rule 17Ad-22(d)(1): Transparent and Enforceable Rules and
Procedures
    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 (legally and practically) structure for
each aspect of their activities in all relevant jurisdictions.\52\ The
clearing agency should have written policies and procedures\53\ in
place that, at a minimum, address the significant aspects of a clearing
agency's operations and risk management in order to provide a well
founded legal framework and must be clear, internally consistent, and
readily accessible by the public in order to provide a transparent
legal framework. In addition, the clearing agency must be able to
enforce its policies and procedures that contemplate enforcement by the
clearing agency. Moreover, policies and procedures that govern or
create remedial measures that a party other than the clearing agency
(such as a clearing member) can undertake to seek redress or to promote
compliance with applicable rules must be enforceable.\54\ For the
clearing agency's policies and procedures to be enforceable, a clearing
agency must have appropriate means to compel parties to comply in a
timely manner, including members or service providers of clearing
agencies that are non-U.S. persons. The Commission preliminarily
believes this proposed requirement would help to reduce the legal risks
involved in the clearance and settlement process. Such legal risks
include, among other things, the likelihood that the policies and
procedures of a clearing agency are incomplete, opaque, or not
enforceable and will therefore adversely affect the functioning of the
clearing agency.\55\ Because they would function to reduce these legal
risks, the Commission preliminarily believes that well founded,
transparent and enforceable policies and procedures established by the
clearing agency to underpin the clearing agency's operational and
business activities are essential to a clearing agency's ability to
facilitate the prompt and accurate clearance and settlement of
securities transactions and safeguard securities and funds as required
for the protection of investors by Section 17A of the Exchange Act.\56\
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    \52\ A relevant jurisdiction would include, among others,
activities (i) in the United States, (ii) involving any means of
interstate commerce, or (iii) in respect to providing clearing
services to any U.S. person. For clearing agencies that operate in
multiple jurisdictions, this also could include resolving possible
conflicts of laws issues that the clearing agency may encounter.
    \53\ Clearing agencies are SROs as defined in Section 3(a)(26)
of the Exchange Act. A stated policy, practice, or interpretation of
an SRO, such as a clearing agency's written policies and procedures,
would generally be deemed to be a proposed rule change. See 17 CFR
240.19b-4.
    \54\ The Commission preliminarily believes that proposed Rule
17Ad-22(d)(1) would augment the Exchange Act requirement that the
rules of the clearing agency must provide that its participants
shall be appropriately disciplined for any violation of any
provision of the rules of the clearing agency. See 15 U.S.C. 78q-
1(b)(3)(G).
    \55\ See generally, RSSS Recommendation 1, Legal Framework and
RCCP Recommendation 1, Legal Risk.
    \56\ 15 U.S.C. 78q-1(a)(1)(A).
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Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(1). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding policies and
procedures providing for a well founded, transparent, and enforceable
legal framework sufficiently clear? If not, why not? Is there a better
alternative?
     How would this proposal affect the current practices of
clearing agencies in formulating policies and procedures? Would the
proposed rule affect the costs of providing clearing agency services?
Please explain.
     What are the advantages and disadvantages of taking into
account that legal risks may vary by the types of services offered by
clearing agencies and whether the clearing agency operates in multiple
jurisdictions? Are there any considerations, such as issues concerning
compliance with regulations under various jurisdictions, that the
Commission should take into account for clearing agencies operating in
multiple jurisdictions?
     Should the Commission consider more prescriptive rules to
define how clearing agencies would provide for a well founded,
transparent and enforceable legal framework? Please explain why or why
not. Alternatively, should the Commission consider more prescriptive
rules that would apply in the context of approval of a clearing
agency's application for registration?
     Should the Commission require a clearing agency to submit
legal opinions or other supporting evidence to demonstrate the legal
adequacy of the mechanisms at the clearing agency that

are in place to handle participant defaults?
Proposed Rule 17Ad-22(d)(2): Participation Requirements
    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. This
proposed requirement is intended to reduce the likelihood of defaults
by participants, while also providing flexibility to tailor standards
that are linked to the obligations of the participant. As a result, the
Commission preliminarily believes this requirement would protect
investors and facilitate prompt and accurate clearance and settlement
by promoting membership standards at clearing agencies that are likely
to limit the potential for defaults.
    The proposed rule also would require clearing agencies to have
procedures in place to monitor that participation requirements are met
on an ongoing basis. Operational and financial stability of
participants is subject to market forces and can therefore change over
time. Because participants collectively contribute to the operational
and financial stability of a clearing agency, the Commission
preliminarily believes that the proposed requirement to continue to
monitor compliance with the clearing agency's participation
requirements supports the Exchange Act requirement that clearing
agencies are able to facilitate prompt and accurate clearance and
settlement.\57\
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    \57\ 15 U.S.C 78q-1(b)(3)(A).
---------------------------------------------------------------------------

    In addition, clearing agencies would be required to have
participation requirements that are objective,\58\ publicly disclosed,
and facilitate fair and open access.\59\ The Commission preliminarily
believes this requirement would foster compliance with the requirement
under Section 17A of the Exchange Act that the rules of a clearing
agency must not be designed to permit unfair discrimination in the
admission of participants by requiring standards that are designed to
be measurable, open and fair.\60\
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    \58\ Objective criteria would generally include, but not be
limited to, criteria that are based on measureable facts such as
capital requirements.
    \59\ Having open access, in part, involves having a process for
admission of participants that does not unfairly discriminate. See
15 U.S.C. 78q-1(b)(3)(F) (``The rules of a clearing agency * * * are
not designed to permit unfair discrimination in the admission of
participants or among participants in the use of the clearing
agency''). In addition, the Dodd-Frank Act added Section 3C to the
Exchange Act which provides in relevant part: ``(2) OPEN ACCESS.--
The rules of a clearing agency described in paragraph (1) shall--
(A) prescribe that all security-based swaps submitted to the
clearing agency with the same terms and conditions are economically
equivalent within the clearing agency and may be offset with each
other within the clearing agency; and (B) provide for non-
discriminatory clearing of a security-based swap executed
bilaterally or on or through the rules of an unaffiliated national
securities exchange or security-based swap execution facility.''
Public Law 111-203 Sec.  763(a) (adding Section 3C to the Exchange
Act).
    \60\ 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)(2). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding participation
requirements sufficiently clear? If not, why not and what would be a
better alternative?
     How do current practices of registered clearing agencies
with respect to participation standards compare to the proposed
requirements in this rule? Are there any expected costs or benefits to
clearing agencies in connection with adding to or revising their
participation standards in order to implement this portion of the
Commission's proposed rule?
     Should the Commission's proposed rule regarding
participation requirements be more specific? If so, why and in what
way? Should the Commission's proposed rule regarding participation
requirements be less specific to allow for greater flexibility? If so,
why and in what way?
     Should more specific monitoring obligations be imposed to
ensure compliance with participation standards? For example, should the
Commission consider mandating an independent review of the process for
monitoring participants' compliance with the clearing agency's
participation requirements? Why or why not?
Proposed Rule 17Ad-22(d)(3): Custody of Assets and Investment Risk
    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 whereby risk
of loss or of delay in access to them is minimized. Minimizing the risk
of loss or delay in access is intended to refer to holding assets in
ways that, to the extent reasonably practicable, would limit the
potential for loss of those assets and delay in access to them. For
example, the Commission is aware that clearing agencies currently seek
to minimize the risk of loss or delay in access by holding assets that
are highly-liquid (e.g., cash, U.S. Treasury securities or securities
issued by a U.S. government agency) and engaging banks to custody the
assets and facilitate settlement. Compliance with the proposed
requirement is intended to improve the ability of the clearing agency
to meet its settlement obligations by reducing the likelihood that
assets securing participant obligations to the clearing agency would be
unavailable or insufficient when the clearing agency needs to draw on
them. The proposed rule would also require clearing agencies to invest
assets in instruments with minimal credit, market, and liquidity risks.
A requirement that a clearing agency hold assets in instruments with
minimal credit, market and liquidity risk may promote the clearing
agency's ability to retrieve these assets promptly. That, in turn,
could help to increase the potential for a clearing agency to timely
meet its settlement obligations to its participants.
    The Commission preliminarily believes that proposed Rule 17Ad-
22(d)(3) would strengthen the requirement in Section 17A(b)(3)(F) of
the Exchange Act that the rules of a clearing agency must be designed
to ensure the safeguarding of securities and funds in the custody or
control of the clearing agency or for which the clearing agency is
responsible.\61\ In this way, the Commission preliminarily believes the
proposed rule would also promote protection of the financial market
served by the clearing agency.
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    \61\ 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)(3). In addition, the Commission requests
comments on the following specific issues:
     Are the proposed rule's requirements regarding custody and
investment of assets sufficiently clear? If not, why not and what would
be a better alternative?
     How do current practices of clearing agencies for holding
or investing in assets compare to the Commission's proposal? What are
the expected incremental costs to clearing agencies in connection with
adding to or revising these current practices in order to comply with
the Commission's proposed rule?
     Are there any other factors not mentioned that the
Commission should take into consideration with respect to

minimizing custody of assets and investment risk?
     Should clearing agencies ever be permitted to hold assets
in instruments that do not have minimal credit, market and liquidity
risk? If so, why and under what circumstances?
     What measures should clearing agencies have in place to
minimize risk of loss or delay in access to assets? Should the proposed
rule specify any such measures?
Proposed Rule 17Ad-22(d)(4): Identification and Mitigation of
Operational Risk
    Proposed Rule 17Ad-22(d)(4) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify sources of operational risk
and minimize these risks through the development of appropriate
systems, controls, and procedures. A clearing agency that develops
systems, controls and procedures which, taken as a whole, are designed
to limit the identified sources of operational risk to the extent
reasonably practicable would be able to satisfy this requirement. The
proposed rule also would require clearing agencies to implement systems
that are reliable, resilient and secure and have adequate scalable
capacity. This should help to ensure that clearing agencies are able to
operate with minimal disruptions, even during times of market stress
when there may be greater demands on their systems due to higher
volume. In addition, the proposed rule would require that clearing
agencies have business continuity plans that allow for timely recovery
of operations and ensure the fulfillment of a clearing agency's
obligations. This requirement would be relevant in the event of, among
other things, deficiencies in information systems or internal controls,
human errors, management failures, unauthorized intrusions into
corporate or production systems, or disruptions from external events
such as natural disasters.
    The Commission preliminarily believes that the requirements under
proposed Rule 17Ad-22(d)(4) should collectively help to address risks
posed by potential operational deficiencies to the clearing agency and
its participants. Specifically, to help limit disruptions that may
impede the proper functioning of a clearing agency, the Commission
preliminarily believes it is imperative that clearing agencies review
their operations for potential weaknesses and develop appropriate
systems, controls, and procedures to address weaknesses contemplated
under the proposed rule. Moreover, the Commission preliminarily
believes that maintaining reliable, resilient and secure systems with
adequate backup capability, as well as continuity plans providing for
timely recovery of operations, are essential components of facilitating
prompt and accurate clearance and settlement. The Commission intends
for proposed Rule 17Ad-22(d)(4) to complement the existing guidance
provided by the Commission in its Automation Review Policy statements
\62\ and Interagency White Paper on Sound Practices to Strengthen the
Resilience of the U.S. Financial System.\63\
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    \62\ See Exchange Act Release Nos. 27445 (November 16, 1989), 54
FR 48704 (``ARP I'') and 29815 (May 9, 1991), 56 FR 22489 (``ARP
II''). Generally, the guidance in ARP I and ARP II provides for the
following activities by clearing agencies: (1) Performing periodic
risk assessments of its automated data processing (``ADP'') systems
and facilities; (2) providing for the selection of the clearing
agency's independent auditors by non-management directors and
authorizing such non-management directors to review the nature,
scope, and results of all audit work performed; (3) having an
adequately staffed and competent internal audit department; (4)
furnishing annually to participants audited financial statements and
an opinion from an independent public accountant as to the clearing
agency's system of internal control--including unaudited quarterly
financial statements also should be provided to participants upon
request; and (5) developing and maintaining plans to assure the
safeguarding of securities and funds, the integrity of the ADP
system, and recovery of securities, funds, or data under a variety
of loss or destruction scenarios.
    \63\ See Exchange Act Release No. 47638 (April 7, 2003), 68 FR
17809 (April 11, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.
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Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(4). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding identification
and mitigation of operational risk sufficiently clear? If not, why not
and what would be a better alternative?
     How do current practices of clearing agencies with respect
to operational risks 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 relating to operational risks in order to
implement the Commission's proposed rule?
     Should the Commission's proposal require a specific
methodology to identify and mitigate operational risk? If so, what is
the methodology and why should this methodology be required?
     Should the Commission require that business continuity
plans be tested with participants on an ongoing basis or with a
specified frequency? Should any other more prescriptive requirements be
considered by the Commission?
     Would a clearing agency's ability to comply with the
proposed rule be affected if the clearing agency's operations were
outsourced to another firm? If so, how should the proposed rule address
these differences in compliance? Would the need to minimize operational
risk require limits on the types of operations that can be outsourced
by clearing agencies? Would the answer depend on whether the function
was outsourced to an affiliated or unaffiliated firm? Please explain.
Proposed Rule 17Ad-22(d)(5): Money Settlement Risks
    Proposed Rule 17Ad-22(d)(5) would require clearing agencies
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. The
Commission notes that there are a number of arrangements that clearing
agencies could establish to comply with the proposed rule. For example,
a clearing agency could establish criteria for use of banks to effect
money settlements with its participants that address the banks'
creditworthiness, access to liquidity, and operational reliability.
Where practicable, a clearing agency could use multiple settlement
banks and monitor the concentration of payments among its settlement
banks. A clearing agency also could employ agreements with such banks
to ensure that funds transfers to the clearing agency are final when
effected. In addition, where available, a clearing agency could use a
central bank to effect money settlements with its participants. Use of
the Federal Reserve System in the United States or other central bank
would eliminate the risks associated with using a settlement bank.\64\
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    \64\ The Board of Governors of the Federal Reserve System will
determine whether systemically important clearing agencies may
obtain account access from the Federal Reserve System.
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    These proposed requirements are meant to reduce the risk that
financial obligations related to the activities of a clearing agency
are not timely settled or discharged with finality. Failure by a bank
to effectuate timely and final settlement adversely affects the
clearing

agency by exposing it to credit and liquidity pressures that can
destabilize the clearing agency's ability to facilitate prompt and
accurate clearance and settlement. Accordingly, the Commission is
proposing this new rule, which is designed to limit the potential that
the money settlement arrangements cause the clearing agency to face
higher levels of credit and liquidity risks and to provide assurance
that funds transfers are final when effected. In addition, the
Commission preliminarily believes that the proposed rule would assist a
clearing agency in meeting the requirement of Section 17A(b)(3)(F) of
the Exchange Act, which requires the rules of a clearing agency to be
designed to assure the safeguarding of securities and funds which are
in the custody or control of the clearing agency or for which it is
responsible.\65\
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    \65\ 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)(5). In addition, the Commission requests
comments on the following specific issues:
     Is the Commission's proposed rule regarding money
settlement risk sufficiently clear? If not, why not and what would be a
better alternative?
     How do current practices regarding money settlement risk
of clearing agencies 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 regarding money settlement risk in order to
implement the Commission's proposed rule?
     Would it be reasonable to eliminate the clearing agency's
credit and liquidity risks from the use of banks to effect money
settlements with its participants? If so, how?
     Are there other rules that the Commission should establish
regarding money settlement risk management, for example, by mandating
the minimum number of banks that a clearing agency may use to effect
money settlements with its participants in order to avoid reliance on a
small number of such banks, or by specifying characteristics of
financial institutions that may be used by clearing agencies for
settlement purposes? If so, what would be the appropriate rules and
what would be the effect of adopting them?
     Should rules for money settlement risk management
established by the Commission be uniform, or are there circumstances in
which it would be appropriate for clearing agencies to accept a higher
level of money settlement risk, such as when transacting in certain
product categories or with certain types of customers? Could the rules
proposed by the Commission limit the ability of clearing agencies to
compete for certain types of business either within the United States
or internationally? Why or why not?
     Should the Commission adopt rules to govern the clearing
agency's use of banks that are affiliated with participants in the
clearing agency? Should the Commission prohibit this practice? Please
explain.
Proposed Rule 17Ad-22(d)(6): Cost-Effectiveness
    Proposed Rule 17Ad-22(d)(6) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide that their operations are
cost-effective in meeting the requirements of participants while
maintaining the safety and security of operations. To maintain safe and
secure operations, a clearing agency would need to comply with the
requirements under the Exchange Act and the rules thereunder. For
example, a clearing agency would need to maintain the ability to comply
with any recordkeeping or other regulatory requirement. Having clearing
agencies be mindful of the costs that are incurred by their
participants, while maintaining such compliance, should help to reduce
inefficiencies in the provision of clearing agency services. This is
particularly important in circumstances where clearing agencies may not
be subject to strong competitive forces (such as when there is only one
clearing agency for an asset class) for the provision of their services
and therefore may have less of an incentive to be cost-effective in
meeting the requirements of participants. Accordingly, the Commission
preliminarily believes the proposed rule is appropriate in the public
interest, for the protection of investors, because it would potentially
help reduce the costs incurred for clearing agency services while also
maintaining appropriate standards for a clearing agency's operations.
Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(6). In addition, the Commission requests
comments on the following specific issues:
     Would the proposed rule help to assure that a clearing
agency's operations are cost-effective? Does the proposed rule
establish a standard for maintaining cost-effectiveness that is
sufficiently clear? If not, why not and how might the rule be altered?
     Are there any other requirements that the Commission
should include in the rule to help ensure that clearing agencies are
cost-effective in providing clearing and settlement services while also
maintaining safe and secure operations and compliance with all
regulatory requirements?
     Does any specific business model for clearing agencies
help to promote cost-effectiveness? Should the business model of a
clearing agency affect the type of rule regarding cost-effectiveness
that should apply to the clearing agency?
     Should the Commission consider issuing additional guidance
on how clearing agencies could be cost-effective in meeting the
requirements of participants while maintaining safe and secure