Derivatives Clearing Organizations and International Standards NPRM

Vol. 78

Friday,

No. 159

August 16, 2013

Part IV

Commodity Futures Trading Commission

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17 CFR Parts 39, 140, and 190
Derivatives Clearing Organizations and International Standards; Proposed
Rule

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Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 39, 140, and 190
RIN Number 3038–AE06

Derivatives Clearing Organizations and
International Standards
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:

The Commodity Futures
Trading Commission (‘‘Commission’’) is
proposing amendments to its
regulations to establish additional
standards for compliance with the
derivatives clearing organization
(‘‘DCO’’) core principles set forth in
Section 5b(c)(2) of the Commodity
Exchange Act (‘‘CEA’’) for systemically
important DCOs (‘‘SIDCOs’’) and DCOs
that elect to opt-in to the SIDCO
regulatory requirements (‘‘Subpart C
DCOs’’). SIDCOs and Subpart C DCOs
would be required to comply with the
requirements applicable to all DCOs,
which are set forth in the Commission’s
DCO regulations on compliance with
core principles, to the extent those
requirements are not inconsistent with
the requirements of the regulations in
this proposed rule. The proposed
amendments include: Procedural
requirements for opting in to the
regulatory regime as well as substantive
requirements relating to governance,
financial resources, system safeguards,
special default rules and procedures for
uncovered losses or shortfalls, risk
management, additional disclosure
requirements, efficiency, and recovery
and wind-down procedures. These
additional requirements would also be
consistent with the Principles for
Financial Market Infrastructures
(‘‘PFMIs’’) published by the Committee
on Payment and Settlement Systems
and the Board of the International
Organization of Securities Commissions
(‘‘CPSS–IOSCO’’). In addition, the
Commission is proposing certain
delegation provisions and certain
technical clarifications.
DATES: Submit comments on or before
September 16, 2013.
ADDRESSES: You may submit comments,
identified by RIN number 3038–AE06,
by any of the following methods:
• Agency Web site: http://
comments.cftc.gov.
• Mail: Secretary of the Commission,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW., Washington, DC
20581.
• Hand Delivery/Courier: Same as
Mail, above.

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SUMMARY:

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• Federal eRulemaking Portal: http://
www.Regulations.gov. Follow the
instructions for submitting comments.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to http://
www.cftc.gov. You should submit only
information that you wish to make
available publicly. If you wish the
Commission to consider information
that may be exempt from disclosure
under the Freedom of Information Act,
a petition for confidential treatment of
the exempt information may be
submitted according to the procedures
established in Commission regulation
145.
The Commission reserves the right
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from http://www.cftc.gov that it may
deem to be inappropriate for
publication, such as obscene language.
All submissions that have been
redacted or removed that contain
comments on the merits of the
rulemaking will be retained in the
public comment file and will be
considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT:
Ananda Radhakrishnan, Director,
Division of Clearing and Risk (‘‘DCR’’),
at 202–418–5188 or
[email protected]; Robert B.
Wasserman, Chief Counsel, DCR, at
202–418–5092 or [email protected];
M. Laura Astrada, Associate Chief
Counsel, DCR, at 202–418–7622 or
[email protected]; Peter A. Kals, Special
Counsel, DCR, at 202–418–5466 or
[email protected]; Jocelyn Partridge,
Special Counsel, DCR, at 202–418–5926
or [email protected]; Tracey Wingate,
Special Counsel, DCR, at 202–418–5319
or [email protected]; or Kathryn L.
Ballintine, Attorney-Advisor, DCR, at
202–418–5575 or [email protected],
in each case, at the Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Regulatory Framework for Registered
DCOs
B. Designation of DCOs as Systemically
Important Under Title VIII of the DoddFrank Act
C. Existing Standards for SIDCOs
D. DCO Core Principles and Existing
Regulations for Registered DCOs
E. PFMIs

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F. The Role of the PFMIs in International
Banking Standards
G. Proposed Rulemaking Applicable to
SIDCOs and Subpart C DCOs
II. Discussion of Revised and Proposed Rules
A. Regulation 39.2 (Definitions)
B. Regulation 39.30 (Scope)
C. Regulation 39.31 (Election To Become
Subject to the Provisions of Subpart C)
D. Regulation 39.32 (Governance for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
E. Regulation 39.33 (Financial Resources
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
F. Regulation 39.34 (System Safeguards for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
G. Regulation 39.35 (Default Rules and
Procedures for Uncovered Losses or
Shortfalls (Recovery) for Systemically
Important Derivatives Clearing
Organizations and Subpart C Derivatives
Clearing Organizations)
H. Regulation 39.36 (Risk Management for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
I. Regulation 39.37 (Additional Disclosure
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
J. Regulation 39.38 (Efficiency for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
K. Regulation 39.39 (Recovery and WindDown for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
L. Regulation 39.40 (Consistency With the
Principles for Financial Market
Infrastructures)
M. Regulation 39.41 (Special Enforcement
Authority For Systemically Important
Derivatives Clearing Organizations)
N. Regulation 39.42 (Advance Notice of
Material Risk-Related Rule Changes by
Systemically Important Derivatives
Clearing Organizations)
O. Regulation 140.94 (Delegation of
Authority to the Director of the Division
of Clearing and Risk)
P. Regulation 190.09 (Member Property)
III. Effective Date
IV. Related Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Consideration of Costs and Benefits

I. Background
A. Regulatory Framework for Registered
DCOs
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Dodd-Frank Act’’).1 Title VII of the
1 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010). The text of the Dodd-Frank Act may be

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Dodd-Frank Act, entitled the ‘‘Wall
Street Transparency and Accountability
Act of 2010,’’ 2 amended the Commodity
Exchange Act (‘‘CEA’’ or the ‘‘Act’’) 3 to
establish a comprehensive regulatory
framework for over-the-counter (‘‘OTC’’)
derivatives, including swaps. The
legislation was enacted to reduce risk,
increase transparency, and promote
market integrity within the financial
system by, among other things: (1)
Providing for the registration and
comprehensive regulation of swap
dealers and major swap participants; (2)
imposing mandatory clearing and trade
execution requirements on clearable
swap contracts; (3) creating rigorous
recordkeeping and real-time reporting
regimes; and (4) enhancing the
Commission’s rulemaking and
enforcement authorities with respect to,
among others, all registered entities and
intermediaries subject to the
Commission’s oversight.
Section 725(c) of the Dodd-Frank Act
amended Section 5b(c)(2) of the CEA,
which sets forth core principles that a
DCO must comply with in order to
register and maintain registration with
the Commission. The core principles
were originally added to the CEA by the
Commodity Futures Modernization Act
of 2000,4 and, in 2001, the Commission
issued guidance on DCO compliance
with these core principles.5 However, in
furtherance of the goals of the DoddFrank Act to reduce risk, increase
transparency, and promote market
integrity, the Commission, pursuant to
the Commission’s enhanced rulemaking
authority,6 withdrew the 2001 guidance
and adopted regulations establishing
standards for compliance with the DCO
core principles.7 As noted in the
preamble to the final rule for Subpart A
and Subpart B of part 39 of the
Commission’s regulations (‘‘Subpart A’’
and ‘‘Subpart B,’’ respectively), the
implementing regulations of the DCO
core principles, the Commission sought
to provide legal certainty for market
participants, strengthen the risk
management practices of DCOs, and
accessed at http://www.cftc.gov/ucm/groups/public/
@swaps/documents/file/hr4173_enrolledbill.pdf.
2 Section 701 of the Dodd-Frank Act.
3 7 U.S.C. 1 et seq.
4 See Commodity Futures Modernization Act of
2000, Public Law 106–554, 114 Stat. 2763 (2000).
5 See A New Regulatory Framework for Clearing
Organizations, 66 FR 45604 (Aug. 29, 2001)
(adopting 17 CFR Part 39, Appendix A).
6 See Section 725(c)(2)(i) of the Dodd Frank Act
(giving the Commission explicit authority to
promulgate rules regarding the core principles
pursuant to its rulemaking authority under Section
8a(5) of the CEA, 7 U.S.C. 12a(5)).
7 See Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR 69334 (Nov.
8, 2011).

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increase overall confidence in the
financial system by assuring ‘‘market
participants and the public that DCOs
are meeting minimum risk management
standards.’’ 8

systemically important under Title
VIII.15 Two of these designated FMUs
are CFTC-registered DCOs 16 for which
the Commission is the Supervisory
Agency.17

B. Designation of DCOs as Systemically
Important Under Title VIII of the DoddFrank Act

C. Existing Standards for SIDCOs
Section 805 of the Dodd-Frank Act
directs the Commission to consider
relevant international standards and
existing prudential requirements when
prescribing risk management standards
governing the operations related to
payment, clearing, and settlement
activities for FMUs that are (1)
designated as systemically important by
the Council and (2) engaged in activities
for which the Commission is the
Supervisory Agency.18 More generally,
Section 752 of the Dodd-Frank Act
directs the Commission to consult and
coordinate with foreign regulatory
authorities on the establishment of
consistent international standards with
respect to the regulation of, among other
things, swaps, futures, and options on
futures.19
The Commission has previously
reviewed the risk management

Title VIII of the Dodd-Frank Act,
entitled ‘‘Payment, Clearing, and
Settlement Supervision Act of 2010,’’ 9
was enacted to mitigate systemic risk in
the financial system and promote
financial stability.10 Section 804 of the
Dodd-Frank Act requires the Financial
Stability Oversight Council (‘‘Council’’)
to designate those financial market
utilities (‘‘FMUs’’) 11 that the Council
determines are, or are likely to become,
systemically important.12
In determining whether an FMU is
systemically important, the Council
uses a detailed two-stage designations
process, using certain statutory
considerations 13 and other metrics to
assesses, among other things, ‘‘whether
possible disruptions [to the functioning
of an FMU] are potentially severe, not
necessarily in the sense that they
themselves might trigger damage to the
U.S. economy, but because such
disruptions might reduce the ability of
financial institutions or markets to
perform their normal intermediation
functions.’’ 14 On July 18, 2012, the
Council designated eight FMUs as
8 Id.

at 69335.
801 of the Dodd-Frank Act.
10 Section 802(b) of the Dodd-Frank Act.
11 An FMU includes ‘‘any person that manages or
operates a multilateral system for the purpose of
transferring, clearing, or settling payments,
securities, or other financial transactions among
financial institutions or between financial
institutions and the person.’’ Section 803(6)(A) of
the Dodd-Frank Act.
12 Section 804(a)(1) of the Dodd-Frank Act. The
term ‘‘systemically important’’ means ‘‘a situation
where the failure of or a disruption to the
functioning of a financial market utility . . . 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.’’ Section 803(9) of the Dodd-Frank Act. See
also Authority to Designate Financial Market
Utilities as Systemically Important, 76 FR 44763,
44774 (July 27, 2011) (final rule).
13 Under Section 804(a)(2) of the Dodd-Frank Act,
in determining whether an FMU is or is likely to
become systemically important, the Council must
take into consideration the following: (A) The
aggregate monetary value of transactions processed
by the FMU; (B) the aggregate exposure of an FMU
to its counterparties; (C) the relationship,
interdependencies, or other interactions of the FMU
with other FMUs or payment, clearing or settlement
activities; (D) the effect that the failure of or a
disruption to the FMU would have on critical
markets, financial institutions or the broader
financial system; and (E) any other factors the
Council deems appropriate.
14 76 FR at 44766.
9 Section

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15 See Press Release, Financial Stability Oversight
Council, Financial Stability Oversight Council
Makes First Designations in Effort to Protect Against
Future Financial Crises (July 18, 2012), available at
http://www.treasury.gov/press-center/pressreleases/Pages/tg1645.aspx.
16 While Chicago Mercantile Exchange, Inc.
(‘‘CME’’), ICE Clear Credit LLC (‘‘ICE Clear Credit’’),
and The Options Clearing Corporation (‘‘OCC’’) are
the CFTC-registered DCOs that were designated as
systemically important by the Council, the CFTC is
the Supervisory Agency only for CME and ICE Clear
Credit, the SEC serves as OCC’s Supervisory
Agency.
17 See Section 803(8)(A) of the Dodd-Frank Act
(defining ‘‘Supervisory Agency’’ as the federal
agency that has primary jurisdiction over a
designated financial market utility under federal
banking, securities or commodity futures laws).
18 See Section 805(a)(2) of the Dodd-Frank Act.
The Commission notes that under section 805 of the
Dodd-Frank Act it also has the authority to
prescribe risk management standards governing the
operations related to payment, clearing, and
settlement activities for FMUs that are designated
as systemically important by the Council and are
engaged in activities for which the Commission is
the appropriate financial regulator.
19 Section 752 of the Dodd-Frank Act, codified at
15 U.S.C. 8325, provides:
(a) In order to promote effective and consistent
global regulation of swaps and security based
swaps, the [CFTC], the Securities and Exchange
Commission, and the prudential regulators (as that
term is defined in section 1a(30) of the [CEA], as
appropriate, shall consult and coordinate with
foreign regulatory authorities on the establishment
of international standards with respect to the
regulation * * * of swaps * * * [and] swap
entities * * *.
(b) In order to promote effective and consistent
global regulation of contracts of sale of a commodity
for future delivery and options on such contracts,
the [CFTC] shall consult and coordinate with
foreign regulatory authorities on the establishment
of international standards with respect to the
regulation of contracts of a sale of a commodity for
future delivery and on options on such contracts.

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standards set forth in part 39 of the
Commission’s regulations in light of
relevant international standards and
existing prudential requirements to
identify those areas in which additional
risk management standards for SIDCOs
would be appropriate. In 2010, the
Commission proposed enhanced
financial resource requirements for
SIDCOs that would have required a
SIDCO to (1) maintain sufficient
financial resources to meet the SIDCO’s
financial obligations to its clearing
members notwithstanding a default by
the two clearing members creating the
largest combined financial exposure for
the SIDCO in extreme but plausible
market conditions,20 and (2) only count
the value of assessments, after a 30%
haircut, to meet up to 20% of the
resources required to meet obligations
arising from a default by the clearing
member creating the second largest
financial exposure.21 In addition, in
2011 the Commission proposed to
improve system safeguards for SIDCOs
by enhancing certain business
continuity and disaster recovery
procedures.22
Because efforts to finalize the PFMIs
were ongoing at the time the
Commission adopted certain
amendments to part 39 applicable to
DCOs, rules specific to SIDCOs could
have put SIDCOs at a competitive
disadvantage vis-a`-vis foreign central
counterparties (‘‘CCPs’’) not yet subject
to comparable rules. Moreover, at the
time, because no DCO had been
designated as systemically important by
the Council, the Commission concluded
it would be premature to finalize the
SIDCO regulations in the Derivatives
Clearing Organization General
Provisions and Core Principles adopting
release.23 Instead, the Commission
decided, consistent with Section
805(a)(1) of the Dodd-Frank Act,24 to
20 Financial Resources Requirements for
Derivatives Clearing Organizations, 75 FR 63113, at
63119 (Oct. 14, 2010) (notice of proposed
rulemaking).
21 Id.
22 See Risk Management Requirements for
Derivatives Clearing Organizations, 76 FR 3697,
3726–3727 (Jan. 20, 2011) (notice of proposed
rulemaking). The proposal also implemented
special enforcement authority over SIDCOs that,
pursuant to section 807(c) of the Dodd-Frank Act,
would have granted the Commission authority
under the provisions of subsections (b) through (n)
of section 8 of the Federal Deposit Insurance Act
in the same manner and to the same extent as if the
SIDCO were an insured depository institution and
the Commission were the appropriate federal
banking agency for such insured depository
institution. See 76 FR at 3727.
23 See 76 FR at 69352.
24 The Commission notes again that Section
805(a)(1) of the Dodd-Frank Act requires the
Commission to consider international standards in
promulgating risk management rules.

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monitor domestic and international
developments concerning CCPs and
reconsider the proposed SIDCO
regulations in light of such
developments. In 2013, after careful
consideration of the comments on the
2010 proposed SIDCO rules and in light
of domestic and international market
and regulatory developments, the
Commission finalized these proposed
regulations in a manner consistent with
the PFMIs.25 Specifically, in the final
rules the Commission amended part 39
by creating a Subpart C and adding
regulations that (1) increased the
minimum financial resource
requirements for SIDCOs, (2) restricted
the use of assessments by SIDCOs in
meeting such financial resource
obligations, (3) enhanced the system
safeguards requirements for SIDCOs,
and (4) granted the Commission special
enforcement authority over SIDCOs
pursuant to Section 807 of the DoddFrank Act.26

requires a DCO to possess financial
resources that, at a minimum, exceed
the total amount that would enable the
DCO to meet its financial obligations to
its clearing members, notwithstanding a
default by the clearing member creating
the largest financial exposure for the
DCO in extreme but plausible market
conditions and to cover its operating
costs for a period of one year, as
calculated on a rolling basis. Regulation
39.11 codifies these minimum
requirements for all DCOs.28 Pursuant to
regulation 39.29, however, a SIDCO that
is systemically important in multiple
jurisdictions or that is involved in
activities with a more-complex risk
profile must maintain financial
resources sufficient to enable it to meet
its financial obligations to its clearing
members notwithstanding a default by
the two clearing members creating the
largest combined financial exposure for
the SIDCO in extreme but plausible
market conditions.29

D. DCO Core Principles and Regulations
for Registered DCOs
As noted above, in order to register
and maintain registration status with the
Commission, DCOs must comply with
all of the DCO core principles set forth
in Section 5b(c)(2) of the CEA, as
amended by Section 725 of the DoddFrank Act, as well as all applicable
Commission regulations. However, for
purposes of this proposal, the
Commission would like to highlight the
following requirements set forth in the
core principles and related Commission
regulations: Core Principle B (Financial
Resources) and regulations 39.11 and
39.29; Core Principle D (Risk
Management) and regulation 39.13; Core
Principle G (Default Rules and
Procedures) and regulation 39.16; Core
Principle I (System Safeguards) and
regulations 39.18 and 39.30; Core
Principle L (Public Information) and
regulation 39.21; Core Principle O
(Governance Fitness Standards); Core
Principle P (Conflicts of Interest); and
Core Principle Q (Composition of
Governing Boards).

2. Core Principle D: Risk Management
Core Principle D requires a DCO to
ensure that it possesses the ability to
manage the risks associated with
discharging the responsibilities of the
DCO through the use of appropriate
tools and procedures. It further requires
a DCO to measure its credit exposures
to each clearing member not less than
once each business day and to monitor
each such exposure periodically during
the business day. Core Principle D also
requires a DCO to limit its exposure to
potential losses from defaults by
clearing members through margin
requirements and other risk control
mechanisms, to ensure that the DCO’s
operations would not be disrupted and
non-defaulting clearing members would
not be exposed to losses that nondefaulting clearing members cannot
anticipate or control. Finally, Core
Principle D provides that a DCO must
require margin from each clearing
member sufficient to cover potential
exposures in normal market conditions
and that each model and parameter used
in setting such margin requirements
must be risk-based and reviewed on a
regular basis. Regulation 39.13

1. Core Principle B: Financial Resources
Core Principle B requires DCOs to
have ‘‘adequate financial, operational,
and managerial resources, as
determined by the Commission, to
discharge each responsibility of the
[DCO].’’ 27 Specifically, Core Principle B
25 Enhanced Risk Management Standards for
Systemically Important Derivatives Clearing
Organizations, (final rule published in the Federal
Register August 15, 2013) (‘‘SIDCO Final Rule’’).
26 Id.
27 Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a–
1(c)(2)(B).

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28 Specifically, regulation 39.11 requires
registered DCOs to maintain financial resources
sufficient to cover a wide range of potential stress
scenarios, which include, but are not limited to, the
default of the participant and its affiliates that
would potentially cause the largest aggregate credit
exposure to the CCP in extreme but plausible
market conditions, otherwise known as ‘‘Cover
One.’’
29 Financial resources sufficient to cover the
default of the two participants creating the largest
credit exposure in extreme but plausible
circumstances is known as ‘‘over two.’’ See also
infra note 70.

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establishes the requirements that a DCO
must meet in order to comply with Core
Principle D, including documentation
requirements, the methodology for the
calculation and coverage of margin
requirements, and the criteria and
timing of stress tests that a DCO must
conduct.30

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3. Core Principle G: Default Rules and
Procedures
Core Principle G requires a DCO to
have rules and procedures designed to
allow for the efficient, fair, and safe
management of events during which
clearing members become insolvent or
otherwise default on their obligations to
the DCO. In addition, Core Principle G
requires a DCO to clearly state its
default procedures, make its default
rules publicly available, and ensure that
it may take timely action to contain
losses and liquidity pressures and to
continue meeting its obligations.
Regulation 39.16 establishes the
minimum requirements that a DCO
must meet in order to comply with Core
Principle G, including the requirements
for the DCO’s default management plan
and the procedures for dealing with the
default and insolvency of a clearing
member.
4. Core Principle I: System Safeguards
Core Principle I requires a DCO to
establish and maintain a program of risk
analysis and oversight that identifies
and minimizes sources of operational
risk through the development of
appropriate controls and procedures,
and automated systems that are reliable,
secure, and have adequate scalable
capacity. Core Principle I also requires
that the emergency procedures, back-up
facilities, and disaster recovery plans
that a DCO is obligated to establish and
maintain specifically allow for the
timely recovery and resumption of the
DCO’s operations and the fulfillment of
each obligation and responsibility of the
DCO. Finally, Core Principle I requires
that a DCO periodically conduct tests to
verify that the DCO’s back-up resources
are sufficient to ensure daily processing,
clearing, and settlement. Regulation
39.18 delineates the minimum
requirements that a DCO must satisfy in
order to comply with Core Principle I,
including a recovery time objective of
the next business day. In addition,
regulation 39.30 requires a SIDCO to
have a business continuity and disaster
recovery plan with a recovery time
objective of not later than two hours
30 The Commission also requires that a DCO’s
actual coverage of its initial margin requirements
meet an established confidence level of at least
99%, based on data from an appropriate historic
time period. See generally 17 CFR 39.13(g)(2)(iii).

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following the disruption. Regulation
39.30 also requires a SIDCO to have
geographic diversity in the resources
used to enable the SIDCO to meet its
recovery time objective.
5. Core Principle L: Public Information
Core Principle L requires a DCO to
provide market participants sufficient
information to enable the market
participants to identify and evaluate
accurately the risks and costs associated
with using the DCO’s services. More
specifically, a DCO is required to make
available to market participants
information concerning the rules and
operating and default procedures
governing its clearing and settlement
systems and also to disclose publicly
and to the Commission the terms and
conditions of each contract, agreement,
and transaction cleared and settled by
the DCO; each clearing and other fee
charged to members; the DCO’s marginsetting methodology; daily settlement
prices; and other matters relevant to
participation in the DCO’s clearing and
settlement activities. Regulation 39.21
sets forth the requirements a DCO must
meet in order to comply with Core
Principle L and details the information
to be disclosed to the public and
requirements regarding the method and
timing of such disclosure.
6. Core Principle O: Governance Fitness
Standards
Core Principle O requires a DCO to
establish transparent governing
arrangements to both fulfill public
interest requirements and to permit the
consideration of the views of owners
and participants. In addition, Core
Principle O requires a DCO to establish
and enforce appropriate fitness
standards for directors, members of any
disciplinary committee, members of the
DCO, any other individual or entity
with direct access to the settlement or
clearing activities of the DCO, and
affiliated parties.
7. Core Principle P: Conflicts of Interest
Core Principle P requires a DCO to
establish and enforce rules to minimize
conflicts of interest in the decision
making process of the DCO. Core
Principle P further requires a DCO to
establish a process for resolving
conflicts of interest.
8. Core Principle Q: Composition of
Governing Boards
Core Principle Q requires a DCO to
ensure that the composition of the
governing board or committee of the
DCO includes market participants.

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E. PFMIs
1. Overview
In the SIDCO Final Rule, the
Commission determined that, for
purposes of meeting its obligation
pursuant to Section 805(a)(2)(A) of the
Dodd-Frank Act, the PFMIs, which were
developed by CPSS–IOSCO over a
period of several years,31 were the
international standards most relevant to
the risk management of SIDCOs.32
In February 2010, CPSS–IOSCO
launched a review of the existing sets of
international standards for financial
market infrastructures (‘‘FMIs’’) in
support of a broader effort by the
Financial Stability Board (‘‘FSB’’) 33 to
strengthen core financial infrastructures
and markets by ensuring that gaps in
international standards were identified
and addressed.34 CPSS–IOSCO
endeavored to incorporate in the review
process lessons from the 2008 financial
crisis and the experience of using the
existing international standards, as well
as policy and analytical work by other
international committees including the
Basel Committee on Banking
Supervision (‘‘BCBS’’).35 The PFMIs
replace CPSS–IOSCO’s previous
international standards applicable to
CCPs,36 and establish international risk
management standards for FMIs,
including CCPs, that facilitate clearing
31 See Committee on Payment and Settlement
Systems and the Technical Committee of the
International Organization of Securities
Commissions, Principles for Financial Market
Infrastructures, (April 2012) available at http://
www.iosco.org/library/pubdocs/pdf/
IOSCOPD377.pdf. See also the Financial Stability
Board June 2012 Third Progress Report on
Implementation, available at http://
www.financialstabilityboard.org/publications/
r_120615.pdf (Noting publication of the PFMIs as
achieving ‘‘an important milestone in the global
development of a sound basis for central clearing
of all standardised OTC derivatives’’).
32 In making this determination, the Commission
noted that ‘‘the adoption and implementation of the
PFMIs by numerous foreign jurisdictions highlights
the role these principles play in creating a global,
unified set of international risk management
standards for CCPs.’’ See SIDCO Final Rule.
33 The FSB is an international organization that
coordinates with national financial authorities and
international policy organizations to develop and
promote effective regulatory, supervisory and other
financial sector policies. See generally http://
www.financialstabilityboard.org.
34 PFMIs, ¶ 1.6.
35 Id.
36 The international standards for FMIs, prior to
the publication of the PFMIs, included, the Core
Principles for Systemically Important Payment
Systems published by CPSS in 2001, the
Recommendations for Securities Settlement
Systems published by CPSS–IOSCO in 2001, and
the Recommendations for Central Counterparties
published by CPSS–IOSCO in 2004 (collectively all
three are referred to as the ‘‘CPSS–IOSCO Principles
and Recommendations’’). See PFMIs, ¶¶ 1.4–1.5.

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and settlement.37 In issuing the PFMIs,
CPSS–IOSCO sought to strengthen and
harmonize existing international
standards and incorporate new
specifications for CCPs clearing OTC
derivatives.38 The objectives of the
PFMIs are to enhance the safety and
efficiency of FMIs and, more broadly,
reduce systemic risk andfoster
transparency and financial stability.39
The PFMIs set out 24 principles
which address the risk and efficiency of
an FMI’s operations.40 Assessments of
observance with the PFMIs focus also
on the ‘‘key considerations’’ set forth for
each of the principles.41 While Subpart
A and Subpart B incorporate the vast
majority of the standards set forth in the
PFMIs,42 the Commission, which is a
member of the Board of IOSCO, intends
to implement rules and regulations that
are fully consistent with the standards
set forth in the PFMIs by the end of
2013. To that end, the Commission has
recognized that in certain instances, the
standards set forth in the PFMIs may not
be fully covered by the requirements set
forth in Subpart A and Subpart B. Thus,
this rulemaking would revise Subpart C
to address those gaps, specifically with
respect to the following PFMI
principles: Principle 2 (Governance);
Principle 3 (Framework for the
comprehensive management of risks);
Principle 4 (Credit risk); Principle 6
(Margin); Principle 7 (Liquidity risk);
Principle 9 (Money settlements);
Principle 14 (Segregation and
portability); Principle 15 (General
business risk); Principle 16 (Custody
and investment risks); Principle 17
(Operational risk); Principle 21
(Efficiency and effectiveness); Principle
22 (Communication procedures and
standards); and Principle 23 (Disclosure
of rules, key procedures, and market
data).
37 The PFMIs define a ‘‘financial market
infrastructure’’ as a ‘‘multilateral system among
participating institutions, including the operator of
the system, used for the purposes of clearing,
settling, or recording payments, securities,
derivatives, or other financial transactions.’’ See
PFMIs, ¶ 1.8.
38 See id., ¶ 1.2.
39 Id., ¶ 1.15.
40 See id., ¶ 1.19.
41 See Committee on Payment and Settlement
Systems and the Board of the International
Organization of Securities Commissions Principles
for Financial Market Infrastructures: Disclosure
Framework and Assessment Methodology (Dec.
2012) (hereinafter ‘‘Disclosure Framework and
Assessment Methodology’’), available at http://
www.iosco.org/library/pubdocs/pdf/
IOSCOPD396.pdf.
42 Indeed, Subpart A and Subpart B were
informed by the consultative report for the PFMIs.
See generally 76 FR at 69334.

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2. Principle 2: Governance
Principle 2 addresses the governance
arrangements of an FMI.43 Specifically,
it states that the governance
arrangements of an FMI should be
‘‘clear and transparent, promote the
safety and efficiency of the FMI, and
support the stability of the broader
financial system.’’ 44 An FMI’s
governance arrangements must be
documented and set forth ‘‘direct lines
of responsibility and accountability,’’
which are disclosed to owners,
regulators, clearing members and their
customers, and the public.45 In addition,
an FMI must clearly specify the roles
and responsibilities of the board of
directors and management, ensure that
the board of directors and management
have appropriate experience, design
procedures to identify and resolve
conflicts of interest for members of the
board of directors, and regularly review
the performance of the board of
directors as a whole and individual
directors.46 In order to ensure that the
board of directors has the appropriate
incentive to fulfill its multiple roles, the
board must typically include nonexecutive board members.47 Further, the
FMI’s risk management framework must
be clear, documented and reflect the
risk-tolerance policy, assign
responsibility and accountability for
risk decisions, and specify how
decisions will be made in crises and
emergencies.48 Finally, Principle 2
requires the FMI’s ‘‘design, rules,
overall strategy, and decisions to reflect
appropriately the legitimate interests of
its direct and indirect participants and
other relevant stakeholders,’’ and
requires that ‘‘major decisions’’ be
‘‘clearly disclosed to relevant
stakeholders’’ and to the public when
there is ‘‘a broad market impact.’’ 49
3. Principle 3: Framework for the
Comprehensive Management of Risks
Principle 3 addresses an FMI’s risk
management framework, requiring it to
‘‘comprehensively manag[e] legal,
credit, liquidity, operational, and other
risks.’’ 50 In addition, as part of its risk
management framework, an FMI ‘‘must
43 The

PFMIs define ‘‘governance’’ as ‘‘the set of
relationships between an FMI’s owners, board of
directors (or equivalent), management, and other
relevant parties, including participants, authorities,
and other stakeholders (such as participants’
customers, other interdependent FMIs, and the
broader market).’’ PFMIs at Annex H: Glossary.
44 See PFMIs at Principle 2.
45 Id. at Principle 2, Key Consideration
(hereinafter, ‘‘K.C.’’) 2.
46 Id. at Principle 2, K.C. 3, 5.
47 Id. at Principle 2, K.C. 4.
48 See id. at Principle 2, K.C. 6.
49 Id. at Principle 2, K.C. 7.
50 PFMIs at Principle 3.

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regularly review’’ and develop tools to
address ‘‘the material risks it bears from
and poses to other entities . . . as a
result of interdependencies,’’ 51 and
‘‘identify scenarios that may potentially
prevent it from being able to provide its
critical operations and services as a
going concern.52 Principle 3 further
requires an FMI to ‘‘assess the
effectiveness of a full range of options
for recovery or orderly wind-down’’ and
to ‘‘prepare appropriate plans for its
recovery or orderly wind-down as a
result of that assessment.’’ 53 An FMI is
required to ‘‘provide incentives’’ so that
its participants and their customers
‘‘manage and contain the risks they pose
to the FMI.’’ 54 Finally, Principle 3
requires an FMI’s risk management
framework to be periodically
reviewed.55
4. Principle 4: Credit Risk
Principle 4 addresses an FMI’s credit
risk, that is, the risk that a counterparty
to the CCP will be unable to fully meet
its financial obligations when due.56
Generally, Principle 4 requires all FMIs
to establish explicit rules and
procedures to address any credit losses
they may face as a result of an
individual or combined default among
its participants with respect to any of
their obligations to the FMI.57 These
rules and procedures should also
address how potentially uncovered
credit losses would be allocated, how
the funds an FMI may borrow from
liquidity providers will be repaid, and
how an FMI will replenish its financial
resources that it may use during a stress
event, such as a default, so that it can
continue to operate in a safe and sound
manner.58 More specifically, Principle 4
states that ‘‘a CCP should cover its
current and potential future exposures
to each participant fully with a high
degree of confidence using margin and
other prefunded financial resources.’’ 59
Additionally, Principle 4 provides that
a CCP involved in activities with a more
complex risk profile 60 or that is
51 PFMIs
52 PFMIs

at Principle 3, K.C. 3.
at Principle 3, K.C. 4.

53 Id.
54 PFMIs

at Principle 3, K.C. 2.
at Principle 3, K.C. 1.
56 The PFMIs define ‘‘credit risk’’ as the risk that
a counterparty, whether a participant or other
entity, will be unable to meet fully its financial
obligations when due, or at any time in the future.
PFMIs at Annex H: Glossary.
57 See PFMIs at Principle 4, K.C. 7.
58 See id.
59 Id. at Principle 4, K.C. 4.
60 Activities ‘‘with a more complex risk profile’’
include clearing financial instruments that are
characterized by discrete jump-to-default price
changes or that are highly correlated with potential
participant defaults. Id. at Explanatory Note
(hereinafter, ‘‘E.N.’’) 3.4.19.
55 PFMIs

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systemically important in multiple
jurisdictions should maintain additional
financial resources sufficient to cover a
wide range of potential stress scenarios,
including, but not limited to, the default
of the two participants and their
affiliates that would potentially cause
the largest aggregate credit exposure to
the CCP in extreme but plausible market
conditions.
5. Principle 6: Margin
Principle 6 addresses an FMI’s margin
requirements and requires a CCP to use
‘‘an effective margin system that is riskbased and regularly reviewed’’ to ‘‘cover
its credit exposures to its participants
for all products.’’ 61 Specifically,
Principle 6 requires a CCP’s margin
system to take into account the ‘‘risks
and particular attributes of each
product, portfolio and market that it
serves’’ and be calibrated accordingly.62
Further, a CCP’s margin system must
have reliably sourced and timely price
data.63 A CCP’s regular reviews of its
margin models and coverage must
include, at minimum, (i) rigorous daily
backtesting, (ii) monthly sensitivity
analyses, and (iii) regular ‘‘assessment
of the theoretical and empirical
properties’’ of the margin models, which
consider a wide range of possible
market conditions ‘‘including the mostvolatile periods that have been
experienced by the markets it serves and
extreme changes in the correlation
between prices.’’ 64 Principle 6 also
states that ‘‘[a] CCP should have the
authority and operational capacity to
make intraday margin calls and
payments, both scheduled and
unscheduled, to participants.’’ 65
6. Principle 7: Liquidity risk
Principle 7 addresses the risk that an
FMI may not have sufficient funds to
meet its financial obligations as and
when due.66 Specifically, Principle 7
provides that an FMI manage its
liquidity risks from a variety of sources,
including participants, settlement
banks, custodian banks, and liquidity
providers 67 on an ongoing and timely
basis 68 and regularly test the sufficiency
of liquidity resources through rigorous
61 PFMIs

at Principle 6.
at Principle 6, K.C. 1.
63 See id. at Principle 6, K.C. 2.
64 Id. at Principle 6, K.C. 6.
65 Id. at Principle 6, K.C. 4.
66 The PFMIs define ‘‘liquidity risk’’ as ‘‘the risk
that a counterparty, whether a participant or other
entity, will have insufficient funds to meet its
financial obligations as and when expected,
although it may be able to do so in the future.’’ Id.
at Annex H: Glossary.
67 See PFMIs at Principle 7, K.C. 1.
68 See PFMIs at Principle 7, K.C. 2.

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stress testing.69 Additionally, Principle
7 provides that the minimum liquid
resource requirement for CCPs should
be resources that would permit Cover
One, but a CCP that is involved in
activities with a more complex risk
profile or that is systemically important
in multiple jurisdictions should
‘‘maintain additional liquidity resources
sufficient to cover a wider range of
potential stress scenarios,’’ including
resources that would permit Cover
Two.70 Principle 7 also sets forth
specifications for qualifying liquidity
resources which may be used to meet
the minimum liquid resource
requirement.71
7. Principle 9: Money Settlements
Principle 9 addresses money
settlements, stating that an FMI should
minimize and strictly control the credit
and liquidity risk arising from the use
of commercial bank money.72 In other
words, an FMI should ‘‘monitor,
manage, and limit its credit and
liquidity risks arising from commercial
settlement banks,’’ by (i) establishing
and monitoring ‘‘adherence to strict
criteria for its settlement banks that take
into account of, among other things,
their regulation and supervision,
creditworthiness, capitalization, access
to liquidity, and operational
reliability;’’ 73 and (ii) monitoring and
managing ‘‘the concentration credit and
liquidity exposures to its commercial
settlement banks.’’ 74
8. Principle 14: Segregation and
Portability
Principle 14 addresses segregation
and portability, stating that ‘‘a CCP
should have rules and procedures that
enable the segregation and portability of
a participant’s customers and the
collateral provided to the CCP with
respect to those positions.’’ 75 A CCP’s
segregation and portability rules should,
at a minimum, ‘‘effectively protect a
participant’s customers’ positions and
related collateral from the default or
insolvency of that participant.’’ 76
Further, Principle 14 states that a CCP’s
segregation and portability
69 See

PFMIs at Principle 7, K.C. 9.
70 PFMIs at Principle 7, K.C. 4. The term ‘‘Cover
Two’’ refers to the requirement that a CCP maintain
financial resources sufficient to enable it to meet its
financial obligations to its clearing members
notwithstanding a default by the two clearing
members creating the largest combined financial
exposure for the SIDCO in extreme but plausible
market conditions.
71 See PFMIs at Principle 7, K.C. 5–8.
72 Id.
73 See PFMIs at Principle 7, K.C. 3.
74 See id.
75 PFMIs at Principle 14.
76 Id. at K.C. 1.

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arrangements should be disclosed,
including whether the protection
provided for customer collateral is on an
individual or omnibus basis and
whether there are any ‘‘constraints, such
as legal or operational constraints’’ that
may impair its ability to segregate or
port a participant’s customers’ positions
and related collateral.’’ 77
9. Principle 15: General Business Risk
Principle 15 addresses general
business risk, the inability of an FMI to
continue as a going concern, requiring
an FMI to ‘‘hold sufficient liquid net
assets funded by equity to cover
potential general business losses.’’ 78
The liquid net assets should be
sufficient, at all times, ‘‘to ensure a
recovery or orderly wind-down of
critical operations and services.’’ 79
Specifically, ‘‘an FMI should maintain a
viable recovery or orderly wind-down
plan’’ that is supported by ‘‘liquid net
assets funded by equity equal to at least
six months of current operating
expenses.’’ 80
10. Principle 16: Custody and
Investment Risk
Principle 16 addresses custody and
investment risks, stating that an FMI
should safeguard its own assets as well
as the assets of its participants.81
Specifically, the FMI should minimize
the risk of loss on and delay in access
to these assets.82 In addition, the FMI’s
investments should be in instruments
with minimal credit, market and
liquidity risks.83
11. Principle 17: Operational Risk
Principle 17 addresses the risk of
deficiencies in information systems or
internal processes, human errors,
management failures, or disruptions
from external events that will result in
the reduction or deterioration of
services provided by the FMI.84
Principle 17 states that ‘‘[b]usiness
continuity management should aim for
timely recovery of operations and
fulfillment [sic] of the FMI’s obligations,
including in the event of a wide-scale or
77 PFMIs

at Principle 14, K.C. 4.
PFMIs define ‘‘general business risk’’ as
‘‘any potential impairment of the FMI’s financial
position (as a business concern) as a consequence
of a decline in its revenues or an increase in its
expenses, such that expenses exceed revenues and
result in a loss that must be charged against
capital.’’ PFMIs at Annex H: Glossary.
79 PFMIs at Principle 15.
80 Id. at K.C. 3. Such liquid net assets used to
support the recovery and orderly wind-down plan
should be held in addition to the assets required to
cover participant defaults and other risks. Id.
81 PFMIs at Principle 16.
82 Id.
83 Id.
84 PFMIs, ¶ 2.9.
78 The

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major disruption.’’ 85 Additionally, an
FMI’s business continuity plan ‘‘should
incorporate the use of a secondary site
and should be designed to ensure that
critical information technology (‘‘IT’’)
systems can resume operations within
two hours following disruptive
events.’’ 86
12. Principle 21: Efficiency and
Effectiveness
Principle 21 addresses the efficiency
and effectiveness of an FMI. An FMI
should be designed to meet the needs of
its participants and the markets it
serves, in particular, with regard to
choice of clearing and settlement
arrangement, operating structure, scope
of products cleared or settled and
integration of technology and
procedures.87 An effective CCP reliably
meets its obligations in a timely manner
and achieves the public policy goals of
safety and efficiency for participants
and the markets it serves.88
13. Principle 22: Communication
Procedures and Standards
Principle 22 addresses
communication procedures and
standards. An FMI should use, or at a
minimum accommodate, internationally
accepted communication procedures
and standards.89 These include common
sets of rules across systems for exchange
messages, standardized messaging
formats, and reference data standards
for identifying financial instruments
and counterparties.
14. Principle 23: Disclosure of Rules,
Key Procedures, and Market Data

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Principle 23 addresses the disclosure
of an FMI’s rules and procedures to
participants and the public. An FMI
should disclose its rules and procedures
to participants, so that participants can
have an ‘‘accurate understanding of the
risks, fees, and other material costs they
incur by participating in the FMI.’’ 90
Further, the FMI should make
disclosures to the public regarding fees,
basic operational information, and other
relevant information, such as the
responses to the Disclosure Framework
published by CPSS–IOSCO,91 so that
prospective participants can also assess
the risks, fees, and other material costs
incurred by participating in the FMI.92
85 PFMIs

at Principle 17.
at Principle 17, K.C. 6.
87 PFMIs at Principle 21, K.C. 1.
88 Id. at Principle 21, K.C. 2–3.
89 PFMIs at Principle 22, K.C. 1.
90 PFMIs at Principle 23.
91 See Disclosure Framework and Assessment
Methodology, supra note 41.
92 See PFMIs at E.N. 3.23.1.
86 Id.

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F. The Role of the PFMIs in
International Banking Standards
The Commission notes that where a
CCP is not prudentially supervised in a
jurisdiction that has domestic rules and
regulations that are consistent with the
standards set forth in the PFMIs, the
implementation of certain international
banking regulations will have
significant cost implications for that
CCP and its market participants.
In July of 2012, the BCBS,93 the
international body that sets standards
for the regulation of banks, published
the ‘‘Capital Requirements for Bank
Exposures to Central Counterparties’’
(‘‘Basel CCP Capital Requirements’’),
which sets forth interim rules governing
the capital charges arising from bank
exposures to CCPs related to OTC
derivatives, exchange traded derivatives
and securities financing transactions.94
The Basel CCP Capital Requirements
create financial incentives for banks 95
to clear financial derivatives with CCPs
that are licensed in a jurisdiction where
the relevant regulator has adopted rules
or regulations that are consistent with
the standards set forth in the PFMIs.
Specifically, the Basel CCP Capital
Requirements introduce new capital
charges based on counterparty risk for
banks conducting financial derivatives
transactions through a CCP.96 These
new capital charges relate to a bank’s
93 The BCBS is comprised of senior
representatives of bank supervisory authorities and
central banks from around the world including,
Argentina, Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong SAR, India,
Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore,
South Africa, Spain, Sweden, Switzerland, Turkey,
the United Kingdom and the United States. See
Bank for International Settlements, Basel III: A
Global Regulatory Framework for More Resilient
Banks and Banking Systems, December 2010
(revised June 2011), available at http://www.bis.org/
publ/bcbs189.htm.
94 See Capital Requirements for Bank Exposures
to Central Counterparties (July 2012), available at
www.bis.org/publ/bcbs227.pdf. The Basel CCP
Capital Requirements are one component of Basel
III, a framework that ‘‘is part of a comprehensive set
of reform measures developed by the BCBS to
strengthen the regulation, supervision and risk
management of the international banking sector.’’
See Bank for International Settlement’s Web site for
compilation of documents that form the regulatory
framework of Basel III, available at http://
www.bis.org/bcbs/basel3.htm.
95 ‘‘Bank’’ is defined in accordance with the Basel
framework to mean a bank, banking group or other
entity (i.e. bank holding company) whose capital is
being measured. See Basel III: A Global Regulatory
Framework, Definition of Capital, paragraph 51. The
term ‘‘bank,’’ as used herein, also includes
subsidiaries and affiliates of the banking group or
other entity. The Commission notes that a bank may
be a client and/or a clearing member of a DCO.
96 See Basel CCP Capital Requirements, Annex 4,
Section II, 6(i).

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trade exposure and default fund
exposure to a CCP.97
The capital charges for trade exposure
are based upon a function multiplying
exposure by risk weight. Risk weight is
a measure that represents the likelihood
that the loss to which the bank is
exposed will be incurred, and the extent
of that loss. The risk weight assigned
under the Basel CCP Capital
Requirements varies significantly
depending on whether or not the
counterparty is a qualified CCP
(‘‘QCCP’’).98 A QCCP is defined as an
entity that (i) is licensed to operate as
a CCP, and is permitted by the
appropriate regulator to operate as such,
and (ii) is prudentially supervised in a
jurisdiction where the relevant regulator
has established and publicly indicated
that it applies to the CCP on an ongoing
basis, domestic rules and regulations
that are consistent with the PFMIs.99 If
a bank transacts through a QCCP acting
either as (1) a clearing member of a CCP
for its own account or for clients 100 or
(2) a client of a clearing member that
enters into an OTC derivatives
transaction with the clearing member
acting as a financial intermediary, then
the risk weight is a flat 2% for purposes
of calculating the counterparty risk.101 If
97 Trade exposure is a measure of the amount of
loss a bank is exposed to, based on the size of its
position, given a CCP’s failure. Under the Basel CCP
Capital Requirements, trade exposure is defined to
include the current and potential future exposure
of a bank acting as either a clearing member or a
client to a CCP arising from OTC derivatives,
exchange traded derivatives transactions or
securities financing transactions, as well as initial
margin. See Basel CCP Capital Requirements,
Annex 4, Section I, A: General Terms. Current
exposure, includes variation margin that is owed by
the CCP, but not yet been received by the clearing
member or client. Id.
Default fund exposure is a measure of the loss a
bank acting as a clearing member is exposed to
arising from the use of its contributions to the CCP’s
mutualized default fund resources. See Basel CCP
Capital Requirements, Annex 4, Section I, A:
General Terms.
98 See id. at Annex 4, Section IX, Exposures to
Qualifying CCPs, paragraphs 110–119 (describing
the methodology for calculating a bank’s trade
exposure to a qualified CCP); see also id. at
paragraph 126 (describing methodology for
calculating a bank’s trade exposure to a nonqualifying CCP). ‘‘A QCCP is defined as an entity
that (i) is licensed to operate as a CCP, and is
permitted by the appropriate regulator to operate as
such, and (ii) is prudentially supervised in a
jurisdiction where the relevant regulator has
established and publicly indicated that it applies to
the CCP on an ongoing basis, domestic rules and
regulations that are consistent with the PFMIs.’’ See
Section I, A: General Terms of the Basel CCP
Capital Requirements).
99 Id. at Section I, A: General Terms.
100 The term ‘‘client’’ as used herein refers to a
customer of a DCO.
101 Id. at Section IX: Central Counterparties,
paragraphs 110 and 114. Client trade exposures are
risk-weighted at 2% if the following two conditions
are met: (1) The offsetting transactions are
identified by the CCP as client transactions and

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the CCP is non-qualifying, then risk
weight is the same as a bilateral OTC
derivative trade and the bank applies
the corresponding bilateral risk-weight
treatment, which is at least 20% if the
CCP is a bank or as high as 100% if the
CCP is a corporate institution.102
With respect to default fund exposure,
whenever a clearing member bank is
required to maintain capital for
exposures arising from default fund
contributions to a QCCP, the clearing
member bank may apply one of two
methodologies for determining the
capital requirement: The risk-sensitive
approach, or the 1250% risk weight
approach.103 The risk-sensitive
approach considers various factors in
determining the risk weight for a bank’s
default exposure to a QCCP such as (i)
the size and quality of a QCCP’s
financial resources, (ii) the counterparty
credit risk exposures of such a CCP, and
(iii) the application of such financial
resources via the CCP’s loss bearing
waterfall in the case one or more
clearing members default.104 The
1250% risk weight approach allows a
clearing member bank to apply a 1250%
risk weight to its default fund exposures
to the QCCP, subject to an overall cap
of 20% on the risk-weighted assets from
all trade exposures to the QCCP.105 In
other words, banks with exposures to
QCCPs have a cap on the capital charges
related to their default fund exposure. In
contrast, a clearing member bank with
exposures to a non-qualified CCP must
collateral to support them is held by the CCP and/
or clearing member, as applicable, under
arrangements that prevent losses to the client due
to the default or insolvency of the clearing member,
or the clearing member’s other clients, or the joint
default or insolvency of the clearing member and
any of its other clients and (2) relevant laws,
regulations, contractual or administrative
arrangements provide that the offsetting
transactions with the defaulted or insolvent clearing
member are highly likely to continue to be
indirectly transacted through the CCP, or by the
CCP, should the clearing member default or become
insolvent.
However, in certain circumstances risk weight
may increase. Specifically, if condition 1 is not met
(i.e. where a client is not protected from losses in
the case that the clearing member and another
client of the clearing member jointly default or
become jointly insolvent) but condition 2 is met,
the banks trade exposure is risk-weighted at 4%. If
neither condition 1 nor 2 is met, then the bank must
capitalize its exposure to the CCP as a bilateral
trade. Id. at paragraphs 115 and 116.
102 See BCBS, Consultative Document:
Capitalisation of Bank Exposures to Central
Counterparties, paragraph 28 (Nov. 2011), available
at http://www.bis.org/publ/bcbs.206.htm.
103 See Basel CCP Capital Requirements, Annex 4,
Section IX, paragraphs 121–125.
104 Id. at paragraph 122. The Commission notes
that the 1250% risk weight represents the reciprocal
of the 8% capital ratio (which is the percentage of
a bank’s capital to its risk-weighted assets).
105 Id. at paragraph 125.

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apply a risk weight of 1250% with no
cap for default fund exposures.106
Thus, the Basel CCP Capital
Requirements provide incentives for
banks, including their subsidiaries and
affiliates, to clear derivatives through
CCPs that are QCCPs by setting (1) lower
capital charges for OTC derivatives
transacted through a QCCP and (2)
significantly higher capital charges for
OTC derivatives transacted through
non-qualifying CCPs. The increased
capital charges for transactions through
non-qualifying CCPs may have
significant business and operational
implications for U.S. DCOs that operate
internationally and are not QCCPs.
Specifically, banks faced with such
higher capital charges may transfer their
OTC derivatives business away from
such DCOs to a QCCP in order to benefit
from the preferential capital charges
provided by Basel CCP Capital
Requirements. Alternatively, banks may
reduce or discontinue their OTC
business altogether. Banks may also
pass through the higher costs of
transacting on a non-qualifying DCO
that result from the higher capital
charges to their customers. Accordingly,
customers using such banks as
intermediaries may transfer their
business to an intermediary at a QCCP.
In short, a DCO’s failure to be a QCCP
may cause it to face a competitive
disadvantage retaining members and
customers.
G. Proposed Rulemaking Applicable to
SIDCOs and Subpart C DCOs
As described in detail in section II
below, this proposed rulemaking would
create a new category of DCO, a Subpart
C DCO. A Subpart C DCO would
include any registered DCO that elects
to become subject to the provisions in
Subpart C of part 39 of the
Commission’s regulations (‘‘Subpart
C’’). Further, this rulemaking would
revise Subpart C so that Subpart C
would apply to SIDCOs and Subpart C
DCOs, and would include new or
revised standards for governance,
financial resources, system safeguards,
default rules and procedures for
uncovered losses or shortfalls, risk
management, disclosure, efficiency, and
recovery and wind-down procedures.
These requirements would address any
remaining gaps between the
Commission’s regulations and the PFMI
standards. Thus, Subpart C, together
with the provisions in Subpart A and
Subpart B, would establish domestic
rules and regulations that are consistent
with the PFMIs. As such, because
SIDCOs and Subpart C DCOs would
106 Id.

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have the requirements of Subpart A,
Subpart B, and Subpart C applied to
them on a continuing basis, SIDCOs and
Subpart C DCOs would be QCCPs for
purposes of the Basel CCP Capital
Requirements.107 The Commission
requests comment on all aspects of the
rules proposed herein, as well as
comment on the specific provisions and
issues highlighted in section II, below.
II. Discussion of Revised and Proposed
Rules
A. Regulation 39.2 (Definitions)
The Commission proposes to amend
regulation 39.2 by amending one
definition and adding six definitions.
First, the Commission proposes a
technical amendment to the definition
of ‘‘systemically important derivatives
clearing organization.’’ The definition
now describes a SIDCO as a registered
DCO ‘‘which has been designated by the
[Council] to be systemically important
. . . .’’ The proposed definition would
describe a SIDCO as a registered DCO
‘‘which is currently designated . . . ’’
This revision is necessary to allow for
the possibility that a systemic
importance designation may be
rescinded.108
Second, the Commission proposes to
add a definition for the phrase ‘‘activity
with a more complex risk profile,’’ to
provide greater clarity as to the types of
activities that would trigger a Cover
Two financial resources requirement.
The Commission proposes to define
‘‘activity with a more complex risk
profile’’ to include clearing credit
default swaps, credit default futures,
and derivatives that reference either
credit default swaps or credit default
futures, as well as any other activity
designated as such by the Commission.
By permitting activities to be added by
Commission action, the proposed
definition provides the Commission
with flexibility to address new and
innovative market activities. The phrase
‘‘activity with a more complex risk
profile’’ appears in regulation 39.29
(Financial resources requirements),
which this rulemaking proposes to
revise and renumber as regulation 39.33.
The phrase also appears in PFMI
Principles 4 (Credit risk) and 7
(Liquidity risk).
The Commission also proposes to add
a definition for the term ‘‘subpart C
107 See

discussion of QCCP status supra Section

I.F.
108 See 76 FR at 44775 (finalizing 12 CFR
1320.13(b), which states that ‘‘[t]he Council shall
rescind a designation of systemic importance for a
designated financial market utility if the Council
determines that the financial market utility no
longer meets the standards for systemic
importance.’’).

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derivatives clearing organization.’’ As
proposed, a ‘‘subpart C derivatives
clearing organization’’ would include
any registered DCO that is not a SIDCO
and that has elected to become subject
to Subpart C.
In addition, the Commission proposes
to add definitions for ‘‘depository
institution,’’ ‘‘U.S. branch and agency of
a foreign banking organization,’’ and
‘‘trust company.’’ A ‘‘depository
institution’’ would have the meaning set
forth in Section 19(b)(1)(A) of the
Federal Reserve Act (12 U.S.C.
461(b)(1)(A)). A ‘‘U.S. branch and
agency of a foreign banking
organization’’ would mean the U.S.
branch and agency of a foreign banking
organization as defined in Section 1(b)
of the International Banking Act of 1978
(12 U.S.C. 3101). A ‘‘trust company’’
would mean a trust company that is a
member of the Federal Reserve System,
under Section 1 of the Federal Reserve
Act (12 U.S.C. 221), but that does not
meet the definition of ‘‘depository
institution.’’
The Commission requests comment
on these definitions. In particular, the
Commission requests comment on the
potential costs and benefits resulting
from or arising out of the proposed
definition of ‘‘activity with a more
complex risk profile.’’ The Commission
requests that, where possible,
commenters provide both quantitative
data and detailed analysis in their
comments, particularly with respect to
estimates of costs and benefits. In
addition, the Commission requests
comment on whether there are
alternative definitions that would
provide a more effective or efficient
means for achieving consistency with
the standards set forth by the PFMIs.
The Commission requests that
commenters include a detailed
description of any such alternatives, and
estimates of the costs and benefits of
such alternatives.
B. Regulation 39.30 (Scope)
The Commission proposes to expand
regulation 39.28 (and renumber it as
regulation 39.30) so that Subpart C
would apply to SIDCOs and Subpart C
DCOs. As described above, the rules
proposed in Subpart C address the gaps
between Commission regulations and
the standards set forth in the PFMIs.109
As such, a DCO that is subject to the
requirements of Subpart A, Subpart B,
and Subpart C should meet the
requirements for QCCP status and
benefit from the lower capital charges
on clearing member banks and bank
customers of clearing members for
109 See

also supra Section I.G.

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exposures resulting from derivatives
cleared through QCCPs.110 Such a DCO
may also be viewed more favorably by
potential members or customers of
members in that it would be seen to be
held to international standards. Because
of these potential benefits, the
Commission proposes that a DCO that
has not been designated to be
systemically important should have the
option to elect to become subject to
Subpart C.111
With respect to SIDCOs, the
Commission is committed to
maintaining risk management standards
that enhance the safety and efficiency of
a SIDCO, reduce systemic risks, foster
transparency and support the stability of
the broader financial system.112 To
support financial stability, a SIDCO
must operate in a safe and sound
manner. If it fails to measure, monitor,
and manage its risks effectively, a
SIDCO could pose significant risk to its
participants and the financial system
more broadly.113 The Commission
shares the stated objectives of the
PFMIs, namely to enhance the safety
and efficiency of FMIs and, more
broadly, reduce systemic risk and foster
transparency and financial stability.114
The PFMIs have been adopted and
implemented by numerous foreign
jurisdictions.115 A global, unified set of
110 See

supra Section I.F.
a technical matter, the Commission
proposes to move existing paragraph (c) of
renumbered regulation 39.30 (requiring a SIDCO to
provide notice to the Commission in advance of any
proposed change to its rules, procedures, or
operations that could materially affect the nature or
level of risks presented by the SIDCO, in
accordance with the requirements of regulation
40.10) to proposed new regulation 39.42. Because
the other provisions of proposed regulation 39.30
would pertain exclusively to the scope of Subpart
C, it would be appropriate for existing paragraph (c)
to be codified in a separate regulation. See infra
Section II.N for further detail.
112 See SIDCO Final Rule (Discussion of risk
management standards). See also Section 805(b) of
the Dodd-Frank Act.
113 See supra Section I.E.
114 PFMIs ¶ 1.15.
115 In Europe, the European Market Infrastructure
Regulation and implementing technical standards
entered into force on March 15, 2013, and establish
standards for CCPs that are consistent with the
PFMIs. See Commission Delegated Regulation (EU)
No 153/2013, available at http://eur-lex.europa.eu/
LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0041:
0074:EN:PDF; and Regulation (EU) No 648/2012 of
the European Parliament and of the Council on OTC
Derivatives, Central Counterparties and Trade
Repositories, preamble paragraph 90, 2012 O.J. (L
201), available at http://eur-lex.europa.eu/LexUri
Serv/LexUriServ.do?uri=OJ:L:2012:201:FULL:EN:
PDF.
In Asia, Singapore has adopted the PFMIs into its
financial regulations pertaining to FMIs. See
Monetary Authority of Singapore, ‘‘Supervision of
Financial Market Infrastructures in Singapore,’’
(January 2013), available at http://www.mas.gov.sg/
∼/media/MAS/About%20MAS/Monographs%
20and%20information%20papers/
111 As

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international risk management
standards for systemically important
CCPs can help support the stability of
the broader financial system and, for the
reasons set forth in the discussion
below, the Commission proposes that
SIDCOs be required to comply with all
of the requirements set forth in part 39
of the Commission’s regulations,
including the proposed standards set
forth in Subpart C.
The Commission requests comment
on the proposed rules. Specifically, and
in light of the potential impact that a
SIDCO’s failure could have on the U.S.
financial system, the Commission
requests comment on the potential costs
and benefits resulting from, or arising
out of, requiring SIDCOs to comply with
Subpart C. The Commission requests
that, where possible, commenters
provide quantitative data and detailed
analysis in their comments, particularly
with respect to estimates of costs and
benefits. In addition, the Commission
requests comment on whether there are
more effective or efficient means for
achieving consistency with the
standards set forth by the PFMIs. The
Commission requests that commenters
include a detailed description of any
such alternatives, and estimates of the
costs and benefits of such alternatives.
C. Regulation 39.31 (Election To Become
Subject to the Provisions of Subpart C)
As discussed above,116 the Basel CCP
Capital Requirements impose
significantly higher capital charges on
banks (including their subsidiaries and
MASMonograph_Supervision_of_Financial_
Market_Infrastructures_in_Singapore%202.pdf.
In addition, Australia and Canada have publicly
indicated their intent to adopt the PFMIs. See
Reserve Bank of Australia, ‘‘Consultation on New
Financial Stability Standards,’’ (August 2012),
available at http://www.rba.gov.au/paymentssystem/clearing-settlement/consultations/201208new-fin-stability-standards/index.html; Canadian
Securities Administrators Consultation Paper 91–
406 ‘‘Derivatives: OTC Central Counterparty
Clearing,’’ (June 20, 2012), available at http://www.
osc.gov.on.ca/documents/en/Securities-Category9/
csa_20120620_91–406_counterparty-clearing.pdf.
In the United States, the SEC adopted a final rule
that incorporates heightened risk management
standards for CCPs that clear security-based swaps,
based on, in part, the PFMIs’ ‘‘Cover Two’’ standard
for CCPs engaged in a more complex risk profile or
that are systemically important in multiple
jurisdictions. See 17 CFR 240.17Ad-22(b)(3) (2013)
(requiring, in relevant part, SEC-registered clearing
agencies (i.e., CCPs) to maintain sufficient financial
resources to withstand, at a minimum, a default by
the participant family to which they have the
largest exposure in extreme but plausible
conditions, provided that a security-based swap
clearing agency, (i.e., a CCP that clears securitybased swaps) shall maintain sufficient financial
resources to withstand, at a minimum, a default by
the two participant families to which it has the
largest exposure in extreme but plausible market
conditions).
116 See discussion supra Section I.F.

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affiliates) that clear derivatives through
CCPs that do not qualify as QCCPs.
Because such charges could create
incentives for banks to migrate their
business to CCPs that are QCCPs or to
avoid clearing, U.S. DCOs that operate
internationally, but that are not QCCPs,
may face a substantial competitive
disadvantage. It would appear that
DCOs that have not been designated by
the Council as systemically important
should have the ability to be held to
international standards and to attain
QCCP status.117 Accordingly, the
Commission is proposing regulation
39.31, which would provide a
mechanism whereby a DCO that has not
been designated by the Council as
systemically important may elect to
become subject to the provisions of
Subpart C (i.e., may ‘‘opt’’ to become
subject to the regulations otherwise
applicable only to SIDCOs) and,
thereby, attain QCCP status. The
Commission is also proposing
procedures for withdrawing or
rescinding that election.
The proposed amendments to Subpart
C are intended to enhance the financial
integrity and operational security of a
SIDCO, which is critically important to
safeguarding the stability of the U.S.
financial system. Accordingly, the
Commission proposes that a SIDCO
should be subject to all of the
requirements set forth in Subpart C. The
Commission recognizes, however, that
the overall balance of the costs and
benefits of this enhanced regulatory
regime, including the benefits accruing
from QCCP status, and the costs
associated with the implementation of
Subpart C, may vary among DCOs that
are not SIDCOs. The proposed ‘‘opt-in’’
regime allows DCOs that are not
designated by the Council as
systemically important to weigh for
themselves the costs and benefits of
attaining QCCP status.
The authority provided by Sections
5b(c)(2)(A) and 8a(5) of the CEA permits
the Commission to establish and enforce
regulations applicable to specified
categories of DCOs that affirmatively
elect to become subject to such
regulations. Indeed, the Commission
notes that it applies, and maintains the
authority to enforce, regulations to
persons and entities that voluntarily
register in certain capacities.118
117 A DCO that is subject to the obligations
contained in Subpart A, Subpart B, and Subpart C
would be a QCCP.
118 See, e.g., Section 5b(b) of the CEA, 7 U.S.C.
7a–1(b) (voluntary registration as a DCO). The
Commission recognizes that for such entities, the
benefits of voluntary registration outweigh the costs
of complying with the CEA and Commission
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Authority for proposed regulation
39.31 is also supported by Section 752
of the Dodd- Frank Act,119 which, as
described above, directs the
Commission to consult and coordinate
with foreign regulatory authorities on
effective and consistent global
regulation of swaps and futures.
Expanding the application of Subpart C
to include DCOs that have not been
designated by the Council as
systemically important, but that
nonetheless wish to become subject to
regulations that are fully consistent with
the standards set forth in the PFMIs,
helps promote the international
consistency called for in Section 752.
The mandate of Section 15 of the CEA
further supports the adoption of a
flexible approach, permitting some nonSIDCOs, but not all DCOs, to be subject
to the additional regulations of Subpart
C. As discussed below in more detail,
the Commission is required by Section
15(a)(1) to consider the costs and
benefits of any proposed regulation
prior to promulgating it.120 The benefits
of enhanced financial integrity and
operational security, the benefits
accruing from being held to
international standards and from QCCP
status, and the costs associated with the
implementation of Subpart C, may vary
among DCOs that have not been
designated as systemically important.
DCOs that wish to compete
internationally may find compliance
with Subpart C a necessary cost to
operate on a global stage. Similarly,
DCOs that have banks or bank affiliates
as members may find such compliance
important to their membership and, in
turn, to their own business.
Accordingly, the Commission proposes
that, at this time, DCOs that are not
designated as systemically important
should be provided with the
opportunity to become subject to
Subpart C based upon their assessments
of the benefits and burdens associated
with meeting the regulations set out in
this Subpart C.
The Commission emphasizes
however, that, under the present
proposal, once a non-SIDCO elects to
become subject to Subpart C, that nonSIDCO would, as of the effective date of
entities to register with it, which registration
necessarily entails continuing supervision by the
Commission, compliance with the CEA and
Commission regulations, and Commission authority
to enforce the CEA and its regulations against such
entities.
119 See supra note 19.
120 See infra Section IV.C (Consideration of Costs
and Benefits); see also Section 15(a)(1) of the CEA,
7 U.S.C. 19(a)(1), stating that, ‘‘Before promulgating
a regulation under this Act or issuing an order . . .
the Commission shall consider the costs and
benefits of the action of the Commission.’’

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the election, be subject to examination
for compliance with Subpart C and to
enforcement action for non-compliance.
This status would continue until such
time, if any, as the election is properly
vacated as set forth in proposed
regulation 39.31(e).
1. Regulation 39.31(a): Eligibility
Requirements
Proposed regulation 39.31(a) sets forth
the two categories of entities that would
be eligible to elect to become subject to
the provisions in Subpart C. A DCO that
is not a SIDCO could request such
election using the procedures set forth
in proposed regulation 39.31(b). An
entity applying for registration as a DCO
pursuant to regulation 39.3 (‘‘DCO
Applicant’’) could request the election
in conjunction with its application for
registration (‘‘Registration Application’’)
using the procedures set forth in
proposed regulation 39.31(c).
2. Regulation 39.31(b): Subpart C
Election and Withdrawal Procedures for
Registered DCOs
Proposed regulation 39.31(b) would
establish the procedures by which a
DCO that is already registered could
elect to become subject to the provisions
of Subpart C and the procedure by
which it could withdraw that election.
These procedures are intended to
provide the Commission, clearing
members, and customers (and regulators
of such clearing members and
customers) with assurance that the
electing DCO will be held to and will be
required to meet the standards set forth
in Subpart C and in the PFMIs.
A DCO seeking to become subject to
Subpart C would be required to file with
the Commission a completed Subpart C
Election Form, which is proposed to be
included in part 39 of the Commission’s
regulations as Appendix B thereto. The
proposed Subpart C Election Form
would include three parts: (1) General
Instructions, (2) Elections and
Certifications, and (3) Disclosures and
Exhibits. As discussed below, a DCO
Applicant requesting an election to
become subject to Subpart C also would
be required to file a Subpart C Election
Form with the Commission.121
In the Elections and Certifications
portion of the Subpart C Election Form,
a DCO would be required to
affirmatively elect to become subject to
Subpart C and to specify the date upon
which it seeks to make its election
effective. The effective date selected by
the DCO could be no earlier than ten
business days after the date the Subpart
C Election Form is filed with the
121 See

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Commission. The DCO, through its duly
authorized representative,122 would be
required to certify that, as of the
effective date of its election, the DCO
will be in compliance with Subpart C
and will remain in compliance unless
and until the DCO rescinds its election
pursuant to proposed regulation
39.31(e), discussed below.123 The DCO
also would be required to certify,
through its duly authorized
representative, that all information
contained in the Subpart C Election
Form is ‘‘true, current and complete in
all material respects.’’
In the Disclosures and Exhibits
portion of the Subpart C Election Form,
a DCO would be required to provide a
regulatory compliance chart that
separately sets forth for proposed
Subpart C regulations 39.32 through
39.39, citations to the relevant rules,
policies and procedures of the DCO that
address each such regulation and a
summary of the manner in which the
DCO will comply with each regulation.
In addition, the DCO would be required
to provide, in separate exhibits, any
documents that demonstrate its
compliance with proposed Subpart C
regulations 39.32 through 39.36 and
39.39.124 The Commission also proposes
requiring the DCO to complete and to
publish on the DCO’s Web site the
DCO’s responses to the Disclosure
Framework and to provide the
Commission with the URL to the
specific page where such responses can
found.125 The Disclosure Framework
122 The signatures required by the ‘‘Elections and
Certifications’’ portion of the proposed Subpart C
Election Form would be required to be the manual
signatures of the duly authorized representatives of
the DCO described in the instructions. If the
Subpart C Election Form is filed by a corporation,
the Elections and Certifications would be required
to be signed in the name of the corporation by a
principal officer duly authorized; if filed by a
limited liability company, they would be required
to be signed in the name of the limited liability
company by a manager or member duly authorized
to sign on the limited liability company’s behalf; if
filed by a partnership, they would be required to
be signed in the name of the partnership by a
general partner duly authorized; and if filed by an
unincorporated organization or association which is
not a partnership, they would be required to be
signed in the name of such organization or
association by the managing agent (i.e., a duly
authorized person who directs or manages or who
participates in the directing or managing of its
affairs).
123 See discussion infra Section II.C.5.
124 This approach is consistent with the Form
DCO that must be filed by DCO Applicants. The
Form DCO requires DCO Applicants to submit to
the Commission, as individual exhibits to the Form
DCO, documents that demonstrate compliance with
the requirements contained in Subpart B. 17 CFR
Part. 39, Appendix A.
125 This proposed obligation is consistent with
the obligation under proposed regulation 39.37 of
SIDCOs and Subpart C DCOs to complete and
publically disclose their Disclosure Framework
responses. See discussion infra Section II.I.

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would be required to be completed in
accordance with section 2.0 and Annex
A thereof 126 and would be expected to
fully explain how the DCO complies
with the standards set forth in the
PFMIs. As noted in section 2.5 of the
Disclosure Framework, CPSS–IOSCO
are in the process of developing a set of
criteria for the disclosure by an FMI of
quantitative information to enable
stakeholders to evaluate FMIs and to
make cross-comparisons (‘‘Quantitative
Information Disclosure’’). The
Commission proposes requiring the
DCO, in the event that such criteria are
published, to publish its Quantitative
Information Disclosure on the DCO’s
Web site and to provide the
Commission, on its Subpart C Election
Form, the URL to the specific page
where the Quantitative Information
Disclosure may be found.
Pursuant to proposed regulation
39.31(b)(2), the filing of a Subpart C
Election Form would not create a
presumption that the Subpart C Election
Form is materially complete or that
supplemental information would not be
required. The Commission could, prior
to the effective date, request that the
DCO provide supplemental information
in order to process the DCO’s Subpart C
Election Form and the DCO would be
required to file such supplemental
information with the Commission.
Proposed regulation 39.31(b)(3) also
would require the DCO to promptly
amend its Subpart C Election Form if it
discovers a material omission or error
in, or if there is a material change in, the
information provided to the
Commission in the Subpart C Election
Form or other information provided in
126 Compliance with Section 2 and Annex A of
the Disclosure Framework, collectively, would
require the SIDCO or Subpart C DCO to provide ‘‘a
comprehensive narrative disclosure for each
applicable [PFMI] principle with sufficient detail
and context to enable the reader to understand the
[SIDCO’s or Subpart C DCO’s] approach to
observing the principle. In addition, the SIDCO or
Subpart C DCO would be required to provide: (1)
An executive summary of the key points from the
disclosure [responses]; (2) a summary of the major
changes since the last update of the
disclosure[responses]; (3) a description of the
SIDCO or Subpart C DCO and the markets it serves,
including basic data and performance statistics on
its services and operations; (4) a description of the
SIDCO’s or Subpart C DCO’s general organization
and governance structure; (5) an overview of the
SIDCO’s or Subpart C DCO’s legal and regulatory
framework; (6) an explanation of the SIDCO’s or
Subpart C DCO’s system design and operation; (6)
a list of publicly available resources, including
those referenced in the disclosure [responses], that
may help a reader understand the SIDCO or Subpart
C DCO and its approach to observing each
applicable PFMI principle. The narrative disclosure
for each principle would be required to provide
sufficient detail and context ‘‘to enable a variety of
readers with different backgrounds to understand
the [SIDCO’s or Subpart C DCO’s] approach to
observing the principle.’’ Id.

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connection with the Subpart C Election
Form.
Once a Subpart C Election Form is
filed by a DCO, the Commission may
permit the DCO’s election to become
subject to Subpart C to take effect as set
forth in proposed regulation 39.31(b)(4)
or may stay or deny the election under
proposed regulation 39.31(b)(5). If the
Commission stays or denies the
election, it would issue written
notification thereof to the DCO.
Proposed regulation 39.31(b)(4) would
provide that, unless the Commission
stays or denies the DCO’s election to
become subject to Subpart C, such
election would become effective upon
the later of: (1)(i) The effective date
specified by the DCO in its Subpart C
Election Form or (ii) ten business days
after the DCO files its Subpart C
Election Form with the Commission or
(2) or upon the effective date set forth
in written notification from the
Commission that it shall permit the
election to take effect after a stay issued
pursuant to proposed regulation
39.31(b)(5). The Commission may
provide written acknowledgement of
receipt of the DCO’s Subpart C Election
Form, as well as written
acknowledgement that it has permitted
the DCO’s election to become subject to
Subpart C to take effect and the effective
date of that election.127 The
Commission emphasizes that, consistent
with the certification required to be
provided by a DCO as part of its Subpart
C Election Form, a DCO, as of the date
its election to become subject to Subpart
C becomes effective, would be held to
the requirements of Subpart C and the
DCO would become subject to potential
enforcement action by the Commission
for failure to comply with any such
requirements. To the extent that
compliance with Subpart C would
require the DCO to implement new rules
or rule amendments, all such rules or
rule amendments must be approved or
permitted to take effect prior to the
effective date.
Proposed regulation 39.31(b)(7) would
allow a DCO that has submitted a
Subpart C Election Form to withdraw
the form at any time prior to the
effective date specified therein by filing
a notice thereof with the Commission.
Withdrawal, however, would not be
permitted on or after the specified
effective date. A DCO that wishes to
rescind its election to become subject to
127 The decision to approve, to deny or to stay an
election to become subject to Subpart C may be
made by, and the related written notices may be
provided by, the Director of the Division of Clearing
and Risk pursuant to the authority delegated to him
or her under the proposed amendment to regulation
140.94. See infra Section II.O.

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Subpart C after the effective date would
be permitted to do so using the
procedures set forth in proposed
regulation 39.31(e).128
3. Regulation 39.31(c): Election and
Withdrawal Procedures for DCO
Applicants
Proposed regulation 39.31(c) sets forth
procedures through which a DCO
Applicant may request to become
subject to the provisions of Subpart C at
the time that the DCO Applicant files its
Registration Application. These
procedures are intended to provide the
Commission with a basis to evaluate the
DCO Applicant’s ability to comply with
the provisions of Subpart C, and
ultimately to provide the Commission,
potential members and customers (and
regulators of such members and
customers) with assurance that the DCO
Applicant will, once DCO registration
has been granted, be held to and will,
in fact, meet the standards set forth in
Subpart C and in the PFMIs.
The Commission encourages DCO
Applicants to make their election to
become subject to Subpart C at the time
that their Registration Application is
filed. The Commission anticipates
considerable overlap between the
information and documentation
contained in a Registration Application
filed by a DCO Applicant and the
information and documentation that
would be required to be submitted to
the Commission as part of a Subpart C
Election Form. It would appear that
simultaneous filings would allow
Commission resources to be used more
efficiently and effectively.
As proposed, a DCO Applicant
requesting an election to become subject
to Subpart C would make such request
by attaching a Subpart C Election Form
to the Form DCO that the DCO
Applicant files pursuant to regulation
39.31. The certifications, disclosures,
and exhibits that would be required to
be provided by a DCO Applicant in the
Subpart C Election Form would be the
same as those required of registered
DCOs,129 except that the DCO Applicant
128 See

discussion infra Section II.C.5.
DCO Applicant would be required to: (1)
Certify that all information contained in its Subpart
C Election Form is ‘‘true, correct and complete in
all material respects;’’ (2) provide a regulatory
compliance chart that separately sets forth, for
proposed Subpart C regulations 39.32 through
39.39, citations to the relevant rules, policies and
procedures of the DCO Applicant that address each
such regulation and a summary of the manner in
which the DCO Applicant will comply with each
regulation; (c) provide, as separate exhibits to the
Subpart C Election Form, any documents that
demonstrate the DCO Applicant’s compliance with
proposed Subpart C regulations 39.32 through 39.36
and 39.39; (d) complete and publish on the DCO
Applicant’s Web site, the DCO’s responses to the

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would not specify an effective date for
its election. Rather, the DCO Applicant
would certify that, if the Commission
permits its election to become subject to
Subpart C to become effective, the DCO
Applicant will be in compliance with
the Subpart C regulations as of the date
set forth in the Commission’s notice
thereof.
As with Subpart C Election Forms
filed by registered DCOs, the filing of a
Subpart C Election Form by a DCO
Applicant would not create a
presumption that the Subpart C Election
Form is materially complete or that
supplemental information would not be
required. Under proposed regulation
39.31(c)(3), the Commission could, at
any time during the Commission’s
review of the Subpart C Election Form,
request that the DCO Applicant submit
supplemental information in order for
the Commission to process the DCO
Applicant’s Subpart C Election Form or
its Registration Application and the
DCO Applicant would be required to
file such supplemental information. In
addition, the DCO Applicant would be
required by proposed regulation
39.31(c)(4) to promptly amend its
Subpart C Election Form if it discovers
a material omission or error in, or if
there is a material change in, the
information provided to the
Commission in the Subpart C Election
Form or other information provided in
connection with the Subpart C Election
Form.130
Under proposed regulation
39.31(c)(2), the Commission would
review the Subpart C Election Form as
part of the Commission’s review of the
DCO Applicant’s Registration
Application and the Commission, based
upon its review and analysis of the
information submitted in the Subpart C
Election Form, could permit the DCO
Applicant’s election to take effect at the
time it approves the Registration
Application. The Commission would
provide the DCO Applicant written
notice of its determination to permit the
election to become subject to Subpart C
to become effective.131 The Commission
Disclosure Framework and provide the Commission
with the URL to specific Web site page where such
responses can found; and (e) if applicable, publish
on the DCO Applicant’s Web site the DCO
Applicant’s Quantitative Information Disclosure
and provide the Commission the URL to the
specific page where such disclosure may be found.
130 Proposed regulations 39.31(c)(3) and
39.31(c)(4) are consistent with regulations 39.3(a)(2)
and 39.3(a)(3) governing DCO application
amendments and the submission of supplemental
information in connection with a DCO application,
respectively. 17 CFR 39.31(a)(2)–(3).
131 The decision to permit a DCO to become
subject to Subpart C may be made by, and notice
thereof may be provided by, the Director of the
Division of Clearing and Risk, as set forth in

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notes that any Registration Application
for which there is a Subpart C Election
Form pending would be evaluated
against the standards set forth in
Subpart C as well as the standards set
forth in Subpart A and Subpart B in
order for the Commission to approve the
Registration Application. That is, the
Commission would not approve any
such Registration Application if the
Commission determines that the DCO
Applicant’s election to become subject
to Subpart C should not become
effective because the DCO Applicant has
not demonstrated its ability to comply
with the requirements of Subpart C. The
DCO Applicant would be permitted to
withdraw the Subpart C Election Form
as set forth in proposed regulation
39.31(c)(5), however, prior to the
Commission’s taking action on the
Registration Application.
Proposed regulation 39.31(c)(5) would
permit a DCO Applicant to withdraw a
request to become subject to Subpart C
by filing with the Commission a notice
of the withdrawal. The DCO Applicant
could withdraw its Subpart C Election
Form without withdrawing its Form
DCO.
4. Regulation 39.31(d)—Public
Information
Proposed regulation 39.31(d) would
provide that certain portions of the
Subpart C Election Form will be
considered public documents that may
routinely be made available for public
inspection. Such portions include: The
Elections and Certifications and
Disclosures in the Subpart C Election
Form, the rules of the DCO, the
regulatory compliance chart, and any
other part of the Subpart C Election
Form that is not covered by a request for
confidential treatment subject to
regulation 145.9. This proposal is
consistent with the transparent
treatment typically afforded materials
submitted in connection with
applications to become registered with
the Commission.132
5. Regulation 39.31(e)—Rescission
Proposed 39.31(e) would permit a
Subpart C DCO to rescind its election to
comply with Subpart C by filing a notice
of its intent to rescind the election with
the Commission. The Commission
proposes that DCOs that ‘‘opt-in’’ to
Subpart C should be permitted to
rescind, subject to certain conditions.
These conditions are intended to
provide the DCO’s members and
Commission regulation 140.94, as proposed to be
amended herein. See discussion infra Section II.O.
132 See, e.g., 17 CFR 39.3(a)(5) (setting forth those
portions of DCO Registration Applications that are
considered public information).

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customers, and the regulators of such
members and customers, notice of, and
time to take such actions as these
entities may deem appropriate in light
of, the DCO’s decision to rescind its
election. As discussed above, the
Commission proposes that a SIDCO
should be required to comply with the
Subpart C provisions unless and until
the SIDCO’s designation as systemically
important is rescinded by the
Council.133
As proposed, the rescission of a
DCO’s election to become subject to
Subpart C would become effective on
the date specified by the Subpart C DCO
in its notice of intent to rescind the
Subpart C election, except that the
rescission could not become effective
any earlier than 90 days after the date
the notice of intent to rescind is filed
with the Commission. This proposed
90-day period is necessary to provide
banks and other entities that wish to
limit their cleared transactions to
clearing solely through a QCCP (e.g.,
because of the preferential Basel CCP
Capital Requirements applicable to
exposures to derivatives cleared through
a QCCP) sufficient time to transfer their
business to another Subpart C DCO or
SIDCO. The Subpart C DCO would be
required to comply with all of the
provisions of Subpart C until such
rescission is effective. The Commission
also proposes requiring that the notice
of intent to rescind include a
certification that the Subpart C DCO has
complied with and will comply with the
notice requirements set forth in
proposed regulation 39.31(e)(3).
Proposed regulation 39.31(e)(3)(i)
would require a Subpart C DCO that
files a notice of intent to rescind to
provide periodic notices to each of its
clearing members, and to have rules in
place requiring each of its clearing
members to provide such notices to
each of the clearing member’s
customers. Specifically, a Subpart C
DCO would be required to issue the
following notices to its clearing
members: (1) No later than the filing
with the Commission of the notice of its
intent to rescind its election to be
subject to Subpart C, written notice that
the Subpart C DCO intends to file such
notice and the date that the rescission
is intended to take effect, and (2) on the
effective date of the rescission of its
election to be subject to Subpart C,
written notice that the rescission has
become effective. These notices appear
necessary to ensure that the Subpart C
133 See 12 CFR 1320.13(b) (procedure for the
Council to rescind a designation of systemic
importance for a systemically important financial
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DCO’s clearing members and customers
are afforded sufficient time to consider
and react to the implications of the
Subpart C DCO’s rescission of its
election to be subject to Subpart C.
Proposed regulation 39.31(e)(3)(ii)
would also require a Subpart C DCO to:
(1) No later than the date it files a notice
of its intent to rescind its election to be
subject to Subpart C, provide notice to
the general public of its intent to rescind
such election; (2) on the effective date
of the rescission of its election to be
subject to Subpart C, provide written
notice to the general public that the
rescission has become effective; and (3)
remove all references to its Subpart C
DCO (and QCCP) status on its Web site
and in all other materials that it
provides to its clearing members and
customers, other market participants, or
members of the public. As discussed
herein, because of the potential capital
impact of transacting through a
clearinghouse that is not a QCCP, these
public notices would appear necessary
to ensure that market participants are
afforded sufficient time to consider and
react to a Subpart C DCO’s rescission of
its election to be subject to Subpart C.
However, the Commission proposes that
the notices to the general public
required by this subsection may be
accomplished through publication on
the Subpart C DCO’s Web site.
In addition, the employees and
representatives of the Subpart C DCO
would be prohibited by proposed
regulation 39.31(e)(3)(iii) from making
any reference to the organization as a
Subpart C DCO (or QCCP) on and after
the date that the notice of its intent to
rescind its election to become subject to
Subpart C is filed. Because the QCCP
recognition that accompanies Subpart C
DCO status provides significant benefits
to those transacting through a Subpart C
DCO, it would be inappropriate and
misleading to permit a DCO to hold
itself out as a Subpart C DCO (or QCCP)
once it has filed a notice of intention to
rescind that status, even though the
rescission is not immediately effective.
Proposed regulation 39.31(e)(4)
provides that the rescission of a DCO’s
election to be subject to Subpart C
would not affect the authority of the
Commission concerning any activities
or events occurring during the time that
the DCO maintained its status as a
Subpart C DCO. That is, the Subpart C
DCO is continually obligated to, and
would be subject to enforcement action
for failure to, comply with the Subpart
C provisions during the time that it was
subject to Subpart C and maintained its
Subpart C DCO status.
Proposed regulation 39.31(f) would
provide that a SIDCO that is registered

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with the Commission, but whose
designation of systemic importance is
rescinded by the Council, shall
immediately be deemed to be a Subpart
C DCO. Such Subpart C DCO would be
subject to the Subpart C provisions
unless and until it elects to rescind its
status as a Subpart C DCO.
The Commission requests comment
on all aspects of proposed regulation
39.31 including, without limitation, the
following:
(1) All aspects of the proposed
Subpart C election eligibility
requirements including, without
limitation, the appropriateness of
permitting DCO Applicants to request to
become subject to Subpart C at the time
of filing their Registration Applications.
If DCO Applicants should not be
permitted to request to become subject
to Subpart C at the time of filing their
Registration Applications, what would
be the basis for such prohibition and
what would be a suitable waiting period
after registration with the Commission
for making a Subpart C Election Form
filing?
(2) All aspects of the proposed
Subpart C Election Form including,
without limitation, the following:
(a) The elections and certifications
contained therein and the disclosures
and exhibits required;
(b) whether DCOs and DCO
Applicants should be permitted to
amend or supplement their Subpart C
Election Form; and
(c) possible incentives to encourage
DCOs and DCO Applicants to file
Subpart C Election Forms that are
accurate and complete at the time of
filing, in order to avoid amendments,
supplements and withdrawals.
(3) Whether the Commission should
require the Subpart C Election Form
certifications to be made under penalty
of perjury.
(4) All aspects of the proposed
election and withdrawal procedures
applicable to DCOs including, without
limitation, the following:
(a) The appropriateness of permitting
a DCO to designate the effective date of
its status as a Subpart C DCO that is
subject to the provisions of Subpart C;
(b) The appropriateness of the tenbusiness-day waiting period prior to a
DCO’s status as a Subpart C DCO
becoming effective, any suggested
alternative time frame, and the reasons
why such alternatives would be
preferable; and
(c) The circumstances under which it
would be appropriate for the
Commission to provide written
acknowledgement of receipt of the
Subpart C Election Form and/or the
effective date of the DCO’s Subpart C

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DCO status, and the form of such
acknowledgment.
(5) All aspects of the proposed
election and withdrawal procedures
applicable to DCO Applicants
including, without limitation, the
following:
(a) The prohibition against approving
a Registration Application if a related
Subpart C Election Form is pending and
the Commission has determined that the
DCO Applicant’s request to become
subject to Subpart C should not take
effect;
(b) The circumstances under which it
may be appropriate for the Commission
to approve a Registration Application,
but to stay or deny an election to
become subject to Subpart C;
(c) If the Commission were to approve
a Registration Application, but deny an
election to become subject to Subpart C,
whether the DCO Applicant should be
required to wait a particular amount of
time (and if so, what amount of time
would be appropriate) before being
permitted to elect to become subject to
Subpart C pursuant to proposed
39.31(b);
(d) If an election to become subject to
Subpart C could be stayed when a
Registration Application is approved,
whether the stay should be limited to a
particular time period (and if so, what
time period) after which the election
must be permitted to take effect or be
denied; and
(e) Any incentives, including but not
limited to any waiting period after
registration for eligibility to elect to
become a Subpart C DCO, to encourage
DCO Applicants to submit their Subpart
C Election Form with their Registration
Applications.
(6) The circumstances under which a
DCO or DCO Applicant should be
permitted to withdraw its Subpart C
Election Form.
(7) All aspects of the proposed
procedures for rescinding an election to
become subject to Subpart C including,
without limitation, the following:
(a) The information that must be
contained with the notice of intent to
rescind;
(b) The benefits and burden of the
mandatory 90-day waiting period
between the filing of the notice of intent
to rescind and the date the rescission is
effective;
(c) The timing, content and methods,
and the costs and benefits, of providing
the required notices to clearing
members, the customers of clearing
members, and the general public;
(d) The requirement to remove and
refrain from references to the DCO as a
Subpart C DCO (and QCCP) and the
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(e) The burden of a Subpart C DCO’s
rescission on bank clearing members
and the bank customers of such Subpart
C DCO’s clearing members, including
the costs associated with unwinding
and/or transferring positions; and
(f) Whether any alternative or
additional conditions should be
required of a Subpart C DCO beyond the
proposed 90-day waiting period (and if
so what alternative or additional
conditions would be appropriate). For
example, is 90 days sufficient time for
clearing members and their customers to
take such action as they may deem
appropriate in light of such rescission?
(8) Any alternative approach to
permitting a DCO or DCO Applicant to
elect to become subject to Subpart C.
(9) The provision that a SIDCO whose
status as a designated financial market
utility is rescinded by the Financial
Stability Oversight Council, be
immediately deemed to be a Subpart C
DCO, pending an election by the former
SIDCO to rescind Subpart C DCO status.
(10) What additional disclosures
should the Commission require or what
other measures should the Commission
take to help ensure that Subpart C DCOs
obtain QCCP status?
(11) The costs and potential benefits
resulting from or arising out of,
permitting a DCO to elect to become
subject to the provisions of Subpart C,
any aspect of the procedures for
allowing such election under proposed
regulation 39.31, and any aspect of any
suggested alternative procedures.
For each comment submitted, the
Commission requests that each
commenter please provide detailed
rationale supporting the response, as
well as quantitative data where
practicable, particularly with respect to
estimates of costs and benefits.
D. Regulation 39.32 (Governance for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
The Commission proposes to add
regulation 39.32 in order to implement
DCO Core Principles O (Governance
Fitness Standards), P (Conflicts of
Interest), and Q (Composition of
Governing Boards) for SIDCOs and
Subpart C DCOs in a manner that is
consistent with PFMI Principle 2
(Governance).134
134 In 2010 and 2011, the Commission proposed
regulations concerning the governance of DCOs (the
‘‘2010/2011 Proposals’’). See Requirements for
Derivatives Clearing Organizations, Designated
Contract Markets, and Swap Execution Facilities
Regarding the Mitigation of Conflicts of Interest, 75
FR 63732 (Oct. 18, 2010); see also Governance
Requirements for Derivatives Clearing
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As discussed above, DCO Core
Principle O states that each DCO must
establish governance arrangements that
are transparent to fulfill public interest
requirements and to permit the
consideration of the views of owners
and participants.135 DCO Core Principle
O also requires each DCO to establish
and enforce appropriate fitness
standards for (i) directors, (ii) members
of any disciplinary committee, (iii)
members of the DCO, (iv) any other
individual or entity with direct access to
the settlement or clearing activities of
the DCO, and (v) any party affiliated
with any entity mentioned in (i)–(v)
above. In addition, DCO Core Principle
P requires each DCO to establish and
enforce rules to minimize conflicts of
interest in the decision making process
of the DCO, and DCO Core Principle Q
states that each DCO must ensure that
the composition of the governing board
or committee of the DCO includes
market participants. These core
principles are substantively similar to
PFMI Principle 2, which states that a
CCP ‘‘should have governance
arrangements that are clear and
transparent, promote the safety and
efficiency of [the CCP], and support the
stability of the broader financial system,
other relevant public interest
considerations, and the objectives of
relevant stakeholders.’’ Additionally,
under PFMI Principle 2, a CCP should
have procedures for managing conflicts
of interest among board members and
board members and managers should be
required have ‘‘appropriate skills,’’
‘‘incentives,’’ and ‘‘experience.’’ 136
The governance requirements set forth
in proposed regulation 39.32 are
designed to enhance risk management
and controls by promoting fitness
standards for directors and managers,
promoting transparency of governance
arrangements, and making sure that the
interests of a SIDCO’s or Subpart C
DCO’s clearing members and, where
relevant, customers are taken into
account. Because of the potential impact
that a SIDCO’s failure could have on the
U.S. financial markets, the Commission
is proposing these requirements for
SIDCOs. Moreover, it would be
beneficial to Subpart C DCOs, their
members and customers, and the
financial system generally to apply
these standards to Subpart C DCOs.
Swap Execution Facilities, 76 FR 722 (Jan. 8, 2011).
The Commission notes that the regulations
contained in the 2010/2011 Proposals are the
subject of a separate rulemaking and, as such, the
Commission does not intend to address or include
those regulations in this rulemaking.
135 See supra Section I.D.6.
136 PFMIs at Principle 2, K.C. 4–5.

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Specifically, subsection (a) (General
rules) would require a SIDCO or Subpart
C DCO to establish governance
arrangements that: (1) Are written, clear
and transparent, place a high priority on
the safety and efficiency of the SIDCO
or Subpart C DCO, and explicitly
support the stability of the broader
financial system and other relevant
public interest considerations; (2)
ensure that the design, rules, overall
strategy, and major decisions of the
SIDCO or Subpart C DCO appropriately
reflect the legitimate interests of
clearing members, customers of clearing
members, and other relevant
stakeholders; and (3) disclose, to an
extent consistent with other statutory
and regulatory requirements on
confidentiality and disclosure: (i) Major
decisions of the board of directors to
clearing members, other relevant
stakeholders, and to the Commission,
and (ii) major decisions of the board of
directors having a broad market impact
to the public.137
Subsection (b) (Governance
arrangements) would require the rules
and procedures of a SIDCO or Subpart
C DCO to: (1) Describe the SIDCO’s or
Subpart C DCO’s management structure;
(2) clearly specify the roles and
responsibilities of the board of directors
and its committees, including the
establishment of a clear and
documented risk management
framework; (3) clearly specify the roles
and responsibilities of management; (4)
establish procedures for managing
conflicts of interest among board
members; and (5) assign responsibility
and accountability for risk decisions
and for implementing rules concerning
default, recovery, and wind-down.
Subsection (c) (Fitness standards for
the board of directors and management)
would require that board members and
managers have the appropriate
experience, skills, incentives and
integrity; risk management and internal
control personnel have sufficient
independence, authority, resources and
access to the board of directors; and that
the board of directors include members
who are not executives, officers or
employees of the SIDCO or Subpart C
DCO or of their affiliates.
The Commission requests comment
on all aspects of these proposals. The
Commission is particularly interested in
the following: In light of the potential
impact that a SIDCO’s failure could
have on the U.S. financial system,
would compliance with proposed
137 The provisions concerning transparency
describe which information, including the
identities of board members, should be disclosed to
the public and/or the Commission.

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regulation 39.32 reduce systemic risks?
Would applying proposed regulation
39.32 to SIDCOs and to Subpart C DCOs
contribute to the goals articulated in the
Dodd-Frank Act, particularly the goals
of Titles VII and VIII of the Dodd-Frank
Act? If so, in what ways? If not, why
not? What alternatives, if any, to
proposed regulation 39.32 would be
more effective in reducing systemic risk
or accomplishing the goals articulated
in the Dodd-Frank Act? Is proposed
regulation 39.32 consistent with the
PFMIs? If not, what changes need to be
made to achieve such consistency?
What alternatives to proposed
regulation 39.32, if any, would be more
effective or efficient for achieving
consistency with the standards set forth
by the PFMIs? Can proposed regulation
39.32 be effectively implemented and
complied with? If not, what changes can
be made to permit effective
implementation and compliance? What
are the potential benefits and costs
resulting from, or arising out of,
requiring SIDCOs to comply with
regulation 39.32? The Commission also
requests comment on the potential costs
and benefits resulting from, or arising
out of, requiring Subpart C DCOs to
comply with regulation 39.32. In
considering costs and benefits,
commenters are requested to address the
effect of the proposed regulation not
only on a DCO, but also on the DCO’s
clearing members, the customers of
clearing members, and the financial
system more broadly. The Commission
requests that, where possible,
commenters provide quantitative data in
their comments, particularly with
respect to estimates of costs and
benefits. The Commission requests that
commenters include a detailed
description of any alternatives to
proposed regulation 39.32 and estimates
of the costs and benefits of such
alternatives.
E. Regulation 39.33 (Financial
Resources Requirements for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
In 2013, the Commission finalized
financial resource requirements for
SIDCOs in a manner that parallels the
financial resources standard in Principle
4 of the PFMIs.138 Regulation 39.29
requires a SIDCO that is systemically
important in multiple jurisdictions, or
that is involved in activities with a more
complex risk profile, to meet a Cover
Two requirement, i.e. financial
resources sufficient to enable it to meet
its financial obligations to its clearing
138 See

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members notwithstanding a default by
the two clearing members creating the
largest combined financial exposure in
extreme but plausible market
conditions. Moreover, where a clearing
member controls another clearing
member or is under common control
with another clearing member,
regulation 39.29 also requires SIDCOs to
treat affiliated clearing members as a
single clearing member for the purposes
of the Cover Two requirement. In
addition, regulation 39.29 prohibits a
SIDCO from using assessments as a
financial resource to meet this Cover
Two standard.
The Commission proposes to further
amend regulation 39.29 to enhance
financial resources requirements for
SIDCOs and Subpart C DCOs and to
achieve consistency with the relevant
provisions of the PFMIs, in particular
Principle 4 and Principle 7.
The Commission first proposes to
renumber existing regulation 39.29 to
39.33 and to apply the requirements set
forth therein to Subpart C DCOs. The
Commission further proposes, for
purposes of organization, deleting from
paragraph (a)(1) the requirement that,
where a clearing member controls
another clearing member or is under
common control with another clearing
member, a SIDCO treat affiliated
clearing members as a single clearing
member (the ‘‘Clearing Member
Aggregation Requirement’’). The
Commission proposes to include such
language in new paragraph (a)(4) to
clarify that the Clearing Member
Aggregation Requirement applies when
a SIDCO or Subpart C DCO calculates its
financial resources requirements under
regulation 39.33(a) as well as its
liquidity resources requirements under
regulation 39.33(c).
The Commission also proposes
amending paragraph (a) to state that the
Commission shall, if it deems
appropriate, determine whether a
SIDCO or Subpart C DCO is systemically
important in multiple jurisdictions. In
making this determination, the
Commission would, in order to limit
such determinations to appropriate
cases, review whether another
jurisdiction had determined the SIDCO
or Subpart C DCO to be systemically
important according to a designations
process that considers whether the
foreseeable effects of a failure or
disruption of the derivatives clearing
organization could threaten the stability
of each relevant jurisdiction’s financial
system. In addition, the Commission
proposes amending paragraph (a) to
state that the Commission shall also
determine, if it deems appropriate,
whether any of the activities of a SIDCO

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or Subpart C DCO, in addition to
clearing credit default swaps, credit
default futures, and any derivatives that
reference either, has a more complex
risk profile and may take into
consideration characteristics such as
non-linear and discrete jump-to-default
price changes.139 In addition and in
light of the proposed liquidity
provisions discussed below, the
Commission proposes a technical
clarification to paragraph (a)(1) to make
clear that such a SIDCO or Subpart C
DCO must meet its ‘‘credit exposure’’
(rather than ‘‘financial obligations’’) to
its clearing members notwithstanding a
default by the two clearing members
creating the largest ‘‘aggregate credit’’
(rather than ‘‘combined financial’’)
exposure in extreme but plausible
market conditions. The Commission
also proposes amending paragraph (b) to
clarify that the prohibition on including
assessments as a financial resource
applies to calculating financial
resources needed to cover the default of
the largest and, where applicable,
second largest clearing member, in
extreme but plausible circumstances.140
The Commission proposes adding
paragraphs (c), (d), and (e) to address
the liquidity of SIDCOs’ and Subpart C
DCOs’ financial resources. These new
paragraphs are intended to address the
gaps between current part 39
requirements and standards set forth in
Principle 7.141
139 The Commission’s proposed amendment to
regulation 140.94(a) would delegate the authority to
make these determinations to the Director of the
Division of Clearing and Risk.
140 The preamble to the SIDCO Final Rule
adopting release made clear that paragraph (b)
applied to both Cover One and Cover Two, but the
Commission has decided to add clarifying language
to the regulation text. See generally SIDCO Final
Rule.
141 As discussed above in Section I.E.6, Principle
7, K.C. 2 requires a CCP to measure, monitor, and
manage liquidity risk effectively. This includes the
CCP maintaining sufficient liquid resources in all
relevant currencies in order to effect same-day and,
where applicable, intraday and multiday settlement
of payment obligations in a wide range of potential
stress scenarios, including the default of the
participant that would create the largest aggregate
payment obligations in extreme but plausible
market conditions. In addition, Principle 7, K. C. 5
limits a CCP to counting only certain qualifying
liquid resources for the purpose of meeting its
financial resources requirement. These resources
include: Cash in the currency of the requisite
obligations, held either at the central bank of issue
or at a creditworthy commercial bank; committed
lines of credit; or high quality, liquid, general
obligations of a sovereign nation. In addition,
Principle 7, K. C. 4 states that a CCP that is
systemically important in multiple jurisdictions or
that is involved in activities with a more complex
risk profile should consider maintaining sufficient
qualifying liquid resources to meet the default of
the two participants that would create the largest
aggregate payment obligations in such
circumstances. Principle 7, K. C. 7 also requires a
CCP to monitor its liquidity providers, including

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Proposed paragraph (c)(1) would
require a SIDCO or Subpart C DCO to
maintain eligible liquidity resources
that will enable the SIDCO or Subpart
C DCO to meet its intraday, same-day,
and multiday settlement obligations, as
defined in regulation 39.14(a), with a
high degree of confidence under a wide
range of stress scenarios, including the
default of the member creating the
largest liquidity requirements under
extreme but plausible circumstances.
Maintaining resources that enable the
DCO to meet these obligations will help
prevent a SIDCO or Subpart C DCO from
defaulting on its obligations to nondefaulting clearing members, which is
particularly important for a SIDCO
because of the potential impact that the
failure of a SIDCO could have on the
U.S. financial markets.
Proposed paragraph (c)(2) would
require a SIDCO or Subpart C DCO to
maintain liquidity resources that are
sufficient to satisfy the obligations
required by new paragraph (c)(1) in all
relevant currencies for which the SIDCO
or Subpart C DCO has settlement
obligations to its clearing members. A
SIDCO should be able promptly to meet
its obligations in each relevant currency.
If a SIDCO has sufficient funds to meet
an obligation, but the funds are not in
the correct currency, then the SIDCO
cannot meet that obligation in a timely
manner, which could lead to a
disruption of the SIDCO’s services. Such
disruption could, in turn, have a
significant impact on the financial
stability of the U.S. economy.
Proposed paragraph (c)(3) would limit
a SIDCO or Subpart C DCO to using only
certain types of liquidity resources to
satisfy the minimum liquidity
requirement set forth in proposed
paragraph (c)(1).142 Among these
‘‘qualifying liquidity resources’’ are
‘‘committed lines of credit,’’
‘‘committed foreign exchange swaps,’’
and ‘‘committed repurchase
agreements.’’ ‘‘Committed’’ is intended
to connote a legally binding contract
under which a liquidity provider agrees
to provide the relevant liquidity
resource without delay or further
evaluation of the DCO’s
clearing members, by undertaking due diligence to
confirm that they have sufficient information to
understand and manage their liquidity risks and
have the capacity to perform as required under their
commitments to the CCP.
142 In determining whether the liquidity resources
that are eligible under paragraph (c)(3) are sufficient
to meet the obligation specified under paragraph
(c)(1) (resources that ‘‘enable’’ the DCO to meet its
settlement obligations), it is important to avoid
double counting. For example, one may not count
both a committed repurchase arrangement and U.S.
Treasury Bills that would be used to collateralize
that arrangement.

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creditworthiness, e.g., a line of credit
that cannot be withdrawn at the election
of the liquidity provider during times of
financial stress, or in the event of the
default of a member of the SIDCO or
Subpart C DCO.143 The proposed list of
these resources is consistent with those
set forth in Principle 7. Also consistent
with Principle 7, proposed paragraph
(c)(1)(ii) would require a SIDCO or
Subpart C DCO that is systemically
important in multiple jurisdictions, or
that is involved in activities with a more
complex risk profile, to consider
maintaining eligible liquidity resources
that, at a minimum, will enable it to
meet its intraday, same-day, and
multiday settlement obligations, stress
scenarios that include a default of the
two clearing members creating the
largest aggregate liquidity obligation for
the DCO in extreme but plausible
market conditions. The financial
integrity of a SIDCOs and or Subpart C
DCOs might be enhanced if it considers
meeting this enhanced standard.
Under proposed paragraph (c)(3)(ii), a
SIDCO or Subpart C DCO would be
required to take appropriate steps to
verify that its qualifying liquidity
arrangements do not include material
adverse change provisions and are
enforceable, and will be highly reliable,
even in extreme but plausible market
conditions. This requirement is
consistent with Principle 7.
Also consistent with Principle 7,
under proposed paragraph (c)(4), if a
SIDCO or Subpart C DCO maintains
liquid financial resources in addition to
those required to satisfy the Cover One
requirement, then those resources
should be in the form of assets that are
likely to be saleable with proceeds
available promptly or acceptable as
collateral for lines of credit, swaps, or
repurchase agreements on an ad hoc
basis. In addition, Principle 7 provides
and proposed paragraph 39.33(c)(4)
requires that a SIDCO or Subpart C DCO
should consider maintaining collateral
with low credit, liquidity, and market
risks that is typically accepted by a
central bank of issue for any currency in
which it may have settlement
obligations, but shall not assume the
availability of emergency central bank
credit as a part of its liquidity plan.144
143 Times of financial stress, and the event of the
default of a member of the DCO are, of course, the
times when reliable liquidity arrangements are most
needed.
144 It should be noted that the requirement of
proposed paragraph (c)(4) that a SIDCO or Subpart
C DCO consider maintaining certain types of
collateral, like the requirement of proposed
paragraph (c)(1)(ii), does not include a requirement
as to the decision to be made following such
consideration.

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These provisions are designed to
enhance the financial condition of
SIDCOs and Subpart C DCOs and help
reinforce stability.145
Pursuant to proposed paragraphs
(d)(1)–(2), a SIDCO or Subpart C DCO
would be required to monitor its
liquidity providers in a manner
consistent with Principle 7. Proposed
paragraph (d)(1) would define ‘‘liquidity
provider’’ to mean any of the following:
(i) A depository institution, a U.S.
branch and agency of a foreign banking
organization, a trust company, or a
syndicate of depository institutions,
U.S. branches and agencies of foreign
banking organizations, or a trust
companies providing a line of credit,
foreign exchange swap facility or
repurchase facility to the SIDCO or
Subpart C DCO; and (ii) Any other
counterparty relied upon by a SIDCO or
Subpart C DCO to meet its minimum
liquidity resources requirement under
paragraph (c) of this section. Moreover,
under proposed paragraph (d)(5), a
SIDCO with access to accounts and
services at a Federal Reserve Bank is
encouraged to use those services, where
practical, to enhance its management of
liquidity risk.146 In addition, proposed
paragraph (d)(4) would require a SIDCO
or Subpart C DCO to regularly test its
procedures for accessing its liquidity
resources. Finally, pursuant to new
subsection (e) and consistent with
Principle 4, a SIDCO or Subpart C DCO
would be required to document its
supporting rationale for, and have
appropriate governance arrangements
relating to, the amount of total financial
resources it maintains pursuant to
regulation 39.33(a) and the amount of
total liquidity resources it maintains
pursuant to regulation 39.33(c).147
The Commission requests comment
on all aspects of proposed regulation
39.33. The Commission is particularly
interested in the following:
145 See generally Financial Stability Oversight
Council 2012 Annual Report, Appendix A at 163
(finding that ‘‘the contagion effect of a CME failure
could impose material financial losses on CME’s
clearing members and other market participants
(such as customers) and could lead to increased
liquidity demands and credit problems across
financial institutions, especially those that are
active in the futures and options markets.’’).
146 Under Section 806(a) of the Dodd-Frank Act,
12 U.S.C. 5465(a), the Board may authorize a
Federal Reserve Bank to establish and maintain an
account for an FMU, which, as described above in
Section I.B., includes a SIDCO. A SIDCO with
access to accounts and services at a Federal Reserve
Bank would be required to comply with related
rules published by the Board of Governors of the
Federal Reserve System. See generally Financial
Market Utilities, 78 FR 14024 (Mar. 4, 2013)
(proposal by the Board of rules to govern accounts
held by designated FMUs).
147 This provision is consistent with PFMI
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Are the proposed considerations in
paragraph (a)(2) for determining
whether a DCO is systemically
important in multiple jurisdictions and
in paragraph (a)(3) for determining
whether it is engaged in activities with
a more complex risk profile workable?
Should alternative considerations be
used?
In proposed paragraph (d)(4), should
the Commission specify the frequency
with which a SIDCO or Subpart C DCO
must test its procedures for accessing its
liquidity resources? In proposed
paragraph (c)(3)(i)(E)(1) and (c)(3)(ii),
the Commission permits highly
marketable collateral to be used as a
liquidity resource provided that such
collateral is held in custody and
investments that are readily available
and convertible into cash with
prearranged and highly reliable funding
arrangements, even in extreme but
plausible market conditions. As such,
the Commission proposes to permit as a
liquidity resource obligations of the
United States Treasury or high quality,
liquid, general obligations of a sovereign
nation provided that such obligations
are readily available and convertible
into cash pursuant to prearranged and
highly reliable funding arrangements.
This is consistent with the language of
the PFMIs.148 Should the requirement
be for funding arrangements that are
committed? The Commission requests
comment on whether there are any
highly reliable funding arrangements
that meet the requirements of the
proposed regulations that are not
committed funding arrangements.
In addition, in light of the potential
impact that a SIDCO’s failure could
have on the U.S. financial system,
would compliance with proposed
regulation 39.33 reduce systemic risks?
Would proposed regulation 39.33
contribute to the goals articulated in the
Dodd-Frank Act, particularly the goals
of Titles VII and VIII of the Dodd-Frank
Act? If so, in what ways? If not, why
not? What alternatives, if any, to
proposed regulation 39.33 would be
more effective in reducing systemic risk
or accomplishing the goals articulated
in the Dodd-Frank Act? Is proposed
regulation 39.33 consistent with the
PFMIs? Are there more effective or
efficient means for achieving
consistency with the liquidity standards
set forth in Principle 7? If not, what
changes need to be made to achieve
such consistency? What alternatives to
proposed regulation 39.33, if any, would
be more effective or efficient for
achieving consistency with the
standards set forth by the PFMIs? The

Commission requests that commenters
include a detailed description of any
such alternatives and estimates of the
costs and benefits of such alternatives.
Should regulation 39.33 provide that
only a SIDCO can be deemed
systemically important in multiple
jurisdictions? Can proposed regulation
39.33 be effectively implemented and
complied with? If not, what changes can
be made to permit effective
implementation and compliance? What
are the potential costs and benefits
resulting from, or arising out of,
requiring a SIDCO to comply with
proposed regulation 39.33? What are the
potential costs and benefits resulting
from, or arising out of, requiring Subpart
C DCOs to comply with proposed
regulation 39.33? In considering costs
and benefits, commenters are requested
to address the effect of the proposed
regulation not only on a DCO, but also
on the DCO’s clearing members, the
customers of clearing members, and the
financial system more broadly. The
Commission requests that, where
possible, commenters provide
quantitative data in their comments,
particularly with respect to estimates of
costs and benefits.
F. Regulation 39.34 (System Safeguards
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
In 2013, the Commission finalized
regulation 39.30, which enhanced
system safeguards requirements for
SIDCOs for business continuity and
disaster recovery, and included a twohour recovery time objective (‘‘RTO’’)
for SIDCOs.149 As discussed in the
adopting release, the two-hour RTO is
consistent with Principle 17 of the
PFMIs and increases the soundness and
operating resiliency of the SIDCO,
which in turn, increases the overall
stability of the U.S. financial markets.150
The Commission proposes renumbering
regulation 39.30 as regulation 39.34 and
amending the regulation to cover
SIDCOs and Subpart C DCOs as well as
a technical correction to paragraph (b) to
make clear that subparagraphs (1), (2),
and (3) concern each activity necessary
for the daily processing, clearing, and
settlement of existing and new
contracts. Finally, to provide flexibility
to address the practical burdens of
obtaining the necessary physical and
technological resources, and of
organizing human resources, as
appropriate to implement a two-hour
RTO, the Commission proposes
amending the regulation to allow the
149 See

148 See

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Commission to, upon application, grant
newly designated SIDCOs and Subpart
C DCOs up to one year to comply with
the provisions of regulation 39.34.
The Commission requests comment
on all aspects of proposed regulation
39.34. The Commission is particularly
interested in the following: Would
applying proposed regulation 39.34 to
Subpart C DCOs contribute to the goals
articulated in the Dodd-Frank Act,
particularly the goals of Titles VII and
VIII of the Dodd-Frank Act? If so, in
what ways? If not, why not? What
alternatives, if any, to proposed
regulation 39.34 would be more
effective in reducing systemic risk or
accomplishing the goals articulated in
the Dodd-Frank Act? Is proposed
regulation 39.34 consistent with the
PFMIs? If not, what changes need to be
made to achieve such consistency?
What alternatives to proposed
regulation 39.34, if any, would be more
effective or efficient for achieving
consistency with the standards set forth
by the PFMIs? The Commission requests
that commenters include a detailed
description of any such alternatives and
estimates of the costs and benefits of
such alternatives. Can proposed
regulation 39.34 be effectively
implemented and complied with? If not,
what changes can be made to permit
effective implementation and
compliance? What are the potential
costs and benefits resulting from, or
arising out of, requiring a SIDCO to
comply with proposed regulation 39.34?
What are the potential costs and benefits
resulting from, or arising out of,
requiring Subpart C DCOs to comply
with proposed regulation 39.34? In
considering costs and benefits,
commenters are requested to address the
effect of the proposed regulation not
only on a DCO, but also on the DCO’s
clearing members, the customers of
clearing members, and the financial
system more broadly. The Commission
requests that, where possible,
commenters provide quantitative data in
their comments, particularly with
respect to estimates of costs and
benefits.
G. Regulation 39.35 (Default Rules and
Procedures for Uncovered Credit Losses
or Liquidity Shortfalls (Recovery) for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
The Commission is proposing
regulation 39.35, which adds
requirements pursuant to DCO Core
Principle G, to address certain potential
gaps between Commission regulations

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and Principles 4 and 7.151 In particular,
proposed regulation 39.35 is designed to
protect SIDCOs, Subpart C DCOs, their
members and customers, and the
financial system more broadly by
requiring SIDCOs and Subpart C DCOs
to have plans and procedures to address
credit losses and liquidity shortfalls
beyond their prefunded resources, thus
promoting their ability to promptly
fulfill their obligations and continue to
perform their critical functions.
Regulation 39.16 currently requires a
DCO to adopt procedures permitting it
to take timely action to contain losses
and liquidity pressures and to continue
meeting its obligations in the event of a
default on the obligations of a clearing
member to the DCO.152 Proposed
regulation 39.35 would require SIDCOs
and Subpart C DCOs to adopt additional
procedures to address certain issues
arising from extraordinary stress events,
including the default of one or more
clearing members. Specifically,
consistent with Principle 4 of the
PFMIs, proposed paragraph (a) would
require a SIDCO or Subpart C DCO to
adopt rules and procedures addressing
the following:
1. How the SIDCO or Subpart C DCO
would allocate losses exceeding the financial
resources available to the SIDCO or Subpart
C DCO;
2. How the SIDCO or Subpart C DCO
would arrange for the repayment of any
funds the SIDCO or Subpart C DCO may
borrow; and
3. How the SIDCO or Subpart C DCO
would replenish any financial resources it
may employ during such a stress event, so
that the SIDCO or Subpart C DCO would be
able to continue to operate in a safe and
sound manner.

Consistent with Principle 7 of the
PFMIs, proposed paragraph (b) would
require a SIDCO or Subpart C DCO to
establish rules and procedures enabling
it to promptly meet all of its settlement
obligations, on a same day and, where
appropriate, on an intraday and
multiday basis, in the context of the
occurrence of either or both of the
following scenarios: (i) Following an
individual or combined default
involving one or more clearing
members’ obligations to the SIDCO or
151 DCO Core Principle G requires a DCO to have
rules and procedures ‘‘designed to allow for the
efficient, fair, and safe management of events
during which [clearing] members or participants—
(I) become insolvent; or (II) otherwise default on the
obligations of the members or participants to the
[DCO].’’ Each DCO ‘‘is required to (I) clearly state
the default procedures on the [DCO]; (II) make
publicly available the default rules of the [DCO];
and (III) ensure that the [DCO] may take timely
action—(aa) to contain losses and liquidity
pressures; and (bb) to continue meeting each
obligation of the DCO.’’ See supra Section I.D.3.
152 17 CFR 39.16(c).

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Subpart C DCO or (ii) if there is an
unforeseen liquidity shortfall exceeding
the financial resources of the SIDCO or
Subpart C DCO. Such rules and
procedures should be established ex
ante and may provide for the means of:
increasing available assets (e.g. by using
assessments) and/or reducing the size of
liabilities (e.g. by engaging in variation
margin haircuts or tear-ups); as well as
obtaining liquidity from participants
(e.g. through rules-based repurchase
arrangements); employing a sequenced
application of such tools; and
replenishing any credit and liquidity
resources that may be employed during
a stress event.
Proposed regulation 39.35 addresses
significant consequences that could
result from a clearing member’s default.
Specifically, a DCO might not have
sufficient financial resources following
a clearing member’s default either to
cover the default or to fulfill its
settlement obligations. Similarly, a DCO
may be unable to fulfill its settlement
obligations due to a liquidity shortfall
exceeding its financial resources. In
order to avoid the negative effect on its
clearing members, their customers, and
on the financial system more broadly of
a DCO’s failure promptly to meet its
settlement obligations, it would be
prudent for a DCO to have a recovery
plan that addresses these scenarios and,
given their importance to the U.S.
financial system, it is critical for SIDCOs
to have such plans. In addition, because
this plan would be specified in the
DCO’s rules and/or procedures, it would
be disclosed to clearing members, their
customers, and the broader public. Such
transparency would likely help clearing
members, their customers, and other
market participants properly allocate
capital and other resources as well as
facilitate the development of their own
recovery plans.
The Commission requests comment
on all aspects of these proposals. The
Commission is particularly interested in
the following: In light of the potential
impact that a SIDCO’s failure could
have on the U.S. financial system,
would compliance with proposed
regulation 39.35 reduce systemic risks?
Would proposed regulation 39.35
contribute to the goals articulated in the
Dodd-Frank Act, particularly the goals
of Titles VII and VIII of the Dodd-Frank
Act? If so, in what ways? If not, why
not? What alternatives, if any, to
proposed regulation 39.35 would be
more effective in reducing systemic risk
or accomplishing the goals articulated
in the Dodd-Frank Act? Is proposed
regulation 39.35 consistent with the
PFMIs? If not, what changes need to be
made to achieve such consistency?

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What alternatives to proposed
regulation 39.35, if any, would be more
effective or efficient for achieving
consistency with the standards set forth
by the PFMIs? Can proposed regulation
39.35 be effectively implemented and
complied with? If not, what changes can
be made to permit effective
implementation and compliance? What
are the potential benefits and costs
resulting from, or arising out of,
requiring SIDCOs to comply with
regulation 39.35? The Commission also
requests comment on the potential costs
and benefits resulting from, or arising
out of, requiring Subpart C DCOs to
comply with regulation 39.35. In
considering costs and benefits,
commenters are requested to address the
effect of the proposed regulation not
only on a DCO, but also on the DCO’s
clearing members, the customers of
clearing members, and the financial
system more broadly. The Commission
requests that, where possible,
commenters provide quantitative data in
their comments, particularly with
respect to estimates of costs and
benefits. The Commission requests that
commenters include a detailed
description of any alternatives to
proposed regulation 39.35 and estimates
of the costs and benefits of such
alternatives.

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H. Regulation 39.36 (Risk Management
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
Proposed regulation 39.36 would
include additional risk management
requirements for SIDCOs and Subpart C
DCOs. As noted above, regulation 39.13
establishes the risk management
requirements that a DCO would have to
meet in order to comply with Core
Principle D 153 including, among other
things, specific criteria for stress tests
that a DCO must conduct.154 For
153 DCO Core Principle D requires each DCO to
possess the ability to manage the risks associated
with discharging the responsibilities of the DCO
through the use of appropriate tools and
procedures. It further requires each DCO to measure
its credit exposures to each clearing member not
less than once during each business day and to
monitor each such exposure periodically during the
business day. Core Principle D also requires each
DCO to limit its exposure to potential losses from
defaults by clearing members, through margin
requirements and other risk control mechanisms, to
reduce the risk that its operations would not be
disrupted and that non-defaulting clearing members
would not be exposed to losses that non-defaulting
clearing members cannot anticipate or control.
Finally, Core Principle D requires that the margin
that the DCO requires from each clearing member
be sufficient to cover potential exposures in normal
market conditions, and that each model and
parameter used in setting such margin requirements
be risk-based and reviewed on a regular basis.
154 See supra Section I.D.2.

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example, regulation 39.13(h)(3)(ii)
requires a registered DCO to, ‘‘on a
weekly basis, conduct stress tests with
respect to each clearing member
account, by house origin and by each
customer origin, and each swap
portfolio…under extreme but plausible
market conditions.’’ However, pursuant
to this provision, a DCO has reasonable
discretion in determining the
methodology used to conduct such
stress tests.
The Commission is proposing
regulation 39.36 to address certain
differences between Commission
regulations and Principles 4, 6, 7, and
9.155 In particular, proposed regulation
39.36 would require a SIDCO or Subpart
C DCO to enhance its stress testing
procedures in ways that will make it
more likely that the SIDCO or Subpart
C DCO will be able to understand the
risks posed by its members, so that it
can ensure that the relationship between
its resources and obligations enables it
to meet its obligations promptly.
Specifically, and consistent with
Principle 4, proposed regulation
39.36(a)(1) would require a SIDCO or
Subpart C DCO to perform stress testing,
on a daily basis, of its financial
resources using predetermined
parameters and assumptions. In
addition, proposed regulation
39.36(a)(2) would require a SIDCO or
Subpart C DCO to perform
comprehensive analyses of stress testing
scenarios and underlying parameters to
ascertain that they are appropriate for
determining the SIDCO’s or Subpart C
DCO’s required level of financial
resources in current and evolving
market conditions. Proposed regulation
39.36(a)(3) would also require a SIDCO
or Subpart C DCO to perform the
analyses in proposed regulation
39.36(a)(2) ‘‘at least monthly when
products cleared or markets served
display high volatility, become less
liquid, or when the size or
concentration of positions held by
clearing members increases
significantly.’’ A SIDCO or Subpart C
DCO would also be required to
‘‘evaluate [its] stress testing scenarios,
models, and underlying parameters
more frequently than once a month,’’
where appropriate. For purposes of the
analyses in proposed regulation
39.36(a)(1) and proposed regulation
39.36(a)(2), proposed regulation
39.36(a)(4) would require a SIDCO or
Subpart C DCO to include the following
stress scenarios for both defaulting
clearing members’ positions and
possible price changes in liquidation
155 See discussion of Principles 4 and 6 supra
Sections I.E.4, I.E.5.

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periods: (i) Relevant peak historic price
volatilities; (ii) shifts in other market
factors including, as appropriate, price
determinants and yield curves; (iii)
multiple defaults over various time
horizons; (iv) simultaneous pressures in
funding and asset markets; and (v) a
range of forward-looking stress
scenarios in a variety of extreme but
plausible market conditions. Moreover,
proposed regulation 39.36(a)(5) would
require each SIDCO and Subpart C DCO
to establish procedures for reporting
stress test results to its risk management
committee or board of directors, as
appropriate, and for using the results to
assess the adequacy of, and to adjust the
SIDCO’s or Subpart C DCO’s total
financial resources. Finally, proposed
regulation 39.36(a)(6) would require
each SIDCO and Subpart C DCO to use
the results of its financial resources
stress testing to help make sure it meets
the minimum financial resources
requirement set forth in proposed
regulation 39.33(a).
In addition, and consistent with
Principle 7, the Commission is
proposing stress testing requirements for
liquidity resources that are analogous to
the stress testing requirements for
financial resources in proposed
regulation 39.36(a), with the exception
that the stress testing scenarios required
by proposed regulation 39.36(c)(5)
should consider the following: (i) All
entities that might pose material
liquidity risks to the DCO, including
settlement banks, permitted
depositories, liquidity providers, and
other entities; (ii) intraday and multiday
scenarios, where appropriate; (iii) interlinkages between its clearing members
and the multiple roles that they may
play in in the SIDCO’s or Subpart C
DCO’s risk management (e.g., scenarios
where a clearing member or its affiliate
is also a liquidity provider); and (iv) the
probability of multiple failures and
contagion effect among clearing
members.
Proposed regulation 39.36(c)(7) would
require a SIDCO or Subpart C DCO to
use the results of such stress tests to
make certain that it meets the financial
resources requirement set forth in
regulation 39.33(a), and the liquidity
resources requirements set forth in
regulation 39.33(c). In addition, each
SIDCO and Subpart C DCO would be
required to perform, on an annual basis,
a full validation of its financial risk
management model and its liquid risk
management model.
Proposed paragraphs (a), (c), (d), and
(e) are important because stress testing
scenarios, underlying risk factors that
constitute such scenarios, and the
relationship between different risk

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factors are dynamic, and need to be
updated due to changing market
conditions. For example, use of relative,
instead of absolute, changes in interest
rates may be sufficient in a normal
interest rate environment, but can lead
to nonsensical estimates during low rate
periods. In other words, changes in a
particular risk factor during unusually
volatile periods may be more extreme
than any in the existing scenarios. In
addition, it is important for SIDCOs and
Subpart C DCOs to stress test both their
financial resources and liquidity
resources. While stress testing financial
resources helps SIDCOs and Subpart C
DCOs make sure they have the right
amount, SIDCOs and Subpart C DCOs
need access to liquid assets subject to
arrangements in which they can
promptly be convertible to cash to fulfill
their obligations in a timely manner. As
such, stress testing liquidity resources is
a critical exercise for SIDCOs and
Subpart C DCOs as such testing will
help ensure that SIDCOs and Subpart C
DCOs have enough resources to cover
their obligations at the time and on the
day that such obligations are due.
Moreover, given the significant role
SIDCOs play in the U.S. financial
markets, it would appear that obtaining
an in-depth understanding of potential
liquidity needs through comprehensive
stress testing under a broad range of
scenarios is critical for a SIDCO’s
effective risk management.
As noted above, Principle 6 requires
a CCP’s margin system to take into
account the ‘‘risks and particular
attributes of each product, portfolio and
market that it serves’’ and be calibrated
accordingly.156 In particular, Principle 6
requires a CCP to conduct a ‘‘sensitivity
analysis’’ of its margin system at least
monthly, and, more frequently, when
appropriate. Accordingly, consistent
with the standards set forth in Principle
6, paragraph (c) of proposed regulation
39.36 would require a SIDCO or Subpart
C DCO to conduct a sensitivity analysis
of its margin model at least monthly to
analyze and monitor model performance
and overall margin coverage. Moreover,
paragraph (c) would require the
sensitivity analysis to involve reviewing
a wide range of parameter settings and
assumptions that reflect possible market
conditions in order to understand how
the level of margin coverage might be
affected by highly stressed market
conditions. The parameters and
assumptions used by a SIDCO or
Subpart C DCO would be expected to
capture a variety of historical and
hypothetical conditions, including the
most volatile periods that have been
156 See

supra Section I.E.5.

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experienced by the markets served by
the SIDCO or Subpart C DCO and
extreme changes in the correlations
between prices. In addition, the
sensitivity analysis would be conducted
on both actual and hypothetical
positions, and would include testing of
the abilities of the models or model
components to produce accurate results
using actual or hypothetical datasets
and assessing the impact of different
model parameter settings. The SIDCO or
Subpart C DCO would also be required
to evaluate potential losses in clearing
members’ proprietary positions and,
where appropriate, customer positions.
With respect to SIDCOs and Subpart C
DCOs that are involved in activities
with a more complex risk profile, the
Commission proposes requiring such
SIDCOs and Subpart C DCOs to take
into consideration parameter settings
that reflect the potential impact of the
simultaneous default of two clearing
members and consider the underlying
credit instruments.157 Proposed
regulation 39.36(d) would require a
SIDCO or Subpart C DCO regularly to
conduct an assessment of the theoretical
and empirical properties of its margin
model for all products it clears, and
proposed regulation 39.36(e) would
require a SIDCO or Subpart C DCO to
perform, on an annual basis, a full
validation of its financial risk
management model and its liquid risk
management model. Moreover, under
proposed paragraph (f), and consistent
with Principle 16, custody and
investment arrangements for a
systemically important derivatives
clearing organization’s and subpart C
derivatives clearing organization’s own
funds and assets would be subject to the
same requirements as those specified in
§ 39.15 of this chapter for funds and
assets of clearing members. This
includes establishing standards and
procedures that are designed to protect
and ensure safety as specified in
§ 39.15(a), custody arrangements that
minimize the risk of loss or of delay in
access by the DCO as specified in
§ 39.15(c), and limitation of investments
to instruments with minimal credit,
market, and liquidity risks as specified
in § 39.15(e).
It is vitally important that all DCOs
obtain an in-depth understanding of
their exposure to credit risk. As
financial derivatives markets expand
globally and counterparty credit risk
increases in size and complexity, a
DCO’s ability to assess its exposure to

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credit risk becomes even more critical.
These proposed regulations are
intended to enhance the ability of
SIDCOs and Subpart C DCOs to manage
their risk exposure. Because a SIDCO
plays a significant role in the financial
markets, accurate and dynamic risk
management is critical not only to the
SIDCO, but also to the stability of the
broader U.S. financial system.
Under proposed paragraph (g), and
consistent with Principle 9, a SIDCO or
Subpart C DCO would be required to
monitor, manage, and limit its credit
and liquidity risks arising from its
settlement banks.158 Specifically, a
SIDCO or Subpart C DCO would be
required to establish, and monitor
adherence to, strict criteria for its
settlement banks that take account of,
among other things, their regulation and
supervision, creditworthiness,
capitalization, access to liquidity, and
operational reliability. In addition, a
SIDCO or Subpart C DCO would be
required to monitor and manage the
concentration of credit and liquidity
exposures to its settlement banks. In
order to mitigate both the probability of
being exposed to a settlement bank’s
failure and the potential losses and
liquidity pressures to which it would be
exposed in the event of such a failure,
each SIDCO and Subpart C DCO should,
where reasonable and practicable, use
multiple settlement banks instead of one
and consider using different settlement
banks for different functions, such as
depositing funds, investing funds or
holding liquidity resources.159
The Commission requests comment
on all aspects of proposed regulation
39.36. The Commission is particularly
interested in the following: In light of
the potential impact that a SIDCO’s
failure could have on the U.S. financial
system, would compliance with
proposed regulation 39.36 reduce
systemic risks? Would proposed
regulation 39.36 contribute to the goals
articulated in the Dodd-Frank Act,
particularly the goals of Titles VII and
VIII of the Dodd-Frank Act? If so, in
what ways? If not, why not? What
alternatives, if any, to proposed
regulation 39.36 would be more
effective in reducing systemic risk or
accomplishing the goals articulated in
the Dodd-Frank Act? Is proposed
regulation 39.36 consistent with the
PFMIs? If not, what changes need to be
made to achieve such consistency?
What alternatives to proposed
158 See

discussion of Principle 9 supra Section

I.E.7.
157 See supra Section II.E (discussing ‘‘Cover
Two’’ in connection with revised regulation 39.33
(financial resources)). See generally PFMIs at E.N.
3.6.17.

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159 See PFMIs at E.N. 3.9.5, 3.9.6. These issues
could be avoided by a SIDCO to the extent it uses
Federal Reserve Bank accounts and services
pursuant to proposed regulation 39.33(d)(5).

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regulation 39.36, if any, would be more
effective or efficient for achieving
consistency with the standards set forth
by the PFMIs? Can proposed regulation
39.36 be effectively implemented and
complied with? If not, what changes can
be made to permit effective
implementation and compliance? What
are the potential benefits and costs
resulting from, or arising out of,
requiring SIDCOs to comply with
regulation 39.36? The Commission also
requests comment on the potential costs
and benefits resulting from, or arising
out of, requiring Subpart C DCOs to
comply with regulation 39.36. In
considering costs and benefits,
commenters are requested to address the
effect of the proposed regulation not
only on a DCO, but also on the DCO’s
clearing members, the customers of
clearing members, and the financial
system more broadly. The Commission
requests that, where possible,
commenters provide quantitative data in
their comments, particularly with
respect to estimates of costs and
benefits. The Commission requests that
commenters include a detailed
description of any alternatives to
proposed regulation 39.36 and estimates
of the costs and benefits of such
alternatives.
I. Regulation 39.37 (Additional
Disclosure for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
The Commission is proposing
regulation 39.37 to set forth additional
public disclosure requirements for
SIDCOs and Subpart C DCOs.160 These
requirements are intended to address
differences between current
requirements and PFMI Principles 14
and 23. In particular, proposed
regulation 39.37 is designed to enable
members of SIDCOs and Subpart C
DCOs, their customers, and the general
public to understand the risk of
exposures to such DCOs, and to promote
their ability to evaluate the quality of
such DCOs, thereby enhancing
competition and market discipline.
Specifically, proposed regulation
39.37 would require SIDCOs and
Subpart C DCOs to disclose certain
information to the public and to the
Commission. First, consistent with
Principle 23, a SIDCO or Subpart C DCO
160 Public disclosure requirements for all
registered DCOs are set forth in Regulation 39.21,
which implements DCO Core Principle L (Public
Information), and requires DCOs to provide to
market participants sufficient information to enable
them to identify and evaluate accurately the risks
and costs associated with using the services of the
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would be required to disclose its
responses to the CPSS–IOSCO
Disclosure Framework, discussed in
section II.C.2, above. Further, a SIDCO
or Subpart C DCO would be required to
review and update at least every two
years and following material changes to
the SIDCO’s or Subpart C DCO’s system
or its environment, its responses to the
Disclosure Framework to ensure the
continued accuracy and usefulness of
the responses.161 A material change to
the SIDCO’s or Subpart C DCO’s system
or environment is a change that would
significantly change the accuracy and
usefulness of the SIDCO’s or Subpart C
DCO’s existing responses. Proposed
regulation 39.37 would also require a
SIDCO or Subpart C DCO to disclose,
publicly and to the Commission,
relevant basic data on transaction
volume and values. This requirement is
intended to be consistent with the
Quantitative Information Disclosure that
CPSS–IOSCO are in the process of
developing.162
Also under proposed regulation 39.37,
a SIDCO or Subpart C DCO would be
required, consistent with Principle 14,
to publish its rules, policies, and
procedures describing whether
customer funds are protected on an
individual or omnibus basis and
whether customer funds are subject to
any legal or operational constraints that
may impair the ability of the SIDCO or
Subpart C DCO to segregate or port the
positions and related collateral of a
clearing member’s customers. This
additional transparency, particularly
with respect to information regarding
the protection of customer positions and
related collateral, is important for the
safe and effective transfer of positions
and collateral in a default, resolution or
insolvency scenario.163 The
Commission notes that the ability to
transfer customer positions and
associated collateral may reduce the
need to liquidate positions, which
liquidation could create substantial
losses for customers and further disrupt
the stability of the financial markets
during times of market stress. In
addition, these proposed additional
disclosures will help regulators and
market participants assess SIDCOs and
Subpart C DCOs, particularly with
respect to a SIDCO’s or Subpart C DCO’s
compliance with the PFMIs. Because of
a SIDCO’s importance to the U.S.
financial markets, it would appear that
161 Available at: http://www.bis.org/publ/
cpss106.pdf.
162 See supra section II.C.2. for a discussion of the
Quantitative Information Disclosure (referencing
section 2.5 of the CPSS–IOSCO Disclosure
Framework).
163 See PFMIs at E.N. 3.14.1.

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such public assessment will help
provide comfort to market participants,
which could prove to be a stabilizing
force in times of severe market stress.
The Commission requests comment
on all aspects of these proposals. The
Commission is particularly interested in
the following: In light of the potential
impact that a SIDCO’s failure could
have on the U.S. financial system,
would compliance with proposed
regulation 39.37 reduce systemic risks?
Would proposed regulation 39.37
contribute to the goals articulated in the
Dodd-Frank Act, particularly the goals
of Titles VII and VIII of the Dodd-Frank
Act? If so, in what ways? If not, why
not? What alternatives, if any, to
proposed regulation 39.37 would be
more effective in reducing systemic risk
or accomplishing the goals articulated
in the Dodd-Frank Act? Is proposed
regulation 39.37 consistent with the
PFMIs? If not, what changes need to be
made to achieve such consistency?
What alternatives to proposed
regulation 39.37, if any, would be more
effective or efficient for achieving
consistency with the standards set forth
by the PFMIs? Can proposed regulation
39.37 be effectively implemented and
complied with? If not, what changes can
be made to permit effective
implementation and compliance? What
are the potential benefits and costs
resulting from, or arising out of,
requiring SIDCOs to comply with
regulation 39.37? The Commission also
requests comment on the potential costs
and benefits resulting from, or arising
out of, requiring Subpart C DCOs to
comply with regulation 39.37. In
considering costs and benefits,
commenters are requested to address the
effect of the proposed regulation not
only on a DCO, but also on the DCO’s
clearing members, the customers of
clearing members, and the financial
system more broadly. The Commission
requests that, where possible,
commenters provide quantitative data in
their comments, particularly with
respect to estimates of costs and
benefits. The Commission requests that
commenters include a detailed
description of any alternatives to
proposed regulation 39.37 and estimates
of the costs and benefits of such
alternatives.
J. Regulation 39.38 (Efficiency for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Cearing Organizations)
Consistent with Principle 21,
proposed regulation 39.38 would
require a SIDCO or Subpart C DCO to
design efficiently and effectively its
clearing and settlement arrangements,

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operating structure and procedures,
product scope, and use of technology. In
addition, a SIDCO or Subpart C DCO
would be required to establish clearly
defined goals and objectives that are
measurable and achievable, including
goals with regards to minimum service
levels, risk management expectations,
and business priorities. Moreover, a
SIDCO or Subpart C DCO would be
required to facilitate efficient payment,
clearing, and settlement by
accommodating internationally
accepted communication procedures
and standards. The explanatory notes to
Principle 21 provide that an efficient
CCP has the required resources to
perform its functions 164 and the
efficiency of the CCP depends on the
choice of clearing and settlement
arrangement, operating structure, scope
of products cleared or settled, and
integration of technology and
procedures.165 In addition, the
explanatory notes state that an effective
CCP reliably meets its obligations in a
timely manner and achieves the public
policy goals of safety and efficiency for
participants and the markets it
serves.166 Finally, consistent with
Principle 22, proposed regulation
39.38(d) would require each SIDCO and
Subpart C DCO to facilitate efficient
payment, clearing, and settlement by
accommodating internationally
accepted communication procedures
and standards.
It would appear to be prudent for
SIDCOs and Subpart C DCOs to comply
with such international standards of
efficiency and effectiveness. A SIDCO or
Subpart C DCO that is inefficient or
ineffective could distort financial
activity and market structure, increasing
financial and other risks to the SIDCO’s
or Subpart C DCO’s participants.167
Although there is no DCO Core
Principle specifically directed at
efficiency and effectiveness, furthering
these goals would improve compliance
with Core Principle D (requiring, in
part, that a DCO ensure it has the ability
to manage the risks associated with
discharging its responsibilities through
the use of appropriate tools and
procedures) and Core Principle G
(requiring, in part, that a DCO have
rules and procedures designed to allow
for the efficient, fair, and safe
management of events during which
members or participants become
insolvent or other default).
The Commission requests comment
on all aspects of these proposals. The
164 See

PFMIs at E.N. 3.21.1.
at E.N. 3.21.2.
166 PFMIs at E.N. 3.21.5.
167 PFMIs at E.N. 3.21.1.
165 PFMIs

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Commission is particularly interested in
the following: In light of the potential
impact that a SIDCO’s failure could
have on the U.S. financial system,
would compliance with proposed
regulation 39.38 reduce systemic risks?
Would proposed regulation 39.38
contribute to the goals articulated in the
Dodd-Frank Act, particularly the goals
of Titles VII and VIII of the Dodd-Frank
Act? If so, in what ways? If not, why
not? What alternatives, if any, to
proposed regulation 39.38 would be
more effective in reducing systemic risk
or accomplishing the goals articulated
in the Dodd-Frank Act? Is proposed
regulation 39.38 consistent with the
PFMIs? If not, what changes need to be
made to achieve such consistency?
What alternatives to proposed
regulation 39.38, if any, would be more
effective or efficient for achieving
consistency with the standards set forth
by the PFMIs? Can proposed regulation
39.38 be effectively implemented and
complied with? If not, what changes can
be made to permit effective
implementation and compliance? What
are the potential benefits and costs
resulting from, or arising out of,
requiring SIDCOs to comply with
regulation 39.38? The Commission also
requests comment on the potential costs
and benefits resulting from, or arising
out of, requiring Subpart C DCOs to
comply with regulation 39.38. In
considering costs and benefits,
commenters are requested to address the
effect of the proposed regulation not
only on a DCO, but also on the DCO’s
clearing members, the customers of
clearing members, and the financial
system more broadly. The Commission
requests that, where possible,
commenters provide quantitative data in
their comments, particularly with
respect to estimates of costs and
benefits. The Commission requests that
commenters include a detailed
description of any alternatives to
proposed regulation 39.38 and estimates
of the costs and benefits of such
alternatives.
K. Regulation 39.39 (Recovery and
Wind-Down For Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
The Commission is proposing
regulation 39.39 to require a SIDCO or
Subpart C DCO to maintain viable plans
for recovery and orderly wind-down. In
particular, regulation 39.39 is designed
to protect the members of such DCOs
and their customers, as well as the
financial system more broadly from the
consequences of a disorderly failure of
such a DCO.

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As noted above, Principle 3 requires
a CCP to have a sound risk management
framework for comprehensively
managing legal, credit, liquidity,
operational, and other risks.168 Under
Principle 3, such a framework would
include identifying scenarios that may
prevent the CCP from providing critical
operations and services as a going
concern and would assess the
effectiveness of a full range of options
for recovery or orderly wind-down.
Similarly, Principle 15 requires a CCP to
identify, monitor, and manage its
general business risk and hold sufficient
liquid net assets funded by equity to
cover potential general business losses
so that the CCP can continue operations
and services as a going concern if those
losses materialize.169 Further, these
liquid net assets should, at all times, be
sufficient to allow for recovery or
orderly wind-down of critical
operations and services.170 Although
there is no Core Principle that pertains
directly to the establishment of a
recovery and wind-down plan,
proposed regulation 39.37 promotes
concepts set forth in Core Principles B
(Financial Resources), D (Risk
Management), G (Default Rules and
Procedures), and I (System
Safeguards).171
Accordingly, proposed regulation
39.39 requires a SIDCO or Subpart C
DCO to develop additional plans that
specifically address ‘‘recovery’’ and
‘‘wind-down.’’ The Commission
proposes defining ‘‘recovery’’ as the
actions of a SIDCO or Subpart C DCO,
consistent with its rules, procedures,
and other ex-ante contractual
arrangements, to address any uncovered
credit loss, liquidity shortfall, capital
inadequacy, or business, operational or
other structural weakness, including the
replenishment of any depleted prefunded financial resources and liquidity
arrangements, as necessary to maintain
the SIDCO’s or Subpart C DCO’s
viability as a going concern so that it
can continue to provide its critical
services without requiring the
commencement of an insolvency
proceeding or the use of resolution
powers by the Federal Deposit
Insurance Corporation or any other
relevant resolution authority. The
Commission proposes defining ‘‘winddown’’ as the actions of a SIDCO or
Subpart C DCO to effect the permanent
cessation or sale or transfer of one or
more services. The Commission is also
proposing to add a definition for
168 See

supra Section I.E.3.
supra Section I.E.9.
170 See id.
171 See supra Section I.D.1–4.
169 See

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‘‘general business risk,’’ which would
mean any potential impairment of a
SIDCO’s or Subpart C DCO’s financial
position, as a business concern, as a
consequence of a decline in its revenues
or an increase in its expenses, such that
expenses exceed revenues and result in
a loss that the SIDCO or Subpart C DCO
must charge against capital. In addition,
the Commission proposes defining
‘‘operational risk’’ to mean the risk that
deficiencies in information systems or
internal processes, human errors,
management failures or disruptions
from external events will result in the
reduction, deterioration, or breakdown
of services provided by a SIDCO or
Subpart C DCO. Finally, the
Commission is proposing to define
‘‘unencumbered liquid financial assets’’
to include cash and highly liquid
securities. These proposed definitions
are designed to be consistent with the
meaning of such terms in the PFMIs.
The Commission requests comment as
to whether these definitions are
appropriate. Specifically, the
Commission requests comment on
whether the definition of ‘‘recovery’’ is
appropriate in light of emerging
international consensus.
The Commission is proposing to
require each SIDCO and Subpart C DCO
to maintain viable plans for: (i)
Recovery or orderly wind-down,
necessitated by credit losses or liquidity
shortfalls; and (ii) recovery or orderly
wind-down, necessitated by general
business risk, operational risk, or any
other risk that threatens the SIDCO’s or
Subpart C DCO’s viability as a going
concern. The Commission also proposes
requiring that the recovery and winddown plans of SIDCOs and Subpart C
DCOs meet certain standards, set forth
in proposed subsection (c). Specifically,
the Commission proposes requiring a
SIDCO or Subpart C DCO to identify
scenarios that may potentially prevent it
from being able to provide its critical
operations and services as a going
concern and assess the effectiveness of
a full range of options for recovery or
orderly wind-down. The SIDCO’s or
Subpart C DCO’s plans should also
include procedures for informing the
Commission, as soon as practicable,
when the recovery plan is initiated or
wind-down is pending, as well as
procedures for providing the
Commission and any other relevant
authorities (e.g., the Federal Deposit
Insurance Corporation) with
information necessary for resolution
planning.
Proposed regulation 39.39(d) requires
that the recovery and wind-down plans
of a SIDCO or Subpart C DCO be
supported by certain resources.

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Specifically, in evaluating the resources
available to cover any uncovered credit
losses or liquidity shortfalls as part of its
recovery or wind-down plans
necessitated by credit losses of liquidity
shortfalls, a SIDCO or Subpart C DCO
would be permitted to consider, among
other things, assessments of additional
resources provided for under its rules
that it reasonably expects to collect from
non-defaulting members. In addition, a
SIDCO or Subpart C DCO would be
required to maintain sufficient
unencumbered liquid financial assets,
funded by the equity of its owners, to
implement its recovery or wind-down
plans necessitated by general business
risk, operational risk, or any other risk
that threatens the SIDCO’s or Subpart C
DCO’s viability as a going concern.
Moreover, while the resources required
by regulation 39.11(a)(2) may be
sufficient to maintain a SIDCO’s or
Subpart C DCO’s recovery or winddown plans necessitated by general
business risk, operational risk, or any
other risk that threatens the SIDCO’s or
Subpart C DCO’s viability as a going
concern, a SIDCO or Subpart C DCO
would be required to (i) analyze such
plans, including the particular
circumstances and risks associated with
the SIDCO or Subpart C DCO, and (ii)
maintain any additional resources that
may be necessary to implement such
plans.172 A SIDCO or Subpart C DCO
would be required to comply with
regulation 39.11(e)(2) in allocating
sufficient financial resources to
implement its recovery or wind-down
plans necessitated by general business
risk, operational risk, or any other risk
that threatens the SIDCO’s or Subpart C
DCO’s viability as a going concern.
Moreover, such plans would need to
include evidence and analysis to
support the conclusion that the amount
considered necessary is, in fact,
sufficient to implement them.
Proposed regulation 39.39(d)(3)
would prohibit counting the resources
maintained to meet the requirements of
regulations 39.11(a)(1) and 39.33 as
available, in whole or in part, for uses
other than addressing the default of one
or more clearing members. Further,
proposed regulation 39.39(d)(3) would
prohibit a SIDCO or Subpart C DCO
from counting the same resources as
available to address both its recovery or
orderly wind-down, necessitated by
172 Thus, the requirements of proposed
§ 39.39(d)(2) and existing § 39.11(a)(2) are
overlapping, rather than alternative. A SIDCO or
Subpart C DCO whose plan pursuant to
§ 39.39(b)(2) anticipates completion of wind-down
in three months would nonetheless be held to the
requirement of one year of operating costs specified
in § 39.11(a)(2).

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credit losses or liquidity shortfalls; and
its recovery or orderly wind-down,
necessitated by general business risk,
operational risk, or any other risk that
threatens the SIDCO’s or Subpart C
DCO’s viability as a going concern. In
other words, if a SIDCO or Subpart C
DCO allocates resources, in whole or in
part, to execute its recovery plans
required by proposed regulation
39.39(b)(1), it may not allocate those
same resources, in whole or in part, to
satisfy the requirements of proposed
regulation 39.39(b)(2).173 In addition,
resources may be allocated only to the
extent the use of that resource is not
otherwise limited by the CEA,
Commission regulations, the SIDCO’s or
Subpart C DCO’s rules, or any
contractual arrangements to which the
SIDCO or Subpart C DCO is a party.
Finally, under 39.39(e), a SIDCO or
Subpart C DCO would be required to
maintain viable plans for raising
additional financial resources,
including, where appropriate, capital, in
a scenario in which it is unable, or
virtually unable, to comply with any
financial resource requirements set forth
in part 39. These plans would also have
to be approved by the SIDCO’s or
Subpart C DCO’s board of directors and
be updated regularly.
These proposed regulations are
intended to address certain differences
between existing Commission
regulations and the standards set forth
in the PFMIs. In addition, it would
appear to be necessary for a SIDCO to
maintain and regularly update a
recovery and wind-down plan so as to
reduce or attempt to control the
potential impact a failure or disruption
of the SIDCO’s operations would have
on the stability of the U.S. financial
markets.
The Commission requests comment
on all aspects of these proposals. The
Commission is particularly interested in
the following: In light of the potential
impact that a SIDCO’s failure could
have on the U.S. financial system,
would compliance with proposed
regulation 39.39 reduce systemic risks?
Would proposed regulation 39.39
contribute to the goals articulated in the
Dodd-Frank Act, particularly the goals
of Titles VII and VIII of the Dodd-Frank
Act? If so, in what ways? If not, why
not? What alternatives, if any, to
proposed regulation 39.39 would be
more effective in reducing systemic risk
or accomplishing the goals articulated
in the Dodd-Frank Act? Is proposed
regulation 39.39 consistent with the
PFMIs? If not, what changes need to be
173 This is consistent with the approach taken in
§ 39.11(b)(3).

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Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules
made to achieve such consistency?
What alternatives to proposed
regulation 39.39, if any, would be more
effective or efficient for achieving
consistency with the standards set forth
by the PFMIs? Can proposed regulation
39.39 be effectively implemented and
complied with? If not, what changes can
be made to permit effective
implementation and compliance? What
are the potential benefits and costs
resulting from, or arising out of,
requiring SIDCOs to comply with
regulation 39.39? The Commission also
requests comment on the potential costs
and benefits resulting from, or arising
out of, requiring Subpart C DCOs to
comply with regulation 39.39. In
considering costs and benefits,
commenters are requested to address the
effect of the proposed regulation not
only on a DCO, but also on the DCO’s
clearing members, the customers of
clearing members, and the financial
system more broadly. The Commission
requests that, where possible,
commenters provide quantitative data in
their comments, particularly with
respect to estimates of costs and
benefits. The Commission requests that
commenters include a detailed
description of any alternatives to
proposed regulation 39.39 and estimates
of the costs and benefits of such
alternatives.

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L. Regulation 39.40 (Consistency With
the PFMIs)
Proposed regulation 39.40 would
make clear that Subpart C is intended to
establish regulations that, together with
Subpart A and Subpart B, are consistent
with the DCO Core Principles set forth
in Section 5b(c)(2) of the CEA and the
PFMIs. Specifically, to the extent of any
ambiguity, the Commission intends to
interpret the regulations set forth in part
39 in a manner that is consistent with
the standards set forth in the PFMIs.
Such consistency would appear to
promote international harmonization
and is intended to allow the bank
clearing members and bank customers
of SIDCOs and Subpart C DCOs to
receive the more favorable capital
treatment under the Basel CCP Capital
Requirements.
The Commission requests comment
on all aspects of these proposals.
Specifically, the Commission requests
comment on whether there are more
effective or efficient means for achieving
consistency with the standards set forth
by the PFMIs. The Commission requests
that commenters include a detailed
description of any such alternatives and
estimates of the costs and benefits of
any such alternatives.

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M. Regulation 39.41 (Special
Enforcement Authority for Systemically
Important Derivatives Clearing
Organizations)
In 2013, the Commission adopted
regulation 39.31, which implemented
special enforcement authority over
SIDCOs granted to the Commission
under section 807(c) of the Dodd-Frank
Act.174 The Commission is not
proposing any changes to regulation
39.31 other than to renumber it as
regulation 39.41.
N. Regulation 39.42 (Advance Notice of
Material Risk-Related Rule Changes by
Systemically Important Derivatives
Clearing Organizations)
The Commission proposes moving
existing paragraph (c) of regulation
39.30 (Scope) to proposed regulation
39.42.175 This provision instructs a
SIDCO to provide advance notice to the
Commission of any proposed change to
its rules, procedures, or operations that
could materially affect the nature or
level of risks presented by the SIDCO,
in accordance with regulation 40.10.176
Because the other provisions of
proposed revised regulation 39.28
(renumbered as regulation 39.30)
pertain to the scope of Subpart C,177 it
would be appropriate for paragraph (d)
to be codified in a separate regulation.
No substantive change is intended.
O. Regulation 140.94 (Delegation of
Authority to the Director of the Division
of Clearing and Risk)
The Commission proposes amending
regulation 140.94 so that certain
Commission functions contained in
these proposed regulations would be
delegated to the Director of the Division
of Clearing and Risk and to such staff
members as the Director may designate.
Specifically, the Commission proposes
to delegate all functions reserved to the
Commission in proposed regulation
39.31 including, for example, the
authority to request that a DCO provide
information supplementing a Subpart C
Election Form that it has filed with the
Commission; to determine whether an
election to be subject to Subpart C
should be permitted to become effective,
stayed or denied; and to provide any
notices regarding the foregoing. The
Commission also proposes to delegate to
the Director of the Division of Clearing
and Risk and to his or her designees the
174 See

SIDCO Final Rule.
supra Section II.B and note 111.
176 The Commission promulgated this provision
as part of the SIDCO Final Rule.
177 See supra Section II.B. (discussing proposed
revised regulation 39.28, renumbered as regulation
39.30).
175 See

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decision described in regulation
39.34(d) (whether to grant a SIDCO or a
Subpart C DCO up to one year to
comply with any provision of regulation
39.34).
P. Regulation 190.09 (Member Property)
Certain of the proposed requirements
for SIDCOs and Subpart C DCOs
necessitate certain clarifications to part
190 of the Commission’s regulations.
Specifically, proposed regulation
39.35(a) would require a SIDCO or
Subpart C DCO to ‘‘adopt explicit rules
and procedures that address fully any
loss arising from any individual or
combined default relating to any
clearing members’ obligations to the
SIDCO or Subpart C DCO.’’ Proposed
regulation 39.37(b) would require a
SIDCO or Subpart C DCO to maintain
viable plans for recovery and orderly
wind-down. In addition, SIDCOs and
Subpart C DCOs must comply with Core
Principle R, which require all registered
DCOs to ‘‘have a well-founded,
transparent, and enforceable legal
framework for each aspect of the
activities of the DCO.’’
The Commission notes that the risk
management practices of DCOs vary
depending, in part, on the types of
assets that the DCO clears. For example,
some DCOs ring-fence mutualized
default resources related to certain asset
classes separately from resources related
to other such classes, in part, because of
the different risk profiles associated
with those asset classes and a desire
among members to avoid exposure to
contributions to mutualized resources
for asset classes in which such members
do not participate. In such cases, the
DCOs have updated their financial
safeguards arrangements to
accommodate these differences.178
Recognizing the diversity of financial
safeguard arrangements among DCOs, it
would appear to be prudent to clarify
certain language in part 190 to
materially aid compliance with Core
Principle R and the proposed
regulations specified above.
Specifically, regulation 190.09 defines
the scope of ‘‘member property’’ in the
context of a DCO bankruptcy. The
Commission notes that when regulation
178 For example, CME Clearing has three
independent guaranty funds and financial
safeguards: one for interest rate swap contracts (IRS
Contracts), one for credit default swap contracts
(CDS Contracts), and one for futures and cleared
OTC products, other than IRS or CDS (the Base
Guaranty Fund). See Rule 802.A of the CME
Rulebook in respect of the Base Guaranty Fund,
Rule 8G802.A of the CME Rulebook in respect of
IRS Contracts, and Rule 8H802.A of the CME
Rulebook in respect of CDS Contracts, each of
which is available at http://www.cmegroup.com/
rulebook/CME/.

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190.09(b) was first proposed and
adopted in the early 1980s, DCOs did
not hold specific and independent
guaranty funds for different product
classes within a single legal entity. As
such, the definition of ‘‘member
property’’ in regulation 190.09(b) does
not expressly address the treatment of
independent guaranty fund deposits in
the context of a DCO bankruptcy. Thus,
to avoid interference with the rules of a
DCO governing the operation of such
funds, the Commission proposes the
clarifications discussed below.
Therefore, the Commission proposes
amending paragraph (b) of regulation
190.09 to clarify that the scope of
member property will be determined
based on the by-laws and rules of the
relevant DCO. Specifically, this
amendment would clarify that the
inclusion of guaranty fund contributions
and other property as ‘‘member
property’’ in the context of a DCO
bankruptcy would be subject to the bylaws or rules of the DCO. Thus, under
proposed regulation 190.09(b), the
Commission proposes that a DCO’s
distinct guaranty funds, which are
established for separate product classes
by the DCO’s by-laws or rules, shall be
treated separately from one another to
the extent required by the DCO’s bylaws or rules.
The Commission requests comment
on all aspects of this proposal.
Specifically, the Commission requests
comment on whether the amendments
to regulation 190.09 will impose any
costs on DCOs, clearing members, or
other market participants, and whether
there are more effective or efficient
means for recognizing the diversity of
financial safeguard arrangements among
DCOs in a bankruptcy. The Commission
requests that commenters include a
detailed description of any such
alternatives and estimates of the costs
and benefits of such alternatives.

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III. Effective Date
Revised regulation 190.09 would take
effect upon publication of the final
rulemaking in the Federal Register.
Proposed regulations 39.31 and 140.94
would take effect on December 13, 2013.
All of the other revised and proposed
regulations set forth herein would take
effect on December 31, 2013, in
accordance with the Commission’s goal
of implementing DCO regulations
consistent with the PFMIs by the end of
calendar year 2013.
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501 et seq.,

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provides that an agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a valid
control number from the Office of
Management and Budget (‘‘OMB’’). This
rulemaking contains recordkeeping and
reporting requirements that are
collections of information within the
meaning of the PRA. In particular,
although the Commission does not
anticipate that more than ten persons
will respond initially to this collection
of information, the term ‘‘ten or more
persons,’’ which triggers PRA
compliance, has been deemed to apply
to ‘‘[a]ny recordkeeping, reporting, or
disclosure requirement contained in a
rule of general applicability.’’ 5 CFR.
1320.3(c)(4). The Commission will
submit an information collection
request in the form of an amendment to
existing OMB control number 3038–
0081.
This rulemaking contains many
provisions that would qualify as
collections of information, for which the
Commission has already sought and
obtained a control number from OMB.
The burden hours associated with those
provisions are not replicated here
because the Commission is obligated to
account for PRA burden once, and the
PRA encourages multiple applications
of a single collection.179 Accordingly,
the burdens associated with the
collections contained in this proposed
rulemaking, and the information
collection request that will be submitted
to OMB, have been estimated only to the
extent that the proposed rulemaking
imposes collections of information that
OMB has not yet reviewed and
approved.
It should be noted that among the
thirteen DCOs presently registered with
the Commission, only two are SIDCOs.
Moreover, not all remaining DCOs or all
DCO Applicants are likely to elect to
become Subpart C DCOs (for example,
DCOs that are based outside of the U.S.
may seek to obtain QCCP status through
regulation by their home country
regulator). Thus, the burden
calculations herein are based on an
estimate of how many DCOs are SIDCOs
and how DCOs and DCO Applicants are
likely to elect to become Subpart C
DCOs. Additionally, many of the
collections herein, in particular those
related to electing Subpart C DCO
status, are expected to be one-time
events for a DCO. It is anticipated that
three DCOs will elect to become subject
to Subpart C in the year following the
adoption of final rules, with possibly
179 See

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one or two additional elections
thereafter.
Finally, it is not possible to precisely
estimate the reporting and
recordkeeping burden for the SIDCOs
and Subpart C DCOs that will be
affected by the collections contained in
this rulemaking, as the actual burden
will be dependent on the operations and
staffing of each particular SIDCO and
Subpart C DCO and the manner in
which they choose to implement
compliance with certain requirements.
Therefore, the burden estimates below
are meant to be a composite of the
burdens that will be absorbed across all
SIDCOs and Subpart C DCOs, to the
extent that the provisions for which
information collection burdens are
applicable.
1. Collections Only Applicable to
Subpart C DCOs
Proposed regulations 39.31(b) and
39.31(c) would establish the process
whereby DCO and DCO Applicants,
respectively, may elect to become
Subpart C DCOs subject to the
provisions of Subpart C. The election
involves filing the proposed Subpart C
Election Form that would be contained
in proposed appendix B to part 39
(including completing the certifications
therein, providing proposed exhibits A
through G, and drafting and publishing
the DCO’s responses to the Disclosure
Framework, and, when applicable, the
DCO’s Quantitative Information
Disclosure). Additionally, paragraphs
(b)(2) and (c)(3) of proposed regulation
39.31 provide for Commission requests
for supplemental information from
those requesting Subpart C DCO status;
paragraphs (b)(3) and (c)(4) require
amendments to the Subpart C Election
Form in the event that a DCO or DCO
Applicant, respectively, discovers a
material omission or error in, or if there
is a material change in, the information
provided in the Subpart C Election
Form; paragraphs (b)(7) and (c)(5)
permit a DCO or DCO Applicant,
respectively, to submit a notice of
withdrawal to the Commission in the
event the DCO or DCO Applicant
determines not to seek Subpart C DCO
status prior to such status becoming
effective; and paragraph (e) establishes
the procedures by which a Subpart C
DCO may rescind its Subpart C DCO
status after it has been permitted to take
effect. Each of these requirements
implies recordkeeping that would be
produced by a DCO to the Commission
on an occasional basis to demonstrate
compliance with the proposed rules.
It is estimated presently that it is
likely that only three DCOs will elect to
become Subpart C DCOs, but it has been

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conservatively estimated below that,
collectively, five DCOs or DCO
Applicants may elect to become Subpart
C DCOs. It is unlikely that any DCO or
DCO Applicant will withdraw its
election to become subject to Subpart C
prior to such election becoming
effective, but an estimate of compliance
with the withdrawal procedures by one
DCO has been included below. It is
estimated presently that it is likely that
none of the Subpart C DCOs will elect
to rescind its election, but it has been
conservatively estimated below that one
Subpart C DCO may rescind its election.
Consequently, the burden hours for the
proposed collection of information in
this rulemaking have been estimated as
follows:
Reporting—Certifications—Subpart C
Election Form
Estimated number of reporters: 5
Estimated number of reports per
reporter: 1
Average number of hours per report:
25
Estimated gross annual reporting
burden: 125
Reporting—Exhibits A through G—
Subpart C Election Form
Estimated number of reporters: 5
Estimated number of reports per
reporter: 1
Average number of hours per report:
155
Estimated gross annual reporting
burden: 775
Reporting—Preparing and Publishing
Disclosure Framework Responses
Estimated number of reporters: 5
Estimated number of reports per
reporter: 1
Average number of hours per report:
200
Estimated gross annual reporting
burden: 1,000
Reporting—Preparing Quantitative
Information Disclosures
Estimated number of reporters: 5
Estimated number of reports per
reporter: 1
Average number of hours per report:
80
Estimated gross annual reporting
burden: 400
Reporting—Requests for Supplemental
Information
Estimated number of reporters: 5
Estimated number of reports per
reporter: 5
Average number of hours per report:
45
Estimated gross annual reporting
burden: 1,125
Reporting—Amendments to Subpart C
Election Form
Estimated number of reporters: 5
Estimated number of reports per

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reporter: 3
Average number of hours per report:
8
Estimated gross annual reporting
burden: 120
Reporting—Withdrawal Notices
Estimated number of reporters: 1
Estimated number of reports per
reporter: 1
Average number of hours per report:
2
Estimated gross annual reporting
burden: 2
Reporting—Rescission Notices
Estimated number of reporters: 1
Estimated number of reports per
reporter: 75
Average number of hours per report:
3
Estimated gross annual reporting
burden: 225
Recordkeeping
Estimated number of recordkeepers: 5
Estimated number of records per
recordkeeper: 82
Average number of hours per record:
1
Estimated gross annual recordkeeping
burden: 410
2. Collections Applicable Both to
SIDCOs and Subpart C DCOs
Proposed regulations 39.32(a) and (b)
establish governance requirements
applicable to each SIDCO and Subpart
C DCO, including specific provisions
requiring written and disclosed
governance arrangements and the
disclosure of certain decisions on
particular, not regularly scheduled,
occasions, to the Commission, the
SIDCO or Subpart C DCO’s clearing
members, other relevant stakeholders
and/or the public. Proposed regulation
39.33(d) requires a SIDCO or Subpart C
DCO to conduct due diligence on its
liquidity providers and to conduct
periodic testing with respect to its
access to liquidity resources. Proposed
regulation 39.33(e) establishes
documentation requirements with
respect to the supporting rationale for
the financial and liquidity resources it
maintains pursuant to proposed
regulations 39.33(a) and 39.33(c),
respectively.
Proposed regulation 39.36(c)(6)
requires each SIDCO and Subpart C
DCO to report stress test results to its
risk management committee or board of
directors. Proposed regulation 39.37(a)
requires each SIDCO and Subpart C
DCO to complete and to publicly
disclose its responses to the Disclosure
Framework and, when applicable, to
complete and disclose a Quantitative
Information Disclosure. As described
above and as accounted for in the
previous portion of this PRA burden

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estimate, these tasks will be conducted
by Subpart C DCOs as part of their
election to become subject to Subpart C.
SIDCOs and DCOs also are required to
update their Disclosure Framework
responses and Quantitative Information
Disclosure every two years. Proposed
regulations 39.37(c) and (d) require each
SIDCO or Subpart C DCO to disclose,
publicly and to the Commission, certain
data on transaction volume and values
and their rules, policies, and procedures
related to the segregation and the
portability of customers’ positions and
funds.
Proposed regulation 39.38 requires
each SIDCO or Subpart C DCO to
establish a process to review the
efficiency and effectiveness of its
clearing and settlement arrangements,
operating structure and procedures,
scope of products cleared and use of
technology. Finally, proposed
regulations 39.39(b) and (c) require each
SIDCO and Subpart C DCO to develop
and maintain viable plans for the
recovery or wind-down of the SIDCO or
Subpart C DCO necessitated by certain
circumstances. Each of these
requirements implies recordkeeping that
would be produced by the SIDCO or
Subpart C DCO to the Commission on
an occasional basis to demonstrate
compliance with the proposed rules.
It is not possible to estimate with
precision how many DCOs may, in the
future, be determined to be SIDCOs and
how many may elect to become Subpart
C DCOs, but it conservatively has been
estimated below that, collectively, a
total of seven DCOs may be determined
to be SIDCOs or may opt to become
Subpart C DCOs. Presently, there are
two SIDCOs and is has been estimated
that five DCOs will elect to become
Subpart C DCOs. Consequently, the
burden hours for the proposed
collection of information in this
rulemaking have been estimated as
follows:
Reporting—Governance Requirements—
Written Governance Arrangements
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 1
Average number of hours per report:
200
Estimated gross annual reporting
burden: 1,400
Reporting—Governance Requirements—
Required Disclosures
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 6
Average number of hours per report:
3
Estimated gross annual reporting
burden: 126

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Reporting—Financial and Liquidity
Resource Documentation
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 1
Average number of hours per report:
120
Estimated gross annual reporting
burden: 840
Reporting—Stress Test Results
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 16
Average number of hours per report:
14
Estimated gross annual reporting
burden: 1,568
Reporting—Preparing and Publishing
Disclosure Framework Responses
(SIDCOs only)
Estimated number of reporters: 2
Estimated number of reports per
recordkeeper: 1
Average number of hours per report:
200
Estimated gross annual reporting
burden: 400
Reporting—Updating and Republishing
Disclosure Framework Responses
(SIDCOs and Subpart C DCOs)
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 1
Average number of hours per report:
80
Estimated gross annual reporting
burden: 560
Reporting—Preparing and Publishing
Quantitative Information
Disclosures (SIDCOs only)
Estimated number of reporters: 2
Estimated number of reports per
reporter: 1
Average number of hours per report:
80
Estimated gross annual reporting
burden: 160
Reporting—Updating and Republishing
Quantitative Information
Disclosures (SIDCOs and Subpart C
DCOs)
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 1
Average number of hours per report:
35
Estimated gross annual reporting
burden: 245
Reporting—Transaction, Segregation,
Portability Disclosures
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 2
Average number of hours per report:
35
Estimated gross annual reporting
burden: 490
Reporting—Efficiency and Effectiveness
Review

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Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 1
Average number of hours per report:
3
Estimated gross annual reporting
burden: 21
Reporting—Recovery and Wind-Down
Plan
Estimated number of reporters: 7
Estimated number of reports per
recordkeeper: 1
Average number of hours per report:
480
Estimated gross annual reporting
burden: 3,360
Recordkeeping—Liquidity Resource Due
Diligence and Testing
Estimated number of recordkeepers: 7
Estimated number of records per
recordkeeper: 4
Average number of hours per record:
10
Estimated gross annual recordkeeping
burden: 280
Recordkeeping—Financial and Liquidity
Resources, Excluding Due Diligence
and Testing
Estimated number of recordkeepers: 7
Estimated number of records per
recordkeeper: 4
Average number of hours per record:
10
Estimated gross annual recordkeeping
burden: 280
Recordkeeping—Generally
Estimated number of recordkeepers: 7
Estimated number of records per
recordkeeper: 28
Average number of hours per record:
10
Estimated gross annual recordkeeping
burden: 1960
3. Information Collection Comments
The Commission invites the public
and other Federal agencies to comment
on any aspect of the proposed
information collection requirements
discussed above. Pursuant to 44
U.S.C.3506(c)(2)(B), the Commission
will consider public comments on such
proposed requirements in:
• Evaluating whether the proposed
collections of information are necessary
for the proper performance of the
functions of the Commission, including
whether the information will have a
practical use;
• Evaluating the accuracy of the
estimated burden of the proposed
information collection requirements,
including the degree to which the
methodology and the assumptions that
the Commission employed were valid;
• Enhancing the quality, utility, and
clarity of the information proposed to be
collected; and
• Minimizing the burden of the
proposed information collection

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requirements on SIDCOs and Subpart C
DCOs, including through the use of
appropriate automated, electronic,
mechanical, or other technological
information collection techniques, e.g.,
permitting electronic submission of
responses.
Copies of the submission from the
Commission to OMB are available from
the CFTC Clearance Officer, 1155 21st
Street NW., Washington, DC 20581,
(202) 418–5160 or from http://
RegInfo.gov. Organizations and
individuals desiring to submit
comments on the proposed information
collection requirements should send
those comments to:
• The Office of Information and
Regulatory Affairs, Office of
Management and Budget, Room 10235,
New Executive Office Building,
Washington, DC 20503, Attn: Desk
Officer of the Commodity Futures
Trading Commission;
• (202) 395–6566 (fax); or
• [email protected]
(email).
Please provide the Commission with
a copy of submitted comments so that
all comments can be summarized and
addressed in the final rulemaking, and
please refer to the ADDRESSES section of
this rulemaking for instructions on
submitting comments to the
Commission. OMB is required to make
a decision concerning the proposed
information collection requirements
between thirty (30) and sixty (60) days
after publication of the NPRM in the
Federal Register. Therefore, a comment
to OMB is best assured of receiving full
consideration if OMB (as well as the
Commission) receives it within thirty
(30) days of publication of this NPRM.
The time frame for commenting on the
PRA does not affect the deadline
established by the Commission on the
proposed rules, provided in the DATES
section of this rulemaking.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
whether the rules they propose will
have a significant economic impact on
a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact.180 The rules proposed by the
Commission will only affect DCOs. The
Commission has previously established
certain definitions of ‘‘small entities’’ to
be used by the Commission in
evaluating the impact of its regulations
on small entities in accordance with the
180 5

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RFA.181 The Commission has previously
determined that DCOs are not small
entities for the purpose of the RFA.182
Accordingly, the Chairman, on behalf of
the Commission, hereby certifies
pursuant to 5 U.S.C. 605(b) that the
proposed rules will not have a
significant economic impact on a
substantial number of small entities.
C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders.183
Section 15(a) further specifies that the
costs and benefits shall be evaluated in
light of five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission’s cost and benefit
considerations in accordance with
Section 15(a) are discussed below.
2. Background
As discussed above, this proposed
rulemaking would: Address gaps
between part 39 of the Commission’s
regulations and the standards set forth
in the PFMIs; provide a procedure for
Subpart C DCOs to elect to become
subject to the provisions of Subpart C;
and make related technical amendments
to regulation 190.09. As proposed,
revised Subpart C, together with
Subpart A and Subpart B, would
establish regulations that are consistent
with the PFMIs.184

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3. Costs and Benefits of the Proposed
Rules
a. Costs
The Commission does not have
quantification or estimation of the costs
associated with the proposed
regulations. However, in qualitative
terms, the Commission recognizes that
the proposed regulations are
comprehensive and, compared to the
status quo, may impose important costs
on SIDCOs and Subpart C DCOs
depending, in particular, on the
SIDCO’s or Subpart C DCO’s current
financial and liquid resources, and risk
181 Policy Statement and Establishment of
Definitions of ‘‘Small Entities’’ for Purposes of the
Regulatory Flexibility Act, 47 FR 18618 (Apr. 30,
1982).
182 See 66 FR at 45609.
183 7 U.S.C. 19(a).
184 See supra Section I.G.

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management framework. In particular,
these proposed regulations may require
SIDCOs and Subpart C DCOs to
undertake a comprehensive review and
analysis of their current policies,
procedures, and systems in order to
determine where it may be necessary to
design and implement additional or
alternative policies, procedures, and
systems. Such costs may increase
operational, administrative, and
compliance costs for a SIDCO or
Subpart C DCO. The Commission
requests comment on the potential costs
of the proposed regulations on SIDCOs
and Subpart C DCOs, including, where
possible, quantitative data. In addition,
the Commission requests comment on
the competitive impact, the costs as well
as benefits, resulting from, or arising out
of, requiring SIDCOs to comply with the
provisions set forth in Subpart C, while
permitting other registered DCOs to
elect to become subject to these
requirements (or to forego such
election).
In addition to the costs for SIDCOs
and Subpart C DCOs, the Commission
has considered the costs the proposed
regulations would impose upon market
participants and the public. To the
extent costs increase, the Commission
notes that higher trading prices for
market participants (i.e., increased
clearing fees, guaranty fund
contributions, and margin fees, etc.)
may discourage market participation
and result in decreased liquidity and
reduced price discovery.
i. Regulation 39.31 (Election To Become
Subject to the Provisions of Subpart C)
As discussed above, proposed
regulation 39.31 would set forth the
procedures a DCO would be required to
follow to elect to become subject to the
provisions of Subpart C.185 Proposed
paragraph (b) would require a registered
DCO to file a completed Subpart C
Election Form with the Commission.
The form appears in proposed
Appendix B to Subpart C and is
modeled after Form DCO, which the
Commission promulgated in 2011 as
part of the DCO General Provisions and
Core Principles final rule.186 Proposed
paragraph (c) would require the same of
a DCO that applies for registration with
the Commission and that wants to be
subject to the provisions of Subpart C as
of the date the DCO is registered with
the Commission. The Subpart C Election
Form would include disclosures and
exhibits wherein the DCO would be
185 See supra Section II.C (discussing proposed
regulation 39.31).
186 DCO General Provisions and Core Principles,
76 FR 69334 (Nov. 8, 2011) (final rule).

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required to provide the following: a
regulatory compliance chart; citations to
the relevant rules, policies, and
procedures of the DCO that addresses
each Subpart C regulation; and a
summary of the manner in which the
DCO would comply with each
regulation. In addition, the DCO would
be required to provide, in separate
exhibits, all documents that
demonstrate the DCO’s compliance with
proposed regulations 39.32 through
39.36 and proposed regulation 39.39. A
DCO would also be required to complete
responses to the Disclosure Framework
and publish a copy of its responses on
its Web site.
The Commission notes that proposed
regulation 39.31 would only apply to a
DCO that the Council has not designated
to be systemically important and that
elects to become subject to the
provisions of Subpart C. Proposed
regulation 39.31, by providing an opt-in
procedure and a procedure to rescind
such election offers the benefit of
permitting a DCO that is not
systemically important may weigh (i) (1)
the cost of preparing a comprehensive
and complete Subpart C Election Form
in accordance with the requirements set
forth in proposed regulation 39.31 and
(2) the costs associated with the
requirements set forth in Subpart C
against (ii) the benefit of attaining QCCP
status, and, thus, to decide for itself
whether to become subject to Subpart C.
As discussed below, a Subpart C
DCO’s compliance with the provisions
of Subpart C would cause the Subpart
C DCO to incur certain costs. Some of
these costs may then be incurred,
indirectly, by the Subpart C DCO’s
clearing members and their customers.
The Commission requests comments
concerning examples of such costs. If a
clearing member or its customer would
incur greater costs by clearing through
a Subpart C DCO rather than through a
DCO that has not opted-in to Subpart C,
then that clearing member or customer
may decide not to clear through a
Subpart C DCO. The Commission
requests comment as to how these
indirect costs may be mitigated. The
Commission also requests comment
concerning the extent to which a DCO’s
analysis of whether the costs of being a
Subpart C DCO may outweigh the
benefits could be affected by the
possibility that some of the costs may be
incurred indirectly by clearing members
and their customers.
In addition to the requests for
comment set forth above, the
Commission requests comment
concerning the costs associated with the
Subpart C Election Form, including
without limitation, the election and

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withdrawal procedures set forth in
proposed regulation 39.31, as well as
the requirements surrounding
completion and publication of
responses to the Disclosure Framework.
The Commission also requests that each
commenter provide quantitative data
where practicable, as well as a detailed
rationale supporting the response.
The Commission notes that pursuant
to proposed paragraph (e), a Subpart C
DCO would be permitted, subject to a 90
day notice period, to rescind its election
to become subject to the provisions of
Subpart C. As a result of the rescission,
the DCO would no longer be considered
a QCCP, which would likely create
important costs for bank clearing
members and the bank customers of a
DCO’s clearing members due to the
higher capital costs that they would
incur as a result of clearing transactions
through the DCO that is no longer a
QCCP.187 Alternatively, clearing
members and their customers may
choose to end their clearing activities
and transact through another DCO that
is a QCCP, with either choice imposing
costs on those clearing members and
their customers.
As discussed in section II.C., above,
the Commission requests comments on
the potential costs to a Subpart C DCO
to comply with all aspects of proposed
regulation 39.32, including the cost of
the opting-in process (including but not
limited to the completion of the Subpart
C Election Form) and the process for
rescinding such an opting-in (including
the notices required) and any costs that
would be imposed on other market
participants or the financial system
more broadly.
ii. Regulation 39.32 (Governance for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
As discussed above, proposed
regulation 39.32 establishes governance
requirements for SIDCOs and Subpart C
DCOs that are consistent with the PFMIs
and establish rules and procedures
concerning conflicts of interest,
compensation policies, organizational
structure, and fitness standards for
directors and officers.188 Specifically,
SIDCOs and Subpart C DCOs would be
required to have written governance
arrangements that are clear and
transparent, that place a high priority on
the safety and efficiency of the SIDCO
or Subpart C DCOs, and that explicitly
support the stability of the broader
187 See supra Section I.F (discussing the treatment
for non-QCCP clearing members under the Basel
CCP Capital Requirements).
188 See supra Section II.D (discussing proposed
regulation 39.32).

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financial system and other relevant
public interest considerations of
clearing members, customers of clearing
members, and other relevant
stakeholders. In addition, these
governance arrangements would be
required to reflect the legitimate
interests of clearing members, customers
of clearing members, and other relevant
stakeholders. To an extent consistent
with other statutory and regulatory
requirements on confidentiality and
disclosure, SIDCO’s and Subpart C
DCOs would also be required to disclose
major decisions of the board.189
Proposed regulation 39.32 would
require the rules and procedures of
SIDCOs and Subpart C DCOs to: (1)
Describe the SIDCO’s or Subpart C
DCO’s management structure; (2) clearly
specify the roles and responsibilities of
the board of directors and its
committees, including the establishment
of a clear and documented risk
management framework; (3) clearly
specify the roles and responsibilities of
management; (4) establish appropriate
compensation policies; (5) establish
procedures for managing conflicts of
interest among board members; and (6)
assign responsibility and accountability
for risk decisions and for implementing
rules concerning default, recovery, and
wind-down. Finally, proposed
regulation 39.32 would require that the
board members and managers of SIDCOs
and Subpart C DCOs have the
appropriate experience, skills,
incentives and integrity; risk
management and internal control
personnel have sufficient independence,
authority, resources and access to the
board of directors; and that the board of
directors include members who are not
executives, officers or employees of the
SIDCO or Subpart C DCO or of their
affiliates.
To the extent these requirements
affect the behavior of a DCO, costs could
arise from additional hours a DCO’s
employees might need to spend
analyzing the compliance of the DCO’s
rules and procedures with these
requirements, designing and drafting
new or amended rules and procedures
where the analysis indicates that these
are necessary, and implementing these
new or amended rules and procedures.
These costs are difficult for the
Commission to assess in the abstract
because the proposed regulation grants
a DCO a certain amount of discretion in
determining which rules and
procedures should be adopted to
comply with the proposed regulation.
As discussed in section II.D., above, the
Commission requests comments on the
189 Id.

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potential costs to a SIDCO or Subpart C
DCO to comply with all aspects of
proposed regulation 39.32, and any
costs that would be imposed on other
market participants or the financial
system more broadly. As noted above,
the Commission specifically requests
comment on alternative means to
establish governance requirements
consistent with the PFMIs, and the costs
(or cost savings) associated with such
alternatives.
iii. Regulation 39.33 (Financial
Resources for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
(a.) Regulation 39.33(a): Cover Two
As discussed above, proposed
amended regulation 39.33(a) would
require a Subpart C DCO to comply with
the Cover Two minimum financial
resource standard for all of its activities
if the Subpart C DCO: (1) Is involved in
activities with a more complex risk
profile or (2) is systemically important
in multiple jurisdictions. This
requirement currently applies to all
SIDCOs.190
The cost of the Cover Two
requirement for a Subpart C DCO that
meets either or both of the two criteria
described above 191 includes the
opportunity cost 192 of the additional
financial resources needed to satisfy the
guaranty fund requirements for the risk
of loss resulting from the default of the
clearing member creating the second
largest credit exposure.193 In addition,
the possibility exists that some market
participants will port their positions
from a Subpart C DCO that either (1) is
deemed systemically important in
multiple jurisdictions or (2) clears
products of a more complex risk profile
to another DCO for which neither (1)
nor (2) applies because the value of the
Cover Two protection to these market
participants is less than the price at
which that protection is being offered.
These market participants will transact
with SIDCOs or Subpart C DCOs that
190 See supra Section II.E (discussing proposed
revised regulation 39.33).
191 All Subpart C DCOs would bear the
administrative cost of determining whether they
meet either of the criteria.
192 For Subpart C DCOs that are not deemed
systemically important in multiple jurisdictions or
that do not clear products with a more complex risk
profile, the Cover One financial resources
requirement would continue to apply, and
therefore, these Subpart C DCOs would not face
increased opportunity costs associated with the
proposed regulation.
193 In the event that these additional resources
would need to be raised by the Subpart C DCO, as
opposed to reallocated, this cost would be the
funding cost for raising these additional resources.

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operate under Cover One, which is a
lower financial resources requirement,
and thus, get the benefit of lower
transactional fees and forego the
enhanced protections associated with
the SIDCOs or Subpart C DCOs.
However, the potential cost to a SIDCO
or a Subpart C DCO subject to the Cover
Two requirement and to the goal of
systemic risk reduction would likely be
mitigated because: (a) Not every product
offered by a SIDCO or Subpart C DCO
would be available at other DCOs and
(b) a SIDCO or Subpart C DCO may offer
benefits not available to a DCO does not
elect to become subject to the provisions
of Subpart C, that is not designated as
systemically important, and/or that does
not clear products with a more complex
risk profile. This would therefore reduce
the likelihood that market participants
would port their positions to other
DCOs. As indicated in section II.E.
(description of proposed regulation
39.33), above, the Commission requests
comment on these costs, including
quantitative data, if available.

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(b.) Regulation 39.33(b): Valuation of
Financial Resources
Proposed amended regulation
39.33(b) would prohibit SIDCOs and
Subpart C DCOs from including
assessments as part of their calculation
of the financial resources available to
cover the default of the clearing member
creating the largest credit exposure and,
where applicable, the default of the two
clearing members creating the largest
aggregate credit exposure, in extreme
but plausible circumstances, i.e., Cover
One or Cover Two.194 This requirement
currently applies to all SIDCOs and
would be expanded to include Subpart
C DCOs. The costs associated with the
prohibition on the use of assessments by
a Subpart C DCO in calculating its
obligations under regulation 39.33(a)
would include the opportunity cost of
the additional pre-funded financial
resources needed to replace the value of
such assessments, which may require an
infusion of additional capital. In
addition, as with the Cover Two
requirement, market participant demand
may shift from a SIDCO or a Subpart C
DCO subject to the Cover Two
requirement to a DCO with a lower
capitalization requirement. As indicated
in Section II.E, above, the Commission
requests comment on these costs,
including quantitative data, if available.
194 See supra Section II.E (discussing proposed
revised regulation 39.33).

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(c.) Regulation 39.33(c), (d) and (e):
Liquidity
Proposed regulation 39.33(c) would
require a SIDCO and a Subpart C DCO
to maintain eligible liquidity resources
that will enable it to meet its intraday,
same-day and multiday settlement
obligations, in all relevant currencies,
with a high degree of confidence under
a wide range of stress scenarios
notwithstanding a default by the
clearing member creating the largest
aggregate liquidity obligation. Eligible
resources are limited to cash in the
currency of the requisite obligation,
held at the central bank of issue or a
creditworthy commercial bank, certain
highly marketable collateral, subject to
certain prearranged and highly reliable
funding arrangements, and various
committed liquidity arrangements.
These arrangements must be reliable
and enforceable in extreme but
plausible market conditions, and must
not contain material adverse change
clauses.
In addition, a SIDCO or Subpart C
DCO that is systemically important in
multiple jurisdictions or that is involved
in activities with a more complex risk
profile would be required to consider
maintaining liquidity resources that
would enable it to meet the default of
the two clearing members creating the
largest aggregate payment obligation. If
a SIDCO or Subpart C DCO maintains
liquid financial resources in addition to
those required to satisfy the minimum
financial resources requirement set forth
in regulations 39.11(a)(1) and 39.33(a),
then those resources should be in the
form of assets that are likely to be
saleable or acceptable as collateral for
lines of credit, swaps, or repurchase
agreements on an ad hoc basis.195
Proposed regulation 39.33(d) would
impose a duty on SIDCOs and Subpart
C DCOs to perform due diligence on
their liquidity providers in order to
determine their ability to perform
reliably their commitments to provide
liquidity. Finally, proposed regulation
39.33(e) would require SIDCOs and
Subpart C DCOs to document their
supporting rationale for the amount of
financial resources they maintain
pursuant to proposed regulation
39.33(a) and the amount of liquidity
resources they maintain pursuant to
proposed regulation 39.33(c).196
Proposed regulations 39.33(c)-(e) may
result in additional costs for a SIDCO or
Subpart C DCO with respect to
analyzing and measuring intra-day,
same-day, and multiday liquidity
195 Id.
196 Id.

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requirements in all relevant currencies,
developing plans to meet those
requirements, obtaining eligible
liquidity resources and making eligible
liquidity arrangements, reviewing and
monitoring each liquidity provider’s
risks and reliability (including through
periodic testing of access to liquidity),
and documenting the DCO’s basis for
conclusions with respect to its financial
resources and liquidity resources
requirements. These proposed
regulations also will require stress
testing and other analysis of such
resources as compared with the DCO’s
liquidity needs. Specifically, with
regards to proposed regulation 39.33(c),
there may be costs involved in obtaining
cash in the relevant currencies or
arranging for qualifying liquidity
commitments, such as a committed line
of credit, to satisfy the minimum
financial resources requirement set forth
in regulation 39.11(a)(1)(i.e., Cover
One). Obtaining these committed
financial resources would involve
administrative expenses such as the
negotiation and drafting of committed
arrangements, as well as costs arising
from the payment of fees to liquidity
providers. In addition, there may be
operational costs involved in calculating
the liquidity resources requirements at
the Cover One level on an intraday,
same-day, and multiday basis over the
course of a default. This calculation may
require undertaking a complex analysis
of the SIDCO’s or Subpart C DCO’s
exposures and processes, including
various models, and, where appropriate,
designing and implementing changes to
either create or modify existing internal
processes. While this analysis may
involve costs, it would appear that it
will improve the SIDCO’s or Subpart C
DCO’s financial condition, as described
below in section 2.b.iii. of the benefits
section.
Proposed regulation 39.33(d) may
increase administrative costs to the
extent that a SIDCO or a Subpart C DCO
is required to review and monitor its
liquidity provider’s capacity and
reliability to perform its liquidity
obligations to the DCO. In addition,
proposed regulation 39.33(e) may
impose an administrative cost to
document the SIDCO or Subpart C
DCO’s rationale for the financial
resources it maintains.
As discussed in section II.E., above,
the Commission requests comments on
the potential costs to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.33
and any costs that would be imposed on
other market participants or the
financial system more broadly. As noted
above, the Commission specifically

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requests comment on alternative means
to establish financial resources and
liquidity requirements consistent with
the PFMIs (including, e.g., through
alternative definitions of terms), and the
costs (or cost savings) associated with
such alternatives.

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iv. Regulation 39.34 (System Safeguards
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
As discussed above, proposed
amended regulation 39.34 would
require SIDCOs and Subpart C DCOs to
comply with enhanced system
safeguards requirements.197 While
SIDCOs are already subject to these
requirements, the Commission proposes
expanding this regulation to include
Subpart C DCOs. The proposed
regulation could increase operational
costs for Subpart C DCOs by requiring
additional resources, including with
respect to personnel, technology (e.g.,
hardware and software) and the
purchase or rental of premises in order
to achieve geographic dispersal of
resources. In particular, the costs of
moving from a next-day RTO, the
minimum standard established by the
DCO core principles and current
regulation 39.18, to a two-hour RTO as
required by proposed regulation 39.34,
may be significant. Additionally, the
implementation of a two-hour RTO may
impose one-time costs to establish the
enhanced resources and recurring costs
to operate the additional resources. As
discussed in section II.F. above, the
Commission requests comments on the
potential costs to a Subpart C DCO in
complying with all aspects of proposed
regulation 39.34, and any costs that
would be imposed on other market
participants or the financial system
more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
establish, for Subpart C DCOs, system
safeguards requirements consistent with
the PFMIs and the costs (or cost savings)
associated with such alternatives.
v. Regulation 39.35 (Default Rules and
Procedures for Uncovered Losses or
Shortfalls (Recovery) for Systemically
Important Derivatives Clearing
Organizations and Subpart C Derivatives
Clearing Organizations)
Proposed regulation 39.35 would
require SIDCOs and Subpart C DCOs to
adopt policies and procedures to
address certain issues arising from
extraordinary stress events, including
the default of one or more clearing
197 See supra Section II.F (discussing proposed
regulation 39.34).

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members.198 The costs associated with
these default rules and procedures may
include administrative costs to: review
and analyze current policies and
procedures; design and draft new or
amended policies and procedures; and
implement the new or amended policies
and procedures. Such default rules and
procedures must sufficiently (1) allocate
uncovered credit losses and (2) enable a
SIDCO or Subpart C DCO to promptly
meet all of its obligations in the event
of a default by one or more clearing
members or an unforeseen liquidity
shortfall exceeding the financial
resources of the SIDCO or Subpart C
DCO. As discussed in section II.G.
above, the Commission requests
comments on the potential costs to a
SIDCO or a Subpart C DCO in
complying with all aspects of proposed
regulation 39.35, and any costs that
would be imposed on other market
participants or the financial system
more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
establish requirements, in a manner
consistent with the PFMIs, for adopting
rules and procedures for uncovered
losses or shortfalls, and the costs (or
cost savings) associated with such
alternatives.
vi. Regulation 39.36 (Risk Management
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
Proposed regulation 39.36 would
impose enhanced risk management
requirements for a SIDCO or Subpart C
DCO, including, but not limited to,
specific criteria for stress tests of
financial resources, specific criteria for
sensitivity analysis of margin models,
specific criteria for stress tests of
liquidity resources, requirements
surrounding the monitoring and
management of credit and liquidity risks
arising out of settlement banks, and
requirements surrounding the custody
and investment of a SIDCO’s or Subpart
C DCO’s own funds and assets.199
Complying with this regulation could
involve operational costs to perform the
required testing, monitoring and
analyses, which may include: A
comprehensive analysis of existing
stress testing scenarios; the design of
new and/or alternative stress testing
scenarios; and the design of a sensitivity
analysis; the creation of a system for
comprehensively monitoring, managing
and limiting credit and liquidity risks
198 See supra Section II.G (discussing proposed
regulation 39.35).
199 See supra Section II.H (discussing proposed
regulation 39.36).

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arising out of settlement banks; and the
implementation of controls surrounding
the custody and investment of a
SIDCO’s or Subpart C DCO’s own funds
and assets. In addition, there may be
costs associated with the modification
and/or creation of processes necessary
to support the enhanced risk
management requirements in the
proposed regulation. There would also
be ongoing costs to conduct such risk
management, analyze the results, and
take action based on such results. In
particular, to the extent that the
analyses and monitoring reveal the need
for additional financial or liquidity
resources, there would be costs
associated with obtaining such
resources. In addition, there may be
administrative and other costs
associated with the management of a
SIDCO’s or Subpart C DCO’s settlement
bank exposures. As discussed in section
II.H., above, the Commission requests
comments on the potential costs to a
SIDCO or a Subpart C DCO in
complying with all aspects of proposed
regulation 39.36, and any costs that
would be imposed on other market
participants or the financial system
more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
establish risk management requirements
consistent with the PFMIs, and the costs
(or cost savings) associated with such
alternatives.
vii. Regulation 39.37 (Additional
Disclosure for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.37 would set
forth additional public disclosure
requirements for a SIDCO and Subpart
C DCO, including the disclosure of, and
updates to, the DCO’s responses to the
Disclosure Framework for FMIs.200
Complying with this regulation may
impose administrative costs to conduct
a comprehensive analysis of the SIDCO
or Subpart C DCO’s policies, procedures
and systems as well as the costs
associated with the design, drafting and
implementation of any new or modified
policies, procedures and systems that
would be necessary to comply with the
proposed regulation. As discussed in
section II.I. above, the Commission
requests comments on the potential
costs to a SIDCO or a Subpart C DCO in
complying with all aspects of proposed
regulation 39.37, and any costs that
would be imposed on other market
participants or the financial system
200 See supra Section II.I (discussing proposed
regulation 39.37).

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more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
establish disclosure requirements
consistent with the PFMIs, and the costs
(or cost savings) associated with such
alternatives.

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viii. Regulation 39.38 (Efficiency for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
Proposed regulation 39.38 would
require a SIDCO or a Subpart C DCO to
comply with certain efficiency
standards regarding its clearing and
settlement arrangements, operating
structure and procedures, product
scope, and use of technology. In
addition, a SIDCO or Subpart C DCO
would be required to establish clearly
defined goals and objectives that are
measureable and achievable, including
minimum service levels, risk
management expectations, and business
priorities.201 SIDCOs and Subpart C
DCOs would also be required to
facilitate efficient payment, clearing and
settlement by accommodating
internationally accepted communication
procedures and standards. The costs
associated with the proposed regulation
may include the administrative costs of
conducting a comprehensive review and
analysis of the SIDCO’s or Subpart C
DCO’s policies, procedures and systems,
and where appropriate, the design,
drafting and implementation of new or
modified policies, procedures and
systems to establish the goals and
objectives necessary to comply with this
regulations. There may also be
administrative costs associated with
establishing a mechanism to review the
DCO’s compliance with the proposed
regulation, as well as operational costs
associated with designing and
implementing processes to
accommodate internationally accepted
communications standards. As
discussed in section II.J. above, the
Commission requests comments on the
potential costs to a SIDCO or a Subpart
C DCO in complying with all aspects of
proposed regulation 39.38, and any
costs that would be imposed on other
market participants or the financial
system more broadly. As noted above,
the Commission specifically requests
comment on alternative means to
establish a requirement for efficiency
standards consistent with the PFMIs,
and the costs (or cost savings) associated
with such alternatives.
201 See supra Section II.J (discussing proposed
regulation 39.38).

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ix. Regulation 39.39 (Recovery and
Wind-Down for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
Proposed regulation 39.37 would
require a SIDCO or Subpart C DCO to
maintain viable plans for recovery and
orderly wind-down, in cases
necessitated by (1) credit losses or
liquidity shortfalls and (2) general
business risk, operational risk, or any
other risk that threatens the DCO’s
viability as a going concern. This would
require the DCO to identify scenarios
that may prevent a SIDCO or Subpart C
DCO from being able to provide its
critical operations and services as a
going concern and to assess the
effectiveness of a full range of options
for recovery or orderly wind-down.
The proposed regulation would also
require a SIDCO or Subpart C DCO to
evaluate the resources available to meet
the plan to cover credit losses and
liquidity shortfalls, and to maintain
sufficient unencumbered liquid
financial assets to implement the plan to
cover other risks. The latter point
requires a SIDCO or Subpart C DCO to
analyze whether its particular
circumstances and risks require it to
maintain liquid net assets to fund the
plan that are in addition to those
resources currently required by
regulation 39.11(a)(2).
This proposed regulation may impose
costs on a SIDCO or Subpart C DCO to
the extent it will be necessary to
undertake a comprehensive qualitative
and quantitative analysis of the credit,
liquidity, general business, operational
and other risks that may threaten the
DCO’s ability to provide its critical
operations and services as a going
concern, to design and draft plans to
mitigate and address those risks, to
analyze whether the DCO’s resources
allocated to recovery and/or wind-down
are sufficient to implement those plans.
This analysis may lead to the design of
alternative and/or additional scenarios
to be included in stress testing, the
drafting of new or revised policies for a
recovery and/or wind-down plan, and
potentially the necessity of maintaining
additional resources or procedures to
obtain such resources in the event they
are needed. Moreover, the regulation
prohibits the double counting of
available resources—that is, resources
considered as available to meet the
recovery and orderly wind-down plan
for credit losses and liquidity shortfalls
cannot be considered as available to
meet the recovery and orderly winddown plan for general business risk,
operational risk, and other risks (or vice-

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versa). This may result in the need to
maintain a larger quantum of total
resources to meet both plans which,
depending on the resources maintained,
may involve costs arising from factors
such as greater use of capital by the
DCO, or greater capital charges for
clearing members arising out of their
commitments to contribute default
resources.
As discussed in section II.K. above,
the Commission requests comments on
the potential costs to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.39,
and any costs that would be imposed on
other market participants or the
financial system more broadly. As noted
above, the Commission specifically
requests comment on alternative means
to establish, consistent with the PFMIs,
a requirement for the adoption of a
recovery and wind-down plan, and the
costs (or cost savings) associated with
such alternatives.
b. Benefits
As explained in the subsections that
follow, this proposed rule would hold
SIDCOs and Subpart C DCOs to
enhanced regulatory standards, which
are designed to promote the financial
strength, operational integrity, security,
and reliability of these organizations
and to reduce the likelihood of their
disruption or failure. This would then
increase the overall stability of the U.S.
financial markets. As the PFMIs note,
FMIs, including CCPs (i.e. DCOs), play
a critical role in fostering financial
stability.202 This is particularly the case
with respect to SIDCOs. The Council
has determined that the failure of or a
disruption to the functioning of a SIDCO
could create or increase the risk of
significant liquidity or credit problems
spreading among financial institutions
or markets and thereby threaten the
stability of the U.S. financial system.203
In addition, the proposed regulations
would help ensure that SIDCOs and
Subpart C DCOs are held to
international standards in order to
provide them with the opportunity to
gain QCCP status. As discussed above,
attaining QCCP status would provide
clearing members that are banks, as well
as banks that are customers of clearing
members, with the benefit of complying
with less onerous capital requirements,
pursuant to the Basel CCP Capital
Requirements, than if the SIDCO or
202 PFMIs,

E.N. 1.1.
http://www.treasury.gov/initiatives/fsoc/
designations/Pages/default.aspx (describing the
designations of CME and ICE Clear Credit to be
systemically important financial market utilities)
and see supra Section I.C.
203 See

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Subpart C DCO were not a QCCP.204 In
turn, this may increase a SIDCO or
Subpart C DCO’s competitiveness vis-a`vis non-U.S. clearing organizations that
demonstrate compliance with
international standards and are QCCPs.
i. Regulation 39.31 (Election To Become
Subject to the Provisions of Subpart C)
The procedures set forth in proposed
regulation 39.31, together with the
proposed Subpart C Election Form, are
intended to promote the protection of
market participants and the public.
These proposed procedures would
require the Commission’s staff to
conduct a comprehensive and thorough
review of a DCO that elects to become
subject to the provisions of Subpart C.
In addition, the international Basel CCP
Capital Requirements provide
incentives for banks to clear derivatives
through CCPs that are qualified CCPs or
‘‘QCCPs’’ by setting lower capital
charges for exposures arising from
derivatives cleared through a QCCP and
setting significantly higher capital
charges for exposures arising from
derivatives cleared through nonqualifying CCPs. These proposed
regulations are consistent with the
international standards set forth in the
PFMIs and address the remaining
divergences between part 39 of the
Commission’s regulations and the
PFMIs, which will provide an
opportunity for a Subpart C DCO to gain
QCCP status.
Without regulation 39.31, a DCO that
is not designated by the Council as
being systemically important would not
have the opportunity to gain QCCP
status, thereby potentially putting such
a DCO at a significant competitive
disadvantage compared to SIDCOs and
non-U.S. clearing organizations. This
would ultimately be to the detriment of
such a DCO’s clearing members and
their customers.205 The Commission
also notes that by clearing through a
Subpart C DCO, a clearing member and
its customers would be afforded the
benefits of clearing through a DCO
subject to enhanced risk management,
operational, and other standards. The
Commission requests comment
concerning the extent to which clearing
members and their customers would
benefit from the additional standards to
which a Subpart C DCO and SIDCO
would be subject.
Proposed regulation 39.31 would
provide a benefit to a Subpart C DCO by
allowing the Subpart C DCO to weigh
204 See

supra Section I.F.
supra Section I.F (discussing QCCP status
and the Basel CCP Capital Requirements); see also
supra Section II.C. (discussing proposed regulation
39.31).
205 See

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for itself the costs and benefits of
maintaining QCCP status. The notice
requirements would provide important
benefits to clearing members of the
rescinding Subpart C DCO (and their
customers), particularly those that are
banks or bank affiliates, by providing
them with advance notice to permit
them to assess their options and take
any actions they deem appropriate with
respect to clearing at a DCO that has
acted to rescind its election to be held
to the standards of Subpart C (and thus
to renounce status as a QCCP).
In addition to the requests for
comments detailed above, the
Commission invites public comment on
its cost-benefit considerations.
Specifically, the Commission seeks
comment, including quantitative data, if
available, concerning the costs and
benefits associated with having an optin process for DCOs that have not been
designated as systemically important by
the Council to elect to be subject to
Subpart C, the proposed process for that
election, and the costs and benefits that
may be incurred and realized by the
clearing members and customers of a
Subpart C DCO that rescinds its election
to become subject to the provisions of
Subpart C. In addition, the Commission
seeks comment on whether the notice
requirements, the 90 day notice period
and the requirements set forth in
proposed regulation 39.31(e)(3)(iii) are
sufficient to mitigate the costs
associated with a Subpart C DCO’s
ability to rescind its election.
Commenters are also invited to submit
with their comment letters any data or
other information that they may have
quantifying or qualifying the costs and
benefits of the proposed regulations.
ii. Regulation 39.32 (Governance for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
The requirements set forth in
proposed regulation 39.32 would appear
to be beneficial to the extent that they
cause a SIDCO or Subpart C DCO to
internalize and/or more appropriately
allocate certain costs that would
otherwise be borne by clearing
members, customers of clearing
members, and other relevant
stakeholders. Such requirements would
also appear to promote market stability
because the governance arrangements of
SIDCOs and Subpart C DCOs would be
required to explicitly support the
stability of the financial system and
other relevant public interest
considerations of clearing members,
customers of clearing members, and

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other relevant stakeholders,206 and
reflect the legitimate interests of
clearing members, customers of clearing
members, and other relevant
stakeholders. Finally, the governance
arrangements required by proposed
regulation 39.32 would promote a more
efficient, effective, and reliable DCO risk
management and operating structure.
As discussed in section II.D. above,
the Commission requests comments on
the potential benefits to a SIDCO and a
Subpart C DCO in complying with all
aspects of proposed regulation 39.32,
and any benefits that would be realized
by other market participants (including
members of such a DCO and their
customers) or the financial system more
broadly. As noted above, the
Commission specifically requests
comment on alternative means to
address these issues, and the benefits
associated with such alternatives.
iii. Regulation 39.33 (Financial
Resources for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
As described above, proposed
regulation 39.33(a), as revised, would be
expanded to include Subpart C DCOs
and require those Subpart C DCOs that
engage in an activity with a more
complex risk profile (e.g., clearing credit
default swaps or credit default futures),
or that are systemically important in
multiple jurisdictions, to comply with
the Cover Two minimum financial
resources requirement.207 This
regulation currently applies to SIDCOs.
Proposed regulation 39.33(a) would
increase the financial stability of
Subpart C DCOs that are engaged in
activities with a more complex risk
profile or that are systemically
important in multiple jurisdictions
because it would require such Subpart
C DCOs to comply with enhanced
minimum financial resource
requirements. Compliance with such
standards, in turn, could increase the
overall stability of the U.S. financial
markets because enhancing a Subpart C
DCO’s financial resources requirements
from the minimum of Cover One to a
more stringent Cover Two standard
helps to ensure the affected Subpart C
DCO will have greater financial
resources to meet its obligations to
market participants, including in the
case of defaults by multiple clearing
members. These added financial
resources lessen the likelihood of the
206 See supra Section II.D (discussing proposed
regulation 39.32).
207 See supra Section II.E (discussing proposed
revised regulation 39.33).

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Subpart C DCO’s failure which, in times
of market turmoil, could increase the
risk to the stability of the U.S. financial
system.208 By bolstering certain Subpart
C DCO’s resources, regulation 39.33(a)
contributes to the financial integrity of
the financial markets and reduces the
likelihood of systemic risk from
spreading through the financial markets
due to the Subpart C DCO’s failure or
disruption. In addition, the approach of
obtaining resources in such low-stress
periods avoids the need to call for
additional resources from clearing
members during less stable, more
volatile times, which would have procyclical effects on the U.S. financial
markets.
As described above, proposed
regulation 39.33(a)(2) would provide the
Commission with the ability to
determine that a SIDCO or a Subpart C
DCO is systemically important in
multiple jurisdictions, considering
whether the DCO is a SIDCO and
whether the DCO has been determined
to be systemically important by one or
more foreign jurisdictions pursuant to a
designation process that considers
whether the foreseeable effects of a
failure or disruption of the SIDCO or
Subpart C DCO could threaten the
stability of each relevant jurisdiction’s
financial system. Moreover, proposed
regulation 39.33(a)(3) would provide the
Commission with the ability to expand
the definition of ‘‘activity with a more
complex risk profile’’ beyond clearing
credit default swaps or credit default
futures. These provisions give the
Commission the flexibility to determine,
under appropriate circumstances, what
particular SIDCOs or Subpart C DCOs
(or DCOs that engage in certain
activities) would need to maintain
Cover Two default resources. Such a
decision would help to ensure that the
affected SIDCO or Subpart C DCO
would have greater financial resources
to meet its obligations to market
participants, including in the case of
defaults by multiple clearing members.
These added financial resources would
decrease the likelihood that the SIDCO
or Subpart C DCO would fail, thus
contributing to the integrity and
stability of the financial markets.
Proposed regulation 39.33 would also
prohibit a Subpart C DCO from using
assessments to meets its default
resource obligations, i.e., those under
regulations 39.11(a)(1) and 39.33(a).
This prohibition currently applies to
SIDCOs. Prohibiting the use of
assessments by a Subpart C DCO in
meeting its default resource requirement
would appear to increase the financial
208 See

supra Section I.B.

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stability of the Subpart C DCO, which in
turn, would increase the overall stability
of the U.S. financial markets.
Assessment powers are more likely to
be exercised during periods of financial
market stress. If, during such a period,
a clearing member defaults and the loss
to the Subpart C DCO is sufficiently
large to deplete (1) the collateral posted
by the defaulting clearing member, (2)
the defaulting clearing member’s
guaranty fund contribution, and (3) the
remaining pre-funded default fund
contributions, a Subpart C DCO’s
exercise of assessment powers over the
non-defaulting clearing members may
exacerbate a presumably already
weakened financial market. The
demand by a Subpart C DCO for more
capital from its clearing members could
force one or more additional clearing
members into default because they
cannot meet the assessment. The
inability to meet the assessment could
lead clearing members and/or their
customers to de-leverage (i.e., sell off
their positions) in falling asset markets,
which further drives down asset prices
and may result in clearing members
and/or their customers defaulting on
their obligations to each other and/or to
the Subpart C DCO. In such extreme
circumstances, assessments could
trigger a downward spiral and lead to
the destabilization of the financial
markets. Prohibiting the use of
assessments by a Subpart C DCO in
meeting default resources requirements
is intended to require the Subpart C
DCO to retain more financial resources
upfront, i.e., to prefund its financial
resources requirement to cover its
potential exposure.
The increase in prefunding of
financial resources by a Subpart C DCO
may increase costs to clearing members
of that Subpart C DCO (e.g., requiring
clearing members to post additional
funds with the Subpart C DCO), but it
also reduces the likelihood that the
Subpart C DCO will require additional
capital infusions during a time of
financial stress when raising such
additional capital is expensive relative
to market norms. By increasing
prefunded financial resources, a Subpart
C DCO becomes less reliant on the
ability of its clearing members to pay an
assessment, more secure in its ability to
meets its obligations, and more viable in
any given situation, even in the case of
multiple defaults of clearing members.
Accordingly, proposed regulation
39.33(b) would increase the financial
security and reliability of the Subpart C
DCO, which will, therefore, further
increase the overall stability of the U.S.
financial markets.

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As described above, proposed
regulation 39.33(c) would require a
SIDCO or Subpart C DCO to maintain a
minimum level of eligible liquidity
resources that would permit the DCO to
satisfy its intraday, same-day, and
multi-day settlement obligations in all
relevant currencies. Proposed regulation
39.33(d) would require a SIDCO or
Subpart C DCO to undertake due
diligence to confirm that each liquidity
provider upon which the DCO relies has
the capacity to perform its commitments
to provide liquidity (and to regularly
test its own procedures for accessing its
liquidity resources) and would require a
SIDCO with access to accounts and
services at a Federal Reserve Bank to
use such services where practical.
Proposed regulation 39.33(e) would
require a SIDCO or Subpart C DCO to
document its supporting rationale for,
and to have adequate governance
arrangements relating to, the amount of
total financial resources it maintains
and the amount of total liquidity
resources it maintains.
These requirements would increase
the likelihood that a SIDCO or Subpart
C DCO would promptly meet its
settlement obligations in a variety of
market conditions. In determining the
resources that would be necessary to
meet the qualifying liquid resources
requirements, a SIDCO or Subpart C
DCO may need to undertake a complex
analysis of the SIDCO’s or Subpart C
DCO’s exposures and processes,
including various models, and, where
appropriate, designing and
implementing changes to either create
or modify existing internal processes
and documenting the rationale for the
amount of total financial and total
liquidity resources the SIDCO or
Subpart C DCO maintains. These efforts
are likely to contribute to a better ex
ante understanding by the SIDCO’s or
Subpart C DCO’s management of the
liquidity risks the DCO is likely to face
in a stress scenario, resources that are
calculated to enable the DCO to
completely meets its settlement
obligations on a prompt basis despite
the default of a clearing member, and
better assurance of its ability to rely on
the commitments of its liquidity
providers.
The result of this analysis and these
enhanced resources is likely to be better
preparation to meet liquidity challenges
promptly, and a greater likelihood that
the DCO would efficiently and
effectively meet its obligations promptly
in a default scenario. This improved
preparation and enhanced likelihood of
the SIDCO or Subpart C DCO’s prompt
meeting of its own obligations will
benefit the DCO’s clearing members and

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and any benefits that would be realized
by other market participants or the
financial system more broadly. As noted
above, the Commission specifically
requests comment on alternative means
to address these issues, and the benefits
associated with such alternatives.

to address these issues, and the benefits
associated with such alternatives.

v. Regulation 39.35 (Default Rules and
Procedures for Uncovered Losses or
Shortfalls (Recovery) for Systemically
Important Derivatives Clearing
Organizations and Subpart C Derivatives
Clearing Organizations)

iv. Regulation 39.34 (System Safeguards
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
As discussed above, proposed
amended regulation 39.34 would
require SIDCOs and Subpart C DCOs to
comply with enhanced system
safeguards requirements.209 While
SIDCOs are already subject to these
requirements, the Commission proposes
expanding this regulation to include
Subpart C DCOs. A two-hour RTO in a
Subpart C DCO’s BC–DR plan would
increase the soundness and operating
resiliency of the Subpart C DCO. The
two-hour RTO ensures that even in the
event of a wide-scale disruption, the
potential negative effects upon U.S.
financial markets would be minimized
because the affected Subpart C DCO
would recover rapidly and resume its
critical market functions. This would
allow other market participants to
process their transactions, including
those participants in locations not
directly affected by the disruption. The
two-hour RTO would increase a Subpart
C DCO’s resiliency by requiring the
Subpart C DCO to have the resources
and technology necessary to resume
operations promptly. This resiliency, in
turn, would increase the overall stability
of the U.S. financial markets.
As discussed in section II.F. above,
the Commission requests comments on
the potential benefits to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.34,

As discussed above, proposed
regulation 39.35 would require SIDCOs
and Subpart C DCOs to adopt explicit
rules and procedures for: (i) Allocating
uncovered credit losses and (ii) meeting
all settlement obligations in a variety of
market conditions.210 The analysis
SIDCOs and Subpart C DCOs would
need to perform to create these rules
and procedures are likely to contribute
to a better ex ante understanding by the
SIDCO or Subpart C DCO of the
scenarios that would lead to uncovered
credit losses or liquidity shortfalls. This
analysis would also enable the SIDCO or
Subpart C DCO to more effectively and
efficiently meet its obligations
promptly, thereby avoiding harm to
clearing members and their customers
from a default. In addition, requiring
SIDCOs and Subpart C DCOs to have
clear rules and procedures addressing
such scenarios would be beneficial for
clearing members and their customers
in that these rules and procedures
would provide clearing members with a
better understanding of the members’
own obligations, and the extent to
which the SIDCO or Subpart C DCO
would perform its obligations to its
clearing members during periods of
market stress. This understanding
would, in turn, contribute to the ability
of clearing members and their customers
to tailor their own contingency plans to
address those circumstances. Improved
preparation by SIDCOs, Subpart C
DCOs, and their clearing members will
also redound to the benefit of the larger
financial system by mitigating systemic
risk.
As discussed in section II.G. above,
the Commission requests comments on
the potential benefits to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.35,
and any benefits that would be realized
by other market participants or the
financial system more broadly. As noted
above, the Commission specifically
requests comment on alternative means

As discussed above, the enhanced risk
management requirements set forth in
proposed regulation 39.36 are designed
to help SIDCOs and Subpart C DCOs
manage their risk exposure.211 For
example, the proposed provisions
would require SIDCOs and Subpart C
DCOs to stress test their financial
resources, stress test their liquidity
resources, and conduct regular
sensitivity analyses of their margin
methodologies. The analyses performed
under the proposed requirements would
appear to increase the DCO’s ability to
mitigate and address credit risks, and to
create proper incentives for members
with respect to the exposures they
create to the SIDCO or Subpart C DCO
by enabling the DCO to tie risk
exposures to margin requirements. In
addition, proposed regulation 39.36
would require a SIDCO or Subpart C
DCO to monitor, manage and limit its
credit and liquidity risks arising from its
settlement banks, as well invest its own
funds and assets in instruments with
minimal credit, market, and liquidity
risks. This provision would also appear
to increase the SIDCO’s or Subpart C
DCO’s ability to mitigate and address
the probability of being exposed to a
settlement bank’s failure and the
potential losses and liquidity pressures
to which the SIDCO or Subpart C DCO
would be exposed in the event of such
a failure. This, in turn, would benefit
members of such DCOs and their
customers, as discussed above. It would
also appear that by enhancing the
reliability and stability of SIDCOs and
Subpart C DCOs, the overall stability of
the U.S. financial markets will be
strengthened.
As discussed in section II.H. above,
the Commission requests comments on
the potential benefits to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.36,
and any benefits that would be realized
by members of such DCOs and their
customers, as well as other market
participants or the financial system
more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
address these issues, and the benefits
associated with such alternatives.

194 See supra Section II.F (discussing proposed
regulation 39.34).

210 See supra Section II.G (discussing proposed
regulation 39.35).

211 See supra Section II.H (discussing proposed
regulation 39.36).

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their customers by avoiding an inability
to meet settlement obligations that
might cause knock-on liquidity
problems to such clearing members and
their customers. The harm to clearing
members and customers from a failure
of a SIDCO or Subpart C DCO to meet
its obligations promptly would be
especially serious in a time of general
financial stress. The assurance of the
DCO meeting its settlement obligations
promptly would also redound to the
benefit of the larger financial system by
mitigating systemic risk.
As discussed in section II.E. above,
the Commission requests comments on
the potential benefits to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.33,
and any benefits that would be realized
by other market participants or the
financial system more broadly. As noted
above, the Commission specifically
requests comment on alternative means
to address these issues, and the benefits
associated with such alternatives.

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vi. Regulation 39.36 (Risk Management
for Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)

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vii. Regulation 39.37 (Additional
Disclosure for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
The disclosure requirements set forth
in proposed regulation 39.37 212 would
be beneficial to clearing members of
SIDCOs and Subpart C DCOs, as well as
to customers of clearing members,
because they would provide
transparency and certainty concerning
the processes, operations and exposures
of these DCOs. In particular, proposed
paragraph (d) would require a SIDCO or
Subpart C DCO to publicly disclose its
policies and procedures concerning the
segregation and portability of customers’
positions and funds. These disclosures
would enable clearing members and
their customers to better understand
their respective exposures to the SIDCO
or Subpart C DCO, to better choose a
DCO that fits their needs, and, in turn,
to create incentives for safe and effective
operations of SIDCOs and Subpart C
DCOs.
As discussed in section II.I. above, the
Commission requests comments on the
potential benefits to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.37,
and any benefits that would be realized
by members of such DCOs and their
customers, as well as other market
participants or the financial system
more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
address these issues, and the benefits
associated with such alternatives.

more broadly, may be offered more
efficient clearing services that may be
easier to access at an operational level.
As discussed in section II.J. above, the
Commission requests comments on the
potential benefits to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.38,
and any benefits that would be realized
by members of such DCOs, their
customers, as well as other market
participants or the financial system
more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
address these issues, and the benefits
associated with such alternatives.

viii. Regulation 39.38 (Efficiency for
Systemically Important Derivatives
Clearing Organizations and Subpart C
Derivatives Clearing Organizations)
The efficiency requirements set forth
in proposed regulation 39.38 would be
beneficial to clearing members of
SIDCOs and Subpart C DCOs, as well as
to customers of clearing members,
because they would require these DCOs
to regularly endeavor to improve their
clearing and settlement arrangements,
operating structures and procedures,
product offerings, and use of
technology. In addition, SIDCOs and
Subpart C DCOs would be required to
facilitate efficient payment, clearing and
settlement by accommodating
internationally accepted communication
procedures and standards, which could
result in operational efficiency for
market participants. As a result,
members of such DCOs and their
customers, as well as the marketplace

ix. Regulation 39.39 (Recovery and
Wind-Down for Systemically Important
Derivatives Clearing Organizations and
Subpart C Derivatives Clearing
Organizations)
As discussed above, proposed
regulation 39.39 would require a SIDCO
and Subpart C DCO to maintain viable
plans for recovery and orderly winddown, in cases necessitated by (1) credit
losses or liquidity shortfalls and (2)
general business risk, operational risk,
or any other risk that threatens the
derivatives clearing organization’s
viability as a going concern. This would
require the DCO to identify scenarios
that may prevent a SIDCO or Subpart C
DCO from being able to provide its
critical operations and services as a
going concern and to assess the
effectiveness of a full range of options
for recovery or orderly wind-down.
The proposed regulation would also
require a SIDCO or Subpart C DCO to
evaluate the resources available to meet
the plan to cover credit losses and
liquidity shortfalls, and to maintain
sufficient unencumbered liquid
financial assets to implement the plan to
cover other risks. The latter point
requires a SIDCO or Subpart C DCO to
analyze whether its particular
circumstances and risks require it to
maintain liquid net assets to fund the
plan that are in addition to those
resources currently required by
regulation 39.11(a)(2).213
The complex analysis and plan
preparation that a SIDCO or Subpart C
DCO would undertake to comply with
the proposed regulation, including
designing and implementing changes to
existing plans, are likely to contribute to
a better ex ante understanding by the
SIDCO’s or Subpart C DCO’s
management of the challenges the DCO
would face in a recovery or wind-down
scenario, and thus better preparation to

212 See supra Section II.I (discussing proposed
regulation 39.37).

213 See supra Section II.K (discussing proposed
regulation 39.39).

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meet those challenges. This improved
preparation would help reduce the
possibility of market disruptions and
financial losses to clearing members and
their customers. By maintaining and
regularly updating recovery and winddown plans, and maintaining resources
and arrangements designed to meet the
requirements of such plans, the DCO
will better be able to mitigate the impact
that a threat to, or a disruption of, a
SIDCO’s or Subpart C DCO’s operations
would have on customers, clearing
members, and, more broadly, the
stability of the U.S. financial markets.
By reducing the possibility that a DCO
would default in a disorganized fashion,
the proposed regulation would also help
to reduce the likelihood of a failure by
the DCO to meet its obligations to its
members, thereby enhancing protection
for members of such a DCO and their
customers, as well as helping to avoid
the systemic effects of DCO failure.
As discussed in section II.K. above,
the Commission requests comments on
the potential benefits to a SIDCO or a
Subpart C DCO in complying with all
aspects of proposed regulation 39.39,
and any benefits that would be realized
by members of such DCOs and their
customers, as well as other market
participants or the financial system
more broadly. As noted above, the
Commission specifically requests
comment on alternative means to
address these issues, and the benefits
associated with such alternatives.
4. Section 15(a) Factors
i. Protection of Market Participants and
the Public
The proposed regulations create
additional standards for compliance
with the CEA, which include
governance standards, enhanced
financial resources and liquidity
resource requirements, system safeguard
requirements, special default rules and
procedures for uncovered losses or
shortfalls, enhanced risk management
requirements, additional disclosure
requirements, efficiency standards, and
standards for recovery and wind-down
procedures. They also include
procedures for Subpart C DCOs to elect
to be held to such additional standards,
and procedures to rescind such election.
These standards and procedures would
further the protection of members of
SIDCOs and Subpart C DCOs, customers
of such members, as well as other
market participants and the public by
increasing the financial stability and
operational security of SIDCOs and
Subpart C DCOs. These proposed
regulations could, more broadly,
increase the stability of the U.S.

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financial markets. A designation of
systemic importance under Title VIII
means the failure of a SIDCO or the
disruption of its clearing and settlement
activities could create or increase the
risk of significant liquidity or credit
problems spreading among financial
institutions or markets, thereby
threatening the stability of the U.S.
financial markets. The regulations
contained in this proposed rule are
designed to help ensure that SIDCOs
continue to function even in extreme
circumstances, including multiple
defaults by clearing members and widescale disruptions. While there may be
increased costs associated with the
implementation of the proposed rules,
the increased costs associated with the
implementation of the proposed rules
for Subpart C DCOs would be borne
only by those DCOs that have not been
designated systemically important
under Title VIII and that elect to become
subject to the provisions of Subpart C.
Some of those costs would ultimately be
borne by clearing members of such
Subpart C DCOs, and by customers of
such clearing members.
The costs of this rulemaking would be
mitigated by the countervailing benefits
of stronger resources, improved design,
more efficient and effective processes,
and enhanced planning that would lead
to increased safety and soundness of
SIDCOs and the reduction of systemic
risk, which protect market participants
and the public from the adverse
consequences that would result from a
SIDCO’s failure or a disruption in its
functioning. Similarly, the proposed
regulations would increase the safety
and soundness of Subpart C DCOs so
that they may continue to operate even
in extreme circumstances, which would,
in turn, better protect members of such
DCOs, their customers, and also market
participants and the public, particularly
during time of severe market stress.
ii. Efficiency, Competitiveness, and
Financial Integrity
The regulations set forth in this
proposed rulemaking would promote
the financial strength and stability of
SIDCOs and Subpart C DCOs, as well as,
more broadly, efficiency and greater
competition in the global markets.
Proposed regulation 39.38 expressly
promotes efficiency in the design of a
SIDCO’s or Subpart C DCO’s settlement
and clearing arrangements, operating
structure and procedures, scope of
products cleared, and use of technology.
The proposed regulation also requires
SIDCOs and Subpart C DCOs to
accommodate internationally accepted
communication procedures and
standards to facilitate efficient payment,

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clearing, and settlement. In addition, the
proposed regulations promote efficiency
insofar as SIDCOs and Subpart C DCOs
that operate with enhanced financial
and liquidity resources, enhanced risk
management requirements, increased
system safeguards, and wind-down or
recovery plans are more secure and are
less likely to fail.
The proposed regulations would also
promote competition because they are
consistent with the international
standards set forth in the PFMIs and
will help to ensure that SIDCOs are held
to international standards and thus are
enabled to gain QCCP status and
accordingly avoid an important
competitive disadvantage relative to
similarly situated foreign CCPs that
meet international standards and are
QCCPs. Moreover, by allowing other
DCOs to elect to become subject to the
provisions of Subpart C and thus the
opportunity to meet international
standards and to gain QCCP status, the
proposed regulations promote
competition among registered DCOs,
and between registered DCOs and
foreign CCPs that meet international
standards and are QCCPs. Conversely,
the Commission notes that these
enhanced financial resources and risk
management standards are also
associated with additional costs and to
the extent that SIDCOs and Subpart C
DCOs pass along the additional costs to
their clearing members and, indirectly,
those clearing members’ customers,
participation in the affected markets
may decrease and have a negative
impact on price discovery. However, it
would appear that such higher
transactional costs should be offset by
the lower capital charges granted to
clearing members and customers for
exposures resulting from transactions
that are cleared through SIDCOs and
Subpart C DCOs that are also QCCPs.
Additionally, enhanced risk
management and operational standards
would promote financial integrity by
leading to SIDCOs and Subpart C DCOs
to be more secure and less likely to fail.
By increasing the stability and strength
of the SIDCOs and Subpart C DCOs, the
proposed regulations would help
SIDCOs and Subpart C DCOs to meet
their obligations in extreme
circumstances and be able to resume
operations even in the face of wide-scale
disruption, which contributes to the
financial integrity of the financial
markets. Moreover, in requiring (1) more
financial resources to be pre-funded by
expanding the potential losses those
resources are intended to cover and
restricting the means for satisfying those
resource requirements, and (2) requiring
greater liquidity resources, the

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requirements of these proposed
regulations seek to lessen the incidence
of pro-cyclical demands for additional
resources and, in so doing, promote
both financial integrity and market
stability. These efforts would redound
to the benefit of clearing members and
their customers, as well as the financial
system more broadly.
iii. Price Discovery
The regulations in this proposed
rulemaking would enhance financial
resources, liquidity resources, risk
management standards, disclosure
standards, and recovery planning for
SIDCOs and Subpart C DCOs which may
result in increased public confidence,
which, in turn, might lead to expanded
participation in the affected markets
(including markets with products with a
more complex risk profile). The
expanded participation in these markets
(i.e., greater transactional volume) may
have a positive impact on price
discovery. Conversely, the Commission
notes that these proposed regulations
are also associated with additional costs
and to the extent that SIDCOs and
Subpart C DCOs pass along the
additional costs to their clearing
members and, indirectly, to their
clearing members’ customers,
participation in the affected markets
may decrease and have a negative
impact on price discovery. However, it
is the Commission’s belief that such
higher transactional costs should be
offset by the lower capital charges
granted to clearing members and
customers with exposures resulting
from transactions cleared through
SIDCOs and Subpart C DCOs that are
deemed QCCPs.
iv. Sound Risk Management Practices
The regulations in this proposed
rulemaking contribute to the sound risk
management practices of SIDCOs and
Subpart C DCOs because the
requirements would promote the safety
and soundness of SIDCOs and Subpart
C DCOs by: (1) Enhancing the financial
resources requirements and liquidity
resource requirements; (2) enhancing
understanding of credit and liquidity
risks and related governance
arrangements; (3) enhancing system
safeguards to facilitate the continuous
operation and rapid recovery of
activities; 214 (4) enhancing risk
management standards by creating new
stress testing and sensitivity analysis
214 As mentioned above, this proposed
rulemaking would extend to Subpart C DCOs the
system safeguards requirements currently
applicable to SIDCOs. See supra Section II.F
(discussing proposed revised regulation 39.34
(system safeguards)).

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requirements; (5) promoting the active
management of credit and liquidity risks
arising from settlement banks; 215 and
(6) enhancing risk management by
establishing rules and procedures
addressing uncovered credit losses or
liquidity shortfalls, and recovery and
wind-down planning for credit risks and
for business continuity and operational
risks.216 In addition, by strengthening
financial and liquidity resource
requirements, enhancing risk
management standards, and enhancing
disclosure and recovery planning
requirements, these proposed
regulations would provide greater
certainty for clearing members of such
DCOs, their customers, and other market
participants that obligations of the
SIDCOs and Subpart C DCOs will be
honored, and provide certainty and
security to market participants that
potential disruptions will be reduced
and, by extension, the risk of loss of
capital and liquidity will be reduced.
v. Other Public Interest Considerations
The Commission notes the strong
public interest for jurisdictions to either
adopt the PFMIs or establish standards
consistent with the PFMIs in order to
allow CCPs licensed in the relevant
jurisdiction to gain QCCP status. As
emphasized throughout this proposed
rulemaking, SIDCOs and Subpart C
DCOs that are held to international
standards and that gain QCCP status
might hold a competitive advantage in
the financial markets by, inter alia,
helping bank clearing members and
bank customers avoid the much higher
capital charges imposed by the Basel
CCP Capital Requirements on exposures
to non-QCCPs. Moreover, because
‘‘enhancements to the regulation and
supervision of systemically important
financial market utilities . . . are
necessary . . . to support the stability of
the broader financial system,’’ 217
adopting these proposed rules would
promote the public interest in a more
stable broader financial system.

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List of Subjects in 17 CFR Part 39
Commodity futures, Risk
management, Settlement procedures,
Default rules and procedures, System
safeguards.
For the reasons stated in the
preamble, the Commission proposes to
amend 17 CFR part 39 as follows:
215 See supra Section II.H (discussing proposed
regulation 39.36).
216 See supra Section II.G (discussing proposed
regulation 39.35); see also supra Section II.K
(discussing proposed regulation 39.39).
217 See Section 802(a)(4) of the Dodd-Frank Act
(Congressional Findings).

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PART 39—DERIVATIVES CLEARING
ORGANIZATIONS
1. The authority citation for part 39 is
amended to read as follows:

■

Authority: 7 U.S.C. 2, 7a–1, and 12a; 12
U.S.C. 5464; 15 U.S.C. 8325.
■

2. Revise § 39.2 to read as follows:

§ 39.2

Definitions.

For the purposes of this part: Activity
with a more complex risk profile
includes:
(1) Clearing credit default swaps,
credit default futures, or derivatives that
reference either credit default swaps or
credit default futures and
(2) Any other activity designated as
such by the Commission pursuant to
§ 39.33(a)(3).
Back test means a test that compares
a derivatives clearing organization’s
initial margin requirements with
historical price changes to determine
the extent of actual margin coverage.
Customer means a person trading in
any commodity named in the definition
of commodity in section 1a(9) of the Act
or in § 1.3 of this chapter, or in any
swap as defined in section 1a(47) of the
Act or in § 1.3 of this chapter; Provided,
however, an owner or holder of a house
account as defined in this section shall
not be deemed to be a customer within
the meaning of section 4d of the Act, the
regulations that implement sections 4d
and 4f of the Act and § 1.35, and such
an owner or holder of such a house
account shall otherwise be deemed to be
a customer within the meaning of the
Act and §§ 1.37 and 1.46 of this chapter
and all other sections of these rules,
regulations, and orders which do not
implement sections 4d and 4f of the Act.
Customer account or customer origin
means a clearing member account held
on behalf of customers, as that term is
defined in this section, and which is
subject to section 4d(a) or section 4d(f)
of the Act.
Depository institution has the
meaning set forth in section 19(b)(1)(A)
of the Federal Reserve Act (12 U.S.C.
461(b)(1)(A)).
House account or house origin means
a clearing member account which is not
subject to section 4d(a) or 4d(f) of the
Act.
Key personnel means derivatives
clearing organization personnel who
play a significant role in the operations
of the derivatives clearing organization,
the provision of clearing and settlement
services, risk management, or oversight
of compliance with the Act and
Commission regulations and orders. Key
personnel include, but are not limited
to, those persons who are or perform the
functions of any of the following: Chief

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executive officer; president; chief
compliance officer; chief operating
officer; chief risk officer; chief financial
officer; chief technology officer; and
emergency contacts or persons who are
responsible for business continuity or
disaster recovery planning or program
execution.
Stress test means a test that compares
the impact of potential extreme price
moves, changes in option volatility,
and/or changes in other inputs that
affect the value of a position, to the
financial resources of a derivatives
clearing organization, clearing member,
or large trader, to determine the
adequacy of the financial resources of
such entities.
Subpart C derivatives clearing
organization means any derivatives
clearing organization, as defined in
section 1a(15) of the Act and § 1.3(d) of
this chapter, which:
(1) Is registered as a derivatives
clearing organization under section 5b
of the Act;
(2) Is not a systemically important
derivatives clearing organization; and
(3) Has become subject to the
provisions of this Subpart C, pursuant to
§ 39.31.
Systemically important derivatives
clearing organization means a financial
market utility that is a derivatives
clearing organization registered under
section 5b of the Act, which is currently
designated by the Financial Stability
Oversight Council to be systemically
important and for which the
Commission acts as the Supervisory
Agency pursuant to 12 U.S.C. 5462(8).
U.S. branch and agency of a foreign
banking organization means the U.S.
branch and agency of a foreign banking
organization as defined in section 1(b)
of the International Banking Act of 1978
(12 U.S.C. 3101).
Trust company means a trust
company that is a member of the
Federal Reserve System, under section 1
of the Federal Reserve Act (12 U.S.C.
221), but that does not meet the
definition of depository institution.
■ 3. In Subpart B, add and reserve
§§ 39.28 and 39.29.
■ 4. Revise Subpart C to read as follows:
Subpart C—Provisions Applicable to
Systemically Important Derivatives Clearing
Organizations and Derivatives Clearing
Organizations That Elect To Be Subject to
the Provisions of Subpart C
Sec.
39.30 Scope.
39.31 Election to become subject to the
provisions of subpart C.
39.32 Governance for systemically
important derivatives clearing
organizations and subpart C derivatives
clearing organizations.

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39.33 Financial resources for systemically
important derivatives clearing
organizations and subpart C derivatives
clearing organizations.
39.34 System safeguards for systemically
important derivatives clearing
organizations and subpart C derivatives
clearing organizations.
39.35 Default rules and procedures for
uncovered losses or shortfalls (recovery)
for systemically important derivatives
clearing organizations and subpart C
derivatives clearing organizations.
39.36 Risk management for systemically
important derivatives clearing
organizations and subpart C derivatives
clearing organizations.
39.37 Additional disclosure for
systemically important derivatives
clearing organizations and subpart C
derivatives clearing organizations.
39.38 Efficiency for systemically important
derivatives clearing organizations and
subpart C derivatives clearing
organizations.
39.39 Recovery and wind-down for
systemically important derivatives
clearing organizations and subpart C
derivatives clearing organizations.
39.40 Consistency with the Principles for
Financial Market Infrastructures.
39.41 Special enforcement authority for
systemically important derivatives
clearing organizations.
39.42 Advance notice of material riskrelated rule changes by systemically
important derivatives clearing
organizations.
Appendix A to Part 39—Form DCO
Derivatives Clearing Organization
Application for Registration
Appendix B to Part 39—Subpart C Election
Form

Subpart C—Provisions Applicable to
Systemically Important Derivatives
Clearing Organizations and Derivatives
Clearing Organizations That Elect To
Be Subject to the Provisions of
Subpart C

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§ 39.30

Scope.

(a) The provisions of this subpart C
apply to each of the following: A
subpart C derivatives clearing
organization, a systemically important
derivatives clearing organization, and
any derivatives clearing organization, as
defined under section 1a(15) of the Act
and § 1.3(d) of this chapter, seeking to
become a subpart C derivatives clearing
organization pursuant to § 39.31.
(b) A systemically important
derivatives clearing organization is
subject to the provisions of subparts A
and B of this part in addition to the
provisions of this subpart.
(c) A subpart C derivatives clearing
organization is subject to the provisions
of subparts A and B of this part in
addition to the provisions of this
subpart except for §§ 39.41 and 39.42 of
this subpart.

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§ 39.31 Election to become subject to the
provisions of subpart C.

(a) Election eligibility. (1) A
derivatives clearing organization that is
registered with the Commission and that
is not a systemically important
derivatives clearing organization may
elect to become a subpart C derivatives
clearing organization subject to the
provisions of this subpart, using the
procedures set forth in paragraph (b) of
this section.
(2) An applicant for registration as a
derivatives clearing organization
pursuant to § 39.3 may elect to become
a subpart C derivatives clearing
organization subject to the provisions of
this subpart as part of its application for
registration using the procedures set
forth in paragraph (c) of this section.
(b) Election and withdrawal
procedures applicable to registered
derivatives clearing organizations. (1)
Election. A derivatives clearing
organization that is registered with the
Commission and that is not a
systemically important derivatives
clearing organization may request that
the Commission accept its election to
become a subpart C derivatives clearing
organization by filing with the
Commission a completed Subpart C
Election Form. The Subpart C Election
Form shall include the election and all
certifications, disclosures and exhibits,
as provided in appendix B to this part
and any amendments or supplements
thereto filed with the Commission
pursuant to paragraphs (b)(2) and (b)(3)
of this section.
(2) Submission of supplemental
information. The filing of a Subpart C
Election Form does not create a
presumption that the Subpart C Election
Form is materially complete or that
supplemental information will not be
required. The Commission, at any time
prior to the effective date, as provided
in paragraph (b)(4) of this section, may
request that the derivatives clearing
organization submit supplemental
information in order for the Commission
to process the Subpart C Election Form,
and the derivatives clearing
organization shall file such
supplemental information with the
Commission.
(3) Amendments. A derivatives
clearing organization shall promptly
amend its Subpart C Election Form if it
discovers a material omission or error
in, or if there is a material change in, the
information provided to the
Commission in the Subpart C Election
Form or other information provided in
connection with the Subpart C Election
Form.
(4) Effective date. A derivatives
clearing organization’s election to

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become a subpart C derivatives clearing
organization shall become effective:
(i) Upon the later of the following,
provided the Commission has neither
stayed nor denied such election as set
forth in paragraph (b)(5) of this section.
(A) The effective date specified by the
derivatives clearing organization in its
Subpart C Election Form; or
(B) Ten business days after the
derivatives clearing organization files its
Subpart C Election Form with the
Commission;
(ii) Or upon the effective date set forth
in written notification from the
Commission that it shall permit the
election to take effect after a stay issued
pursuant to paragraph (b)(5) of this
section.
(5) Stay or denial of election. Prior to
the effective date set forth in paragraph
(b)(4)(i) of this section, the Commission
may stay or deny a derivatives clearing
organization’s election to become a
subpart C derivatives clearing
organization by issuing a written
notification thereof to the derivatives
clearing organization.
(6) Commission acknowledgement.
The Commission may acknowledge, in
writing, that it has received a Subpart C
Election Form filed by a derivatives
clearing organization and that it has
permitted the derivatives clearing
organization’s election to become
subject to the provisions of this subpart
C to take effect, and the effective date of
such election.
(7) Withdrawal of election. A
derivatives clearing organization that
has filed a Subpart C Election Form may
withdraw an election to become subject
to the provisions of this subpart C at any
time prior to the date that the election
is permitted to take effect by filing with
the Commission a notice of the
withdrawal of election.
(c) Election and withdrawal
procedures applicable to applicants for
registration as derivatives clearing
organization—(1) Election. An applicant
for registration as a derivatives clearing
organization that requests an election to
become subject to the provisions of this
subpart C may make that request by
attaching a completed Subpart C
Election Form to the Form DCO that it
files pursuant to § 39.3. The Subpart C
Election Form shall include the election
and all certifications, disclosures and
exhibits, as provided in appendix B to
part 39, and any amendments or
supplements thereto filed with the
Commission pursuant to paragraphs
(c)(3) or (c)(4) of this section.
(2) Election review and effective date.
The Commission shall review the
applicant’s Subpart C Election Form as
part of the Commission’s review of its

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application for registration pursuant to
§ 39.3(a). The Commission may permit
the applicant’s election to take effect at
the time it approves the applicant’s
application for registration by providing
written notice thereof to the applicant.
The Commission shall not approve any
application for registration filed
pursuant to § 39.3(a) for which a
Subpart C Election Form is pending, if
the Commission determines that the
applicant’s election to become subject to
Subpart C should not become effective
because the applicant has not
demonstrated its ability to comply with
the applicable provisions of this
subpart.
(3) Submission of supplemental
information. The filing of a Subpart C
Election Form does not create a
presumption that the Subpart C Election
Form is materially complete or that
supplemental information will not be
required. At any time during the
Commission’s review of the Subpart C
Election Form, the Commission may
request that the applicant submit
supplemental information in order for
the Commission to process the Subpart
C Election Form and the applicant shall
file such supplemental information with
the Commission.
(4) Amendments. An applicant for
registration as a derivatives clearing
organization shall promptly amend its
Subpart C Election Form if it discovers
a material omission or error in, or if
there is a material change in, the
information provided to the
Commission in the Subpart C Election
Form or other information provided in
connection with the Subpart C Election
Form.
(5) Withdrawal of election. An
applicant for registration as a
derivatives clearing organization may
withdraw an election to become subject
to the provisions of this subpart C by
filing with the Commission a notice of
the withdrawal of its Subpart C Election
Form at any time prior to the date that
the Commission approves its
application for registration as a
derivatives clearing organization. The
applicant may withdraw its Subpart C
Election Form without withdrawing its
Form DCO.
(d) Public information. The following
portions of the Subpart C Election Form
will be public: The Elections and
Certifications and Disclosures in the
Subpart C Election Form, the rules of
the derivatives clearing organization,
the regulatory compliance chart, and
any other portion of the Subpart C
Election Form not covered by a request
for confidential treatment complying
with the requirements of § 145.9 of this
chapter.

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(e) Rescission of election—(1) Notice
of intent to rescind. A subpart C
derivatives clearing organization may
rescind its election to be subject to the
provisions of this subpart C and
terminate its status as a subpart C
derivatives clearing organization by
filing with the Commission a notice of
its intent to rescind such election. The
notice of intent to rescind the election
shall include:
(i) The effective date of the rescission;
and
(ii) A certification signed by the
relevant duly authorized representative
of the subpart C derivatives clearing
organization, as specified in paragraph
three of the General Instructions to the
Subpart C Election Form, stating that
the subpart C derivatives clearing
organization:
(A) Has provided the notice to its
clearing members required by paragraph
(e)(3)(i)(A) of this section;
(B) Will provide the notice to its
clearing members required by paragraph
(e)(3)(i)(B) of this section;
(C) Has provided the notice to the
general public required by paragraph
(e)(3)(ii)(A) of this section;
(D) Will provide notice to the general
public required by paragraph
(e)(3)(ii)(B) of this section; and
(E) Has removed all references to the
organization as a subpart C derivatives
clearing organization and a qualifying
central counterparty on its Web site and
in all other material that it provides to
its clearing members and customers,
other market participants or members of
the public, as required by paragraph
(e)(3)(ii)(C) of this section.
(2) Effective date. The rescission of
the election to be subject to the
provisions of this subpart C shall
become effective on the date set forth in
the notice of intent to rescind the
election filed by the subpart C
derivatives clearing organization
pursuant to § 39.31(e)(1), provided that
the rescission may become effective no
earlier than 90 days after the notice of
intent to rescind the election is filed
with the Commission. The subpart C
derivatives clearing organization shall
continue to comply with all of the
provisions of this subpart C until such
effective date.
(3) Additional notice requirements.
(i) A subpart C derivatives clearing
organization shall provide the following
notices, at the following times, to each
of its clearing members and shall have
rules in place requiring each of its
clearing members to provide the
following notices to each of the clearing
member’s customers:
(A) No later than the filing of a notice
of its intent to rescind its election to be

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subject to the provisions of this subpart
C, written notice that it intends to file
such notice with the Commission and
the effective date thereof; and
(B) On the effective date of the
rescission of its election to be subject to
the provisions of this subpart C, written
notice that the rescission has become
effective.
(ii) A subpart C derivatives clearing
organization shall:
(A) No later than the filing of a notice
of its intent to rescind its election to be
subject to the provisions of this subpart
C, provide notice to the general public,
displayed prominently on its Web site,
of its intent to rescind its election to be
subject to the provisions of this subpart
C;
(B) On and after the effective date of
the rescission of its election to be
subject to the provisions of this subpart
C, provide notice to the general public,
displayed prominently on its Web site,
that the rescission has become effective;
and
(C) Prior to the filing of a notice of its
intent to rescind its election to become
subject to the provisions of this subpart
C, remove all references to the
derivatives clearing organization’s status
as a subpart C derivatives clearing
organization and a qualifying central
counterparty on its Web site and in all
other materials that it provides to its
clearing members and customers, other
market participants, or the general
public.
(iii) The employees and
representatives of a derivatives clearing
organization that has filed a notice of its
intent to rescind its election to be
subject to the provisions of this subpart
C shall refrain from referring to the
organization as a subpart C derivatives
clearing organization and a qualifying
central counterparty on and after the
date that the notice of intent to rescind
the election is filed.
(4) Effect of rescission. The rescission
of a subpart C derivatives clearing
organization’s election to be subject to
the provisions of this subpart C shall not
affect the authority of the Commission
concerning any activities or events
occurring during the time that the
derivatives clearing organization
maintained its status as a subpart C
derivatives clearing organization.
(f) Loss of designation as a
systemically important derivatives
clearing organization. A systemically
important derivatives clearing
organization whose designation of
systemic importance is rescinded by the
Financial Stability Oversight Council,
shall immediately be deemed to be a
subpart C derivatives clearing
organization and shall continue to

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comply with the provisions of this
subpart C unless such derivatives
clearing organization elects to rescind
its status as a subpart C derivatives
clearing organization in accordance
with the requirements of paragraph (e)
of this section.
(g) All forms and notices required by
this § 39.31 shall be filed electronically
with the Secretary of the Commission in
the format and manner specified by the
Commission.

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§ 39.32 Governance for systemically
important derivatives clearing organizations
and subpart C derivatives clearing
organizations.

(a) General rules. (1) Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
have governance arrangements that:
(i) Are written;
(ii) Are clear and transparent;
(iii) Place a high priority on the safety
and efficiency of the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization; and
(iv) Explicitly support the stability of
the broader financial system and other
relevant public interest considerations
of clearing members, customers of
clearing members, and other relevant
stakeholders.
(2) The board of directors shall make
certain that the systemically important
derivatives clearing organization’s or
subpart C derivatives clearing
organization’s design, rules, overall
strategy, and major decisions
appropriately reflect the legitimate
interests of clearing members, customers
of clearing members, and other relevant
stakeholders.
(3) To an extent consistent with other
statutory and regulatory requirements
on confidentiality and disclosure:
(i) Major decisions of the board of
directors should be clearly disclosed to
clearing members, other relevant
stakeholders, and to the Commission;
and
(ii) Major decisions of the board of
directors having a broad market impact
should be clearly disclosed to the
public;
(b) Governance arrangements. Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
have governance arrangements that:
(1) Are clear and documented;
(2) To an extent consistent with other
statutory and regulatory requirements
on confidentiality and disclosure, are
disclosed, as appropriate, to the
Commission and to other relevant
authorities, to clearing members and to

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customers of clearing members, to the
owners of the systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization, and to the public;
(3) Describe the structure pursuant to
which the board of directors,
committees, and management operate;
(4) Include clear and direct lines of
responsibility and accountability;
(5) Clearly specify the roles and
responsibilities of the board of directors
and its committees, including the
establishment of a clear and
documented risk management
framework;
(6) Clearly specify the roles and
responsibilities of management;
(7) Describe procedures for
identifying, addressing, and managing
conflicts of interest involving members
of the board of directors;
(8) Describe procedures pursuant to
which the board of directors oversees
the chief risk officer, risk management
committee, and material risk decisions;
(9) Assign responsibility and
accountability for risk decisions,
including in crises and emergencies;
and
(10) Assign responsibility for
implementing the:
(i) Default rules and procedures
required by §§ 39.16 and 39.35;
(ii) System safeguard rules and
procedures required by §§ 39.18 and
39.34; and
(iii) Recovery and wind-down plans
required by § 39.39.
(c) Fitness standards for board of
directors and management. Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
maintain policies to make certain that:
(1) The board of directors consists of
suitable individuals having appropriate
skills and incentives;
(2) The board of directors includes
individuals who are not executives,
officers or employees of the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization or an affiliate
thereof;
(3) The performance of the board of
directors and the performance of
individual directors are reviewed on a
regular basis;
(4) Managers have the appropriate
experience, skills, and integrity
necessary to discharge operational and
risk management responsibilities; and
(5) Risk management and internal
control personnel have sufficient
independence, authority, resources, and
access to the board of directors so that
the operations of the systemically
important derivatives clearing

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organization or subpart C derivatives
clearing organization are consistent with
the risk management framework
established by the board of directors.
§ 39.33 Financial resources requirements
for systemically important derivatives
clearing organizations and subpart C
derivatives clearing organizations.

(a) General rule. (1) Notwithstanding
the requirements of § 39.11(a)(1), each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization that, in
either case, is systemically important in
multiple jurisdictions or is involved in
activities with a more complex risk
profile shall maintain financial
resources sufficient to enable it to meet
its credit exposure to its clearing
members notwithstanding a default by
the two clearing members creating the
largest aggregate credit exposure for the
derivatives clearing organization in
extreme but plausible market
conditions.
(2) The Commission shall, if it deems
appropriate, determine whether a
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization is
systemically important in multiple
jurisdictions. In determining whether a
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization is
systemically important in multiple
jurisdictions, the Commission shall
consider whether the derivatives
clearing organization:
(i) Is a systemically important
derivatives clearing organization, as
defined by § 39.2; or
(ii) Has been determined to be
systemically important by one or more
jurisdictions other than the United
States pursuant to a designation process
that considers whether the foreseeable
effects of a failure or disruption of the
derivatives clearing organization could
threaten the stability of each relevant
jurisdiction’s financial system.
(3) The Commission shall, if it deems
appropriate, determine whether any of
the activities of a systemically important
derivatives clearing organization or a
subpart C derivatives clearing
organization, in addition to clearing
credit default swaps, credit default
futures, and any derivatives that
reference either credit default swaps or
credit default futures, has a more
complex risk profile. In determining
whether an activity has a more complex
risk profile, the Commission will
consider characteristics such as discrete
jump-to-default price changes or high
correlations with potential participant
defaults as factors supporting (though

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not necessary for) a finding of a more
complex risk profile.
(4) For purposes of this section 39.33,
if a clearing member controls another
clearing member or is under common
control with another clearing member,
such affiliated clearing members shall
be deemed to be a single clearing
member.
(b) Valuation of financial resources.
Notwithstanding the provisions of
§ 39.11(d)(2), assessments for additional
guaranty fund contributions (i.e.,
guaranty fund contributions that are not
pre-funded) shall not be included in
calculating the financial resources
available to meet a systemically
important derivatives clearing
organization’s or subpart C derivatives
clearing organization’s obligations
under paragraph (a) of this section or
§ 39.11(a)(1).
(c) Liquidity resources—(1) Minimum
amount of liquidity resources.
(i) Notwithstanding the provisions of
§ 39.11(e)(1)(ii), each systemically
important derivatives clearing
organization and subpart C derivatives
clearing organization shall maintain
eligible liquidity resources that, at a
minimum, will enable it to meet its
intraday, same-day, and multiday
obligations to perform settlements, as
defined in § 39.14(a)(1), with a high
degree of confidence under a wide range
of stress scenarios that should include,
but not be limited to, a default by the
clearing member creating the largest
aggregate liquidity obligation for the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization in
extreme but plausible market
conditions.
(ii) A systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization that is subject to
§ 39.33(a)(1) shall consider maintaining
eligible liquidity resources that, at a
minimum, will enable it to meet its
intraday, same-day, and multiday
obligations to perform settlements, as
defined in § 39.14(a)(1), with a high
degree of confidence under a wide range
of stress scenarios that should include,
but not be limited to, a default of the
two clearing members creating the
largest aggregate liquidity obligation for
the systemically important derivatives
clearing organization or subpart C
derivatives clearing organization in
extreme but plausible market
conditions.
(2) Satisfaction of settlement in all
relevant currencies. Each systemically
important derivatives clearing
organization and subpart C derivatives
clearing organization shall maintain

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liquidity resources that are sufficient to
satisfy the obligations required by
paragraph (c)(1) of this section in all
relevant currencies for which the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization has
obligations to perform settlements, as
defined in § 39.14(a)(1), to its clearing
members.
(3) Qualifying liquidity resources. (i)
Only the following liquidity resources
are eligible for the purpose of meeting
the requirement of paragraph (c)(1) of
this section:
(A) Cash in the currency of the
requisite obligations, held either at the
central bank of issue or at a
creditworthy commercial bank;
(B) Committed lines of credit;
(C) Committed foreign exchange
swaps;
(D) Committed repurchase
agreements; or
(E) (1) Obligations of the United States
Treasury or high quality, liquid, general
obligations of a sovereign nation.
(2) The assets described in paragraph
(c)(3)(i)(E)(1) of this section must be
readily available and convertible into
cash pursuant to prearranged and highly
reliable funding arrangements.
(ii) With respect to the arrangements
described in paragraph (c)(3)(i) of this
section, the systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization must take appropriate steps
to verify that such arrangements do not
include material adverse change
provisions and are enforceable, and will
be highly reliable, in extreme but
plausible market conditions.
(4) Additional liquidity resources. If a
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization
maintains financial resources in
addition to those required to satisfy
paragraph (c)(1) of this section, then
those resources should be in the form of
assets that are likely to be saleable with
proceeds available promptly or
acceptable as collateral for lines of
credit, swaps, or repurchase agreements
on an ad hoc basis. A systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization should consider
maintaining collateral with low credit,
liquidity, and market risks that is
typically accepted by a central bank of
issue for any currency in which it may
have settlement obligations, but shall
not assume the availability of
emergency central bank credit as a part
of its liquidity plan.

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(d) Liquidity providers. (1) For the
purposes of this paragraph, a liquidity
provider means:
(i) A depository institution, a U.S.
branch and agency of a foreign banking
organization, a trust company, or a
syndicate of depository institutions,
U.S. branches and agencies of foreign
banking organizations, or trust
companies providing a line of credit,
foreign exchange swap facility or
repurchase facility to a systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization;
(ii) Any other counterparty relied
upon by a systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization to meet its minimum
liquidity resources requirement under
paragraph (c) of this section.
(2) In fulfilling its obligations under
paragraph (c) of this section, each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
undertake due diligence to confirm that
each of its liquidity providers, whether
or not such liquidity provider is a
clearing member, has:
(i) Sufficient information to
understand and manage the liquidity
provider’s liquidity risks; and
(ii) The capacity to perform as
required under its commitments to
provide liquidity to the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization.
(3) Where relevant to a liquidity
provider’s ability reliably to perform its
commitments with respect to a
particular currency, the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization may take into
account the liquidity provider’s access
to the central bank of issue of that
currency.
(4) Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall regularly test its
procedures for accessing its liquidity
resources under paragraph (c)(3)(i) of
this section, including testing its
arrangements under paragraph (c)(3)(ii)
and its relevant liquidity provider(s)
under paragraph (d)(1) of this section.
(5) A systemically important
derivatives clearing organization with
access to accounts and services at a
Federal Reserve Bank, pursuant to
section 806(a) of the Dodd-Frank Act, 12
U.S.C. 5465(a), shall use these services,
where practical.
(e) Documentation of financial
resources and liquidity resources. Each

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systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
document its supporting rationale for,
and have appropriate governance
arrangements relating to, the amount of
total financial resources it maintains
pursuant to paragraph (a) of this section
and the amount of total liquidity
resources it maintains pursuant to
paragraph (c) of this section.

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§ 39.34 System safeguards for
systemically important derivatives clearing
organizations and subpart C derivatives
clearing organizations.

(a) Notwithstanding § 39.18(e)(3), the
business continuity and disaster
recovery plan described in § 39.18(e)(1)
for each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall have the objective of
enabling, and the physical,
technological, and personnel resources
described in § 39.18(e)(1) shall be
sufficient to enable, the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization to recover its
operations and resume daily processing,
clearing, and settlement no later than
two hours following the disruption, for
any disruption including a wide-scale
disruption.
(b) To facilitate its ability to achieve
the recovery time objective specified in
paragraph (a) of this section in the event
of a wide-scale disruption, each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization must
maintain a degree of geographic
dispersal of physical, technological and
personnel resources consistent with the
following for each activity necessary for
the daily processing, clearing, and
settlement of existing and new
contracts:
(1) Physical and technological
resources (including a secondary site),
sufficient to enable the entity to meet
the recovery time objective after
interruption of normal clearing by a
wide-scale disruption, must be located
outside the relevant area of the physical
and technological resources the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization
normally relies upon to conduct that
activity, and must not rely on the same
critical transportation,
telecommunications, power, water, or
other critical infrastructure components
the entity normally relies upon for such
activities;
(2) Personnel, who live and work
outside that relevant area, sufficient to

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enable the entity to meet the recovery
time objective after interruption of
normal clearing by a wide-scale
disruption affecting the relevant area in
which the personnel the entity normally
relies upon to engage in such activities
are located;
(3) The provisions of § 39.18(f) shall
apply to these resource requirements.
(c) Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization must conduct regular,
periodic tests of its business continuity
and disaster recovery plans and
resources and its capacity to achieve the
required recovery time objective in the
event of a wide-scale disruption. The
provisions of § 39.18(j) apply to such
testing.
(d) The Commission may, upon
application, grant an entity, which has
been designated as a systemically
important derivatives clearing
organization or that has elected to
become subject to subpart C, up to one
year to comply with any provision of
this section.
§ 39.35 Default rules and procedures for
uncovered credit losses or liquidity
shortfalls (recovery) for systemically
important derivatives clearing organizations
and subpart C derivatives clearing
organizations.

(a) Allocation of uncovered credit
losses. Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall adopt explicit rules
and procedures that address fully any
loss arising from any individual or
combined default relating to any
clearing members’ obligations to the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization. Such
rules and procedures shall address how
the systemically important derivatives
clearing organization or subpart C
derivatives clearing organization would:
(1) Allocate losses exceeding the
financial resources available to the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization;
(2) Repay any funds it may borrow;
and
(3) Replenish any financial resources
it may employ during such a stress
event, so that the systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization can continue to operate in
a safe and sound manner.
(b) Allocation of uncovered liquidity
shortfalls. (1) Each systemically
important derivatives clearing
organization and subpart C derivatives

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clearing organization shall establish
rules and/or procedures that enable it
promptly to meet all of its settlement
obligations, on a same day and, as
appropriate, intraday and multiday
basis, in the context of the occurrence
of either or both of the following
scenarios:
(i) An individual or combined default
involving one or more clearing
members’ obligations to the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization; or
(ii) A liquidity shortfall exceeding the
financial resources of the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization.
(2) The rules and procedures
described in paragraph (b)(1) of this
section shall:
(i) Enable the systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization promptly to meet its
payment obligations in all relevant
currencies;
(ii) Be designed to enable the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization to
avoid unwinding, revoking, or delaying
the same-day settlement of payment
obligations; and
(iii) Address the systemically
important derivatives clearing
organization’s or subpart C derivatives
clearing organization’s process to
replenish any liquidity resources it may
employ during a stress event so that it
can continue to operate in a safe and
sound manner.
§ 39.36 Risk management for systemically
important derivatives clearing organizations
and subpart C derivatives clearing
organizations.

(a) Stress tests of financial resources.
In addition to conducting stress tests
pursuant to § 39.13(h)(3), each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
conduct stress tests of its financial
resources in accordance with the
following standards and practices:
(1) Perform, on a daily basis, stress
testing of its financial resources using
predetermined parameters and
assumptions;
(2) Perform comprehensive analyses
of stress testing scenarios and
underlying parameters to ascertain their
appropriateness for determining the
systemically important derivatives
clearing organization’s or subpart C
derivatives clearing organization’s
required level of financial resources in
current and evolving market conditions;

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(3) Perform the analyses required by
paragraph (a)(2) of this section at least
monthly and when products cleared or
markets served display high volatility or
become less liquid, when the size or
concentration of positions held by
clearing members increases
significantly, or as otherwise
appropriate, evaluate the stress testing
scenarios, models, and underlying
parameters more frequently than once a
month;
(4) For the analyses required by
paragraph (a)(1) and paragraph (a)(2) of
this section, include a range of relevant
stress scenarios, in terms of both
defaulting clearing members’ positions
and possible price changes in
liquidation periods. The scenarios
considered shall include, but are not
limited to, the following:
(i) Relevant peak historic price
volatilities;
(ii) Shifts in other market factors
including, as appropriate, price
determinants and yield curves;
(iii) Multiple defaults over various
time horizons;
(iv) Simultaneous pressures in
funding and asset markets; and
(v) A range of forward-looking stress
scenarios in a variety of extreme but
plausible market conditions.
(5) Establish procedures for:
(i) Reporting stress test results to its
risk management committee or board of
directors, as applicable; and
(ii) Using the results to assess the
adequacy of, and to adjust, its total
amount of financial resources; and
(6) Use the results of stress tests to
support compliance with the minimum
financial resources requirement set forth
in § 39.33(a).
(b) Sensitivity analysis of margin
model.
(1) Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall, at least monthly and
more frequently as appropriate, conduct
a sensitivity analysis of its margin
models to analyze and monitor model
performance and overall margin
coverage. Sensitivity analysis shall be
conducted on both actual and
hypothetical positions.
(2) For the purposes of this paragraph
(b), a sensitivity analysis of a margin
model includes:
(i) Reviewing a wide range of
parameter settings and assumptions that
reflect possible market conditions in
order to understand how the level of
margin coverage might be affected by
highly stressed market conditions. The
range of parameters and assumptions
should capture a variety of historical
and hypothetical conditions, including

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the most volatile periods that have been
experienced by the markets served by
the systemically important derivatives
clearing organization or subpart C
derivatives clearing organization and
extreme changes in the correlations
between prices.
(ii) Testing of the ability of the models
or model components to produce
accurate results using actual or
hypothetical datasets and assessing the
impact of different model parameter
settings.
(iii) Evaluating potential losses in
clearing members’ proprietary positions
and, where appropriate, customer
positions.
(3) A systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization involved in activities with
a more complex risk profile shall take
into consideration parameter settings
that reflect the potential impact of the
simultaneous default of clearing
members and, where applicable, the
underlying credit instruments.
(c) Stress tests of liquidity resources.
Each systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
conduct stress tests of its liquidity
resources in accordance with the
following standards and practices:
(1) Perform, on a daily basis, stress
testing of its liquidity resources using
predetermined parameters and
assumptions;
(2) Perform comprehensive analyses
of stress testing scenarios and
underlying parameters to ascertain their
appropriateness for determining the
systemically important derivatives
clearing organization’s or subpart C
derivatives clearing organization’s
required level of liquidity resources in
current and evolving market conditions;
(3) Perform the analyses required by
paragraph (c)(2) of this section at least
monthly and when products cleared or
markets served display high volatility or
become less liquid, when the size or
concentration of positions held by
clearing members increases
significantly, or as otherwise
appropriate, evaluate its stress testing
scenarios, models, and underlying
parameters more frequently than once a
month;
(4) For the analyses required by
paragraph (c)(1) and paragraph (c)(2) of
this section, include a range of relevant
stress scenarios, in terms of both
defaulting clearing members’ positions
and possible price changes in
liquidation periods. The scenarios
considered shall include, but are not
limited to, the following:

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(i) Relevant peak historic price
volatilities;
(ii) Shifts in other market factors
including, as appropriate, price
determinants and yield curves;
(iii) Multiple defaults over various
time horizons;
(iv) Simultaneous pressures in
funding and asset markets; and
(v) A range of forward-looking stress
scenarios in a variety of extreme but
plausible market conditions.
(5) For the scenarios enumerated in
paragraph (c)(4) of this section, consider
the following:
(i) All entities that might pose
material liquidity risks to the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization,
including settlement banks, permitted
depositories, liquidity providers, and
other entities,
(ii) Multiday scenarios as appropriate,
(iii) Inter-linkages between its clearing
members and the multiple roles that
they may play in the systemically
important derivatives clearing
organization’s or subpart C derivatives
clearing organization’s risk
management; and
(iv) The probability of multiple
failures and contagion effect among
clearing members.
(6) Establish procedures for:
(i) Reporting stress test results to its
risk management committee or board of
directors, as applicable; and
(ii) Using the results to assess the
adequacy of, and to adjust its total
amount of liquidity resources.
(7) Use the results of stress tests to
support compliance with the liquidity
resources requirement set forth in
§ 39.33(c).
(d) Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall regularly conduct an
assessment of the theoretical and
empirical properties of its margin model
for all products it clears.
(e) Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall perform, on an
annual basis, a full validation of its
financial risk management model and
its liquid risk management model.
(f) Custody and investment risk.
Custody and investment arrangements
of a systemically important derivatives
clearing organization’s and subpart C
derivatives clearing organization’s own
funds and assets shall be subject to the
same requirements as those specified in
§ 39.15 of this chapter for the funds and
assets of clearing members, and shall
apply to the derivatives clearing

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organization’s own funds and assets to
the same extent as if such funds and
assets belonged to clearing members.
(g) Settlement banks. Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall:
(1) Monitor, manage, and limit its
credit and liquidity risks arising from its
settlement banks;
(2) Establish, and monitor adherence
to, strict criteria for its settlement banks
that take account of, among other things,
their regulation and supervision,
creditworthiness, capitalization, access
to liquidity, and operational reliability;
and
(3) Monitor and manage the
concentration of credit and liquidity
exposures to its settlement banks.

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§ 39.37 Additional disclosure for
systemically important derivatives clearing
organizations and subpart C derivatives
clearing organizations.

In addition to the requirements of
§ 39.21, each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall:
(a) Complete and publicly disclose its
responses to the Disclosure Framework
for Financial Market Infrastructures
published by the Committee on
Payment and Settlement Systems and
the Board of the International
Organization of Securities Commissions;
(b) Review and update its responses
disclosed as required by paragraph (a) of
this section at least every two years and
following material changes to the
systemically important derivatives
clearing organization’s or subpart C
derivatives clearing organization’s
system or the environment in which it
operates. A material change to the
systemically important derivatives
clearing organization’s or subpart C
derivatives clearing organization’s
system or the environment in which it
operates is a change that would
significantly change the accuracy and
usefulness of the existing responses;
(c) Disclose, publicly and to the
Commission, relevant basic data on
transaction volume and values; and
(d) Disclose, publicly and to the
Commission, rules, policies, and
procedures concerning segregation and
portability of customers’ positions and
funds, including whether each of:
(1) Futures customer funds, as defined
in § 1.3(jjjj) of this chapter;
(2) Cleared Swaps Customer
Collateral, as defined in § 22.1 of this
chapter; or
(3) Foreign futures or foreign options
secured amount, as defined in § 1.3(rr)
of this chapter is:

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(i) Protected on an individual or
omnibus basis or
(ii) Subject to any constraints,
including any legal or operational
constraints that may impair the ability
of the systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization to segregate or transfer the
positions and related collateral of a
clearing member’s customers.
§ 39.38 Efficiency for systemically
important derivatives clearing organizations
and subpart C derivatives clearing
organizations.

(a) General rule. In order to meet the
needs of clearing members and markets,
each systemically important derivatives
clearing organization and subpart C
derivatives clearing organization should
efficiently and effectively design its:
(1) Clearing and settlement
arrangements;
(2) Operating structure and
procedures;
(3) Scope of products cleared; and
(4) Use of technology.
(b) Review of efficiency. Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization should
establish a mechanism to review, on a
regular basis, its compliance with
paragraph (a) of this section.
(c) Clear goals and objectives. Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization should
have clearly defined goals and
objectives that are measurable and
achievable, including in the areas of
minimum service levels, risk
management expectations, and business
priorities.
(d) Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall facilitate efficient
payment, clearing and settlement by
accommodating internationally
accepted communication procedures
and standards.
§ 39.39 Recovery and wind-down for
systemically important derivatives clearing
organizations and subpart C derivatives
clearing organizations.

(a) Definitions. For purposes of this
section:
(1) General business risk means any
potential impairment of a systemically
important derivatives clearing
organization’s or subpart C derivatives
clearing organization’s financial
position, as a business concern, as a
consequence of a decline in its revenues
or an increase in its expenses, such that
expenses exceed revenues and result in
a loss that the derivatives clearing

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organization must charge against
capital.
(2) Wind-down means the actions of a
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization to
effect the permanent cessation or sale or
transfer or one or more services.
(3) Recovery means the actions of a
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization,
consistent with its rules, procedures,
and other ex-ante contractual
arrangements, to address any uncovered
credit loss, liquidity shortfall, capital
inadequacy, or business, operational or
other structural weakness, including the
replenishment of any depleted prefunded financial resources and liquidity
arrangements, as necessary to maintain
the systemically important derivatives
clearing organization’s or subpart C
derivatives clearing organization’s
viability as a going concern.
(4) Operational risk means the risk
that deficiencies in information systems
or internal processes, human errors,
management failures or disruptions
from external events will result in the
reduction, deterioration, or breakdown
of services provided by a systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization.
(5) Unencumbered liquid financial
assets include cash and highly liquid
securities.
(b) Recovery and wind-down plan.
Each systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
maintain viable plans for:
(1) Recovery or orderly wind-down,
necessitated by uncovered credit losses
or liquidity shortfalls; and, separately,
(2) Recovery or orderly wind-down
necessitated by general business risk,
operational risk, or any other risk that
threatens the derivatives clearing
organization’s viability as a going
concern.
(c) (1) In developing the plans
specified in paragraph (b) of this
section, the systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization shall identify scenarios
that may potentially prevent it from
being able to meet its obligations,
provide its critical operations and
services as a going concern and assess
the effectiveness of a full range of
options for recovery or orderly winddown. The plans shall include
procedures for informing the
Commission, as soon as practicable,
when the recovery plan is initiated or
wind-down is pending,

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(2) A systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization shall have procedures for
providing the Commission and the
Federal Deposit Insurance Corporation
with information needed for purposes of
resolution planning.
(d) Financial resources to support the
recovery and wind-down plan.
(1) In evaluating the resources
available to cover an uncovered credit
loss or liquidity shortfall as part of its
recovery plans pursuant to paragraph
(b)(1) of this section, a systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization may consider,
among other things, assessments of
additional resources provided for under
its rules that it reasonably expects to
collect from non-defaulting clearing
members.
(2) Each systemically important
derivatives clearing organization and
subpart C derivatives clearing
organization shall maintain sufficient
unencumbered liquid financial assets,
funded by the equity of its owners, to
implement its recovery or wind-down
plans pursuant to paragraph (b)(2) of
this section. In general, the financial
resources required by § 39.11(a)(2) may
be sufficient, but the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization shall analyze its
particular circumstances and risks and
maintain any additional resources that
may be necessary to implement the
plans. In allocating sufficient financial
resources to implement the plans, the
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization shall
comply with § 39.11(e)(2). The plan
shall include evidence and analysis to

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support the conclusion that the amount
considered necessary is, in fact,
sufficient to implement the plans.
(3) Resources counted in meeting the
requirements of §§ 39.11(a)(1) and 39.33
may not be allocated, in whole or in
part, to the recovery plans required by
paragraph (b)(2) of this section. Other
resources may be allocated, in whole or
in part, to the recovery plans required
by either paragraph (b)(1) or paragraph
(b)(2) of this section, but not both
paragraphs, and only to the extent the
use of such resources is not otherwise
limited by the Act, Commission
regulations, the systemically important
derivatives clearing organization’s or
subpart C derivatives clearing
organization’s rules, or any contractual
arrangements to which the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization is a party.
(e) Plan for raising additional
financial resources. All systemically
important derivatives clearing
organizations and subpart C derivatives
clearing organizations shall maintain
viable plans for raising additional
financial resources, including, where
appropriate, capital, in a scenario in
which the systemically important
derivatives clearing organization or
subpart C derivatives clearing
organization is unable, or virtually
unable, to comply with any financial
resources requirements set forth in this
part. This plan shall be approved by the
board of directors and be updated
regularly.
§ 39.40 Consistency with the Principles for
Financial Market Infrastructures.

This subpart C is intended to establish
standards which, together with subparts
A and B of this part, are consistent with
section 5b(c) of the Act and the
Principles for Financial Market

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Infrastructures published by the
Committee on Payment and Settlement
Systems and the Board of the
International Organization of Securities
Commissions and should be interpreted
in that context.
§ 39.41 Special enforcement authority for
systemically important derivatives clearing
organizations.

For purposes of enforcing the
provisions of Title VIII of the DoddFrank Act, a systemically important
derivatives clearing organization shall
be subject to, and the Commission has
authority under the provisions of
subsections (b) through (n) of section 8
of the Federal Deposit Insurance Act (12
U.S.C. 1818) in the same manner and to
the same extent as if the systemically
important derivatives clearing
organization were an insured depository
institution and the Commission were
the appropriate Federal banking agency
for such insured depository institution.
§ 39.42 Advance notice of material riskrelated rule changes by systemically
important derivatives clearing
organizations.

A systemically important derivatives
clearing organization shall provide
notice to the Commission in advance of
any proposed change to its rules,
procedures, or operations that could
materially affect the nature or level of
risks presented by the systemically
important derivatives clearing
organization, in accordance with the
requirements of § 40.10 of this chapter.
■ 5. Redesignate the Appendix to Part
39 as Appendix A to Part 39.
■ 6. Add appendix B to Part 39 to read
as follows:
Appendix B to Part 39—Subpart C
Election Form
BILLING CODE 6351–01–P

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Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g,
7a, 12, 19, and 24, and 11 U.S.C. 362, 546,
548, 556, and 761–766, unless otherwise
noted.

PART 140—ORGANIZATION,
FUNCTIONS AND PROCEDURES OF
THE COMMISSION

10. In § 190.09, revise paragraph (b) to
read as follows:

■

7. The authority citation for part 140
continues to read as follows:

■

§ 190.09

Authority: 7 U.S.C. 2 and 12a.

8. Amend § 140.94 to add new
paragraphs (c)(12), (c)(13) and (c)(14) as
follows:

■

§ 140.94 Delegation of authority to the
Director of the Division of Clearing and
Risk.

*

*
*
*
*
(c) * * *
(12) All functions reserved to the
Commission in § 39.31 of this chapter;
and
(13) The authority to approve the
application described in § 39.34(d) of
this chapter.
*
*
*
*
*
PART 190—BANKRUPTCY
9. The authority citation for part 190
continues to read as follows:

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■

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Member property.

*

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*
*
*
*
(b) Scope of member property.
Member property shall include all
money, securities and property
received, acquired, or held by a clearing
organization to margin, guarantee or
secure, on behalf of a clearing member,
the proprietary account, as defined in
§ 1.3 of this chapter, any account not
belonging to a foreign futures or foreign
options customer pursuant to the
proviso in § 30.1(c), and any Cleared
Swaps Proprietary Account, as defined
in § 22.1: Provided, however, that any
guaranty deposit or similar payment or
deposit made by such member and any
capital stock, or membership of such
member in the clearing organization
shall also be included in member
property after payment in full, in each
case in accordance with the by-laws or
rules of the clearing organization, of that
portion of:

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(1) The net equity claim of the
member based on its customer account;
and
(2) Any obligations due to the clearing
organization which may be paid
therefrom, including any obligations
due from the clearing organization to
the customers of other members.
Issued in Washington, DC on August 12,
2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.

Appendix to Notice of Proposed
Rulemaking on Derivatives Clearing
Organizations and International
Standards—Commission Voting
Summary
Note: The following appendix will not
appear in the Code of Federal Regulations.

Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Chilton, O’Malia, and Wetjen
voted in the affirmative.
[FR Doc. 2013–19845 Filed 8–15–13; 8:45 am]
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