Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations, 41601-41661 [2012-16233]

Download as PDF Vol. 77 Friday, No. 135 July 13, 2012 Part IV Securities and Exchange Commission mstockstill on DSK4VPTVN1PROD with RULES3 17 CFR Parts 240 and 249 Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b–4 and Form 19b–4 Applicable to All Self-Regulatory Organizations; Final Rule VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\13JYR3.SGM 13JYR3 41602 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34–67286; File No. S7–44–10] RIN 3235–AK87 Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b–4 and Form 19b–4 Applicable to All SelfRegulatory Organizations amendments to § 240.19b–4, except for the compliance date for § 240.19b–4(o), which is discussed in the section of the release titled ‘‘II.G. Effective and Compliance Dates’’; December 10, 2012 for all amendments to § 249.819 and Form 19b–4. FOR FURTHER INFORMATION CONTACT: Catherine Moore, Senior Special Counsel, Kenneth Riitho, Special Counsel or Andrew Bernstein, Special Counsel, at (202) 551–5710; Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–7010. Securities and Exchange Commission. ACTION: Final rule. Table of Contents In accordance with Section 763(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’), the Securities and Exchange Commission (‘‘Commission’’) is adopting rules under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) to specify the process for a registered clearing agency’s submission for review of any securitybased swap, or any group, category, type or class of security-based swaps, that the clearing agency plans to accept for clearing, the manner of notice the clearing agency must provide to its members of such submission and the procedure by which the Commission may stay the requirement that a security-based swap is subject to mandatory clearing while the clearing of the security-based swap is reviewed. The Commission also is adopting a rule to specify that when a security-based swap is required to be cleared, the submission of the security-based swap for clearing must be for central clearing to a clearing agency that functions as a central counterparty. In addition, the Commission is adopting rules to define and describe when notices of proposed changes to rules, procedures or operations are required to be filed by designated financial market utilities in accordance with Section 806(e) of Title VIII of the Dodd-Frank Act and to set forth the process for filing such notices with the Commission. Finally, the Commission is adopting rules to make conforming changes as required by the amendments to Section 19(b) of the Exchange Act contained in Section 916 of the Dodd-Frank Act. DATES: Effective Dates: August 13, 2012 for §§ 240.3Ca–1, 240.3Ca–2, and the amendments to 240.19b–4; December 10, 2012 for all amendments to § 249.819 and Form 19b–4. Compliance Dates: August 13, 2012 for §§ 240.3Ca–1, 240.3Ca–2, and the I. Background II. Discussion A. Security-Based Swap Submissions 1. Process for Making Security-Based Swap Submission to the Commission a. Substance of Security-Based Swap Submissions: Consistency With Section 17A of the Exchange Act b. Substance of Security-Based Swap Submissions: Quantitative and Qualitative Factors c. Substance of Security-Based Swap Submissions: Open Access d. Timing of Security-Based Swap Submissions e. Notice to Clearing Agency Members f. Submissions of a Group, Type or Class of Security-Based Swaps g. Other Issues Related to Security-Based Swap Submissions h. Additional Comments 2. Prevention of Evasion of the Clearing Requirement B. Stay of the Clearing Requirement and Review by the Commission C. Title VIII Notice Filing Requirements for Designated Clearing Agencies 1. Standards for Determining When Advance Notice Is Required 2. Providing Notice of the Matters Included in an Advance Notice to the Board and Interested Persons 3. Timing and Determination of Advance Notice Pursuant to Section 806(e) 4. Implementation of Proposed Changes and Emergency Changes Pursuant to Section 806(e) D. Amendments to Form 19b–4 E. Amendments to Rule 19b–4 Relating to Section 916 of the Dodd-Frank Act F. New Requirements Under Exchange Act Section 3C and Section 806(e) and the Existing Filing Requirements in Exchange Act Section 19(b) G. Effective and Compliance Dates III. Paperwork Reduction Act A. Summary of Collection of Information 1. Amendments to Rule 19b–4 and Form 19b–4 2. Stay of Clearing Requirement B. Use of Information 1. Amendments to Rule 19b–4 and Form 19b–4 2. Stay of Clearing Requirements C. Respondents AGENCY: mstockstill on DSK4VPTVN1PROD with RULES3 SUMMARY: VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 SUPPLEMENTARY INFORMATION: PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 1. Amendments to Rule 19b–4 and Form 19b–4 2. Stay of Clearing Requirement D. Total Annual Reporting and Recordkeeping Burden 1. Background 2. Rule 19b–4 and Form 19b–4 a. Introduction b. Internal Policies and Procedures c. Proposed Rule Changes d. Security-Based Swap Submissions e. Advance Notices f. Summary 3. Posting of Security-Based Swap Submissions, Advance Notices and Proposed Rule Changes on Clearing Agency Web sites 4. Amendment To Conform to Section 916 of the Dodd-Frank Act 5. New Rule 3Ca–1 E. Retention Period of Recordkeeping Requirements F. Collection of Information Is Mandatory G. Responses to Collection of Information Will Not Be Kept Confidential IV. Economic Analysis A. Background 1. Dodd-Frank Act Requirements for Clearing Security-Based Swaps 2. Current Clearing Practices in the Security-Based Swap Market 3. Views on Clearing Requirements for Security-Based Swaps 4. Overview of Statutory Requirements B. Analysis of Final Procedural Rules 1. Analysis of Final Rules Related to Security-Based Swap Submissions 2. Analysis of Final Rules Related to the Process for Staying a Clearing Requirement While the Clearing of the Security-Based Swap Is Reviewed 3. Analysis of Final Rule Related to Preventing Evasion of the Clearing Requirement 4. Analysis of Final Rules Related to Advance Notices 5. Analysis of Final Rules To Amend Rule 19b–4 to Conform To the Requirements of Section 916 of the Dodd-Frank Act V. Regulatory Flexibility Certification A. Self-Regulatory Organizations B. Security-Based Swap Counterparties C. Certification VI. Statutory Authority I. Background On July 21, 2010, the President signed the Dodd-Frank Act into law.1 The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system.2 Title VII and Title VIII of the DoddFrank Act, among other things, impose new requirements with respect to clearance and settlement systems. Title VII of the Dodd-Frank Act (‘‘Title VII’’) provides the Commission and the Commodity Futures Trading 1 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111–203, H.R. 4173). 2 See Pub. L. 111–203, Preamble. E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 Commission (‘‘CFTC’’) with authority to regulate certain over-the-counter (‘‘OTC’’) derivatives in response to the recent financial crisis.3 The Dodd-Frank Act is intended to bolster the existing regulatory structure and provide regulatory tools to oversee the OTC derivatives market, which has grown exponentially in recent years. Title VII provides that the CFTC will regulate ‘‘swaps,’’ the Commission will regulate ‘‘security-based swaps,’’ and the CFTC and the Commission will jointly regulate ‘‘mixed swaps.’’ 4 Title VII was designed to provide greater certainty that, wherever possible and appropriate, swap and securitybased swap contracts formerly traded exclusively in the OTC market are centrally cleared.5 The swaps and 3 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111–176 at 29 (2010) (stating that ‘‘[m]any factors led to the unraveling of this country’s financial sector and the government intervention to correct it, but a major contributor to the financial crisis was the unregulated [OTC] derivatives market.’’) 4 Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System (‘‘Board’’), shall further define the terms ‘‘swap,’’ ‘‘security-based swap,’’ ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ ‘‘major swap participant,’’ ‘‘major security-based swap participant,’’ ‘‘eligible contract participant,’’ and ‘‘security-based swap agreement.’’ The Commission and the CFTC jointly have proposed to further define the terms ‘‘swap,’’ ‘‘security-based swap,’’ and ‘‘security-based swap agreement.’’ See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement;’’ Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Securities Act Release No. 9204, Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011), corrected in Securities Act Release No. 9204A, Securities Exchange Act Release No. 64372A (June 1, 2011), 76 FR 32880 (June 7, 2011) (‘‘Product Definition Proposing Release’’). Further, the Commission and CFTC jointly have adopted rules to further define the terms ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ ‘‘major swap participant,’’ ‘‘major security-based swap participant,’’ and eligible contract participant,’’ See Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant’’, Securities Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012). Moreover, section 712(a)(8) of the Dodd-Frank Act provides that the Commission and the CFTC, after consultation with the Board, shall jointly promulgate such regulations regarding ‘‘mixed swaps’’ as may be necessary to carry out the purposes of Title VII. The Commission and the CFTC have jointly proposed such regulations. See Product Definition Proposing Release. 5 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111–176 at 34 (stating that ‘‘[s]ome parts of the OTC market may not be suitable for clearing and exchange trading due to individual business needs of certain users. Those users should retain the ability to engage in customized, uncleared contracts while bringing in as much of the OTC market under the centrally cleared and exchangetraded framework as possible.’’). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 security-based swaps markets traditionally have been characterized by privately negotiated transactions entered into by two counterparties, in which each assumes the credit risk of the other counterparty.6 Clearing of swaps and security-based swaps was at the heart of Congressional reform of the derivatives markets in Title VII.7 Clearing agencies are broadly defined under the Exchange Act and undertake a variety of functions.8 One such function is to act as a central counterparty (‘‘CCP’’), which is an entity that interposes itself between the counterparties to a trade.9 For example, when a security-based swap contract between two counterparties that are members of a CCP is executed and submitted for clearing, it is typically replaced by two new contracts— separate contracts between the CCP and each of the two original counterparties. At that point, the original counterparties are no longer counterparties to each other. Instead, each acquires the CCP as its counterparty, and the CCP assumes the counterparty credit risk of each of the original counterparties that are members of the CCP.10 Structured and 6 See, e.g., Financial Stability Board, Implementing OTC Derivatives Market Reforms (Oct. 25, 2010), available at: https://www.financial stabilityboard.org/publications/r_101025.pdf. 7 As previously noted, the Dodd-Frank Act seeks to ensure that, wherever possible and appropriate, derivatives contracts formerly traded exclusively in the OTC market be cleared. See supra note 5; see also Letter from Christopher Dodd, Chairman, Committee on Banking, Housing and Urban Affairs, United States Senate and Blanche Lincoln, Chairman, Committee on Agriculture, Nutrition, and Forestry, United States Senate, to Barney Frank, Chairman, Financial Services Committee, United States House of Representatives and Colin Peterson, Chairman, Committee on Agriculture, United States House of Representatives (June 30, 2010) (on file with the United States Senate). 8 Section 3(a)(23)(A) of the Exchange Act defines the term ‘‘clearing agency’’ to mean any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for the comparison of data regarding the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates. 15 U.S.C. 78c(a)(23)(A). 9 See id. An entity that acts as a CCP for securities transactions is a clearing agency as defined in the Exchange Act and is required to register with the Commission. 10 See Cecchetti, Gyntelberg and Hollanders, Central counterparties for over-the-counter PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 41603 operated appropriately, CCPs may improve the management of counterparty risk and may provide additional benefits such as multilateral netting of trades.11 One key way in which the DoddFrank Act promotes clearing of such contracts is by requiring a process by which the Commission would determine whether a security-based swap is required to be cleared. Section 3C of the Exchange Act, as added by Section 763(a) of the Dodd-Frank Act (‘‘Exchange Act Section 3C’’),12 creates, among other things, a clearing requirement with respect to certain security-based swaps. Specifically, this section provides that ‘‘[i]t shall be unlawful for any person to engage in a security-based swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration under this Act if the security-based swap is required to be cleared.’’ 13 Exchange Act Section 3C requires the Commission to adopt rules for a clearing agency’s submission of security-based swaps, or any group, category, type or class of security-based swaps, that a clearing agency plans to accept for derivatives, BIS Quarterly Review, Sept. 2009, available at: https://www.bis.org/publ/qtrpdf/ r_qt0909f.pdf. 11 See id. at 46 (stating that the structure of a CCP ‘‘has three clear benefits. First, it improves the management of counterparty risk. Second, it allows the CCP to perform multilateral netting of exposures as well as payments. Third, it increases transparency by making information on market activity and exposures—both prices and quantities—available to regulators and the public’’); see also Bank for International Settlements’ Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions, Guidance on the application of the 2004 CPSS–IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs: Consultative report, (May 2010), available at: https://www.bis.org/publ/ cpss89.pdf. 12 15 U.S.C. 78c–3 et seq. 13 See 15 U.S.C. 78c–3(a)(1) (as added by Section 763(a) of the Dodd-Frank Act). The requirement that a security-based swap be cleared will stem from the determination to be made by the Commission. Such determination may be made in connection with the review of a clearing agency’s submission regarding a security-based swap, or any group, category, type or class of security-based swaps, that the clearing agency plans to accept for clearing. See 15 U.S.C. 78c–3(b)(2)(C)(ii) (as added by Section 763(a) of the Dodd-Frank Act) (‘‘[t]he Commission shall * * * review each submission made under subparagraphs (A) and (B), and determine whether the securitybased swap, or group, category, type, or class of security-based swaps, described in the submission is required to be cleared.’’). In addition, Exchange Act Section 3C(b)(1) provides that ‘‘[t]he Commission on an ongoing basis shall review each security-based swap, or any group, category, type, or class of security-based swaps to make a determination that such security-based swap, or group, category, type, or class of security-based swaps should be required to be cleared.’’ E:\FR\FM\13JYR3.SGM 13JYR3 41604 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 clearing (‘‘Security-Based Swap Submission’’) and to determine the manner of notice the clearing agency must provide to its members of such Security-Based Swap Submission.14 If the Commission makes a determination that a security-based swap is required to be cleared, then parties may not engage in such securitybased swap without submitting it for clearing to a clearing agency that is either registered with the Commission (or exempt from registration) unless an exception to the clearing requirement applies.15 If the Commission determines that a security-based swap is not required to be cleared, such securitybased swap may still be cleared on a non-mandatory basis by the clearing agency if the clearing agency has rules that permit it to clear such securitybased swap. In addition, Exchange Act Section 3C(b)(1) provides that ‘‘[t]he Commission on an ongoing basis shall review each security-based swap, or any group, category, type, or class of security-based swaps to make a determination that such security-based swap, or group, category, type, or class of security-based swaps should be required to be cleared’’ (‘‘Commissioninitiated Review’’).16 Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’ or ‘‘Title VIII’’), provides for enhanced regulation 14 See 15 U.S.C. 78c–3(b)(2)(A) and (5) (as added by Section 763(a) of the Dodd-Frank Act). For purposes of the amendments to Rule 19b–4 and Form 19b–4 that the Commission is adopting today, and as generally used in this release, the term ‘‘Security-Based Swap Submission’’ means both the identifying information that clearing agencies are required to submit to the Commission pursuant to Exchange Act Section 3C(b)(2) for each securitybased swap (or any group, category, type or class of security-based swaps) that such clearing agency plans to accept for clearing, and, in addition, the accompanying information that a clearing agency is required to provide pursuant to new Rule 19b–4(o)(3). Exchange Act Section 3C(b)(2)(C)(i) requires that the Commission make available to the public any submission received under Exchange Act Section 3C(b)(2)(A). 15 U.S.C. 78c3–1(b)(2)(C)(i) (as added by Section 763(a) of the Dodd-Frank Act). Also, the additional information that clearing agencies are required to provide pursuant to the amendments being adopted today with respect to Rule 19b–4 and Form 19b–4 in general will be published in the notice of the Security-Based Swap Submission and required to be posted on the clearing agency’s Web site. The Commission notes, however, that a clearing agency may request confidential treatment of the additional information pursuant to Rule 24b–2 under the Exchange Act regarding information it desires be kept undisclosed. 17 CFR 240.24b–2. 15 15 U.S.C. 78c–3(a)(1) (as added by Section 763(a) of the Dodd-Frank Act). 16 See 15 U.S.C. 78c–3(b)(1) (as added by Section 763(a) of the Dodd-Frank Act). The Dodd-Frank Act does not require rulemaking with respect to Commission-initiated Reviews. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 of financial market utilities, such as clearing agencies, that manage or operate a multilateral system for the purpose of transferring, clearing or settling payments, securities or other financial transactions among financial institutions or between financial institutions and the financial market utility.17 The regulatory regime in Title VIII will only apply, however, to financial market utilities that the Financial Stability Oversight Council (‘‘Council’’) designates as systemically important (or likely to become systemically important) in accordance with Section 804 of the Clearing Supervision Act.18 Among other requirements prescribed under Title VIII, Section 806(e) of the Clearing Supervision Act (‘‘Section 806(e)’’) requires any financial market utility designated by the Council as systemically important to file 60 days advance notice of changes to its rules, procedures or operations that could materially affect the nature or level of risk presented by the financial market 17 The definition of ‘‘financial market utility’’ in Section 803(6) of the Clearing Supervision Act contains a number of exclusions that include, but are not limited to, certain designated contract markets, registered futures associations, swap data repositories, swap execution facilities, national securities exchanges, national securities associations, alternative trading systems, securitybased swap data repositories, security-based swap execution facilities, brokers, dealers, transfer agents, investment companies and futures commission merchants. 12 U.S.C. 5462(6)(B) (as added by Title VIII). 18 Pursuant to Section 803(9) of the Clearing Supervision Act, a financial market utility is systemically important if the failure of or a disruption to the functioning of such 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. 12 U.S.C. 5462(9) (as added by Title VIII). Under Section 804 of the Clearing Supervision Act, the Council has the authority, on a nondelegable basis and by a vote of not fewer than twothirds of the members then serving, including the affirmative vote of its chairperson, to designate those financial market utilities that the Council determines are, or are likely to become, systemically important. The Council may, using the same procedures as discussed above, rescind such designation if it determines that the financial market utility no longer meets the standards for systemic importance. Before making either determination, the Council is required to consult with the Board and the relevant Supervisory Agency (as determined in accordance with Section 803(8) of the Clearing Supervision Act). Finally, Section 804 of the Clearing Supervision Act sets forth the procedures for giving entities a 30-day notice and the opportunity for a hearing prior to a designation or rescission of the designation of systemic importance. 12 U.S.C. 5463 (as added by Title VIII). On July 18, 2011, the Council adopted final rules describing the criteria that will inform and the processes and procedures established under the Clearing Supervision Act for the Council’s designation of financial market utilities as systemically important. See Authority to Designate Financial Market Utilities as Systemically Important, 76 FR 44763 (July 27, 2011). PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 utility (‘‘Advance Notice’’).19 In addition, Section 806(e) requires each Supervisory Agency 20 to adopt rules, in consultation with the Board, that define and describe when a designated financial market utility is required to file an Advance Notice with its Supervisory Agency.21 Clearing agencies registered with the Commission are financial market utilities, as defined in Section 803(6) of Title VIII; 22 thus, the Commission may be the Supervisory Agency of a clearing agency that is designated as systemically important by the Council (‘‘designated clearing agency’’).23 A clearing agency must begin filing Advance Notices pursuant to Section 806(e) once the Council designates the clearing agency as systemically important as of the compliance date of new Rule 19b–4(o), which the Commission is adopting today. On December 15, 2010, the Commission proposed amendments to Rule 19b–4 under the Exchange Act to implement these new requirements by requiring that Security-Based Swap Submissions under Exchange Act Section 3C and Advance Notices under Section 806(e) be filed with the Commission on Form 19b–4.24 The Proposing Release also contained two new rules that were proposed in accordance with the authority granted to the Commission pursuant to Exchange Act Section 3C: (i) Proposed Rule 3Ca–1, which would establish a procedure by which the Commission, at the request of a counterparty or on its 19 See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII). 20 Section 803(8) of the Clearing Supervision Act defines the term ‘‘Supervisory Agency’’ in reference to the primary regulatory authority for the financial market utility. For example, Section 803(8) of the Clearing Supervision Act provides that the Commission is the Supervisory Agency for any financial market utility that is a Commissionregistered clearing agency. See 12 U.S.C. 5462(8) (as added by Title VIII). To the extent that an entity is both a Commission-registered clearing agency and registered with another agency, such as a CFTCregistered derivatives clearing organization, the statute requires the two agencies to agree on one agency to act as the Supervisory Agency, and if the agencies cannot agree on which agency has primary jurisdiction, the Council shall decide which agency is the Supervisory Agency for purposes of the Clearing Supervision Act. 12 U.S.C. 5462(8) (as added by Title VIII). 21 See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII). 22 12 U.S.C. 5462(6) (as added by Title VIII). 23 See supra note 20 discussing the definition of ‘‘Supervisory Agency’’ under the Dodd-Frank Act. 24 See Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b–4 and Form 19b–4 Applicable to All Self-Regulatory Organizations, Securities Exchange Act Release No. 34–63557 (Dec. 15, 2010), 75 FR 82490 (Dec. 30, 2010) (‘‘Proposing Release’’). E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations own initiative, may stay the requirement that a security-based swap is subject to mandatory clearing, and (ii) proposed Rule 3Ca–2, which was intended to prevent evasions of the clearing requirement by specifying that securitybased swaps required to be cleared must be submitted for central clearing to a clearing agency that functions as a CCP. Finally, the Commission proposed technical, conforming and clarifying amendments to Rule 19b–4 and Form 19b–4 to conform the rule and form with new deadlines and approval, disapproval and temporary suspension standards with respect to proposed rule changes filed under Section 19(b) of the Exchange Act, as modified by Section 916 of the Dodd-Frank Act (‘‘Exchange Act Section 19(b)’’).25 The Commission received 19 comment letters on the Proposing Release from clearing agencies, financial institutions, industry trade groups and other interested persons.26 Commenters were generally supportive of the Commission’s proposals. Some commenters did, however, urge the Commission to take a different approach to certain parts of the proposal. For example, a number of commenters provided suggestions on the proposed rules setting forth the information that clearing agencies will need to provide to the Commission in connection with a Security-Based Swap Submission. As discussed below, the Commission is adopting these rules substantially as proposed, with certain modifications to address commenters’ concerns.27 II. Discussion mstockstill on DSK4VPTVN1PROD with RULES3 The Commission is adopting rules to implement the new requirements imposed by Title VII and Title VIII discussed above. In accordance with the requirements set forth in Exchange Act 25 15 U.S.C. 78s(b) (as amended by Section 916 of the Dodd-Frank Act). 26 Copies of comments received on the proposal are available on the Commission’s Web site at: https://www.sec.gov/comments/s7-44-10/ s74410.shtml. 27 In addition to the changes discussed throughout this release, the Commission has made a number of minor typographical and clarifying revisions to the final rules as compared to what was included in the Proposing Release, including: (i) Inserting a missing word in each of new Rule 3Ca– 1(d) and new Rule 19b–4(n)(3), (ii) amending the header to Rule 19b–4 to reflect the two new types of filings, (iii) replacing the word ‘‘or’’ with ‘‘of’’ in new Rule 19b–4(n)(2)(iii), (iv) replacing the term ‘‘designated financial market utility’’ with ‘‘designated clearing agency’’ in new Rules 19b– 4(n)(2)(iii)(A) and (B) and (v) making numerous changes to the rule text to reflect the style requirements for proper inclusion of the final rules into the Code of Federal Regulations. Based on the non-substantive nature of these revisions, the Commission finds notice of the revisions is not necessary. See 5 U.S.C. 553(b). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Section 3C (as added by Title VII), the Commission is adopting amendments to Rule 19b–4 and Form 19b–4 and new Rule 3Ca–1 under the Exchange Act to establish processes for (i) how clearing agencies registered with the Commission must submit SecurityBased Swap Submissions to the Commission for a determination by the Commission of whether the securitybased swap (or group, category, type or class of security-based swaps) referenced in the submission is required to be cleared, and to determine the manner of notice the clearing agency must provide to its members of such submission and (ii) how the Commission may stay the requirement that a security-based swap is subject to mandatory clearing. The Commission also is adopting new Rule 3Ca–2 to prevent evasion of the clearing requirement. In addition, the Commission is adopting amendments to Rule 19b–4 and Form 19b–4 to implement Section 806(e), which requires any designated clearing agency for which the Commission is the Supervisory Agency to provide an Advance Notice to the Commission. Moreover, the Commission is adopting amendments to Rule 19b–4 and Form 19b–4 to conform to the requirements specified in Exchange Act Section 19(b), as amended by Section 916 of the Dodd Frank Act.28 Section 916 provided for new deadlines by which the Commission must publish and act upon a proposed rule change submitted by a self-regulatory organization (‘‘SRO’’) and new standards for the approval, disapproval and temporary suspension of a proposed rule change. Finally, the Commission is adopting a number of technical and clarifying amendments to Rule 19b–4 and Form 19b–4. As set forth in the Proposing Release, Security-Based Swap Submissions and Advance Notices will be required to be filed with the Commission on Form 19b–4 using the existing Electronic Form 19b–4 Filing System (‘‘EFFS’’). Currently, EFFS is used by SROs, which include registered clearing agencies,29 to file proposed rule changes electronically with the Commission pursuant to Exchange Act Section 19(b) and Rule 19b–4.30 The Commission is 28 15 U.S.C. 78s(b) (as amended by Section 916 of the Dodd-Frank Act). 29 The definition of SRO in Section 3(a)(26) of the Exchange Act includes any registered clearing agency. 15 U.S.C. 78c(a)(26). 30 SROs are required to file with the Commission, in accordance with rules prescribed by the Commission, copies of any proposed rule or any proposed change in, addition to, or deletion from the rules of the SRO (collectively referred to as a ‘‘proposed rule change’’). See 15 U.S.C. 78s(b)(1). PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 41605 requiring clearing agencies to use EFFS for the filing of Security-Based Swap Submissions and Advance Notices because registered clearing agencies already use this system for Exchange Act Section 19(b) filings and because there are similarities between the existing requirement to file proposed rule changes with the Commission under Exchange Act Section 19(b) and the new requirements under the DoddFrank Act to file Security-Based Swap Submissions and under the Clearing Supervision Act to file Advance Notices. A. Security-Based Swap Submissions 1. Process for Making Security-Based Swap Submissions to the Commission Exchange Act Section 3C requires each clearing agency that plans to accept a security-based swap for clearing to file a Security-Based Swap Submission with the Commission for a determination by the Commission of whether the security-based swap (or any group, category, type or class of security-based swaps) referenced in the submission is required to be cleared.31 Accordingly, the Commission is adopting new Rule 19b–4(o)(1), which sets forth the underlying requirement to make these submissions, substantially as proposed, with slight modifications made solely for the purpose of eliminating duplicative language in other parts of the rule and conforming the rule as necessary for certain other non-substantive changes made to other parts of Rule 19b–4 (as discussed below). To facilitate this filing requirement, the Commission is adopting Rule 19b– 4(o)(2) to require clearing agencies to use EFFS and Form 19b–4 for SecurityBased Swap Submissions. As discussed in the Proposing Release, registered clearing agencies, as SROs, are already required to file proposed rule changes on Form 19b–4 on EFFS. Using the same filing process for Security-Based Swap Submissions would leverage existing technology and reduce the resources clearing agencies would have to expend on meeting Commission filing requirements. Moreover, in situations where a single clearing agency action would trigger more than one filing requirement, allowing for each filing to be made pursuant to a single Form 19b– 4 submission would improve efficiency in the filing process. The Commission is adopting the requirements in new Rule 19b–4(o)(2) substantially as proposed, with modifications made to allow for 31 See 15 U.S.C. 78c–3(b)(2) (as added by Section 763(a) of the Dodd-Frank Act). E:\FR\FM\13JYR3.SGM 13JYR3 41606 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 the transition to EFFS filing. Specifically, the Commission is currently in the process of designing and implementing the Commission system upgrades that are necessary in order for Security-Based Swap Submissions to be filed on EFFS. The Commission expects the system upgrades to EFFS to be completed no later than December 10, 2012. In order to avoid delaying clearing agencies from making Security-Based Swap Submissions, the Commission has decided to provide for a temporary means of submission. As a result, the Commission is adopting Rule 19b– 4(o)(2) to provide that Security-Based Swap Submissions filed before December 10, 2012 must be filed with the Commission by submitting the Security-Based Swap Submission to a dedicated email inbox to be established by the Commission. A clearing agency that files a Security-Based Swap Submission by email must include in the submission the same information that is required to be included for Security-Based Swap Submissions in the General Instructions for Form 19b– 4, as such form has been modified by the rules the Commission is adopting today. Security-Based Swap Submissions filed on or after December 10, 2012 on Form 19b–4 would include the same substantive information.32 Additional conforming changes have been made to Rule 19b–4(o)(2) to accommodate the phased implementation of the submission process. The Commission did not receive any comments on its proposal to use EFFS and the existing Form 19b–4 filing process for Security-Based Swap Submissions. Some commenters did, however, raise questions related to other processes involving the clearing of security-based swaps, namely the interplay between the process by which the Commission will determine whether to approve a new security-based swap for clearing and the process by which the Commission will determine whether a security-based swap is required to be cleared.33 Although these comments were not directly responsive to the proposed process by which clearing agencies will file Security-Based Swap Submissions, the Commission appreciates receiving feedback and questions from interested persons regarding how it should ultimately make determinations on which securitybased swaps will be subject to mandatory clearing. Of the commenters that discussed the relationship between a mandatory clearing determination and an action approving the voluntary clearing of security-based swaps, one commenter requested that the Commission clarify the circumstances under which a clearing agency would be required to make a Security-Based Swap Submission with the Commission when it already has Commission-approved rules permitting it to clear the securitybased swap in question.34 Another commenter requested that the Commission ‘‘de-couple the determination that a clearing agency may clear a security-based swap from the determination that a security-based swap should be subject to a mandatory clearing obligation.’’ 35 Finally, one commenter asked for confirmation that ‘‘the Commission intends that a clearing agency ‘eligibility to clear’ review is to be separate from and precede a securitybased swap mandatory clearing review and [that] it is not intended that both reviews can commence simultaneously.’’ 36 In response to the three comments described above, the Commission notes that its process for determining whether a security-based swap is required to be cleared pursuant to Exchange Act Section 3C (which process is triggered by the filing of a Security-Based Swap Submission in accordance with the amendments being adopted today to Rule 19b–4 and Form 19b–4) is separate and distinct from the Commission’s process for determining whether to approve a request by a clearing agency to commence voluntary clearing of a security-based swap (which process will be triggered by the filing of a proposed rule change pursuant to Exchange Act Section 19(b)).37 Each filing process, as 32 The Commission notes that a clearing agency must also continue to meet the filing requirements of Rule 19b–4 and Form 19b–4. For example, if the decision to clear a security-based swap referenced in a Security-Based Swap Submission also requires the clearing agency to file a proposed rule change under Exchange Act Section 19(b), the clearing agency must file the proposed rule change with the Commission on Form 19b–4 using EFFS and separately file the Security-Based Swap Submission with the Commission by email. 33 See, e.g., comment letter of CME Group, Inc. (Feb. 14, 2011) (‘‘CME Letter’’); comment letter of LCH.Clearnet Group (Feb. 14, 2011) (‘‘LCH.Clearnet Letter’’); comment letter of the International Swaps and Derivatives Association, Inc. (‘‘ISDA’’) (Feb. 14, 2011) (‘‘ISDA Letter’’); and comment letter of The Options Clearing Corporation (Feb. 14, 2011) (‘‘OCC Letter’’). 34 See OCC Letter at 3. 35 See LCH.Clearnet Letter at 2–3. 36 See ISDA Letter at 4. 37 A more detailed discussion regarding the separation of the two filing requirements (and subsequent Commission actions) is contained in section II.F of this release. Notably, the requirement to submit a proposed rule change is not affected by the rules the Commission is adopting today related to the process for filing Security-Based Swap Submissions. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 well as each resulting Commission determination, is governed by separate sections of the Exchange Act, and each operates under separate timeframes. Thus, a clearing agency will be required to make a Security-Based Swap Submission regardless of whether it has existing rules permitting it to clear the security-based swap referred to in the submission. However, the Commission anticipates that a clearing agency’s decision to plan to clear a security-based swap (or any group, category, type or class of security-based swaps) could require filings under both Exchange Act Section 19(b) and Exchange Act Section 3C. This is because a clearing agency’s decision to clear a security-based swap may require the clearing agency to change its rules and thus file with the Commission a proposed rule change under Exchange Act Section 19(b). In this scenario, the clearing agency would be required to file a Security-Based Swap Submission with the Commission for a determination by the Commission of whether the security-based swap (or any group, category, type or class of security-based swaps) referenced in the submission is required to be cleared.38 In other words, the two filing requirements are not mutually exclusive. Because a clearing agency may be required to file the same proposal under Exchange Act Section 3C and Exchange Act Section 19(b), and because there may be instances where the same information is required under both statutory provisions,39 the Commission believes that the most efficient use of the Commission’s and clearing agencies’ resources would be to require clearing agencies to use the existing EFFS system for these two related, though legally separate, types of filings (and, to the extent that the filings are made at the same time, pursuant to a single Form 19b–4 submission). In addition, while the Commission recognizes the concerns raised by the commenter requesting that these two processes not commence 38 A clearing agency rule is defined broadly in the Exchange Act to include ‘‘the constitution, articles of incorporation, bylaws, and rules, or instruments corresponding to the foregoing * * * and such of the stated policies, practices, and interpretations of such exchange, association, or clearing agency as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to be rules of such exchange, association, or clearing agency.’’ See 15 U.S.C. 78c(a)(27). The Commission anticipates that a proposal to clear a new type, category or class of security-based swap will, in many cases, also be a change to the rules of a registered clearing agency that must be filed with the Commission for approval pursuant to Exchange Act Section 19(b). 39 See infra section II.F. E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 simultaneously,40 the Commission notes that the timing and sequencing of each of these processes ultimately will be determined based on the individual facts and circumstances of a particular filing. The Commission generally believes that when a security-based swap is submitted for review under Exchange Act Section 3C and concurrently filed under Exchange Act Section 19(b) as a proposed rule change, the two separate reviews will be carried out on the same general timeline and likely involving the same staff, both as a practical matter and to promote efficiency in the use of Commission resources. However, in circumstances where no proposed rule change filing would be required, such as a case where a clearing agency’s rules already permit it to clear the security-based swap in question, EFFS and Form 19b–4 still will be used for the Security-Based Swap Submission. The Commission also received a comment letter that attached a copy of a separate letter that the commenter submitted to the CFTC requesting, among other things, that the CFTC clarify that a designated clearing organization (‘‘DCO’’) would not be required to make any submission to the CFTC for swaps previously listed for clearing by a DCO prior to the date of enactment of Section 723 of the DoddFrank Act (‘‘pre-enactment swaps’’) or for any swaps that a DCO cleared prior to the effective date of the CFTC’s final rules setting forth its swap submission process.41 While this commenter did not explicitly make a concurrent request with respect to security-based swaps, the Commission notes that it will need to have certain information regarding any security-based swap (or any group, category, type, or class of security-based swaps) listed for clearing by a clearing agency as of the date of enactment of Exchange Act Section 3C (i.e., July 21, 2010) (‘‘pre-enactment security-based swaps’’) in light of Exchange Act Section 3C(b)(2)(B) on which to base its determination of whether the securitybased swap is required to be cleared.42 Accordingly, the Commission will continue to work directly with any clearing agency that listed preenactment security-based swaps as of the date of enactment of Exchange Act Section 3C to obtain any information 40 See supra note 36 and accompanying text. Exhibit A to CME Letter. 42 15 U.S.C. 78c–3(b)(2)(B) (as added by Section 763(a) of the Dodd-Frank Act) (‘‘[a]ny securitybased swap or group, category, type, or class of security-based swaps listed for clearing by a clearing agency as of the date of enactment of this subsection shall be considered submitted to the Commission.’’). 41 See VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 necessary for making a mandatory clearing determination.43 Finally, one commenter requested that the Commission clarify that, to the extent that a rule of a clearing agency is changed ‘‘not through any action of the clearing agency but through the action of ISDA or other external authority, such an event would not constitute a rule change or necessitate an additional [Security-Based Swap] Submission.’’ 44 This commenter noted that clearing agencies sometimes have rules that incorporate ISDA terms by reference or state that determinations made by an ISDA committee will apply to the security-based swaps that the clearing agency clears.45 In response to this commenter, the Commission notes that as a general matter, registered clearing agencies have an ongoing responsibility to ensure that their rules are in compliance with Section 17A of the Exchange Act, regardless of the source of, or justification behind, a new rule or rule change. Accordingly, the Commission would need to review actions on a case-by-case basis to determine whether specific actions taken by ISDA or another industry organization would require the filing of a separate proposed rule change or Security-Based Swap Submission. In that respect, the Commission encourages clearing agencies to discuss particular actions with Commission staff in order to determine whether a filing is required. 43 The Commission notes that only two clearing agencies listed security-based swaps for clearing as of July 21, 2010. To begin the process of reviewing pre-enactment swaps, Commission staff has requested, pursuant to Section 17A of the Exchange Act, that each registered clearing agency submit information similar to that which will be required under Rule 19b–4(o)(3) so that the Commission can make the statutorily required determination. The Commission believes that receiving this information directly from the clearing agencies, as opposed to having to gather it from other sources, should help ensure that the Commission is able to make mandatory clearing determinations. Moreover, such information would be based on timely, accurate and comprehensive information obtained from the party most directly involved in the clearing process as it pertains to a particular security-based swap. In addition, providing this information in response to a Commission request is consistent with a clearing agency’s general obligations in connection with its registration with the Commission. After the effective date of Rule 19b–4(o) and once the Commission has verified that the previously submitted information is complete on its face, the Commission will publish the submissions for public comment. The Commission confirms that a clearing agency that is clearing pre-enactment security-based swaps may continue to clear them on a voluntary basis and does not have to wait for a determination from the Commission as to whether the security-based swaps are required to be cleared. 44 See OCC Letter at 4. 45 See id. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 41607 a. Substance of Security-Based Swap Submissions: Consistency With Section 17A of the Exchange Act New Rule 19b–4(o)(3)(i), which the Commission is adopting as proposed, requires that each Security-Based Swap Submission contain a statement explaining how the submission is consistent with Section 17A of the Exchange Act. The requirement to submit the information specified in Rule 19b–4(o)(3)(i) is intended to assist the Commission in its review of the Security-Based Swap Submission in accordance with the standards set forth in Exchange Act Section 3C(b)(4)(A).46 Section 17A specifies, among other things, that the Commission is directed, having due regard for the public interest, the protection of investors, the safeguarding of securities and funds and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents, to use its authority to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities.47 In complying with this requirement, registered clearing agencies should be able to utilize their prior experience with the requirement to comply with a similar rule in the context of filing proposed rule changes with the Commission pursuant to Exchange Act Section 19(b). Specifically, Exchange Act Section 19(b)(2)(C)(i) requires the Commission, prior to approving a proposed rule change filed by any SRO (including a registered clearing agency), to determine that the proposed rule change is consistent with the requirements of the Exchange Act (which would include Section 17A) and the rules and regulations issued thereunder applicable to such organization.48 In connection with proposed rule changes, an SRO is required to ‘‘explain why the proposed rule change is consistent with the requirements of the [Exchange] Act and the rules and regulations thereunder applicable to the [SRO]. A mere assertion that the proposed rule change is consistent with those requirements is not sufficient.’’ 49 46 See 15 U.S.C. 78c–3(b)(4)(A) (as added by Section 763(a) of the Dodd-Frank Act) (‘‘[i]n reviewing a [Security-Based Swap Submission], the Commission shall review whether the submission is consistent with section 17A.’’). 47 15 U.S.C. 78q–1. 48 See 15 U.S.C. 78s(b)(2)(C)(i). 49 Item 3(b) of the General Instructions for Form 19b–4. 17 CFR 240.819. See also Exchange Act Section 19(b), which requires that an SRO provide a statement of the basis of the proposed rule change and provides that the Commission shall approve a E:\FR\FM\13JYR3.SGM Continued 13JYR3 41608 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 Presently, in complying with the requirement to file proposed rule changes with the Commission pursuant to Exchange Act Section 19(b), registered clearing agencies are required to specify, among other things, how the proposed rule change is consistent with the requirements under Section 17A(b)(3) of the Exchange Act. In addition, all registered clearing agencies must comply with the standards in Section 17A of the Exchange Act, which include requirements under Section 17A(b)(3) of the Exchange Act to maintain rules for promoting the prompt and accurate clearance and settlement of securities transactions, assuring the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible, fostering cooperation and coordination with persons engaged in the clearance and settlement of securities transactions, removing impediments to and perfecting the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, and, in general, protecting investors and the public interest.50 A registered clearing agency also is required under Section 17A(b)(3) of the Exchange Act to provide fair access to clearing and to have the capacity to facilitate the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts, and transactions for which it is responsible, as well as to safeguard securities and funds in its custody or control or for which it is responsible.51 The Commission did not receive any comments on the requirement contained in Rule 19b–4(o)(3)(i) that a clearing agency explain how the Security-Based Swap Submission is consistent with Section 17A of the Exchange Act. However, one commenter recommended that the Commission provide further specificity as to precisely what elements of Section 17A(b)(3) of the Exchange Act ‘‘are relevant to the decision to clear a security-based swap and thus must be addressed in a clearing agency’s submission.’’ 52 Because each Securityproposed rule change only if it finds that it is consistent with the requirements of the Exchange Act and the rules and regulations thereunder. 15 U.S.C. 78s(b). 50 See 15 U.S.C. 78q–1(b)(3)(F). 51 See 15 U.S.C. 78q–1(b)(3)(A), (B) and (F). 52 See CME Letter at 2, n.1. In its comment letter, CME Group, Inc. states that Exchange Act Section 3C ‘‘governs the Commission’s responsibility to determine whether a security-based swap that a clearing agency chooses to clear may be cleared’’ and also ‘‘requires the Commission to make determinations respecting whether a security-based swap is subject to the mandatory clearing requirement.’’ The Commission notes, however, VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Based Swap Submission will be tailored to a particular security-based swap (or group, category, type or class of security-based swaps) and to the clearing arrangement established by the particular clearing agency filing the submission, each submission will raise different issues for the Commission to consider. As such, the Commission is unable to state definitely which elements of Section 17A(b)(3) would be relevant to individual submissions. However, the Commission notes that all registered clearing agencies are required to maintain compliance with each of the standards set forth in Section 17A of the Exchange Act as a condition to registration, and a clearing agency should have considered whether clearing a security-based swap (or group, category, type or class of security-based swaps) is consistent with the requirements of Section 17A of the Exchange Act at the time the clearing agency first reached a decision to clear the particular instrument. Accordingly, and in response to the question raised by the commenter, a clearing agency should consider whether it needs to include a statement in the submission discussing the process the clearing agency followed when it reached its initial decision to clear the securitybased swap (or group, category, type or class of security-based swaps). To the extent possible, such discussion could include information on the clearing agency’s consideration of the factors set forth in Rule 19b–4(o)(3)(ii) at the time the clearing agency decided to commence clearing the product and the weight, if any, each such factor (or other factors determined to be appropriate by the clearing agency) was given in reaching its conclusion. If additional procedures were followed, over and above those associated with other types of rule changes or designed to assist the clearing agency in considering the particular risk or other characteristics of the security-based swap (or group, category, type or class of security-based swaps) that is the subject of the submission, the clearing agency could that Exchange Act Section 3C only relates to mandatory clearing determinations. The question of whether a clearing agency may clear a securitybased swap will depend on whether clearing of the security-based swap is permitted under the clearing agency’s rules. To the extent that a clearing agency’s rules must also be modified to permit clearing of a new security-based swap (or group, category, type or class of security-based swaps), such change would need to be approved as a proposed rule change governed by Exchange Act Section 19(b). Other than certain technical changes made pursuant to Section 916 of the Dodd-Frank Act, the process for submitting proposed rule changes with the Commission is not being modified by the rules being adopted today. See supra note 37 and accompanying text. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 specify such procedures. The Commission also encourages clearing agencies to specify and briefly describe any departures from processes contemplated by clearing agency rules in reaching a decision to commence clearing the security-based swap, such as exercises of discretion not to consult established management committees, board committees or participant committees. To the extent relevant to its initial conclusion to clear a security-based swap, the clearing agency could include a clear statement whether it believes that the security-based swap (or group, category, type or class of security-based swaps) that is the subject of the Security-Based Swap Submission should or should not be required to be cleared by the Commission, together with a discussion of the reasons for its belief. If the Commission’s decision to require or not to require the securitybased swap (or group, category, type or class of security-based swaps) that is the subject of the submission to be cleared would or would not materially affect the clearing agency’s judgment that the clearing proposal is consistent with Section 17A of the Exchange Act, the clearing agency is encouraged to include a statement of this nature and explain why this is the case.53 b. Substance of Security-Based Swap Submissions: Quantitative and Qualitative Factors The Commission also is adopting new Rule 19b–4(o)(3)(ii) to specify what qualitative and quantitative factors should be discussed by a clearing agency in its Security-Based Swap Submission. This rule is being adopted substantially as proposed, with certain non-substantive changes having been made to correct paragraph numbering. To provide context for the requirements to provide this information, Exchange Act Section 3C(b)(4)(B) requires the Commission, prior to making a mandatory clearing determination, to analyze five specific qualitative and quantitative factors.54 New Rule 19b– 4(o)(3)(ii) requires clearing agencies to submit information to assist the Commission in its consideration of the five factors specified in Exchange Act 53 As compliance with each of the standards of Section 17A of the Exchange Act is required of each registered clearing agency, the information specified throughout this paragraph is expected to be provided by each clearing agency for any security-based swap (or group, category, type or class of security-based swaps) being considered by the Commission, including pre-enactment swaps. 54 See 15 U.S.C. 78c–3(b)(4)(B)(i)–(v) (as added by Section 763(a) of the Dodd-Frank Act). E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Section 3C(b)(4)(B), including, but not limited to: (i) The existence of significant outstanding notional exposures, trading liquidity and adequate pricing data. (ii) The availability of a rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded. (iii) The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the clearing agency available to clear the contract. (iv) The effect on competition, including appropriate fees and charges applied to clearing. (v) The existence of reasonable legal certainty in the event of the insolvency of the relevant clearing agency or one or more of its clearing members with regard to the treatment of customer and security-based swap counterparty positions, funds, and property. Some commenters requested that the Commission limit the breadth of the information that clearing agencies will be required to submit to the Commission pursuant to Rule 19b– 4(o)(3)(ii) pertaining to the five qualitative and quantitative factors.55 For example, one commenter urged Commission staff to exercise judgment and flexibility in determining the scope of information required in connection with the five qualitative and quantitative factors, noting that some of these factors would require ‘‘at most a very cursory mention’’ in a specific Security-Based Swap Submission, particularly where the responsive information is already well-known to the Commission or where the Commission has extensive knowledge of the clearing agency’s rules or operations.56 Further, this commenter requested that the Commission clarify that when a Rule 19b–4 filing is both a proposed rule change and a SecurityBased Swap Submission, any information that is self-evident from the text of the proposed rule need not be repeated for the Security-Based Swap Submission aspect of the filing.57 In response to this comment, the Commission reiterates that registered clearing agencies will be required to submit Security-Based Swap Submissions for the sole purpose of submitting the information necessary for 55 See, e.g., CME Letter, LCH.Clearnet Letter and OCC Letter. 56 See OCC Letter at 3–5. 57 See id. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 the Commission to determine, pursuant to Exchange Act Section 3C(b)(2)(C)(ii), whether the security-based swap described in the submission is required to be cleared (i.e., subject to mandatory clearing). As discussed in section II.A.1 and throughout this release, the process by which the Commission will determine whether a security-based swap is required to be cleared following the submission of a Security-Based Swap Submission is separate and distinct from the process by which the Commission will determine whether to approve a new security-based swap for voluntary clearing following the filing of a proposed rule change pursuant to Exchange Act Section 19(b).58 In cases where the Rule 19b–4 filing is both a proposed rule change and a SecurityBased Swap Submission, each filing should be complete in accordance with the particular rules applicable to the different types of filings. At the same time, the Commission agrees with this commenter that clearing agencies should not be required to provide unnecessarily duplicative information. Accordingly, if more than one type of filing is made pursuant to a single Form 19b–4 submission, clearing agencies may be able to refer to and crossreference relevant information in the proposed rule change that also is relevant to the Security-Based Swap Submission filing so long as the requirements of each applicable rule are individually satisfied and if the clearing agency clearly explains how the information included in the proposed rule change is applicable to the specific information required to be provided in the Security-Based Swap Submission. Another commenter suggested that the Commission should limit the information required to be in a SecurityBased Swap Submission to include only information addressing whether clearing a security-based swap comports with Section 17A of the Exchange Act.59 In 58 As previously noted, although the Commission will accept both Security-Based Swap Submissions and proposed rule changes on Form 19b–4 through EFFS for the sake of efficiency, each filing will be considered a separate submission to be reviewed in accordance with the appropriate statutory provision—even to the extent that both filings are made at the same time using the same form. 59 See CME Letter at 3. In addition, the CME Letter attached as an exhibit a comment letter, dated Jan. 3, 2011, that CME Group, Inc. submitted to the CFTC in connection with a similar set of proposed rules. See Exhibit A to CME Letter. In this letter, CME Group, Inc. recommended that the CFTC delete a number of items required to be included in a submission to the CFTC in connection with a mandatory clearing determination for swaps. These recommended deletions included each of the five qualitative and quantitative factors set forth in Section 2(h)(2)(D) of the Commodity Exchange Act (which are identical to the factors contained in Exchange Act Section 3C(b)(4)(B)). Specifically, PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 41609 particular, this commenter maintained that the qualitative and quantitative factors set forth in Exchange Act Section 3C(b)(4)(B) were most relevant to the Commission in making its determination as to whether a securitybased swap is required to be cleared and less relevant in the context of a submission by a clearing agency seeking approval to clear a security-based swap.60 This commenter maintained that requiring clearing agencies to perform an analysis of the qualitative and quantitative factors set forth in Exchange Act Section 3C(b)(4)(B) in connection with seeking approval to clear a security-based swap would be ‘‘broad and burdensome,’’ noting that the Commission has a great deal of information necessary to address the statutory factors by virtue of the extensive reporting requirements under the Dodd-Frank Act.61 Similarly, a separate commenter requested that the Commission amend the information requirements in the proposed rule ‘‘such that a clearing agency is required to include in its submission only that information which is necessary for determining the suitability of a security-based swap for clearing and the eligibility of a clearing agency to clear that security-based swap (but not the information required to support the determination of whether a security-based swap should be subject to a mandatory clearing obligation).’’ 62 In furtherance of this suggestion, the commenter suggested specific deletions to the information requirements in the proposed rules that were based on the five statutory factors set forth in Exchange Act Section 3C(b)(4)(B).63 In response to the commenters discussed in the two preceding paragraphs, the Commission notes that the factors specified in new Rule 19b– 4(o)(3)(ii) are identical to the qualitative and quantitative factors that the Commission is required to consider pursuant to Exchange Act Section 3C(b)(4)(B) when determining whether a security-based swap (or group, category, type or class of security-based swaps) will be subject to a mandatory clearing requirement. Moreover, and in response to the commenter that requested that the information required in the submission relate only to the suitability of the security-based swap for clearing and the CME Group, Inc. expressed its belief that these requirements were unclear, unduly burdensome, could defeat the purposes of the Dodd-Frank Act and, in some cases, called for information that the clearing agency does not possess. 60 See id. 61 See id. 62 See LCH.Clearnet Letter at 3. 63 See id. at 4 E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 41610 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations eligibility of the clearing agency to clear the security-based swap, the Commission notes that the information related to the statutory factors are necessary in connection with the Commission’s statutory obligation to make a mandatory clearing determination. The Commission believes that it is appropriate to require such information to be included in Security-Based Swap Submissions because clearing agencies ordinarily have primary access to this information, making it easier for them to submit the information to the Commission than it would be for the Commission to gather the information from other sources, resulting in a more effective and efficient process for both the Commission and clearing agencies. Furthermore, the Commission does not believe that requiring clearing agencies to submit information responsive to new Rule 19b–4(o)(3)(ii) would be overly burdensome or require clearing agencies to provide material that is not in their possession. In particular, and based on its prior experience with the operations and governance of clearing agencies, the Commission would expect that clearing agencies would consider the factors set forth in the statute and the rule as part of their decision-making process, particularly in connection with determining whether to list the relevant security-based swaps for clearing (and knowing that such listing could result in the Commission determining that the security-based swap may be required to be cleared). Based on all of the reasons outlined above, particularly the requirement that the Commission consider each of the factors set forth in Exchange Act Section 3C(b)(4)(B) prior to making a mandatory clearing determination, each Security-Based Swap Submission will be required to include information regarding the factors listed in paragraphs (A) through (E) of Rule 19b–4(o)(3)(ii). In addition, the Proposing Release included examples of information that a clearing agency ‘‘could’’ consider including in its Security-Based Swap Submission in order to respond to the quantitative and qualitative factors specified in Exchange Act Section 3C.64 Some commenters urged the Commission to incorporate these examples into its final rules, thereby requiring all of this information to be included in a clearing agency’s SecurityBased Swap Submission.65 For example, 64 See Proposing Release, supra note 24, at section II.A.1.b. 65 See, e.g., comment letter of Americans for Financial Reform (Feb. 14, 2011) (‘‘AFR Letter’’); VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 one commenter suggested that the proposed rules did not include requirements to ensure that SecurityBased Swap Submissions provide sufficiently detailed information; this commenter stated that the range of information discussed in the proposed rule as information a clearing agency ‘‘could’’ include appears to be essential information that the Commission could use to ‘‘efficiently and effectively determine whether the clearing agency should be allowed to clear the swap, or whether the swap should be required to clear.’’ 66 A second commenter requested that the Commission, at a minimum, replace the word ‘‘could’’ with ‘‘shall’’ in the list of disclosures required to be included in a SecurityBased Swap Submission.67 A third commenter urged the Commission to ‘‘require every clearing agency to submit all of the information identified in the [Proposing] Release and in the instructions as potentially relevant to the five factors’’ set forth in Exchange Act Section 3C(b)(4)(B).68 The same commenter also requested that the proposed rules be expanded to require clearing agencies to submit additional information regarding pricing, liquidity and risk management as part of a Security-Based Swap Submission, and to include an explicit statement in the final rules whereby the Commission would make clear that ‘‘a given level of contract-specific systemic risk is not a prerequisite for a determination that a security-based swap is subject to mandatory clearing.’’ 69 Finally, this comment letter of American Federation of State, County and Municipal Employees (‘‘AFSCME’’) (Feb. 14, 2011) (‘‘AFSCME Letter’’); and comment letter of Better Markets, Inc. (Feb. 14, 2011) (‘‘Better Markets Letter’’). 66 See AFR Letter at 2. 67 See AFSCME Letter at 3–4. While AFSCME suggested that all of the examples identified in the release be incorporated into the rule, it highlighted as particularly relevant the reference to information on product specifications, including copies of any standardized legal documentation, generally accepted contract terms, standard practices for managing and communicating any life cycle events associated with the security-based swap and related adjustments, and the manner in which the information contained in the confirmation of the security-based swap trade is transmitted. 68 See Better Markets Letter at 3–5. 69 See id at 5–7. The additional information suggested by Better Markets, Inc. (‘‘Better Markets’’) includes: (1) Information about any price indices used for pricing the security-based swap; (2) information regarding liquidity over the life of a security-based swap; (3) information regarding risk management procedures, particularly with respect to cross-contract netting and credits relating to initial margin, including correlations to be used and algorithms that result in the netting or credits; and (4) certain information on the hedging relationships between the security-based swaps proposed to be cleared and other security-based swaps that are cleared by the clearing agency or by other clearing agencies. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 commenter urged the Commission to require clearing agencies to include information regarding the decisionmaking process they follow when deciding whether or not to make a Security-Based Swap Submission.70 In response to the three commenters discussed above, the Commission believes that the requirements contained in new Rule 19b–4(o)(3)(ii) strike an appropriate balance by requiring clearing agencies to submit the 70 See Better Markets Letter at 7–8. Specifically, Better Markets urged the Commission to require clearing agencies to: (1) Include a summary of member support for clearing the security-based swap as proposed, as well as member objections; (2) notify the Commission and the public of the type of security-based swap being considered at the time it notifies members of the submission or possible submission; (3) submit input from both the public and customers regarding the decision to make a submission, which can be considered alongside member views (including the methods used to solicit such input and the outcome); and (4) notify the Commission of the decision not to make a submission if the decision is made after the clearing agency risk committee (or similar body) solicits input from members, customers or others regarding a submission, which notification should include the objections and supporting statements received regarding the proposed submission. Similarly, Americans for Financial Reform urged the Commission to require clearing agencies to file submissions (which should be made publicly available) when the clearing agency ‘‘rejects a class of swaps for clearing.’’ See AFR Letter at 2. While the Commission has provided full responses to these comments later in this section, with respect to the commenters requesting that a clearing agency notify the Commission when it decides not to make a Security-Based Swap Submission or when it ‘‘rejects a class’’ of securitybased swaps for clearing, the Commission notes that, to the extent that these commenters’ suggestion is directed toward the Commission’s ability to ensure that clearing agencies do not reject new security-based swaps for clearing for improper reasons, such as anticompetitive reasons, other provisions of the Exchange Act provide the Commission with the ability to investigate and address potential anticompetitive behavior if it occurs. For example, Section 17A of the Exchange Act provides that clearing agency rules must not be designed to permit unfair discrimination in the admission of participants or among participants in the use of the clearing agency and that the rules may not impose a burden of competition that is not necessary or appropriate in furtherance of the provisions of the Exchange Act. See 15 U.S.C. 78q– 1(b)(3)(F) and (I). All proposed rule changes filed by clearing agency with the Commission under Exchange Act Section 19(b)(2) are subject to approval by the Commission and all Security-Based Swap Submissions will be subject to Commission review to determine whether a security-based swap should be required to be cleared. Pursuant to Rule 17a–1, a registered clearing agency must keep copies of all documents made or received by it in the course of its business as such and provide copies of any such documents to the Commission upon request. See 17 CFR 17a–1. The Commission has broad authority under Section 17(b) of the Exchange Act to conduct examinations of clearing agencies. See 15 U.S.C. 78q. And ultimately, under Section 19(h) of the Exchange Act, the Commission has the authority to bring an enforcement action against a clearing agency that has violated or is unable to comply with any provision of the Exchange Act, the rules or regulations thereunder, or its own rules. See 15 U.S.C. 78s. E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations information necessary to allow the Commission to make informed and timely mandatory clearing determinations. In particular, the Commission believes that the information requirements contained in Rule 19b–4(o)(3)(ii) provide for the submission of a comprehensive set of information to be included in a preliminary Security-Based Swap Submission. For example, the Commission believes that most of the information discussed in the proposed rule as information a clearing agency ‘‘could’’ include in a Security-Based Swap Submission is already contemplated by the rules the Commission is adopting today. In fact, in the discussion set forth both the Proposing Release and in the paragraph immediately below, the Commission has attempted to tie each example identified as information a clearing agency ‘‘could’’ include in a Security-Based Swap Submission to a specific section of new Rule 19b–4(o)(3)(ii). As a result, the Commission does not believe that it is necessary to incorporate this information directly into the rule text, as suggested by three commenters.71 Similarly, the Commission believes that the information identified by the commenter who suggested that the final rules be expanded by requiring, among other things, information regarding pricing, liquidity, risk management, and certain decision-making processes also is generally contemplated by one of the requirements of new Rule 19b–4(o).72 71 See supra notes 65 to 68 and accompanying mstockstill on DSK4VPTVN1PROD with RULES3 text. 72 See supra notes 69 to 70 and accompanying text. For example, Better Markets suggested that the Commission require clearing agencies to submit certain information on price indices used for pricing the security-based swap and information on liquidity over the life of the security-based swap. The Commission believes that this information generally falls within the scope of new Rule 19b– 4(o)(3)(ii)(A), which requires the clearing agency to provide information about the existence of significant outstanding notional exposures, trading liquidity and adequate pricing data. In addition, Better Markets suggested that the Commission require clearing agencies to submit certain information regarding the clearing agency’s risk management procedures which the Commission believes is already contemplated by new Rule19b– 4(o)(3)(ii)(B) and (C), which require the clearing agency to provide information about the availability of a rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded as well as the effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the clearing agency available to clear the contract. With respect to the information suggested by Better Markets regarding certain decision-making processes used by the clearing agency when it makes a Security-Based Swap Submission, the Commission believes that much of this information is contemplated by new Rule 19b– VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Moreover, to the extent that information suggested to be included in the final rules by commenters is not addressed in other provisions (including, for example, information on certain hedging relationships between securitybased swaps and information on decisions not to accept a security-based swap for clearing) or omitted from a Security-Based Swap Submission, the Commission notes that it can require the production of additional information from clearing agencies pursuant to Rule 19b–4(o)(6) (to the extent that the information is requested in connection with an actual Security-Based Swap Submission) or in all cases pursuant to the Commission’s general supervisory authority to the extent that it believes such information will be relevant to its consideration of the Security-Based Swap Submission or otherwise. Nevertheless, and as described in the Proposing Release, the Commission believes that while the content of each Security-Based Swap Submission will depend on the specific product referenced therein and the particular set of circumstances related to the clearing arrangement, many common types of information likely will be responsive to a large number of these types of submissions. For example, with respect to Rule 19b–4(o)(3)(ii)(A), a statement describing the existence of outstanding notional exposures, trading liquidity and adequate pricing data could address pricing sources, models and procedures demonstrating an ability to obtain price data to measure credit exposures in a timely and accurate manner, as well as measures of historical market liquidity and trading activity, and expected market liquidity and trading activity if the security-based swap is required to be cleared (including information on the sources of such measures). With respect to Rule 19b–4(o)(3)(ii)(B), a statement describing the availability of a rule framework could include a discussion of the rules, policies or procedures applicable to the clearing of the relevant security-based swap. Additionally, a discussion of credit support infrastructure could include the methods to address and communicate requests for, and posting of, collateral. With respect to Rule 19b–4(o)(3)(ii)(C), a discussion of systemic risk could include a statement on the clearing agency’s risk management procedures including, among other things, the measurement and monitoring of credit exposures, initial and variation margin methodology, methodologies for stress 4(o)(3)(i), which requires clearing agencies to explain how the submission is consistent with Section 17A of the Exchange Act. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 41611 testing and back testing, settlement procedures and default management procedures. With respect to Rule 19b– 4(o)(3)(ii)(D), a discussion of fees and charges could address any volume incentive programs that may apply or impact the fees and charges. With respect to Rule 19b–4(o)(3)(ii)(E), a discussion of legal certainty in the event of an insolvency could address segregation of accounts and all other customer protection measures under insolvency. In addition, the Commission continues to believe that when describing the security-based swap (or group, category, type or class of security-based swaps) referenced in the Security-Based Swap Submission, the clearing agency could discuss the relevant product specifications, including any standardized legal documentation, generally accepted contract terms,73 standard practices for managing and communicating any life cycle events associated with the security-based swap and related adjustments,74 and the manner in which the information contained in the confirmation of the security-based swap trade is transmitted. Further, the clearing agency also could discuss its financial and operational capacity to provide clearing services to all customers potentially subject to the clearing requirements as applicable to the particular security-based swap. Finally, the clearing agency could include an analysis of the effect of a clearing requirement on the market for the group, category, type, or class of security-based swaps, both domestically and globally, including the potential effect on market liquidity, trading activity, use of security-based swaps by direct and indirect market participants and any potential market disruption or benefits. This analysis could include whether the members of the clearing agency are operationally and financially capable of absorbing clearing business (including indirect access market participants) that may result from a determination that the security-based swap (or group, category, type or class of security-based swaps) is required to be cleared.75 73 For example, for some security-based swaps, industry standard documentation would include the applicable ISDA Master Agreement and any related asset-class-specific definitions. 74 The Commission included a definition of ‘‘life cycle event’’ in proposed Regulation SBSR. See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Securities Exchange Act Release No. 63346 (Nov. 19, 2010), 75 FR 75208 (Dec. 2, 2010). 75 In addition to the information required to be submitted to the Commission pursuant to new Rule E:\FR\FM\13JYR3.SGM Continued 13JYR3 41612 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations The Commission believes that basing the information submission requirements in new Rule 19b– 4(o)(3)(ii) on the five statutory factors set forth in Exchange Act Section 3C(b)(4)(B), and supplementing these requirements by providing the above examples of information that the Commission believes could be responsive, is an appropriate approach to implementing the statute because it retains the flexibility provided for in the Proposing Release to allow clearing agencies to address the statutory factors based on the facts and circumstances of a particular submission without requiring specific data points that could be overly prescriptive at the outset. At the same time, the Commission recognizes that a requirement that does not provide enough detail could result in an inefficient use of clearing agency and Commission resources if SecurityBased Swap Submissions contain a large amount of unnecessary or irrelevant information. To that extent, the Commission encourages clearing agencies to discuss, at least initially, prospective Security-Based Swap Submissions with Commission staff to help determine what materials would be responsive to the requirements of new Rule 19b–4(o)(3)(ii) and Exchange Act Section 3C(b)(4)(B) in the context of a particular submission. mstockstill on DSK4VPTVN1PROD with RULES3 c. Substance of Security-Based Swap Submissions: Open Access Exchange Act Section 3C also requires that the rules of a clearing agency that clears security-based swaps subject to the clearing requirement provide for open access.76 In the course of reviewing a Security-Based Swap Submission, the Commission may assess whether a clearing agency’s rules provide for open access, particularly with respect to the relevant SecurityBased Swap Submission. Accordingly, new Rule 19b–4(o)(3)(ii), which is being adopted as proposed, requires that a 19b–4(o)(3), and any information identified in this release as an example of information that clearing agencies may wish to provide in their submissions, the Commission may also require additional information as necessary to assess any of the factors it determines to be appropriate in order to make a determination of whether the clearing requirement applies. See infra section II.A.1.g (discussing new Rule 19b–4(o)(6)). 76 See 15 U.S.C. 78c–3(a)(2) (‘‘OPEN ACCESS.— The rules of a clearing agency described in paragraph (1) shall—(A) prescribe that all securitybased swaps submitted to the clearing agency with the same terms and conditions are economically equivalent within the clearing agency and may be offset with each other within the clearing agency; and (B) provide for non-discriminatory clearing of a security-based swap executed bilaterally or on or through the rules of an unaffiliated national securities exchange or security-based swap execution facility.’’). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Security-Based Swap Submission include a statement regarding how the clearing agency’s rules: (i) Prescribe that all security-based swaps submitted to the clearing agency with the same terms and conditions are economically equivalent within the clearing agency and may be offset with each other within the clearing agency; and (ii) Provide for non-discriminatory clearing of a security-based swap executed bilaterally or on or through the rules of an unaffiliated national securities exchange or security-based swap execution facility. One commenter requested that the Commission delete the requirement that a clearing agency submit information responsive to the factors related to open access in its Security-Based Swap Submission on the basis that requiring this information is ‘‘broad and burdensome’’ and outside of the authority granted to the Commission by the Dodd-Frank Act.77 While the Commission recognizes that the factors related to open access are not included in the five qualitative and quantitative factors that the Commission is required to consider when reviewing a SecurityBased Swap Submission, the Commission notes that Exchange Act Section 3C(a)(2) provides the authority for including this requirement in new Rule 19b–4(o)(3)(ii) in that it requires that the rules of a clearing agency that clears security-based swaps subject to the clearing requirement be in compliance with the two open access provisions.78 By requiring that compliance with the open access requirements be assessed each time a clearing agency files a Security-Based Swap Submission, the clearing agency will be required to demonstrate that it continues to satisfy these ongoing conditions prior to listing a new security-based swap (or group, category, type, or class of security-based swap) for clearing. Because clearing in a particular security-based swap is limited to a small number of clearing agencies, it is critical that access to the clearing agency be open and available to market participants having due regard for risk management considerations.79 Further, CME Letter at 3. 15 U.S.C. 78c–3(a)(2) (as added by Section 763(a) of the Dodd-Frank Act). 79 The Commission has previously recognized that certain conflicts of interest at clearing agencies or among their members could restrict open access to the clearing agency. See Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC, Securities Exchange Act Release No. 63107 (Oct. 14, 2010), 75 FR 65882 PO 00000 77 See 78 See Frm 00012 Fmt 4701 Sfmt 4700 the Commission believes that requiring clearing agencies to address the two open access requirements in a SecurityBased Swap Submission generally would not require a clearing agency to conduct a completely novel analysis or to consider factors with which it is unfamiliar as clearing agencies are already required to address open access issues as part of their compliance with certain requirements contained in Section 17A of the Exchange Act.80 Accordingly, the rules the Commission is adopting today, which are unchanged from what was proposed, require that clearing agencies address in their Security-Based Swap Submission how their rules meet such open access requirements. d. Timing of Security-Based Swap Submissions Pursuant to Exchange Act Section 3C(b)(3), the Commission is required to make its determination of whether a security-based swap described in a clearing agency’s Security-Based Swap Submission is required to be cleared not later than 90 days after receiving such Security-Based Swap Submission.81 The statute further provides that this 90-day determination period may be extended with the consent of the clearing agency making such Security-Based Swap Submission.82 In addition, the statute requires the Commission to make available to the public any Security(Oct. 26, 2010) (noting that ‘‘[a] consequence of increased use of central clearing services, however, is that participants that control or influence a security-based swap clearing agency may gain a competitive advantage in the security-based swaps market by restricting access to the clearing agency. If that occurred, financial institutions and marketplaces that do not have access to central clearing would have limited ability to trade in or list security-based swaps.’’). The Commission also recognized, however, that clearing agencies may legitimately impose minimum participation standards that could affect open access. See id (‘‘The provisions in Section 17A recognize that a clearing agency may discriminate among persons in the admission to, or the use of, the clearing agency, by requiring that participants meet certain financial, operational, and other fitness standards. However, Section 17A also requires that sanctioned discriminations must not be unfair.’’). 80 See 15 U.S.C. 78q–1(b)(3)(F) (requiring that the rules of a clearing agency, among other things, not be designed ‘‘to permit unfair discrimination in the admission of participants or among participants in the use of the clearing agency’’). 81 15 U.S.C. 78c–3(b)(3) (as added by Section 763(a) of the Dodd-Frank Act). Further, pursuant to new Rule 19b–4(o)(2), if any information submitted to the Commission by a clearing agency on Form 19b–4 were not complete or otherwise in compliance with Rule 19b–4 and Form 19b–4, such information would not be considered a SecurityBased Swap Submission and the Commission would be required to inform the clearing agency within twenty-one business days of such submission. 82 15 U.S.C. 78c–3(b)(3) (as added by Section 763(a) of the Dodd-Frank Act). E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Based Swap Submission it receives and to ‘‘provide at least a 30-day public comment period regarding its determination whether the clearing requirement shall apply to the submission.’’ 83 Because the Commission’s obligation to provide for notice and public comment of Security-Based Swap Submissions is set forth in detail in Exchange Act Section 3C, it was not necessary for the Commission to adopt rules regarding these procedures. However, the Commission believes that it is important to provide guidance on how it intends to implement these statutory requirements in practice. Specifically, the Commission believes that the statutory requirement to ‘‘provide at least a 30-day public comment’’ was intended, at least in part, to enable the public to have an opportunity to comment on the Security-Based Swap Submission and to provide information for the Commission to consider as part of making its determination whether the clearing requirement should apply to the submission. Accordingly, the Commission will indicate in each notice that it publishes of a Security-Based Swap Submission that public comment will be accepted during the period specified in the notice (which will in no event be less than 30 days). In addition, the comment period will begin and end within the 90-day determination period (as opposed to beginning after the Commission has made its final determination). The Commission expects to publish notice of the Security-Based Swap Submission in the Federal Register and it also intends to publish notice on the Commission’s publicly-available Web site at www.sec.gov. Such notice would include the solicitation of public comment for the period specified in the notice. This process is consistent with the current process that is in place for proposed rule changes under Exchange Act Section 19(b)(2) and Rule 19b–4. Although the Commission did not propose rules with respect to the procedure it will follow in publishing Security-Based Swap Submissions for public comment, one commenter requested that the Commission extend the minimum public review period to 45 days.84 This commenter also recommended that the comment period should not commence until after: (1) The clearing agency has proven the ability to clear the product through testing; (2) the clearing agency has 83 15 U.S.C. 78c–3(b)(2)(C)(iii) (as added by Section 763(a) of the Dodd-Frank Act). 84 See ISDA Letter at 11. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 sufficient operational resources and established connectivity to the market using standard protocols; (3) all market standardization issues defining the product, life events, etc. have been resolved; (4) pricing standards and margin calculations have been agreed by the clearing agency’s risk committee; and (5) the Commission has all the information it needs and such information has been verified as consistent with data received from security-based swap data repositories, security-based swap dealers and major security-based swap participants.85 In response to this comment letter, the Commission notes that the comment period specified in the notice will be at least 30 days, as is required under the statute.86 The Commission believes the statute permits it to specify a comment period that is longer than 30 days, and the Commission will state the length of the comment period in each notice. Generally, however, the Commission believes that a 30-day comment period for Security-Based Swap Submissions strikes an appropriate balance by providing commenters with sufficient time to formulate their ideas while still giving the Commission time to consider all of the comments received and to factor them into the mandatory clearing determination, particularly as the Commission has a statutory obligation to make a clearing determination not later than 90 days after receiving the submission. In response to the comment suggesting that the Commission should delay the commencement of the comment period until the actions outlined by the above commenter are completed, the Commission notes that most of the information identified by the commenter is already required by the five quantitative and qualitative factors set forth in Exchange Act Section 3C(b)(4)(B) and new Rule 19b– 4(o)(3)(ii).87 Moreover, the Commission is concerned that delaying the commencement of the public comment process would delay the Commission’s potential receipt of feedback from the public which, in the Commission’s experience reviewing proposed rule changes, is often an important source of information for supplementing or id. 15 U.S.C. 78c–3(b)(2)(C)(iii) (as added by Section 763(a) of the Dodd-Frank Act). 87 To the extent that a Security-Based Swap Submission does not include the minimum information set forth in new Rule 19b–4(o)(3), such incomplete submission would, pursuant to new Rule 19b–4(o)(2), be deemed not to have been submitted and the Commission would be required to notify that clearing agency of the rejection of the Security-Based Swap Submission within twentyone business days of the original submission. PO 00000 85 See 86 See Frm 00013 Fmt 4701 Sfmt 4700 41613 challenging the material submitted by the SRO. In addition, a commenter recommended that the Commission adopt an extended transition period between the date that a determination is made that a security-based swap is required to be cleared and the date clearing becomes mandatory for that product.88 This commenter also recommended a second transition period from ‘‘when the ‘exchange/ security-based swap execution facility trading’ requirement is determined to when such requirement takes effect.’’ 89 Finally, this commenter recommended ‘‘full transparency of clearing agency requirements and performance during such period(s).’’ 90 Although the substance of the Commission’s mandatory clearing determinations and the timing of implementation of those determinations are not addressed in the rules being adopted today, which focus on the process by which clearing agencies submit filings, the Commission understands the importance of ensuring that clearing agencies and market participants are given an appropriate amount of time and guidance to comply with a clearing mandate. In many cases, the determination of when and how a clearing requirement should be implemented will depend on the particular product that the Commission determines is required to be cleared. The Commission further notes that Exchange Act Section 3C(b)(4)(C) provides that the Commission, in making a mandatory clearing determination, may require such terms and conditions as the Commission determines to be appropriate.91 e. Notice to Clearing Agency Members Exchange Act Section 3C(b)(2)(A) requires that a clearing agency provide notice to its members, in a manner determined by the Commission, of its Security-Based Swap Submissions.92 To meet this requirement, new Rule 19b– 4(o)(5), which is being adopted as proposed, requires clearing agencies to post all Security-Based Swap Submissions, and any amendments thereto, on their Web sites. This public posting must be completed within two business days following the submission to the Commission. The Commission received one comment expressing general support for this requirement.93 88 See ISDA Letter at 10–11. id. 90 See id. at 11. 91 See 15 U.S.C. 78c–3(b)(4)(C). 92 See 15 U.S.C. 78c–3(b)(2)(A) (as added by Section 763(a) of the Dodd-Frank Act). 93 See AFR Letter at 2. 89 See E:\FR\FM\13JYR3.SGM 13JYR3 41614 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 This Commission believes that a twobusiness-day timeframe is appropriate because it is consistent with the notice requirement that currently applies to proposed rule changes,94 and that such timeframe will provide members of the clearing agency and the public with timely notice of the submission. New Rule 19b–4(o)(5) requires a clearing agency to maintain this posting on its Web site until the Commission makes a determination regarding the SecurityBased Swap Submission, the clearing agency withdraws the Security-Based Swap Submission or the clearing agency is notified that the Security-Based Swap Submission is not properly filed.95 These requirements should help ensure that submissions that are being actively considered by the Commission are readily available to the members of the clearing agency and the public and help provide for a more transparent process. The Commission notes that the current instructions for Form 19b–4 require an SRO to file with the Commission copies of notices issued by the SRO soliciting comment on the proposed rule change and copies of all written comments on the proposed rule change received by the SRO (whether or not comments were solicited) from its members or participants.96 Any correspondence the SRO receives after it files a proposed rule change, but before the Commission takes final action on the proposed rule change, also is required to be filed with the Commission.97 The SRO is required to summarize the substance of all such comments received and respond in detail to any significant issues raised in the comments about the proposed rule change.98 In accordance with the changes the Commission is adopting today, clearing agencies will be subject to these same requirements in connection with Security-Based Swap Submissions. The Commission believes 94 Commission rules currently require SROs to post on their Web sites a copy of any proposed rule change the SRO filed with the Commission, and any amendments thereto. Such posting is required within two business days after filing the proposed rule change with the Commission. See 17 CFR 240.19b–4(l). In adopting this rule, the Commission stated that all market participants, investors and other interested parties should have access to proposed rule changes filed with the Commission, and any amendments, as soon as practicable, and that it did not believe that a two-business-day timeframe would be impractical or unduly burdensome on SROs. See Final Rules Regarding Proposed Rule Changes of Self-Regulatory Organizations, Securities Exchange Act Release No. 50486 (Oct. 4, 2004), 69 FR 60287 (Oct. 8, 2004). 95 Proposed Rule 19b–4(o)(5). 96 See Items 5 and 9 (Exhibit 2) of the General Instructions for Form 19b–4. 17 CFR 240.819. 97 See id. 98 Item 5 of the General Instructions for Form 19b–4. 17 CFR 240.819. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 that applying these requirements in the instructions to Form 19b–4 to SecurityBased Swap Submissions will provide the Commission with an opportunity to consider the various viewpoints expressed by commenters by making sure relevant comments are included in the Security-Based Swap Submission. Finally, one commenter requested that the Commission require clearing agencies ‘‘to notify the Commission, as well as the public, of the type of swap being considered at the time it notifies members of the submission or possible submission.’’ 99 The Commission appreciates this suggestion, but has ultimately decided not to modify new Rule 19b–4(o)(5) in this manner as the Commission believes that requiring Web site disclosure of the Security-Based Swap Submission within two business days of the submission itself will provide interested persons and the public with sufficient opportunity to provide feedback on the submission before the Commission makes a mandatory clearing determination. f. Submissions of a Group, Category, Type or Class of Security-Based Swaps New Rule 19b–4(o)(4), which is being adopted as proposed, requires that clearing agencies submit security-based swaps to the Commission for review by group, category, type, or class to the extent that doing so is practicable and reasonable. Any aggregation will require a clear description in the applicable Security-Based Swap Submission so that market participants and the public know which security-based swaps may be subject to a clearing requirement. The Proposing Release contained a number of requests for comment with respect to how the Commission should apply this rule including, among other things, questions pertaining to how a clearing agency should identify the scope of the group, category, type or class of security-based swaps it plans to clear, the relevant characteristics of securitybased swaps that permit aggregation by group, category, type or class, factors that would make aggregation more difficult, and factors that may be specific to a particular clearing agency. Two commenters requested that the Commission further define the meaning and scope of the terms ‘‘category,’’ ‘‘class,’’ ‘‘type,’’ and ‘‘group’’ with respect to security-based swaps.100 In particular, one of these commenters further suggested using the following characteristics of security-based swaps to define different products: (1) Instrument description; (2) acceptable PO 00000 99 See Better Markets Letter at 8. Exhibit A to CME Letter and ISDA Letter. 100 See Frm 00014 Fmt 4701 Sfmt 4700 currencies (and whether the contract is single currency); (3) acceptable indices; (4) types (e.g., total return or price return); (5) maximum residual term; (6) notional amount (minimum to maximum of the relevant currency unit); (7) applicable day count fraction; (8) applicable business day convention; (9) minimum residual term of the trade (i.e., the period from the date of submission of the trade to the date of termination); and (10) applicable calculation periods.101 Although the commenter did provide specific suggestions of certain characteristics that could be used to create groups, categories, types or classes of security-based swaps, the Commission did not receive any comment letters responding to its requests for suggestions as to how best to utilize the individual characteristics, which may include among other things the underlying security, tenor, and coupon of the security-based swap, to aggregate security-based swaps into groups, categories, types or classes. In addition, the Commission notes that it has not yet received any Security-Based Swap Submissions and does not have detailed information about how clearing agencies would create groups, categories, types or classes of securitybased swaps in determining whether to clear such security-based swaps. For these reasons, the Commission believes that allowing these key terms to evolve over time as an iterative process between the clearing agencies and the Commission is preferable to prematurely hard-coding definitions into the rules without the benefit of experience. Nevertheless, the Commission continues to believe that requiring multiple security-based swaps in each submission—to the extent that such groupings are practicable and reasonable (e.g., by taking into consideration appropriate risk management issues applicable to the aggregation)—would streamline the submission process for Commission staff and the clearing agencies. This approach would allow more securitybased swaps to be reviewed in a timely manner. At the same time, the manner in which the Commission will ultimately determine which securitybased swaps are appropriately aggregated into groups, categories, types, or classes likely will depend on the particular facts and circumstances of the products under consideration. This in turn will be informed by how the clearing agency defines the relevant security-based swap (or relevant group, 101 See E:\FR\FM\13JYR3.SGM ISDA Letter at 3–4. 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations category, type, or class of security-based swaps), how the clearing agency manages the product (both operationally and in its rulebook) and the comments received by the Commission during the public comment period. Prior to the Commission providing further guidance regarding aggregation, clearing agencies may organize their Security-Based Swap Submissions using a reasonable basis that they determine to be appropriate and responsive to the requirements of the Exchange Act. For example, to the extent possible, the groups, categories, types or classes of security-based swaps that are filed with the Commission as a Security-Based Swap Submission could mirror the groups, categories, types or classes that the clearing agency evaluates in determining whether to list such security-based swap for clearing. In addition, clearing agencies could also consider other factors that they deem to be appropriate, including the characteristics identified in the comment letter referred to above.102 In reaching a determination regarding any aggregation, the Commission also expects to conduct its own analysis, which will take into account, at a minimum, the five qualitative and quantitative factors that the Commission is required to consider pursuant to Exchange Act Section 3C(b)(4)(B) when making a mandatory clearing determination. mstockstill on DSK4VPTVN1PROD with RULES3 g. Other Issues Related to SecurityBased Swap Submissions Proposed Rule 19b–4(o)(6)(i) provided that, in making a mandatory clearing determination, the Commission would take into account the factors addressed in the Security-Based Swap Submission and any additional factors the Commission determines to be appropriate. Proposed Rule 19b– 4(o)(6)(i) also required a clearing agency to provide any additional information requested by the Commission as necessary to make a determination. In addition, proposed Rule 19b–4(o)(6)(ii) provided that, in making a determination of whether or not the clearing requirement would apply to the security-based swap (or any group, category, type, or class of security-based swaps) described in the submission, the Commission may require such terms and conditions as the Commission determines to be appropriate in the public interest.103 102 See id. 15 U.S.C. 78c–3(b)(4)(C) (as added by Section 763(a) of the Dodd-Frank Act) and proposed Rule 19b–4(o)(6)(ii). 103 See VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 In connection with proposed Rule 19b–4(o)(6), one commenter urged the Commission to remove the language allowing the Commission, in addition to considering the five statutory factors set forth in Exchange Act Section 3C(b)(4)(B), to consider ‘‘any additional factors the Commission determines to be appropriate’’ in connection with a mandatory clearing determination. The commenter believes that this language exceeds the Commission’s statutory authority and would expose the proposed rules to potential litigation.104 The Commission has carefully considered the comments it received in respect of proposed Rule 19b–4(o)(6). While the Commission disagrees with the commenter that the Commission lacks authority to promulgate a rule allowing it to consider ‘‘any additional factors the Commission determines to be appropriate’’ in connection with a mandatory clearing determination,105 the Commission has nonetheless decided not to adopt the language in the final rule. The Commission believes the language is unnecessary because Exchange Act Section 3C already requires that the Commission shall take into account the five factors in Exchange Act Section 3C(b)(4)(B) in making a mandatory clearing determination and new Rule 19b–4(o)(6)(i), as adopted, requires clearing agencies to provide any additional information requested by the Commission as necessary to assess any of the factors it determines to be appropriate in order to make a mandatory clearing determination in connection with a Security-Based Swap Submission. The Commission believes that this rule, as adopted, already empowers it to require the provision of any additional information relevant to making mandatory clearing determinations under Exchange Act Section 3C. The Commission also has decided not to adopt: (i) The preamble to proposed Rule 19b–4(o)(6), which had stated that upon receipt of a Security-Based Swap Submission, the Commission was required to review the submission and determine whether the relevant security-based swap (or group, category, type or class of security-based swaps) would be required to be cleared and (ii) proposed Rule 19b–4(o)(6)(ii), which Better Markets Letter at 8–10. Commission does not read Exchange Act Section 3C as restricting its existing authority to obtain information from registered clearing agencies. The Commission notes that Section 23(a) of the Exchange Act allows the Commission to ‘‘make such rules and regulations as may be necessary or appropriate to implement the provisions of this title for which [it is] responsible or for the execution of the functions vested in [it] by this title.’’ See 15 U.S.C. 78w(a)(1). PO 00000 104 See 105 The Frm 00015 Fmt 4701 Sfmt 4700 41615 had stated that the Commission may include such terms and conditions as it determined to be appropriate in the public interest in connection with making a mandatory clearing determination. In each case, the Commission notes that these provisions simply mirror statutory provisions set forth in Exchange Act 3C.106 As noted above in connection with the Commission’s modifications to proposed Rule 19b(o)(6)(i), promulgating rules to reiterate existing Commission powers and obligations is unnecessary, and the Commission believes that it would be prudent to remove these types of provisions so as to simplify the final rule to focus on the process by which clearing agencies will be required to make Security-Based Swap Submissions with the Commission. In the Proposing Release, the Commission also requested comment on whether a clearing agency, in connection with each submission or in some circumstances, should be required to include an independent validation of its margin methodology and its ability to maintain sufficient financial resources. In response to this request, one commenter expressed an opinion that independent validations may be helpful in verifying elements of a submission, but that the Commission should use caution in allowing them to become a substitute for the Commission’s own judgment. This commenter also urged the Commission to pay careful attention to the question of what constitutes ‘‘independence’’ for these purposes.107 Another commenter noted that a clearing agency should have an ongoing internal process for validating its internal risk models, which process should be independent of the internal models’ development, implementation, and operation.108 As such, this commenter believes that it should be permissible for the review personnel to be employed by the clearing agency, so long as they are not involved in the development, implementation, and operation of the risk models.109 This 106 See 15 U.S.C. 78c–3(b)(2)(C)(ii) (as added by Section 763(a) of the Dodd-Frank Act) (requiring the Commission to review each Security-Based Swap Submission and determine whether the securitybased swap, or group, category, type, or class of security-based swaps, described in the submission is required to be cleared) and 15 U.S.C. 78c– 3(b)(4)(C) (as added by Section 763(a) of the DoddFrank Act) (providing that the Commission, in making a mandatory clearing determination, may require such terms and conditions to the requirement as the Commission determines to be appropriate). 107 See AFR Letter at 3. 108 See OCC Letter at 3. 109 See id. E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 41616 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations commenter further recommended that the independent validation evaluate ‘‘empirical evidence and documentation supporting the methodologies used, important model assumptions and their limitations, adequacy and robustness of empirical data used in parameter estimation and model calibration, and evidence of a model’s strengths and weaknesses.’’ 110 After reviewing the comments received, the Commission has determined that it is not necessary to include an express requirement in new Rule 19b–4(o)(3) that a SecurityBased Swap Submission refer to an independent validation of the clearing agency’s margin methodology and its ability to maintain sufficient financial resources. The Commission believes such requirement is already contemplated by the final rules, particularly new Rule 19b–4(o)(3)(ii)(B). Specifically, in discussing a clearing agency’s rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the security-based swap (or group, category, type or class of security-based swaps) under consideration, as required by this provision, it may be appropriate for a Security-Based Swap Submission to refer to any independent validation of the clearing agency’s margin methodology or other processes satisfactory to the clearing agency that have assessed the fundamental soundness of all of the assumptions contained in the model as it exists at the time of the submission and that have assessed the appropriateness of the model during a relevant time period. Finally, one commenter requested that the Commission promulgate rules governing Commission-initiated Reviews.111 The commenter further stated that these rules should make clear that during a Commission-initiated Review, the Commission will apply standards that are no different than the standards applied to a review of Security-Based Swap Submissions.112 The Commission notes that the DoddFrank Act does not require rulemaking regarding Commission-initiated Reviews. Commission staff are in the process of determining how these reviews will proceed, particularly with respect to sources of and access to the information the Commission will need to conduct Commission-initiated Reviews, and whether any rulemaking related to these reviews is necessary, either now or in the future. 110 See id. Better Markets Letter at 11–12. 112 See id. 111 See VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 h. Additional Comments The Commission also received a number of comments that did not directly relate to the process of filing Security-Based Swap Submissions or to any specific provision in new Rule 19b– 4(o). In particular, many of these comments related to the clearing of security-based swaps in general and to the rationale underlying the Commission’s specific mandatory clearing determinations. While the Commission appreciates receiving the benefit of the public’s views on a wide range of issues, the Commission nevertheless reiterates that the rules that are being adopted today are limited solely to the process by which clearing agencies will be required to make Security-Based Swap Submissions with the Commission. Accordingly, the Commission is not modifying the final rules in response to the comments summarized below. However, the Commission continues to consider a number of important issues related to its substantive mandatory clearing determinations, including many of the points raised in these comment letters. To the extent that these issues are raised by a particular Security-Based Swap Submission, the Commission will address them at the appropriate time. For example, one commenter urged the Commission to exempt certain structured security-based swaps from the mandatory clearing requirement on the basis that such instruments are ‘‘not clearable’’ as they are not standardized, their underlying collateral pool cannot be evaluated, they would transfer risk to the clearing entity and clearing would require the posting of collateral.113 This comment was related to the determinations to be made by the Commission under Exchange Act Section 3C and not to the process for filing Security-Based Swap Submissions with the Commission. Another commenter provided detailed suggestions to the Commission with respect to how it should evaluate information responsive to the five qualitative and quantitative factors set forth in Exchange Act Section 3C(b)(4)(B), and additional considerations regarding: (1) Standardization, (2) exceptions, (3) affiliate (intra-group) transactions, (4) wrong way risk, (5) implementation timing, and (6) moral hazard concerns.114 Similarly, a commenter advocated that the Commission consider information that is different from what was included in a clearing agency’s 113 See comment letter of American Securitization Forum (Feb. 14, 2011). 114 See ISDA Letter at 9–12. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 Security-Based Swap Submission and to draw upon information provided by other members of the Council.115 Commenters representing seven foreign headquartered banks requested that the Commission adopt implementing regulations under the Dodd-Frank Act ‘‘that enable and encourage foreign banks engaged in swap dealing activities to book their swaps businesses in a single wellcapitalized, highly rated foreign-based banking institution.’’ 116 As a follow-up to this request, 12 foreign-headquartered financial institutions provided specific suggestions of a possible framework for achieving this goal and for dealing with other aspects of the potential extraterritorial application of certain parts of Title VII.117 Similarly, commenters representing three Japanese bank groups requested that the Commission adopt regulations under the Dodd-Frank Act ‘‘with the effect that Japanese banks, including their U.S. branches, are not made subject to the application of Title VII requirements.’’ 118 In addition, one commenter provided the Commission with a copy of a separate comment that it submitted to the Commission in connection with proposed rules regarding the registration and regulation of security-based swap execution facilities (‘‘SB SEFs’’), suggesting that one aspect of proposed Rule 19b–4(o) relates to a proposed rule for SB SEFs.119 Another commenter 115 See AFR Letter at 4. comment letter of Barclays Bank PLC, BNP Paribas S.A., Deutsche Bank AG, Royal Bank of Canada, The Royal Bank of Scotland Group plc, ´ ´ ´ ´ Societe Generale and UBS AG (Jan. 11, 2011). 117 See comment letter of Barclays Bank PLC, BNP Paribas S.A., Credit Suisse AG, Deutsche Bank AG, HSBC, Nomura Securities International, Inc., Rabobank Nederland, Royal Bank of Canada, The ´ ´ Royal Bank of Scotland Group plc, Societe ´ ´ Generale, The Toronto-Dominion Bank and UBS AG (Feb. 17, 2011). 118 See comment letter from the Bank of TokyoMitsubishi UFJ, Ltd., Mizuho Corporate Bank, Ltd., and Sumitomo Mitsui Banking Corporation (May 6, 2011). In the alternative, these commenters requested that the regulations issued pursuant to Title VII: (1) Not apply to transactions between affiliates of a bank group regulated as a bank holding company and (2) not apply to a foreign dealer—particularly one that is subject to comprehensive home country regulation—with respect to requirements that would otherwise apply due to transactions entered into by the foreign dealer with a U.S. based dealer regulated as a swap dealer or security-based swap dealer pursuant to Title VII. Finally, these commenters requested that the effective dates of all adopting regulations under Title VII be deferred until December 31, 2012, which is the deadline for compliance with the G– 20 mandate, so as to avoid overlapping and inconsistent regulatory regimes. 119 See comment letter of GFI Group Inc. (‘‘GFI’’) (Apr. 4, 2011) and Registration and Regulation of Security-Based Swap Execution Facilities, Securities Exchange Act Release No. 34–63825 (Feb. 116 See E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 provided a number of suggestions for expanding access to central clearing of security-based swaps for buy-side participants.120 Two commenters urged the Commission to clarify explicitly in its rules that security-based swap transactions entered into between affiliates within the same corporate group should not be subject to the mandatory clearing requirement.121 Finally, two commenters expressed support for the Commission’s proposed rules in the context of actions the Commission could take to reduce potential short selling abuses in the securities markets.122 As previously noted, all of the comments discussed above pertain to areas that are not governed by Rule 19b– 4(o), which is limited entirely to the process by which clearing agencies will 2, 2011), 76 FR 10948 (Feb. 28, 2011) (‘‘SB SEF Release’’). Specifically, in the SB SEF Release, the Commission proposed Rule 812 to implement Section 3D(d)(3) of the Exchange Act, which would require that an SB SEF permit trading only in security-based swaps that are not readily to susceptible to manipulation. Proposed Rule 812(b) would provide that, prior to permitting the trading of any security-based swap, an SB SEF’s swap review committee must have determined, after taking into account all of the terms and conditions of the security-based swap and the markets for the security-based swap and any underlying security or securities, that such swap is not readily susceptible to manipulation. GFI requested that the Commission specify that an SB SEF would be deemed to have satisfied the requirement in proposed Rule 812 with respect to a security-based swap if the Commission has previously required such security-based swap to be cleared. The Commission notes that this comment is unrelated to the process rules being adopted today. However, the Commission notes that it will consider this comment in the context of the SB SEF Release. 120 See comment letter of the Managed Funds Association (Mar. 24, 2011). Specifically, the Managed Funds Association addressed, among other things, issues regarding: (1) Requirements that dealers be prepared to onboard buy-side market participants on the basis of reasonable objective criteria and reasonable commercial terms; (2) the removal of open interest caps at CCPs and the implementation of a ‘‘reasonable cohort of initial products available for clearing’’ and a detailed cleared product roll-out schedule; (3) requirements that CCPs that clear buy-side transactions ‘‘have a robust, transparent, and efficient margin mechanism, well defined and understood default waterfalls, efficient and robust trade processing and reporting that can handle block trading and allocations, effective and efficient risk compression, proven segregation of customer funds and pre- and post-default portability of positions, clear legal documentation of give-up agreements and trade confirmations, and appropriate buy-side representation on governance boards;’’ and (4) the elimination of regulatory uncertainty. 121 See comment letter of J.P. Morgan (June 3, 2011) and comment letter of the ABA Securities Association, American Council of Life Insurers, Financial Services Roundtable, Futures Industry Association, Institute of International Bankers, International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association (Sept. 8, 2011). 122 See comment letter of Naphtali M. Hamlet (Jan. 22, 2011) and comment letter of Suzanne H. Shatto (Jan. 21, 2011). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 be required to make Security-Based Swap Submissions with the Commission and the information that is required to be included in SecurityBased Swap Submissions. These comments do not address the process or information requirements in the proposed rules. Although some of the comments relate to future actions that may be taken by the Commission, such as mandatory clearing determinations or future rulemakings, those comments are outside the context of the process rules being adopted today, but the Commission will consider the issues raised in these letters as they pertain to relevant areas outside of this rulemaking.123 2. Prevention of Evasion of the Clearing Requirement New Rule 3Ca–2 is being adopted as proposed. Specifically, the new rule clarifies that the phrase ‘‘submits such security-based swap for clearing to a clearing agency’’ found in Exchange Act Section 3C(a)(1)—which establishes the mandatory clearing requirement for security-based swaps—to mean that the security-based swap subject to the clearing requirement must be submitted for central clearing to a clearing agency that functions as a CCP. Exchange Act Section 3C(d)(1) directs the Commission to prescribe rules (and interpretations of rules) the Commission determines to be necessary to prevent evasions of the clearing requirements.124 Specifically, the term ‘‘clearing agency’’ is defined broadly under the Exchange Act,125 and clearing agencies may offer a spectrum of clearing services. The Commission has identified the following entities and activities as falling within the definition of clearing agency: (i) Clearing corporations; (ii) 123 For example, with respect to the international application of mandatory clearing determinations, rather than addressing the international implications of Title VII in a piecemeal approach, the Commission is considering addressing the relevant international issues holistically in a single proposal. Such a proposal would give investors, market participants, foreign regulators, and other interested parties an opportunity to consider the Commission’s proposed approach to the application of Title VII to cross-border security-based swap transactions and non-U.S. persons that act in capacities regulated under the Dodd-Frank Act. This approach should generate thoughtful and constructive comments for us to consider regarding the application of Title VII to cross-border transactions. 124 See 15 U.S.C. 78c–3(d)(1) (as added by Section 763(a) of the Dodd-Frank Act) (stating that ‘‘[t]he Commission shall prescribe rules under this section (and issue interpretations of rules prescribed under this section), as determined by the Commission to be necessary to prevent evasions of the mandatory clearing requirements under this Act.’’). 125 See supra note 8 (discussing the definition of ‘‘clearing agency’’ pursuant to Exchange Act Section 3(a)(23)). PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 41617 securities depositories; and (iii) matching services.126 As a result, there may be entities that operate as registered clearing agencies for security-based swaps that do not provide central clearing and act as a CCP. The Commission believes that the broad definition of the term ‘‘clearing agency’’ could be used by market participants to evade the clearing requirement of Exchange Act Section 3C(a)(1), which states that ‘‘[i]t shall be unlawful for any person to engage in a security-based swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration under this Act if the security-based swap is required to be cleared.’’ 127 For example, market participants seeking to evade the requirement to clear a security-based swap set forth in Exchange Act Section 3C(a)(1) could, in the absence of new Rule 3Ca–2, attempt to satisfy the clearing requirement by submitting the security-based swap for matching services (rather than for central clearing) to a clearing agency that is either registered with the Commission or exempt from registration under the Exchange Act. The Commission believes that other types of clearing functions and services offered by clearing agencies would not achieve the goal of central clearing articulated under the Dodd-Frank Act— improving the management of counterparty risk. As previously noted, a CCP guarantees both sides of a trade executed by two counterparties and, accordingly, lowers the counterparty credit risk of each of the original counterparties that are members of the CCP.128 The Commission believes that new Rule 3Ca–2 will prevent potential evasions of the clearing requirement by requiring market participants to submit security-based swaps to a clearing agency for central clearing as opposed to other clearing functions or services. Accordingly, Rule 3Ca–2 clarifies the reference to ‘‘submits such securitybased swap for clearing to a clearing agency’’ in Exchange Act Section 3C(a)(1) to mean that the security-based swap must be submitted for central clearing to a clearing agency that functions as a CCP. Upon the effective 126 See Order Approving the Clearing Agency Registration of Four Depositories and Four Clearing Corporations, Securities Exchange Act Release No. 20221 (Sept. 23, 1983), 48 FR 45167 (Oct. 3, 1983), and Confirmation and Affirmation of Securities Trades; Matching, Securities Exchange Act Release No. 39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13, 1998). 127 See 15 U.S.C. 78c–3(a)(1) (as added by Section 763(a) of the Dodd-Frank Act). 128 See supra notes 10–11 and accompanying text. E:\FR\FM\13JYR3.SGM 13JYR3 41618 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations and compliance dates for Rule 3Ca–2, counterparties must submit securitybased swaps to a clearing agency for central clearing in order to meet the clearing requirement set forth in Exchange Act Section 3C(a)(1).129 The Commission believes that submission to a clearing agency for clearing services other than central clearing would not satisfy a mandatory clearing requirement because only a clearing agency that functions as a CCP guarantees performance on the trade and thus mitigates counterparty credit risk between the bilateral parties to the trade. The Commission received two comments on Rule 3Ca–2, of which one expressed strong support for the rule to be adopted as proposed.130 The second commenter suggested that the Commission propose rules to address the potential for evasion through ‘‘spurious customization,’’ such as situations where parties to a securitybased swap intentionally include terms in the relevant contract that have no economic purpose other than to cause the contract to fall outside the scope of the clearing agency’s rules.131 The Commission is adopting Rule 3Ca–2 as proposed, but will continue to monitor the clearing of security-based swaps as the market develops and will consider whether additional action should be taken to implement the anti-evasion provisions of Exchange Act Section 3C, including the suggestion raised by the commenter described above. B. Stay of the Clearing Requirement and Review by the Commission New Rule 3Ca–1 establishes a procedure for staying a mandatory clearing requirement and for the Commission’s subsequent review of the terms of the relevant security-based swap (or group, category, type or class of security-based swaps) and the clearing arrangement pursuant to Exchange Act Section 3C(c)(1).132 129 See 15 U.S.C. 78c–3(a)(1). AFR Letter at 2–3. 131 See OCC Letter at 5–6. 132 See 15 U.S.C. 78c–3(c)(1) (as added by Section 763(a) of the Dodd-Frank Act) (providing that, after making a determination that a security-based swap (or group, category, type or class of security-based swaps) is required to be cleared, the Commission, on application of a counterparty to a security-based swap or on the Commission’s own initiative, may stay the clearing requirement until the Commission completes a review of the terms of the securitybased swap and the clearing arrangement). In connection with a stay of the clearing requirement and subsequent review of the terms of the securitybased swap and the clearing arrangement, the Commission is required to adopt rules for reviewing a clearing agency’s clearing of a security-based swap, or any group, category, type or class of security-based swaps, that the clearing agency has mstockstill on DSK4VPTVN1PROD with RULES3 130 See VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Pursuant to new Rule 3Ca–1, a counterparty to a security-based swap subject to the clearing requirement wishing to apply for a stay of the clearing requirement is required to submit a written statement to the Commission that includes (i) a request for a stay of the clearing requirement, (ii) the identity of the counterparties to the security-based swap and a contact at the counterparty requesting the stay, (iii) the identity of the clearing agency clearing the security-based swap, (iv) the terms of the security-based swap subject to the clearing requirement and a description of the clearing arrangement and (v) the reasons a stay should be granted and the securitybased swap should not be subject to a clearing requirement, specifically addressing the same factors a clearing agency must address in its SecurityBased-Swap Submission pursuant to new Rule 19b–4(o)(3). The Commission believes that such information will assist the Commission in determining whether to grant the stay and, if the stay is granted, in conducting a review during the stay period of the terms of the relevant security-based swap (or group, category, type or class of security-based swaps) and the clearing arrangement. In particular, there is likely to be considerable overlap in the Commission’s prior justification and analysis for requiring that a security-based swap be cleared (i.e., the initial mandatory clearing determination) and the factors the Commission would consider when determining whether to subsequently reverse the prior determination. Accordingly, requiring a party seeking a stay to address the same factors that a clearing agency was required to include in the original Security-Based Swap Submission provides the Commission with a logical point from which to begin its analysis. Moreover, because the application for the stay will, pursuant to Exchange Act Section 3C(c)(1), be made by a counterparty to a security-based swap subject to a clearing requirement,133 the Commission will need basic information on the clearing agency that clears the relevant securitybased swap, particularly if the Commission needs to request additional information from the clearing agency in order to make a determination whether to grant the stay or whether to modify the existing clearing requirement. As accepted for clearing. See 15 U.S.C. 78c–3(c)(4) (as added by Section 763(a) of the Dodd-Frank Act). 133 See 15 U.S.C. 78c–3(c)(1) (as added by Section 763(a) of the Dodd-Frank Act) (indicating that a stay could be initiated either pursuant to an application of a counterparty to a security-based swap or on the Commission’s own initiative). PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 such, to the extent that the Commission determines that it requires additional information in the possession of the clearing agency (as distinguished from the information it received from the counterparty), new Rule 3Ca–1(d) requires that any clearing agency that has accepted for clearing the securitybased swap subject to the stay provide information requested by the Commission in the course of its review during the stay.134 New Rule 3Ca–1(e)(1), which is being adopted as proposed, provides that, upon completion of its review,135 the Commission may determine unconditionally, or subject to such terms and conditions as the Commission determines to be appropriate in the public interest, that the security-based swap (or group, category, type or class of security-based swaps) must be cleared.136 Alternatively, new Rule 3Ca– 1(e)(2), which also is being adopted as proposed, provides that the Commission may determine that the clearing requirement does not apply to the security-based swap (or group, category, type or class of security-based swaps).137 If the Commission were to make a determination that the clearing requirement does not apply to a security-based swap (or group, category, type or class of security-based swaps), the new rule provides that clearing may continue on a non-mandatory basis.138 In order to provide the public with notice of the submission of a counterparty’s request for a stay of the clearing requirement, the Commission intends to make each application for a stay available to the public on the Commission’s Web site. A stay of the clearing requirement may be applicable to the counterparty requesting the stay or more broadly, to the security-based swap (or any group, category, type or class of security-based swaps) subject to the clearing requirement. The 134 Rule 3Ca–1(d) is being adopted substantially as proposed, with the one modification being the deletion of the phrase ‘‘but need not be limited to’’ when describing what the Commission’s review of a request for a stay should consider. The reasons for this deletion from the proposal and the Commission’s explanation as to why it does not substantively affect the rule are discussed at the end of this section. 17 CFR 240.3Ca–1(d). 135 Exchange Act Section 3C(c)(2) requires the Commission to complete such clearing review not later than 90 days after issuance of the stay, unless the clearing agency that clears the security-based swap agrees to an extension of the time limit. See 15 U.S.C. 78c–3(c)(2) (as added by Section 763(a) of the Dodd-Frank Act). 136 17 CFR 240.3Ca–1(e)(1). New Rule 3Ca–1(c) provides that a stay of the clearing requirement may be granted with respect to a security-based swap, or the group, category, type, or class of securitybased swaps, as determined by the Commission. 137 17 CFR 240.3Ca–1(e)(2). 138 See id. E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Commission intends to provide notice to the public each time it grants a stay of a mandatory clearing requirement. The Commission received two comment letters regarding proposed Rule 3Ca–1.139 One commenter provided examples of circumstances that may warrant a stay of the mandatory clearing requirement.140 Specifically, this commenter cited situations in which there is an absence of competition, where there is an unresolved clearing member default at the only clearing agency then clearing the relevant product, where the Commission determines to impose a mandatory clearing requirement where no clearing agency has elected to clear the product, or where a product subject to mandatory clearing becomes so illiquid as to threaten the clearing agency’s ability to calculate margin or to manage a default.141 In response to these comments, the Commission notes that the purpose of new Rule 3Ca–1 is, similar to new Rules 19b–4(n) and (o), to establish the process by which certain parties are required to submit information to the Commission. Nevertheless, the Commission appreciates the commenter’s views and will consider them to the extent the issues raised by the commenter are implicated in a particular application for a stay. A second commenter requested that the Commission delete the phrase ‘‘but need not be limited to’’ from proposed Rule 3Ca–1(d) when describing what the Commission’s review of a request for a stay should consider.142 The commenter believes that this language exceeds the Commission’s statutory authority and that the language in Exchange Act Section 3C permits the Commission only to consider the five qualitative and quantitative factors that the Commission is required to consider when making an initial mandatory clearing determination. The commenter further believes that the purpose of the stay provision is to ‘‘afford the Commission more time to complete its review.’’ 143 In response to these comments, the Commission notes that statutory provisions regarding the Commission’s ability to grant a stay of the clearing requirement refers expressly to securitybased swaps for which the Commission already has made a mandatory clearing determination.144 The stay provides 139 See ISDA Letter and Better Markets Letter. ISDA Letter at 12. 141 See id. 142 See Better Markets Letter at 10–11. 143 See id. 144 See 78c–3(c)(1) (‘‘[a]fter making a determination pursuant to subsection (b)(2), the 140 See VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 time for the Commission to re-consider its initial determination or to re-evaluate the determination in light of changed circumstances or new information. The statute does not address specific factors the Commission must consider when making a stay determination. As such, the Commission believes that it may consider any relevant factors (including ones beyond the five qualitative and quantitative factors set forth in Exchange Act Section 3C(b)(4)) when making a determination regarding a potential stay of the clearing requirement without exceeding the statutory authority set forth in Exchange Act Section 3C(c)(3).145 Nevertheless, the Commission has chosen not to adopt the phrase ‘‘but need not be limited to’’ in proposed Rule 3Ca–1(d) so as to simplify the final rule to focus on the process by which information is submitted to the Commission in connection with an application by a counterparty requesting a stay of a mandatory clearing requirement, particularly since the Commission already has the power to consider other factors in making a determination on the request for a stay without the inclusion of this language.146 C. Title VIII Notice Filing Requirements for Designated Clearing Agencies As proposed, the Commission also is amending Rule 19b–4 to add a new paragraph (n) in order to implement the requirement to file Advance Notices in accordance with Title VIII. As discussed in Section I of this release, Section 806(e) requires any financial market utility designated by the Council as systemically important to file 60 days advance notice of changes to its rules, procedures or operations that could materially affect the nature or level of risk presented by the financial market utility.147 To implement this filing requirement, new Rule 19b–4(n) will require that an Advance Notice be submitted to the Commission electronically on Form 19b–4. In addition, Rule 19b–4(n) will define when a proposed change to a clearing agency’s rules, procedures or operations could materially affect the nature or level of risks presented by the designated financial market utility. This definition will determine when an Commission, on application of a counterparty to a security-based swap or on its own initiative, may stay the clearing requirement of subsection (a)(1) until the Commission completes a review of the terms of the security-based swap (or the group, category, type, or class of security-based swaps) and the clearing arrangement.’’) (emphasis added). 145 See supra note 105 and accompanying text. 146 See also supra section II.A.1.g. 147 See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII). PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 41619 Advance Notice under Section 806(e) must be filed with the Commission. Further, the Commission is adopting, as proposed, corresponding amendments to Form 19b–4 as discussed in more detail in section II.D. As with Security-Based Swap Submissions filed pursuant to Exchange Act Section 3C, the Commission anticipates that in many cases a proposed change may be required to be filed as an Advance Notice under Section 806(e) and as a proposed rule change under Exchange Act Section 19(b). This is because a proposal that qualifies as a proposed change to a rule, procedure or operation that materially affects the nature or level of risk presented by the designated clearing agency under Section 806(e) may also qualify as a proposed rule change under Exchange Act Section 19(b).148 As a result, a designated clearing agency may be required to file a proposal as an Advance Notice and as a proposed rule change. Designated clearing agencies, as SROs, will already be required to file proposed rule changes on Form 19b–4 using EFFS.149 Accordingly, and consistent with the proposal for Security-Based Swap Submissions, the Commission is requiring designated clearing agencies to use the existing filing system, EFFS, and Form 19b–4 for the filing of Advance Notices under Section 806(e). This will allow designated clearing agencies to comply with the advance notice requirement in Section 806(e) using the same system they use for submitting proposed rule changes under Exchange Act Section 19(b) and, as applicable, Security-Based Swap Submissions under Exchange Act 148 For example, if the proposed change described in the Advance Notice requires a change in addition to, or a deletion from, the rules of a designated clearing agency, the action also would require the filing of a proposed rule change under Exchange Act Section 19(b). Section 3(a)(27) of the Exchange Act defines ‘‘rules’’ broadly to include ‘‘the constitution, articles of incorporation, bylaws, and rules, or instruments corresponding to the foregoing * * * and such of the stated policies, practices, and interpretations of such exchange, association, or clearing agency as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to be rules of such exchange, association, or clearing agency.’’ 15 U.S.C. 78c(a)(27). 149 As discussed below in Section I.F., the processes under Exchange Act Section 19(b) and Section 806(e) may not always overlap. For example, certain changes to the operations of a designated clearing agency may not be required to be filed as a proposed rule change pursuant to Exchange Act Section 19(b), which does not specifically apply to changes in operations. Such changes may, however, trigger a requirement to file an Advance Notice if they would materially affect the nature or level of risks presented by the designated clearing agency. Nevertheless, the two processes are sufficiently similar as to warrant using the same method for filing. E:\FR\FM\13JYR3.SGM 13JYR3 41620 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 Section 3C. Leveraging the existing filing system, EFFS, for the submission of Advance Notices is intended to utilize efficiently Commission and designated clearing agency resources. The Commission did not receive any comments related to its decision to require Advance Notices to be submitted using EFFS and is adopting this aspect of Rule 19b–4(n)(1), substantially as proposed, with one minor technical modification to account for the need to finalize certain technological changes. Specifically, the Commission is currently in the process of designing and implementing the system upgrades that are necessary in order for Advance Notices to be filed on EFFS. The Commission expects the system upgrades to EFFS to be completed no later than December 10, 2012. However, the Commission recognizes that there is a possibility that the Council may designate a clearing agency as systemically important before the system upgrades are completed. In such a circumstance, a designated clearing agency would be unable to file the Advance Notice on Form 19b–4 and would need to file the Advance Notice with the Commission by other means. As a result, the Commission is revising proposed Rule 19b–4(n)(1) to provide that Advance Notices filed before December 10, 2012 must be filed with the Commission by submitting the Advance Notice to a dedicated email inbox to be established by the Commission.150 A designated clearing agency that files an Advance Notice by email must include in the notice the same information that is required to be included for Advance Notices in the General Instructions for Form 19b–4, as such form has been modified by the rules the Commission is adopting today.151 Advance Notices filed on or after December 10, 2012 on Form 19b– 4 would include the same substantive information. 150 The Commission’s Office of Information Technology maintains a system, known as the EMail Encryption Solution, that allows persons outside the agency to compose and send encrypted emails to users within the Commission. The guide for external users wishing to utilize the EMail Encryption Solution is available at: https://wapps. sec.gov/oitintranet/oit_learn/pdf/Smail-externalguide-01-05-2011.pdf. 151 The Commission notes that a designated clearing agency must also continue to meet the filing requirements of Rule 19b–4 and Form 19b– 4. For example, if the change that requires the designated clearing agency to file an Advance Notice with the Commission is also a proposed rule change under Exchange Act Section 19(b), the designated clearing agency must file the proposed rule change with the Commission on Form 19b–4 using EFFS and separately file the Advance Notice with the Commission by email. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 1. Standards for Determining When Advance Notice Is Required Section 806(e)(1)(A) requires a designated financial market utility to provide 60 days advance notice to its Supervisory Agency of any proposed change to its rules, procedures or operations that could materially affect the nature or level of risks presented by the designated financial market utility.152 For purposes of this requirement, the phrase ‘‘materially affect the nature or level of risks presented’’ is defined in new Rule 19b– 4(n)(2)(i) to mean the existence of a ‘‘reasonable possibility that the change could affect the performance of essential clearing and settlement functions or the overall nature or level of risk presented by the designated clearing agency.’’ This definition was designed to include all changes that would affect the risk management functions performed by the clearing agency that are related to systemic risk, as well as changes that could affect the clearing agency’s ability to continue to perform its core clearance and settlement functions because the Commission believes that such changes could materially affect the nature or level of risk presented by the clearing agency.153 In order to help designated clearing agencies determine whether an Advance Notice is required, new Rule 19b– 4(n)(2)(ii), which is being adopted as proposed, includes a list of categories of changes to rules, procedures or operations that the Commission believes could materially affect the nature or level of risks presented by a designated clearing agency. The list of such changes includes, but is not limited to, changes that materially affect participant and product eligibility, daily or intraday settlement procedures, default procedures, system safeguards, governance or financial resources of the designated clearing agency. The Commission believes that changes in these areas pertain to core functions of a clearing agency and, as a result, may affect the ability of a designated clearing agency to manage its risks appropriately and to continue to conduct systemically important clearance and settlement services. For example, participant and product eligibility requirements of a designated clearing agency are designed to ensure that the clearing agency’s members have sufficient financial 152 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII). 153 Core clearance and settlement functions may include, but are not limited to, the processing, comparison, netting, or guaranteeing of securities transactions as well as any processes or procedures, such as internal risk management controls, that support these functions. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 resources and operational capacity to meet obligations arising from participation in the clearing agency, and to ensure that the products cleared by the clearing agency are sufficiently liquid and that adequate pricing data is available. In addition, a designated clearing agency’s default procedures exist to ensure that, should a default occur, the clearing agency has the financial resources, liquidity and operational abilities to continue to make payments to non-defaulting participants on time. Additional examples of the types of matters that could fall within the categories listed above include changes to the methods for making margin calculations, liquidity arrangements and significant new services of the clearing agency. Moreover, while a broad interpretation of the materiality threshold is consistent with the underlying principles of the Clearing Supervision Act and desirable to permit a review of all matters that affect the risks presented by clearing agencies, not every change to a designated clearing agency’s rules, procedures or operations will be material. Accordingly, new Rule 19b–4(n)(2)(iii), which is being adopted as proposed, includes two broad categories of examples of changes to rules, procedures or operations that the Commission believes would not materially affect the nature or level of risks presented by a designated clearing agency, and therefore would not require the filing of an Advance Notice. The first category includes, but is not limited to, changes to an existing procedure, control, or service that do not modify the rights or obligations of the designated clearing agency or persons using its payment, clearing, or settlement services and that do not adversely affect the safeguarding of securities, collateral, or funds in the custody or control of the designated clearing agency or for which it is responsible. The second category includes, but is not limited to, changes concerned solely with the administration of the designated clearing agency or related to the routine, daily administration, direction and control of employees. The Commission believes that both categories of changes do not pertain to the core functions performed by a clearing agency and, therefore, would not materially affect the nature or level of risk presented by the clearing agency. The Commission received two comments about the scope of the definition of ‘‘materially affect the nature or level of risks presented,’’ as set E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 forth in proposed Rule 19b–4(n)(2).154 One commenter suggested that the proposed definition is too broad and could require unnecessary or impractical submissions of Advance Notices.155 This commenter argued that the definition would include ‘‘all changes that would affect the risk management functions performed by the clearing agency that are related to systemic risk, as well as changes that could affect the clearing agency’s ability to continue to perform its core clearance and settlement functions.’’ 156 This commenter also suggested that the Commission distinguish between ‘‘changes that tend to increase systemic risk and those that tend to decrease it.’’ 157 This commenter urged the Commission to ‘‘consider limiting the changes for which Advance Notice is required to those changes that are reasonably likely to have a materially adverse effect on the nature or level of risks presented.’’ 158 The same commenter also expressed the view that providing Advance Notice to the Commission of the terms of a line of credit in accordance with Section 806(e), prior to finalizing the financing, would be impractical.159 This commenter further requested that a renewal of a liquidity facility be excluded from the requirement to file Advance Notices with the Commission.160 At most, the commenter believes that it would be ‘‘practical and appropriate to require an Advance Notice for a termination or reduction of a liquidity arrangement at the instance of the clearing agency.’’ 161 A second commenter expressed concern regarding the potential scope and burden of the requirement to submit Advance Notices in general, with a specific emphasis on the Commission’s proposed definition of ‘‘materially affect the nature or level of risks presented’’ in Rule 19b–4(n)(2).162 In particular, the commenter argued that the requirement to submit Advance Notices should apply only to ‘‘matters of true importance that require attention by the Commission and comment by the public.’’ 163 Accordingly, the commenter 154 See OCC Letter at 6–7; and comment letter of The Depository Trust & Clearing Corporation (Oct. 3, 2011) (‘‘DTCC Letter’’) at 3–5. 155 See OCC Letter at 6–7. 156 See id. 157 See id. 158 See id. 159 See id. 160 See id. 161 See id. 162 See DTCC Letter at 3–4. 163 See id. The Commission notes that Section 806(e) of the Clearing Supervision Act, which establishes the requirement that a financial market VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 41621 urged the Commission to avoid an overly expansive application of the requirement so as not to create undue strain on the designated clearing agency’s resources, and to take into account the designated clearing agency’s prior experience and judgment in filing proposed rule changes with the Commission pursuant to Exchange Act Section 19(b), the positions taken by the designated clearing agency during its consultations with the Commission regarding a change that could potentially result in an obligation to file an Advance Notice and the role and views of other entities responsible for supervising the designated clearing agency.164 After careful consideration of these two commenters’ views that the definition of ‘‘materially affect the nature or level of risk presented’’ is over broad, the Commission has decided to adopt Rule 19b–4(n)(2), as proposed. As discussed in the Proposing Release, the Commission believes that the proposed definition of ‘‘materially affect the nature or level of risks presented’’ provides sufficient guidance to allow designated clearing agencies to know when an Advance Notice under Section 806(e) is required, while also being broad enough to capture all relevant proposed changes as specific circumstances warrant. The Commission does not believe the definition is so broad as to include proposed changes to be made by a designated clearing agency that would not materially affect the nature or level of risk presented by the clearing agency, and the Commission included examples in the rule to provide guidance regarding when a proposed change would or would not be required to be filed with the Commission. Furthermore, the Commission believes that a standard that would require Advance Notices be filed only for ‘‘matters of true importance,’’ as suggested by one commenter, would provide less clarity and be more open to interpretation than the definition the Commission is adopting today. As suggested by the same commenter, the Commission does intend to take into account a clearing agency’s prior experience and judgment in determining whether a proposed change would materially affect the nature or level of risk presented by the clearing agency. As stated in the Proposing Release, the Commission encourages designated clearing agencies to discuss proposed changes with Commission staff to help determine whether an Advance Notice under Section 806(e) is required to be filed with respect to a proposed change to the clearing agency’s rules, procedures or operations.165 In response to one commenter’s suggestion that Advance Notices be required only when a proposed change would be reasonably likely to have a materially adverse effect on the nature or level of risks presented by a designated clearing agency (as opposed to changes that would decrease risk), the Commission notes that as a practical matter, many changes to the rules, procedures or operations of a designated clearing agency may have both riskincreasing effects in some respects of a designated clearing agency’s operations and risk-reducing effects in other respects. For example, a change in the clearing agency’s margin calculation methodology could result in increased margin requirements for some members of the clearing agency and decreased margin requirements for other members. For that reason, Section 806(e) establishes the requirement to file Advance Notices with the Commission without distinguishing between changes that could materially increase or decrease the nature or level of risk. Finally, and in response to a commenter’s suggestion that proposed changes relating to a line of credit or the renewal of a liquidity facility be excluded from the Advance Notice requirement on the basis that imposing a 60 day delay in a designated clearing agency’s ability to rely on such financing could be impractical and potentially increase risk for the clearing agency, the Commission notes that Section 806(e)(1)(I) permits a designated clearing agency to implement a change in less than 60 days if the Commission notifies the designated clearing agency in writing that it does not object to the proposed change to the designated clearing agency’s rules, procedures or operations and authorizes the designated clearing agency to implement the change on an earlier date, subject to any conditions imposed by the Commission.166 Accordingly, a designated clearing agency that wishes to implement a change in less than 60 days may request that the Commission expedite review of the Advance Notice utility submit Advance Notices to its Supervisory Agency, also contemplates review of the Advance Notice by the Board and consultation between the Board and the applicable Supervisory Agency. See 12 U.S.C. 5465(e)(3) and (4) (as added by Title VIII). 164 See id. 165 One commenter agreed with the approach of encouraging designated clearing agencies to consult with staff and commended the Commission’s recognition of the need for cooperation and dialogue in this area. See OCC Letter at 7. 166 12 U.S.C. 5465(e)(1)(I) (as added by Title VIII). PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\13JYR3.SGM 13JYR3 41622 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 and provide the written notification under Section 806(e)(1)(I). 2. Providing Notice of the Matters Included in an Advance Notice to the Board and Interested Persons Given the role of clearing agencies in supporting financial markets, the Commission recognizes that members of the public may have an interest in proposed changes to the rules, procedures or operations of systemically important clearing agencies. New Rule 19b–4(n)(1) provides that, upon the filing of any Advance Notice by a designated clearing agency, the Commission would provide for prompt publication thereof in the Federal Register, together with the terms of the substance of the proposed change to the rules, procedures or operations of the designated clearing agency and a description of the subjects and issues involved. This requirement is consistent with the existing procedures for proposed rule changes under Exchange Act Section 19(b) and the new procedures for Security-Based Swap Submissions under Exchange Act Section 3C. In addition, new Rule 19b– 4(n)(3) requires designated clearing agencies to post Advance Notices and any amendments thereto on their Web sites within two business days of filing the notice or amendments in order to ensure that interested parties have timely and transparent access to the matters discussed therein, particularly in circumstances where a proposed change is not required to be filed under Exchange Act Section 19(b) and, as a result, would not otherwise be published for comment. These two provisions were intended to allow the Commission to give interested persons an opportunity to review and to submit written data, views and arguments concerning the matters referred to in the Advance Notice.167 The Commission will consider all comments and other information received when determining whether to object to an Advance Notice. One commenter requested that the Commission modify the public notice provisions contained in new Rule 19b–4(n) in order to permit designated clearing agencies to request confidential treatment with respect to an Advance Notice and any related material (including, in certain circumstances, the fact of the filing itself) where the public disclosure of the notice or any such related material would (i) jeopardize the 167 Under the Commission’s current practice with respect to Exchange Act Section 19(b), proposed rule changes are generally published with a twentyone day comment period. The Commission expects that Advance Notices will be published for the same comment period. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 ability of the designated clearing agency to successfully achieve the objective of the proposed change which is the subject of the Advance Notice or (ii) disclose sensitive non-public information.168 This commenter noted specifically that because changes requiring the filing of an Advance Notice by their nature affect risk and risk management controls, ‘‘they may intrinsically involve matters of great sensitivity, which are not appropriate for public disclosure.’’ 169 Section 806(e) does not require that an Advance Notice be made publicly available. However, the Commission is requiring publication of these notices by rule in order to give interested persons an opportunity to express their views with respect to a proposed change filed under Section 806(e). Although as a general matter the Commission believes that providing for a public comment period will benefit its review of Advance Notices, the Commission also understands the commenter’s concern that changes requiring the filing of an Advance Notice could, in some cases intrinsically involve proprietary information regarding a designated clearing agency’s risk management, the public disclosure of which could potentially harm the operations of the clearing agency. In such circumstances, the Commission believes that it is appropriate that an Advance Notice be permitted to be nonpublic. Accordingly, the Commission has added new Rule 19b–4(n)(6) to provide that the provisions of new Rule 19b–4(n) requiring publication of the Advance Notice in the Federal Register and the posting of the notice on the designated clearing agency’s Web site will not apply to any information contained in an Advance Notice for which the designated clearing agency has requested confidential treatment following the procedures set forth in Rule 24b–2 of the Exchange Act.170 The Commission emphasizes, however, that new Rule 19b–4(n)(6) applies only to information submitted to the Commission as an Advance Notice under Section 806(e). Specifically, Rule 19b–4(n)(6) does not relieve a designated clearing agency of its obligation to post any information on its Web site in connection with a SecurityBased Swap Submission pursuant to Exchange Act Section 3C or a proposed rule change pursuant to Exchange Act Section 19(b), nor does it affect the Commission’s publication of either a Security-Based Swap Submission or a proposed rule change in the Federal PO 00000 168 See DTCC Letter at 7–8. id. 170 17 CFR 240.24b–2. 169 See Frm 00022 Fmt 4701 Sfmt 4700 Register pursuant to those statutory provisions.171 In addition, new Rule 19b–4(n)(4), which is being adopted as proposed, requires a designated clearing agency to post a notice on its Web site that the proposed change described in an Advance Notice has been permitted to take effect within two business days of such date as determined in accordance with the timeframe set forth in Section 806(e). The purpose of this rule is to provide a means for public notice when a proposed change under Title VIII is permitted to become effective, since the Commission will not affirmatively approve an Advance Notice under Section 806(e). Because Sections 806(e)(1)(G) and (I) provide that a designated clearing agency may implement a proposed change that is the subject of an Advance Notice if the Commission does not object to it, the Commission will not issue a public order granting approval of the relevant change, as it does with proposed rule changes under Exchange Act Section 19(b). Because there will not be a Commission action to indicate when an Advance Notice has been permitted to take effect, the Commission is adopting new Rule 19b–4(n)(4)(i) to require the designated clearing agency to post notice on its Web site. Moreover, new Rule 19b–4(b)(n)(ii), which is being adopted as proposed, requires the designated clearing agency to post notice on its Web site of the time at which the proposed change becomes effective if that date is different from the date on which the proposed change is permitted to become effective. In order to give interested parties timely notice of the change, this notice will be required to be posted within two business days of the effective date. The Commission is allowing two business days for the designated clearing agency 171 See infra section II.F. Both Exchange Act Sections 3C and 19(b) contain statutory requirements providing for public comment with respect to Security-Based Swap Submissions and proposed rule changes, respectively. See 15 U.S.C. 78c–3(b)(3) (as amended by Section 763(a) of the Dodd-Frank Act) (requiring the Commission to make available to the public any Security-Based Swap Submission it receives and to provide at least a 30-day public comment period ‘‘regarding its determination whether the clearing requirement shall apply to the submission’’) and 15 U.S.C. 78s(b)(1) (requiring that the Commission, ‘‘upon the filing of any proposed rule change, publish notice thereof together with the terms of substance of the proposed rule change or a description of the subjects and issues involved.’’). Although a similar requirement does not exist in Section 806(e), the Commission believes that requiring an opportunity for public input on the changes discussed in an Advance Notice is an important step toward ensuring transparency with respect to proposed changes to the rules, procedures, or operations of designated clearing agencies. E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations to post such notice because the existing notice requirement in Rule 19b–4(l), which requires SROs to post a proposed rule change filed under Exchange Act Section 19(b) and any amendments thereto on its Web site, is two business days after filing of the proposed rule change, and any amendments thereto, with the Commission.172 Once the notice of the effectiveness of the proposed change has been posted, the designated clearing agency will be permitted to remove its original posting of the Advance Notice (and any amendments thereto) from its Web site because notice of the change will no longer be necessary after the public is notified that the change has taken effect. Pursuant to new Rule 19b–4(n)(3)(i), which is being adopted as proposed, a designated clearing agency also may remove the Advance Notice from its Web site if it withdrew the notice or if it was notified that such notice was not properly filed. The Commission did not receive any comments related to any of the provisions described above. Section 806(e)(3) also requires that the Commission provide the Board with a complete copy of any information it receives in connection with the Advance Notice.173 To satisfy this requirement, new Rule 19b–4(n)(5) requires a designated clearing agency to provide to the Board copies of all materials submitted to the Commission relating to an Advance Notice contemporaneously with such submission to the Commission. Such copies were proposed to be provided to the Board in triplicate and in hard copy format, pursuant to proposed changes to the General Instructions for Form 19b– 4. Two commenters suggested that the requirement to provide these copies in hard copy format was inefficient and burdensome and encouraged the Commission to work with the Board to facilitate the submission of filings pursuant to Section 806(e)(3) in electronic format absent a highly compelling reason to do otherwise.174 In response to this comment, the Commission is amending the General Instructions for Form 19b–4 to make clear that filers may instead provide the copies to the Board in an electronic format permitted by the Board. Along with this change to the General Instructions for Form 19b–4, the Commission is adopting Rule 19b–4(n)(5), as proposed. 172 17 CFR 240.19b–4(l). U.S.C. 5465(e)(3) (as added by Title VIII). In addition, the Commission is required to provide the Board with any information it issues or submits in connection therewith. 174 See OCC Letter at 7–8 and DTCC Letter at 8. 173 12 VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 3. Timing and Determination of Advance Notices Pursuant to Section 806(e) Section 806(e)(1)(E) requires that the Commission notify a designated clearing agency of any objection to a proposed change included in an Advance Notice within 60 days of the Commission’s receipt of the Advance Notice, unless the Commission requests additional information in consideration of the notice, in which case the 60-day period will recommence on the date such information is received by the Commission.175 The Commission, may however, pursuant to Section 806(e)(1)(H), extend the review period for an additional 60 days for proposed changes that raise novel or complex issues, subject to the Commission providing the designated clearing agency with prompt written notice of the extension.176 Finally, Section 806(e)(4) requires that the Commission consult with the Board before taking any action on, or completing its review of, the change referred to in the Advance Notice.177 The timeframes set forth in Section 806(e) determine when a proposed change to a designated clearing agency’s rules, procedures or operations will become effective, and the Commission does not believe additional rulemaking related to these timeframes is necessary at this time. 4. Implementation of Proposed Changes and Emergency Changes Pursuant to Section 806(e) Section 806(e)(1)(F) provides generally that a designated clearing agency may not implement a proposed change filed as an Advance Notice during the applicable review period,178 which is typically 60 days from the Commission’s receipt of the Advance Notice, but may be longer if the Commission requests additional information or extends the review 175 12 U.S.C. 5465(e)(1)(E) (as added by Title VIII). The Commission expects that a designated clearing agency would submit a comment letter to the Secretary of the Commission each time that it provides any additional information to the Commission on EFFS in response to a Commission request for information made pursuant to Section 806(e)(1)(D). For purposes of the time periods set forth in Sections 806(e)(1)(E) and (G), the new 60day period will begin on the date the Commission receives the additional information and the comment letter. Because the Commission will include a copy of this letter in its specific comment file for the Advance Notice, which is available on the Commission’s Web site, this approach will provide the means for notifying the public that the information was submitted. 176 12 U.S.C. 5465(e)(1)(H) (as added by Title VIII). 177 12 U.S.C. 5465(e)(4) (as added by Title VIII). 178 12 U.S.C. 5465(e)(1)(F) (as added by Title VIII). PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 41623 period in accordance with the statute.179 Section 806(e), however, provides two mechanisms by which a designated clearing agency could implement a proposed change prior to the expiration of the applicable review period. First, Section 806(e)(1)(I) permits the designated clearing agency to implement a change before the review period expires if the Commission notifies the designated clearing agency in writing that it does not object to the proposed change to the designated clearing agency’s rules, procedures or operations and authorizes the designated clearing agency to implement the change on an earlier date, subject to any conditions imposed by the Commission.180 As noted above, however, before taking any action on, or completing its review of, a change proposed by a designated clearing agency in an Advance Notice, the Commission is required to consult with the Board.181 Second, Section 806(e)(2) allows a designated clearing agency to implement a change that would otherwise require providing an Advance Notice to the Commission if the designated clearing agency determines that (i) an emergency exists and (ii) immediate implementation of the change is necessary for the designated clearing agency to continue to provide its services in a safe and sound manner.182 If a designated clearing agency determines to implement an emergency change, it must provide notice to the Commission as soon as practicable, and in no event later than 24 hours after implementation of the relevant change.183 Such emergency notice must contain all of the information otherwise required to be in an Advance Notice as well as a description of (i) the nature of the emergency and (ii) the reason the change was necessary in order for the designated clearing agency to continue to provide its services in a safe and sound manner.184 In reviewing the emergency notice, the Commission may require modification or rescission of the relevant change if it determines that the change is not consistent with the purposes of the Clearing Supervision Act, including all applicable rules, orders, or the risk management 179 12 U.S.C. 5465(e)(1)(E) and (H) (as added by Title VIII). 180 12 U.S.C. 5465(e)(1)(I) (as added by Title VIII). 181 12 U.S.C. 5465(e)(4) (as added by Title VIII). 182 12 U.S.C. 5465(e)(2)(A) (as added by Title VIII). 183 12 U.S.C. 5465(e)(2)(B) (as added by Title VIII). 184 12 U.S.C. 5465(e)(2)(C) (as added by Title VIII). E:\FR\FM\13JYR3.SGM 13JYR3 41624 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations standards prescribed under Section 805(a) of the Clearing Supervision Act.185 The Commission did not receive any comments on a designated clearing agency’s ability to act on an emergency basis. Designated clearing agencies would be required to provide such emergency notice on Form 19b–4, pursuant to the General Instructions, which are being adopted substantially as proposed. D. Amendments to Form 19b–4 mstockstill on DSK4VPTVN1PROD with RULES3 In conjunction with new Rules 19b–4(n) and (o), the Commission is adopting amendments to Form 19b–4 to reflect the requirements to file SecurityBased Swap Submissions and Advance Notices with the Commission. Specifically, the Commission is modifying the cover page of Form 19b–4 to add additional checkboxes so that a clearing agency may indicate that the filing is being submitted as a Security-Based Swap Submission or an Advance Notice (in the case of a designated clearing agency) as well as a proposed rule change under Exchange Act Section 19(b), in each case to the extent applicable. A clearing agency will be able to select more than one filing type, check the appropriate box or boxes to indicate the filing type and submit all related information as a single filing. In other words, in cases where a proposed change must be filed pursuant to all three filing requirements, the clearing agency would be able, after December 10, 2012, to meet all applicable filing requirements by submitting a single Form 19b–4 electronically on the existing filing system, EFFS, to the Commission. The Commission also is amending the General Instructions for Form 19b–4 regarding the filing requirements for Security-Based Swap Submissions and Advance Notices. The Commission is revising the instructions to include specific information that is required to be filed as part of a Security-Based Swap Submission or an Advance Notice. With respect to Security-Based Swap Submissions, the amendments to the Form 19b–4 General Instructions will require clearing agencies to include a statement that includes, but is not limited to: (i) How the submission is consistent with Section 17A of the 185 12 U.S.C. 5465(e)(2)(D) (as added by Title VIII). Pursuant to Section 806(e)(3), the Commission is required to provide the Board concurrently with a complete copy of any notice, request or other information it receives. However, the Commission is proposing that the designated clearing agency file copies of any such notice, requests or other information directly with the Board in order to help meet this requirement. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Exchange Act; (ii) information that will assist the Commission in the quantitative and qualitative assessment of the factors specified in Exchange Act Section 3C; and (iii) how the rules of the clearing agency meet the criteria for open access. Additionally, in order to facilitate the Commission’s review of a Security-Based Swap Submission, the revised instructions provide examples of the types of information the clearing agency could consider including in its Security-Based Swap Submission in order to respond to the quantitative and qualitative factors specified in Exchange Act Section 3C and the requirements set forth in new Rule 19b–4(o)(3). With respect to Advance Notices, the Commission is adopting amendments to the General Instructions for Form 19b– 4 to require the designated clearing agency to provide a description of the nature of the proposed change and the expected effects on risks to the designated clearing agency, its participants, or the market, along with a description of how the designated clearing agency will manage any identified risks. These instructions also require that a designated clearing agency provide any additional information requested by the Commission necessary to assess the effect the proposed change would have on the nature or level of risks associated with the designated clearing agency’s payment, clearing or settlement activities and the sufficiency of any proposed risk management techniques. The Commission also is adopting a new Exhibit 1A to the General Instructions for the Federal Register notice template used by clearing agencies as an exhibit to the Form 19b– 4 filing. New Exhibit 1A will be used only by clearing agencies. All other SROs will continue to use the current Exhibit 1 to prepare the Federal Register notice for proposed rule changes. The Commission is adopting a separate exhibit for clearing agencies because the rules requiring notice of Security-Based Swap Submissions and Advance Notices to be published in the Federal Register will apply only to clearing agencies. Instructions on preparing a Federal Register notice for Security-Based Swap Submissions and Advance Notices are unnecessary for all other SROs. In order to avoid any confusion, the Commission is providing clearing agencies with Exhibit 1A to use to prepare a Federal Register notice for a proposed rule change, Security-Based Swap Submission, or Advance Notice, or any combination of the three. The amendments to the General Instructions for Form 19b–4 also incorporate the statutory timeframes and other PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 procedural requirements that are contained in Exchange Act Section 3C and Section 806(e). Moreover, pursuant to existing Rule 19b–4(j), SROs are required to sign Form 19b–4 electronically in connection with filing a proposed rule change and to retain a copy of the signature page in accordance with Rule 17a–1. Under the rules the Commission is adopting today, Rule 19b–4(j) has been modified such that it also would apply to SecurityBased Swap Submissions filed in accordance with Exchange Act Section 3C and Advance Notices filed in accordance with Section 806(e). In addition, the Commission is adopting changes to the General Instructions for Form 19b–4, as proposed, to reflect the new deadlines by which the Commission must publish and act upon proposed rule changes submitted by SROs and the new standards for approval, disapproval or suspension of proposed rule changes pursuant to the amendments to Exchange Act Section 19(b) contained in Section 916 of the Dodd-Frank Act. The Commission is also adopting a number of technical and clarifying amendments to Rule 19b–4 and Form 19b–4 to make the instructions consistent with the new requirements in Section 916 of the Dodd-Frank Act and with current practices of SRO filers.186 Section 916 of the Dodd-Frank Act also modified Exchange Act Section 19(b)(3)(A), which permits certain types of proposed rule changes to take effect immediately upon filing with the Commission and without the notice and approval procedures required by Exchange Act Section 19(b)(2), to make clear that any rule establishing or changing a fee, due or other charge imposed by the SRO qualifies for this designation, regardless of whether the fee, due or other charge is applicable only to a member.187 The Commission 186 See amendments to the General Instructions for Form 19b–4. 187 15 U.S.C. 78s(b)(3)(A). When an SRO submits a proposed rule change to the Commission pursuant to Section 19(b)(3)(A) of the Exchange Act, the Commission still reviews the filing and has the power summarily to temporarily suspend the change in rules of the SRO within sixty days of its filing if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. If the Commission takes such action, it is then required to institute proceedings to determine whether the proposed rule change should be approved or disapproved. Temporary suspension of a proposed rule change and any subsequent action to approve or disapprove such change shall not affect the validity or force of the rule change during the period it was in effect and shall not be reviewable under Section 25 of the Exchange Act, nor shall it be deemed to be ‘‘final agency action’’ for purposes of 5 U.S.C. 704. See 15 U.S.C. 78s(b)(3)(A). E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations is also adopting modifications to the General Instructions for Form 19b–4 to reflect this clarification. The Commission did not receive any comments on the proposed amendments to Form 19b–4, and the Commission is adopting these amendments substantially as proposed. Several minor conforming edits and corrections have, however, been made to Form 19b–4 and the General Instructions thereto, as compared to the version that was included in the Proposing Release, to conform to changes made to new Rule 19b–4(o)(3), as described in detail in section II.A.1.b of this release, and to make other necessary clarifications to the form to reflect typographical edits, changes to the form made pursuant to an interim final rule that was adopted after publication of the Proposing Release,188 and other non-substantive revisions to eliminate or correct potentially vague or confusing language.189 mstockstill on DSK4VPTVN1PROD with RULES3 E. Amendments to Rule 19b–4 Relating to Section 916 of the Dodd-Frank Act Under Exchange Act Section 19(b)(2)(E),190 as added by the DoddFrank Act, the Commission is required to send the notice of a proposed rule change filed by an SRO to the Federal Register for publication thereof within 15 days of the date on which the SRO’s 188 See Amendment to Rule Filing Requirements for Dually-Registered Clearing Agencies, Securities Exchange Act Release No. 34–64832 (July 7, 2011), 76 FR 41056 (July 13, 2011). 189 In addition to the changes described in this section, the Commission has also made a number of minor typographical and clarifying revisions to the form as compared to what was included in the Proposing Release, including: (i) Correcting typographical errors and inserting missing graphics on the face of the form, (ii) correcting typographical errors in the descriptions of the components of the form and inserting missing language in the description of Exhibit 1A, (iii) inserting parentheses to distinguish existing language from new language in Item A of the General Instructions, (iv) inserting language into Item B of the General Instructions to make clear that Advance Notices and SecurityBased Swap Submissions are submitted to the Commission pursuant to different statutes, (v) inserting a missing word and closed parenthesis in Item D of the General Instructions, (vi) deleting the word ‘‘also’’ in the second sentence in Item 1(a) to make clear that the text of the proposed rule change should be included ‘‘either’’ in Exhibit 5 or Exhibit 1 (or Exhibit 1A in the filing of a clearing agency) (vii) revising the title of Exhibit 1A in Item 11 of the General Instructions, (viii) clarifying a defined term in Item 3 of the General Instructions (Note 3), (ix) adding the phrase ‘‘If the proposed rule change is subject to Commission approval’’ to the beginning of the sentence in Item 6 to reflect the fact that only certain types of proposed rule changes are subject to Commission approval and (x) modifying Item II of Exhibit 1A to clarify which items of the General Instructions are specifically applicable to the exhibit. Based on the nonsubstantive nature of these revisions, the Commission finds notice of the revisions is not necessary. See 5 U.S.C. 553(b). 190 15 U.S.C. 78s(b)(2)(E). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Web site publication is made. The Commission is amending Rule 19b–4(l) to provide that if an SRO does not post a proposed rule change on its Web site on the same day that it files the proposal with the Commission, then the SRO shall inform the Commission of the date on which it posted such proposal on its Web site. The purpose of this change is to advise the Commission of the date the SRO posted the proposed rule change filing to its Web site, as such posting initiates the Commission’s requirement to send notice of the proposed rule change to the Federal Register. The Commission did not receive any comments on the amendments and is adopting them as proposed. F. New Requirements Under Exchange Act Section 3C and Section 806(e) and the Existing Filing Requirements in Exchange Act Section 19(b) As discussed previously, the Commission is adopting amendments to Rule 19b–4 and Form 19b–4 to incorporate two new requirements under the Dodd-Frank Act that are similar to the existing filing requirement for proposed rule changes under Exchange Act Section 19(b). The first is the requirement to file Security-Based Swap Submissions under new Exchange Act Section 3C. The second is the requirement to file Advance Notices under Section 806(e). The Commission anticipates that in many cases a clearing agency may take an action that would trigger more than one of these filing requirements,191 and the Commission seeks to streamline the filing processes for Exchange Act Section 3C, Section 806(e) and Exchange Act Section 19(b) by proposing that all such filings be made electronically on Form 19b–4. New Rules 19b–4(n) and (o) and the corresponding amendments to Form 19b–4 are being adopted to avoid duplicative filings and to streamline the 191 Title VII contains a clause, which provides in pertinent part, that ‘‘[u]nless otherwise provided by its terms, [Subtitle B] does not divest * * * the Securities and Exchange Commission * * * of any authority derived from any other provision of applicable law.’’ See Section 771 of the Dodd-Frank Act. Similarly, Section 811 of the Dodd-Frank Act provides that ‘‘[u]nless otherwise provided by its terms, this title does not divest any appropriate financial regulator, any Supervisory Agency, or any other Federal or State agency, of any authority derived from any other applicable law, except that any [risk management] standards prescribed by the [Board] under section 805 shall supersede any less stringent requirements established under other authority to the extent of any conflict.’’ Accordingly the new requirements under Titles VII and VIII do not supersede the existing requirements under the Exchange Act that would require clearing agencies (which are all SROs) to file a proposed rule change when the matter described in a Security-Based Swap Submission or Advance Notice also meets the criteria for a proposed rule change. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 41625 process and burden on clearing agencies and the Commission. However, the filing requirements of Exchange Act Section 3C, Section 806(e) and Exchange Act Section 19(b) are distinct from each other and subject to different statutory standards for Commission review. As a result, a clearing agency that files pursuant to more than one of these sections must meet the requirements of the applicable regulatory scheme before the applicable change may become effective. Accordingly, it is likely that many proposals made by clearing agencies may be filed and require review under more than one of the three Commission review procedures discussed herein. For example, a designated clearing agency may be required to submit an Advance Notice in connection with its SecurityBased Swap Submission if the requirement to clear the security-based swap described in the submission would materially affect the nature or level of risks presented by the designated clearing agency. Moreover, if the designated clearing agency did not have existing authority under its rules to clear the relevant security-based swap, such action also would require a proposed rule change filing under Exchange Act Section 19(b). In other cases, only one of the three Commission-review procedures may apply because the scope of proposals requiring review under each of Section 806(e) and Exchange Act Section 3C is in some ways broader and in other ways narrower in comparison to Exchange Act Section 19(b). There is, for example, the potential that certain changes to the operations of a designated clearing agency may not require the filing of a proposed rule change under Exchange Act Section 19(b) or a Security-Based Swap Submission under Exchange Act Section 3C, but may trigger a requirement to file an Advance Notice under Section 806(e). By contrast, because the notice requirement under Section 806(e) applies only to matters that materially affect the nature or level of risk presented by a designated clearing agency, in some cases a rule change filed under Exchange Act Section 19(b) would not trigger the advance notice requirement under Section 806(e). When a clearing agency submits a filing for more than one purpose (i.e., proposed rule change, Security-Based Swap Submission and/or Advance Notice), the Commission will endeavor to evaluate such filings in tandem as part of a parallel process. Although the timing for review under each of Exchange Act Section 3C, Section 806(e) and Exchange Act Section 19(b) is E:\FR\FM\13JYR3.SGM 13JYR3 41626 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 different,192 all three processes contain some degree of flexibility, and the Commission will attempt to streamline the review processes to avoid any unnecessary delays or duplicative requests for information. However, each of the three processes will remain distinct from the other processes. Each proposed rule change, Security-Based Swap Submission and Advance Notice will be reviewed and evaluated independently by the Commission in accordance with the applicable statute and regulatory authority. Moreover, the new requirements being adopted today to file Advance Notices with the Commission and to make Security-Based Swap Submissions would not replace the existing Exchange Act Section 19(b) rule filing process, nor will a filing made under Exchange Act Section 3C or Section 806(e) eliminate the need to satisfy the requirements of the other processes to the extent they are applicable. In other words, the Commission review required by Exchange Act Section 3C is different from the review required under Section 806(e), which in turn is different from the review required under Exchange Act Section 19(b). Section 806(e) requires an analysis of the risk management issues that may impact the clearing agency, its participants, or the market. Exchange Act Section 19(b), by contrast, requires a broader evaluation and an analysis as to whether the proposed rule change is consistent with the requirements of the Exchange Act and the rules thereunder. Finally, Exchange Act Section 3C only applies when a clearing agency plans to accept for clearing a security-based swap (or a group, category, type or class of security-based swaps), and the standard for review is based on a number of specified factors, including but not limited to: (i) How the submission is consistent with Section 17A of the Exchange Act and (ii) the 192 See 15 U.S.C. 78s(b)(2) (as amended by Section 916 of the Dodd-Frank Act) (establishing the timeframes under which the Commission must either approve, disapprove or institute proceedings with respect to a proposed rule change following receipt of the filing); 15 U.S.C. 78c–3(b)(3) (as added by Section 763(a) of the Dodd-Frank Act) (stating that the Commission must make its determination on a Security-Based Swap Submission within 90 days after receipt, unless the clearing agency agrees to an extension of this time limitation) and 12 U.S.C. 5465(e)(1)(G) (as added by Title VIII) (explaining that the Commission must notify a designated clearing agency of any objection to a proposed change filed as an Advance Notice under Section 806(e) within 60 days after receiving the notice filing, unless the Commission requests additional information in consideration of the notice, in which case the 60-day period will recommence on the date such information is received by the Commission). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 factors specified in Exchange Act Section 3C relating to the security-based swap, the market for the security-based swaps, and the clearing agency. The Commission believes that these distinct reviews make it possible for a submission made on Form 19b–4 to be acceptable under the standards for review for one of the three purposes but not under the others.193 For example, in cases where a clearing agency’s plan to accept a new security-based swap (or any group, category, type or class of security-based swaps) for clearing requires it to file both a proposed rule change and a Security-Based Swap Submission, once the proposed rule change is approved and effective, the clearing agency may begin clearing the security-based swap on a voluntary basis, subject to any separate determination that may be made related to the Security-Based Swap Submission to require mandatory clearing. Even if a determination is made not to require mandatory clearing, such security-based swap may continue to be cleared on a voluntary basis. In cases where only the requirements of one of Exchange Act Section 19(b), Exchange Act Section 3C or Section 806(e) are implicated, only the applicable process would need to be completed before the proposal could become effective. The Commission discussed its views regarding the distinct processes under Sections 19(b), 3C, and 806(e) in the Proposing Release and did not receive any comments on these views. G. Effective and Compliance Dates The effective date for §§ 240.3Ca–1, 240.3Ca–2, and the amendments to § 240.19b–4, is August 13, 2012. Similarly, the compliance date for §§ 240.3Ca–1, 240.3Ca–2, and the amendments to § 240.19b–4, except for § 240.19b–4(o), which is discussed below, is August 13, 2012. With respect to the compliance date for new Rule 19b–4(o), which sets forth the process for filing Security-Based Swaps, the Commission recognizes that clearing agencies will require time to gather and synthesize the information required to be included in a submission. To accommodate this transition period, the Commission believes that it is appropriate to delay the compliance date for Rule 19b–4(o) to allow clearing 193 The Commission notes, however, that when a proposal is required to be filed as both a proposed rule change and an Advance Notice, the proposal would not become effective until the statutory provisions applicable to both types of filings are satisfied. For example, a rule proposal may provide for sound risk management practices but also have an anticompetitive aspect that would not satisfy the requirements of the Exchange Act. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 agencies to make any changes to their internal procedures to incorporate the statutory factors and to make any related adjustments, particularly as commenters have stated that a significant amount of data would need to be provided in connection with a Security-Based Swap Submission. More broadly, the Commission is cognizant of the general need to provide for the orderly and methodical implementation of mandatory clearing determinations, commencing with the determinations made with respect to pre-enactment security-based swaps.194 After considering these issues, the Commission has determined that the compliance date for new Rule 19b–4(o) will be the date that is 60 days after the date the Commission issues its first written determination pursuant to Exchange Act Section 3C(b)(2)(C)(ii) 195 determining whether a security-based swap, or group, category, type, or class of security-based swaps, is required to be cleared. The Commission expects that such first determination will address preenactment security-based swaps (i.e., security-based swaps listed for clearing by a clearing agency as of the date of enactment of Exchange Act Section 3C), which, pursuant to Exchange Act Section 3C(b)(2)(B), were deemed to be submitted to the Commission as of such date.196 Two clearing agencies listed security-based swaps for clearing as of July 21, 2010, and provided an extension to the 90-day review period in Exchange Act Section 3C(b)(3), which otherwise would have commenced on July 21, 2010. However, as with other Security-Based Swap Submissions, the Commission is required by the Exchange Act Section 3C to make a determination with respect to such preenactment submissions within the applicable review period. As described above, that section also requires the Commission to make the submission of pre-enactment security-based swaps available to the public and to provide at least a 30-day public comment period regarding its determination whether a clearing requirement should apply to such security-based swaps.197 Accordingly, the Commission believes that the compliance date is appropriate since there will be a public notice and comment process prior to the first written determination pursuant to Exchange Act Section 3C(b)(2)(C)(ii). The Commission expects to include in 194 See supra note 43 and accompanying text. U.S.C. 78c–3(b)(2)(C)(iii) (as added by Section 763(a) of the Dodd-Frank Act). 196 See 15 U.S.C. 78c–3(b)(2)(B). 197 See 15 U.S.C. 78c–3(b)(2)(C)(i) and (iii). 195 15 E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 such notice and written determination references to the impending compliance date and thus clearing agencies will be on notice and will have time to prepare for the filing of their Submissions. Sixty days following the date that the Commission issues that first written determination, clearing agencies will be required to begin filing Security-Based Swap Submissions with the Commission under new Rule 19b–4(o). In addition, the Commission is currently in the process of designing and implementing the system upgrades that are necessary in order for Advance Notices and Security-Based Swap Submissions to be filed on EFFS. The Commission intends to have the system upgrades to EFFS operational by December 10, 2012. Because of the time required to finalize these upgrades, the final rules provide that Advance Notices and Security-Based Swap Submissions filed prior to December 10, 2012 must be filed with the Commission by submitting the applicable filing to a dedicated email inbox to be established by the Commission. Accordingly, the compliance and effective dates for the amendments to § 249.819 and Form 19b–4 is December 10, 2012. III. Paperwork Reduction Act Rule 19b–4, Form 19b–4 and Rule 3Ca–1 contain ‘‘collection of information requirements’’ within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).198 Accordingly, the Commission has submitted the information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. Specifically, the Commission has submitted revisions to the current collection of information titled ‘‘Rule 19b–4 Filings with Respect to Proposed Rule Changes by SelfRegulatory Organizations’’ (OMB Control No. 3235–0045). The Commission also has submitted revisions to the current collection of information titled ‘‘Form 19b–4 under the Securities Exchange Act of 1934’’ (OMB Control No. 3235–0045). Finally, the Commission has submitted a new collection of information titled ‘‘Rule 3Ca–1 Stay of Clearing Requirement and Review by the Commission under the Securities Exchange Act of 1934’’ to OMB for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. OMB has not yet assigned a control number to the new collection of information. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control 198 44 number. Any information submitted to the Commission will be made publicly available. In the Proposing Release, the Commission solicited comments on the collection of information requirements.199 No written comments were received on the estimates in the Proposing Release, although the Commission received informal comments from eight clearing agencies prior to issuing the Proposing Release in order to inform its estimates in that release. For the most part, the Commission is not making any changes to the estimates in the Proposing Release; however, some initial burden estimates have been adjusted, as discussed below, to reflect updated information on such burden estimates. A. Summary of Collection of Information 1. Amendments to Rule 19b–4 and Form 19b–4 Rule 19b–4 currently requires an SRO seeking Commission approval for a proposed rule change to provide the information stipulated in Form 19b–4. Form 19b–4 currently requires a description of the terms of a proposed rule change, the proposed rule change’s impact on various market segments and the relationship between the proposed rule change and the SRO’s existing rules. Form 19b–4 also requires an accurate statement of the authority and statutory basis for, and purpose of, the proposed rule change, the proposal’s impact on competition and a summary of any written comments received by the SRO from SRO members. An SRO also is required to submit Form 19b–4 to the Commission electronically, post a proposed rule change on its Web site within two business days of its filing, and to post and maintain a current and complete set of its rules on its Web site. The Commission is amending Rule 19b–4 to require two new collections of information on Form 19b–4 related to new filing requirements applicable to clearing agencies under the Dodd-Frank Act. The amendments will not otherwise change the collection of information requirements currently in Rule 19b–4 and Form 19b–4. These new reporting requirements are in addition to the information currently required by Rule 19b–4 and Form 19b–4. New Rules 19b–4(n) and (o) will require clearing agencies to file information with the Commission under Section 806(e) and Exchange Act Section 3C, respectively, on Form 19b– 4. Clearing agencies that are required to U.S.C. 3501 et seq. VerDate Mar<15>2010 17:35 Jul 12, 2012 199 See Jkt 226001 PO 00000 Proposing Release, supra note 24. Frm 00027 Fmt 4701 Sfmt 4700 41627 file a Security-Based Swap Submission or an Advance Notice prior to December 3, 2012 will file such notice with the Commission by email. Exchange Act Section 3C requires clearing agencies to submit for a Commission determination of whether mandatory clearing applies, any security-based swap (or any group, category, type or class of security-based swaps) that the clearing agency plans to accept for clearing and to provide notice to its members of such submission. Section 806(e) requires that a clearing agency designated as systemically important by the Council file with the Commission advance notice of proposed changes to its rules, procedures or operations that could materially affect the nature or level of risk presented by the designated clearing agency. The Commission anticipates that in many cases, a clearing agency will be required to file a proposal under Exchange Act Section 3C or Section 806(e) when it is already required to file a proposed rule change under Exchange Act Section 19(b). Accordingly, clearing agencies will be able to submit on the same Form 19b–4, proposals required to be filed with the Commission under Exchange Act Section 3C or Section 806(e) that they are already required to submit under Exchange Act Section 19(b). In some cases, however, a clearing agency will be required to file a proposal under Exchange Act Section 3C or Section 806(e) and not under Exchange Act Section 19(b), for example where a proposal materially affects the nature or level of risks presented by the clearing agency but does not change the rules of the clearing agency. In addition, Exchange Act Section 3C and Section 806(e) each require information to be provided as part of the filing that is in addition to the information required to be filed with a proposed rule change under Exchange Act Section 19(b). A clearing agency will be required to include as part of a Security-Based Swap Submission a statement that includes, but is not limited to: (i) How the submission is consistent with Exchange Act Section 17A; (ii) information that will assist the Commission in the quantitative and qualitative assessment of the factors specified in Exchange Act Section 3C; and (iii) how the rules of the clearing agency meet the criteria for open access. Section 806(e) provides that the Advance Notice include a description of the nature of the proposed change and the expected effects on risks to the designated clearing agency, its participants, or the market and it must provide a description of how the designated clearing agency will manage any identified risks. A designated E:\FR\FM\13JYR3.SGM 13JYR3 41628 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 clearing agency also will be required to provide any additional information requested by the Commission as necessary to assess the effect the proposed change would have on the nature or level of risks associated with the designated clearing agency’s payment, clearing or settlement activities and the sufficiency of any proposed risk management techniques. The amendments to Rule 19b–4 also will require a clearing agency to post certain information on its Web site, and require an SRO that does not post a proposed rule change on its Web site on the same day that it files the proposal with the Commission to inform the Commission of the date on which it posted such proposal on its Web site.200 Security-Based Swap Submissions and Advance Notices, and any amendments thereto, will be required to be posted on the clearing agency’s Web site within two business days of filing the information with the Commission. Except for any filing or information for which a clearing agency has submitted a proper confidential treatment request, the information generally shall remain posted on the clearing agency’s Web site until: (i) In the case of a Security-Based Swap Submission, the Commission makes a mandatory clearing determination, (ii) in the case of an Advance Notice, the date the clearing agency posts a notice of effectiveness in accordance with new Rule 19b– 4(n)(4)(ii), or (iii) in the case of either type of filing, the date the clearing agency withdraws the filing or is notified by the Commission that it was not properly filed. A clearing agency also will be required to post notice on its Web site of the effectiveness of any change to its rules, procedures or operations referred to in an Advance Notice within two business days of the effective date determined in accordance with Section 806(e). 2. Stay of Clearing Requirement New Rule 3Ca–1 provides that the Commission, on application of a counterparty to a security-based swap (or group, category, type, or class of security-based swaps), or on the Commission’s own initiative, may stay the clearing requirement until the Commission completes a review of the terms of the security-based swap and the clearing of the security-based swap that the clearing agency has accepted for clearing. A counterparty to a securitybased swap that applies for a stay of the clearing requirement for a securitybased swap (or group, category, type, or class of security-based swaps) will be required to submit to the Commission the information set forth in new Rule 3Ca–1(b).201 Any clearing agency that has accepted for clearing a security-based swap (or group, category, type, or class of security-based swaps) that is subject to the stay of the clearing requirement will be required to provide information requested by the Commission as it determines to be necessary and appropriate to assess any of the factors in the course of the Commission’s review. B. Use of Information 1. Amendments to Rule 19b–4 and Form 19b–4 The information currently required under Rule 19b–4 and reported on Form 19b–4 is used by the Commission to review proposed rule changes filed by SROs pursuant to Exchange Act Section 19(b)(1) 202 and to provide notice of the proposals to the general public. The Commission relies upon the information received in SRO filings, as well as public comments regarding the information, in reviewing and reaching decisions about whether to approve a proposed rule change. The information to be provided by clearing agencies pursuant to the amendments to Rule 19b–4 and Form 19b–4 will be used by the Commission to evaluate Security-Based Swap Submissions and Advance Notices. The Commission will use the information filed on Form 19b–4 related to SecurityBased Swap Submissions to determine whether the security-based swap (or any group, category, type or class of security-based swaps) described in the Security-Based Swap Submission will be required to be cleared pursuant to Exchange Act Section 3C(a)(1). The Commission will use the information on Form 19b–4 related to Advance Notices filed under Section 806(e) to determine the effect on the nature or level of risks that would be presented by a designated clearing agency based on a proposed change to its rules, procedures or operations, and the expected effects on risk to the designated clearing agency, its participants and the market and to determine whether the Commission should make an objection to the proposed change. In addition, the information on the form will be provided to the Board because the Commission is required to provide copies of all Advance Notices and any additional information provided by the 201 See 200 Rule 19b–4(l). VerDate Mar<15>2010 17:35 Jul 12, 2012 202 15 Jkt 226001 PO 00000 Supra section II.B. U.S.C. 78s(b)(1). Frm 00028 Fmt 4701 Sfmt 4700 designated clearing agency relating to the Advance Notice to the Board and to consult with the Board before taking any action on or completing its review of the Advance Notice.203 In some instances, the Commission also may use the information on the form to determine whether to allow a proposed change to take effect in less than 60 days following the receipt of the Advance Notice and to determine whether a change made on an emergency basis is warranted or whether it should be modified or rescinded. The information to be filed on Form 19b–4 relating to Exchange Act Section 3C and Section 806(e) also will be used by participants of the clearing agency, market participants, other clearing agencies, or the general public to comment on the proposal, as the Commission requires that a clearing agency post the information on its Web site. In addition, pursuant to Exchange Act Section 3C, a clearing agency will be required to provide its members with notice of the Security-Based Swap Submission. As with proposed rule changes under Exchange Act Section 19(b), the Commission will solicit comment from interested parties on proposals filed under Exchange Act Section 3C and Section 806(e). Interested parties could use the information to comment on the proposed change and to provide feedback on the development of the clearing agency’s service offerings and the rules, procedures and operations of the clearing agency. The information collected by the Commission with respect to the date on which the SRO posted a proposed rule change on its Web site (if such posting date is not the same as the filing date) will be used to inform the Commission of the date by which the Commission must send the SRO notice to the Federal Register for publication. 2. Stay of Clearing Requirement The information provided as required by new Rule 3Ca–1 will be used by the Commission to determine whether to grant the stay of the clearing requirement sought by a counterparty and to review whether the clearing requirement will continue to apply to the security-based swap (or group, category, type, or class of security-based swaps) referenced in the request for a stay. 203 12 U.S.C. 5465(e)(3) and (4) (as added by Title VIII). E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations C. Respondents mstockstill on DSK4VPTVN1PROD with RULES3 1. Amendments to Rule 19b–4 and Form 19b–4 Prior to the enactment of the DoddFrank Act, 25 SROs were making filings with the Commission subject to the collection of information under Rule 19b–4 and Form 19b–4. In fiscal year 2011, these SRO respondents filed 1,606 proposed rule changes subject to the current collection of information, of which 1,180 proposed rule changes ultimately became effective.204 Although Rule 19b–4 and Form 19b– 4 apply to all SROs, the new collection of information requirements in the new rules will apply to clearing agencies and, in the case of the amendments pursuant to Section 916 of the DoddFrank Act, to all SROs (i.e,, more than the number of estimated clearing agencies below). The amendments relating to Exchange Act Section 3C will apply to the clearing agencies that currently clear security-based swaps or that the Commission estimates may do so in the future. The obligation to centrally clear security-based swap transactions is a new requirement under Title VII, and three clearing agencies that had previously operated under temporary conditional exemptions under Section 36 of the Exchange Act are now registered security-based swap clearing agencies.205 These three 204 Filings of proposed rule changes are available on the Commission’s Web site at https:// www.sec.gov/rules/sro.shtml. To avoid duplication, the total figure does not include certain pre-filings made with the Commission pursuant to Rule 19b– 4(f)(6), which allows an SRO to designate certain proposed rule changes as effective upon filing if, among other things, the SRO provides written notice of its intent to file, along with a brief description and proposed rule text (a ‘‘pre-filing’’), to the Commission at least five business days prior to an actual filing. 205 Chicago Mercantile Exchange Inc., ICE Clear Credit LLC (formerly ICE Trust US LLC), and ICE Clear Europe Limited are registered with the Commission to clear security-based swaps. The Commission previously authorized five entities to clear credit default swaps, which are security-based swaps. See CDS clearing by ICE Clear Europe Limited, Securities Exchange Act Release Nos. 60372 (July 23, 2009), 74 FR 37748 (July 29, 2009) and 61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010); CDS clearing by Eurex Clearing AG, Securities Exchange Act Release Nos. 60373 (July 23, 2009), 74 FR 37740 (July 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010); CDS clearing by Chicago Mercantile Exchange Inc., Securities Exchange Act Release Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009) and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010); CDS clearing by ICE Clear Credit LLC (formerly ICE Trust US LLC), Securities Exchange Act Release Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009) and 61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010); Temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd. Securities Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 clearing agencies currently clear or plan to clear 206 security-based swaps and there could conceivably be a few more in the foreseeable future.207 In the Proposing Release, the Commission noted that four clearing agencies were at that time authorized to clear securitybased swaps pursuant to the temporary conditional exemptions and estimated that four to six clearing agencies could in the future clear security-based swaps and be subject to the information collection requirements in the rules relating to Exchange Act Section 3C. The Commission used the higher estimate (six) for the PRA analysis in the Proposing Release and the Commission believes that such estimate is still appropriate given the potential for additional clearing agencies to clear security-based swaps in the future. The amendments to Rule 19b–4 and Form 19b–4 relating to the requirement to file Advance Notices with the Commission pursuant to Section 806(e) will only apply to clearing agencies that are registered with the Commission, designated by the Council as systemically important, and for which the Commission is the Supervisory Agency. There are currently nine clearing agencies registered with the Commission; this includes four clearing agencies that were registered with the Commission to clear securities transactions prior to the effectiveness of the Dodd-Frank Act, two clearing agencies that currently do not clear any securities transactions, and three clearing agencies that were deemed registered under Section 17A(l) after the effective date of Title VII of the DoddFrank Act and that are currently clearing or that plan to clear securitybased swaps.208 In addition, and as Eurex Clearing AG, LIFFE A&M, and LCH.Clearnet Ltd. are not currently registered with the Commission to clear security-based swaps. 206 By referring to a clearing agency that plans to clear security-based swaps, the Commission means a clearing agency that is permitted to do so under its rules but that has not yet begun clearing security-based swaps. 207 Based on the significant level of capital and other financial resources necessary for the formation of a clearing agency, the Commission does not expect there to be a large number of clearing agencies that seek to clear security-based swaps. 208 Of the four clearing agencies that were authorized to clear security-based swaps at the time the Proposing Release was issued, one was not deemed registered with the Commission under Section 17A(l) of the Exchange Act after the temporary exemptions expired. Accordingly, the Commission has adjusted its estimate of clearing agencies that currently clear or plan to clear security-based swaps. However, the Commission recognizes that this clearing agency, as well as others, may seek to clear security-based swaps in the future and the Commission has maintained the earlier estimate of six clearing agencies for purposes of the PRA analysis. PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 41629 noted above and in the Proposing Release, a few additional security-based swap clearing agencies could conceivably register with the Commission in the foreseeable future. Accordingly, the number of securitybased swap clearing agencies used in the PRA analysis has been increased beyond the ones that currently exist to a total of six in order to account for such future clearing agencies. For purposes of the PRA analysis, the Commission estimates that the four securities clearing agencies that are currently clearing non-security-based swap securities and the six estimated clearing agencies that either currently clear or may clear security-based swaps in the future would be subject to the applicable collection of information requirements. 2. Stay of Clearing Requirement The Commission estimates that six security-based swap clearing would potentially be subject to the collection of information under new Rule 3Ca–1 in connection with any counterparty requesting a stay of clearing requirement. D. Total Annual Reporting and Recordkeeping Burden 1. Background The amendments to Rule 19b–4 and Form 19b–4 are designed to facilitate the processes for providing the Commission with Security-Based Swap Submissions and Advance Notices and to make these processes efficient by utilizing the existing infrastructure for proposed rule changes, thereby conserving both clearing agency and Commission resources. As amended, Form 19b–4 enables clearing agencies to submit Security-Based Swap Submissions and Advance Notices electronically with the Commission. The amendments to Rule 19b–4 also will require a clearing agency to post on its Web site any Security-Based Swap Submissions, Advance Notices, and any amendments thereto, within two business days of the date on which they are submitted to the Commission. A further amendment to Rule 19b–4 will require an SRO that files a proposed rule change with the Commission to inform the Commission of the date on which it posted such proposal on its Web site if the posting did not occur on the same day that the SRO filed the proposal with the Commission. Finally, new Rule 3Ca–1 specifies the process for a security-based swap counterparty to apply to the Commission for a stay of the clearing requirement. E:\FR\FM\13JYR3.SGM 13JYR3 41630 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 2. Rule 19b–4 and Form 19b–4 a. Introduction As noted in the Proposing Release, the Commission conducted a survey and received informal comments from the staff of eight clearing agencies that will be subject to the new requirements in the amendments to Rule 19b–4 and Form 19b–4. These comments were received prior to the publication of the Proposing Release and the Commission did not receive any additional comments from clearing agencies or any other parties on these estimates after the Proposing Release was published. Clearing agencies indicated they would have to train personnel and develop policies and procedures in order to implement the new filing requirements under Rule 19b–4 and Form 19b–4 in connection with Security-Based Swap Submissions and Advance Notices. In addition, clearing agencies indicated they would have to submit additional information to the Commission on Form 19b–4 in order to meet the requirements for filing Security-Based Swap Submissions or Advance Notices, either as separate filings or as part of filings also submitted as proposed rule changes under Exchange Act Section 19(b). The clearing agencies emphasized that the estimated burdens would depend in large part on the rules ultimately adopted by the Commission to define and determine how frequently Security-Based Swap Submissions and Advance Notices will be required to be filed and the nature and extent of information that will be required with each filing. In addition, the clearing agencies stated that the burden per filing could vary widely, depending on the complexity of each individual filing. For example, some clearing agency proposals may require more information or analysis to be submitted as part of the filing. The clearing agencies also stated that the annual burden also could vary widely from year to year depending on the number of new proposals the clearing agency makes in a particular year. The Commission noted in the Proposing Release that the estimates provided in that release were preliminary and could change after clearing agencies had the opportunity to review and closely evaluate the rules. However, the Commission did not receive any comments on these estimates, from clearing agencies or from other parties and, as a result, has not adjusted these estimates. The estimates of the burden per filing also varied among clearing agencies, which may reflect the different internal processes, training programs, and review procedures for new projects VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 currently in place at the different clearing agencies. In addition, prior to the effective date of the Dodd-Frank Act some clearing agencies were registered with the Commission (‘‘pre-Dodd-Frank Act clearing agencies’’) while others were not. Pre-Dodd-Frank Act clearing agencies had been filing proposed rule changes under Exchange Act Section 19(b) prior to the effective date of the Dodd-Frank Act and have more familiarity with the collection of information requirements related to Rule 19b–4 and Form 19b–4, while the newly registered 209 clearing agencies may not be as familiar with these requirements and may incur a greater burden in connection with using EFFS and training personnel. The Commission used the more conservative numbers estimated by the clearing agencies for its estimates for the PRA. The Commission believed the more conservative estimate was appropriate because the estimates of the burden per filing varied among clearing agencies and could vary among the filings submitted (i.e., some proposals may be more complex and require more time for the clearing agency to prepare a Security-Based Swap Submission or an Advance Notice). In addition, the Commission calculated the burden for the requirements related to Advance Notices assuming that they would apply to ten clearing agencies and the burden for the requirements related to SecurityBased Swap Submissions assuming they would apply to six clearing agencies. Finally, the Commission recognized that there will likely be some substantive and procedural overlap with respect to the processes for preparing and submitting Security-Based Swap Submissions, Advance Notices and proposed rule changes that relate to the same subject matter. For example, in connection with a decision to accept for clearing a new type of security-based swap that was not previously permitted under the clearing agency’s rules, a clearing agency could be required to make a filing as a Security-Based Swap Submission, an Advance Notice and a proposed rule change. In this case, because these submissions all relate to the same underlying proposal, the amount of time required to prepare a single Form 19b–4 for all three purposes is likely to be less than the aggregate amount of time ordinarily required to prepare and submit three separate 209 Newly-registered clearing agencies refers to clearing agencies registered with the Commission to clear security-based swaps after the effective date of the Dodd-Frank Act (which includes clearing agencies that the Commission has estimated may be registered in the future to clear security-based swaps). PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 filings. Nevertheless, in the Proposing Release the Commission calculated the PRA burden for each process individually without accounting for any reduction due to the anticipated overlap in order to assure that the Commission did not underestimate the burdens. Additionally, the estimates in the Proposing Release were derived from discussions between the Commission’s staff and staff of the clearing agencies, as described above. A detailed description of the estimated burdens related to Rule 19b–4 and Form 19b–4 is set forth in the sections below. The Commission did not receive any comments on the PRA estimates published in the Proposing Release and, other than a minor adjustment to reflect a change in status for recently registered clearing agencies, the burden estimates for the rules have not changed. b. Internal Policies and Procedures At the time it issued the Proposing Release, the Commission believed that the six estimated clearing agencies that were either going to be deemed registered to clear security-based swaps pursuant to Section 17A(l) of the Exchange Act or that could on their own initiative seek to be regulated by the Commission in the future in order to clear security-based swaps could incur some one-time costs associated with training their personnel about the procedures for submitting SecurityBased Swap Submissions, Advance Notices, and/or proposed rule changes in electronic format through EFFS. Based on staff discussions with the clearing agencies prior to issuing the Proposing Release, the Commission estimated that each newly-registered clearing agency would spend approximately 20 hours training all staff members who will use EFFS to submit Security-Based Swap Submissions, Advance Notices and/or proposed rule changes electronically. Accordingly, the Commission estimated that the total one-time burden of training staff members of newly-registered clearing agencies to use EFFS will be 120 hours (six respondent clearing agencies × 20 hours). After the Proposing Release was issued, three of these clearing agencies were deemed registered with the Commission pursuant to Section 17A(l) and began being required to file proposed rule changes with the Commission on EFFS. However, these clearing agencies will still need to train staff members on filing Advance Notices and Security-Based Swap Submissions. Accordingly, the Commission does not believe it necessary to modify the estimate used in the Proposing Release with respect to initial training on EFFS. E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Accordingly, the Commission is using the estimates in the Proposing Release for the rules being adopted today. In the Proposing Release, the Commission estimated that, after the initial training was completed, each SRO (including pre-Dodd-Frank Act clearing agencies) would spend approximately 10 hours annually training new compliance staff members and updating the training of existing compliance staff members to use EFFS. The Commission believed that only a minimal amount of EFFS training would be submission-specific and that training a person to submit either a proposed rule change, Security-Based Swap Submission or Advance Notice would generally be sufficient to allow such person to make one or more of the other types of submissions. The Commission did not receive any comments on these estimates in the Proposing Release and is using them for the rules as they are being adopted today, resulting in a total annual burden of 350 hours ((six respondent clearing agencies × 10 hours) + (29 respondent SROs that are not clearing agencies × 10 hours)). Based on staff discussions with the clearing agencies prior to issuing the Proposing Release, the Commission estimated in the Proposing Release that there would be a one-time paperwork burden of 130 hours for each newlyregistered clearing agency to draft and implement internal policies and procedures relating to using EFFS to submit Security-Based Swap Submissions, Advance Notices and proposed rule changes with the Commission, for a total of 780 hours (130 hours × six newly-registered clearing agencies). In addition, and based on conversations with staff from the clearing agencies prior to issuing the Proposing Release, the Commission estimated that there would be a onetime paperwork burden of 30 hours for each pre-Dodd-Frank Act clearing agency to draft and implement modifications to existing internal policies and procedures for using EFFS in order to update them for submitting Security-Based Swap Submissions and/ or Advance Notices with the Commission for a total of 120 hours (30 hours × four pre-Dodd-Frank Act clearing agencies). The Commission believes, based on its experience with clearing agencies, that such internal policies and procedures will be drafted and updated by the in-house counsel at the clearing agencies. The Commission did not receive any comments on the burden estimates in the Proposing Release and is using these estimates for the rules the Commission is adopting today. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 c. Proposed Rule Changes An SRO rule change proposal generally is filed with the Commission after an SRO’s staff has obtained approval of its board of directors. The time required to complete a filing varies significantly and is difficult to separate from the time an SRO spends in developing internally the proposed rule change. In a PRA analysis conducted in 2004 in connection with amendments to Rule 19b–4 and Form 19b–4 (‘‘2004 PRA’’), the Commission estimated that 34 hours is the amount of time that would be required to complete an average proposed rule change filing and 129 hours is the amount of time required to complete a novel or complex proposed rule change filing.210 The Commission stated in the Proposing Release that it preliminarily believed that these estimates remained valid based on its experience with the filings currently received from SROs and relied on these figures to prepare the analysis in the Proposing Release.211 In fiscal year 2011, 25 SRO respondents filed 1,606 rule change proposals subject to the current collection of information. Of this total, and based on the Commission’s experience in reviewing SRO filings and past estimates for Rule 19b–4 and Form 19b–4, the Commission estimates that 80 proposed rule changes could be characterized as novel or complex and 1,526 proposed rule changes could be characterized as average. The Commission estimates that the total annual reporting burden for filing proposed rule changes with the Commission under the amendments to Rule 19b–4 and Form 19b–4 will be 87,086 hours (((1,526/25) × 35 212 average rule change proposals × 34 hours) + ((80/25) × 35 complex rule change proposals × 129 hours)). Thus, on average, the reporting burden for filing proposed rule changes is 38.74 hours (87,086 hours/(2,136 average rule change proposals + 112 complex rule 210 See Securities Exchange Act Release No. 50486 (Oct. 4, 2004), 69 FR 60287 (Oct. 8, 2004), supra note 94. 211 In 2011, the Commission submitted to OMB a request for approval of an extension of the existing collection of information provided for in Rule 19b– 4 and Form 19b–4 (‘‘2011 PRA’’). Submissions for OMB review; comment requests, 76 FR 22740 (Apr. 22, 2011) and 76 FR 37161 (June 24, 2011). The 2011 PRA used the 2004 PRA estimates to determine the amount of time required to complete proposed rule change filings. Consistent with the 2011 PRA, the Commission has used the figures contained in the 2011 PRA analysis in calculating the PRA estimates in this final rule. 212 This figure includes the 32 SROs registered with the Commission as of June 15, 2012 plus the additional clearing agencies that the Commission has estimated could potentially register in the future to clear security-based swaps. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 41631 change proposals)). The Commission made similar estimates in the Proposing Release, only using 2009 fiscal year numbers, and did not receive any comments on those estimates. Accordingly, the Commission believes the modified estimates with 2011 fiscal year numbers are appropriate and, accordingly, these estimates have been used for the rules being adopted today. d. Security-Based Swap Submissions The Commission stated in the Proposing Release that the time required by clearing agencies to prepare, review and submit Security-Based Swap Submissions to comply with new Rule 19b–4(o) likely would vary significantly based on the unique characteristics of each Security-Based Swap Submission and the submitting clearing agency. The Commission estimated based on previous discussions with staff from clearing agencies that the amount of time that a clearing agency would require to internally prepare, review and submit a Security-Based Swap Submission would be 140 hours. The Commission also estimated that each clearing agency would submit 20 Security-Based Swap Submissions annually based on previous discussions with staff from the clearing agencies. The Commission did not receive any comments on these estimated burdens in the Proposing Release. The Commission is modifying Rule 19b– 4(o)(2) from the proposal to provide that clearing agencies that file a SecurityBased Swap Submission before December 3, 2012 shall file such submission with the Commission by email. However, the Commission does not believe the requirement to submit Security-Based Swap Submissions electronically by email instead of on EFFS for a limited period of time would change the estimated amount of time for clearing agencies to prepare, review, and file these submissions since the information to be provided in the filing remains the same and the filing method would still be electronic. Accordingly, the Commission estimates that the total annual reporting burden for clearing agencies submitting Security-Based Swap Submissions electronically with the Commission under the amendments to Rule 19b–4 and Form 19b–4 will be 16,800 hours (20 Security-Based Swap Submissions × 140 hours × six respondent clearing agencies). The Commission also estimated in the Proposing Release that a clearing agency would require 60 hours of outside legal work to assist in the process preparing, reviewing and submitting a SecurityBased Swap Submission, based on previous discussions with staff from the E:\FR\FM\13JYR3.SGM 13JYR3 41632 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 clearing agencies. Assuming an hourly cost of $354 for an outside attorney,213 the Commission estimated that the total annual cost in the aggregate for the six respondent clearing agencies to meet these requirements would be $2,548,800 (60 hours × $354 per hour for an outside attorney × 20 Security-Based Swap Submissions × six respondent clearing agencies). The Commission did not receive any comments on these estimated burdens in the Proposing Release and is using the estimates for the rules as adopted. e. Advance Notices In the Proposing Release, the Commission estimated that the amount of time that designated clearing agency representatives will require to internally prepare, review and electronically file each Advance Notice with the Commission to comply with Rule 19b– 4(n)(1) would be 90 hours. This estimate in the Proposing Release was based on the staff’s previous discussions with the clearing agencies. The Commission did not receive any comments on this estimate. The Commission is modifying Rule 19b–4(n)(1) from the proposal to provide that designated clearing agencies that file an Advance Notice before December 3, 2012 shall file such notice with the Commission by email. However, the Commission does not believe the requirement to submit Advance Notices by email for a limited period of time would change the estimated amount of time for clearing agencies to prepare, review, and electronically file the notices since the material required to be provided in the filing remains the same and the method for submitting the filing remains electronic. The Commission also estimated in the Proposing Release that two hours should be added to the time required to prepare each Advance Notice to comply with the requirement contained in new Rule 19b–4(n)(5) to provide to the Board copies of all materials submitted to the Commission relating to an Advance Notice contemporaneously with such submission to the Commission. The Commission estimated in the Proposing Release based on previous conversations with staff from clearing agencies that each designated clearing agency would submit 35 Advance Notices to the Commission annually. The Commission did not receive any comments on these estimated burdens in the Proposing 213 The hourly rate used for an attorney was from SIFMA’s Management & Professional Earnings in the Securities Industry 2010, modified by the Commission’s staff to account for an 1800 hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. VerDate Mar<15>2010 19:40 Jul 12, 2012 Jkt 226001 Release and is using the estimates for the rules being adopted today. Accordingly, the Commission estimates that the total annual reporting burden on designated clearing agencies submitting Advance Notices electronically with the Commission pursuant to new Rule 19b–4(n) and Form 19b–4 will be 32,200 hours (35 Advance Notices × 92 hours × ten respondent clearing agencies). In the Proposing Release, the Commission also estimated that a designated clearing agency would require 40 hours of outside legal work to assist in the process preparing, reviewing and submitting an Advance Notice with the Commission based on previous discussions with staff from the clearing agencies. Assuming an hourly cost of $354 for an outside attorney,214 the total annual cost in the aggregate for ten respondent clearing agencies to meet these requirements would be $4,956,000 (40 hours × $354 per hour for an outside attorney × 35 Advance Notices × ten respondent clearing agencies). The Commission did not receive any comments on these estimates and is using them for the rule as adopted. f. Summary The Commission estimates that the total annual reporting burden for clearing agencies to internally prepare, file and submit Security-Based Swap Submissions, proposed rule changes and Advance Notices electronically with the Commission under the Rule 19b–4 and Form 19b–4 will be 136,086 hours (16,800 hours for Security-Based Swap Submissions + 32,200 hours for Advance Notices + 87,086 hours for proposed rule changes). The Commission also estimates that the total annual cost in the aggregate for the respondent clearing agencies to engage outside counsel to assist in the process of preparing, filing and submitting Security-Based Swap Submissions and Advance Notices electronically with the Commission under the new Rules 19b– 4(n) and (o) and Form 19b–4 will be $7,504,800 ($2,548,800 for SecurityBased Swap Submissions + $4,956,000 for Advance Notices). 3. Posting of Security-Based Swap Submissions, Advance Notices and Proposed Rule Changes on Clearing Agency Web Sites In the Proposing Release, the Commission stated that it believes clearing agencies that were to be deemed registered under Section 17A(l) or that may be regulated by the Commission in the future to clear PO 00000 214 See id. Frm 00032 Fmt 4701 Sfmt 4700 security-based swaps could incur some one-time costs associated with posting Security-Based Swap Submissions, Advance Notices and proposed rule changes on their Web sites. The Commission estimated that each newlyregistered clearing agency would spend approximately 15 hours creating or updating its existing Web site in order to provide the capability to post these submissions online resulting in a total one-time burden of 90 hours (six respondent clearing agencies × 15 hours). Three of those clearing agencies were deemed registered under Section 17A(l) in July 2012 and were required to begin posting proposed rule changes on their Web sites pursuant to existing Rule 19b–4(l).215 Because new Rules 19b–4(o)(5) and (n)(3) will require Security-Based Swap Submissions and Advance Notices to be posted on a clearing agencies’ Web sites in the same manner as is required for proposed rule changes, the Commission does not believe these three clearing agencies would incur any additional costs to create or update their Web sites to post Security-Based Swap Submissions or Advance Notices pursuant to the new rules. Accordingly, the Commission is modifying the number of respondent clearing agencies to include only the three clearing agencies it estimates may be regulated by the Commission in the future in order to clear security-based swaps. The Commission did not receive any comments on the estimated burden in the Proposing Release regarding the number of hours to create or update a Web site and is using this estimated hours burden for the rules as adopted. The revised estimate is a one-time total burden of 45 hours (three respondent clearing agencies × 15 hours). With respect to annual burdens, the Commission estimated in the Proposing Release that four hours would be required by a clearing agency to post a Security-Based Swap Submission on its Web site to comply with Rule 19b– 4(o)(5). This figure was based on the current estimate for the requirement that SROs post proposed rule changes on their Web sites under Rule 19b–4(l) given the similarities between the two requirements.216 The Commission estimated that the total annual reporting burden for clearing agencies to post Security-Based Swap Submissions on their Web sites would be 480 hours (20 215 17 CFR 240.19b–4(l). Securities and Exchange Commission, Submission for OMB Review, Comment Request, 76 FR 37161 (June 24, 2011). The Supporting Statement containing the detailed estimates for Rule 19b–4 and Form 19b–4 is available at: https://www. reginfo.gov/public/do/PRAViewDocument?ref_nbr= 201104-3235-013. 216 See E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Security-Based Swap Submissions × four hours × six respondent clearing agencies). The Commission did not receive any comments on these estimates in the Proposing Release and is using them for the rules as adopted. The Commission also estimated in the Proposing Release that four hours would be required by a designated clearing agency to post an Advance Notice on its Web site to comply with Rule 19b– 4(n)(3). This figure was based on the current estimate for the requirement that SROs post proposed rule changes on their Web sites under Rule 19b–4(l) given the similarities between the two requirements.217 The Commission estimated that the total annual reporting burden for designated clearing agencies to post Advance Notices on their Web sites would be 1,400 hours (35 Advance Notices × four hours × 10 respondent clearing agencies). The Commission did not receive any comments on these estimates in the Proposing Release and is using them for the rules as adopted. The Commission estimated in the Proposing Release that four hours would be required for a designated clearing agency to comply with proposed Rule 19b–4(n)(4) and post notice on its Web site of any change to its rules, procedures or operations referred to in an Advance Notice once it has been permitted to take effect. This figure was based on the current estimate for the requirement that SROs post proposed rule changes on their Web sites under Rule 19b–4(l) given the similarities between the two requirements.218 The Commission therefore estimated that the total annual reporting burden for designated clearing agencies to post notice on their Web sites of any changes to their rules, procedures or operations referred to in Advance Notices will be 1,400 hours (35 Advance Notices × four hours × 10 respondent clearing agencies). The Commission did not receive any comments on these estimates in the Proposing Release and is using them for the rules as adopted. The Commission has previously provided PRA estimates with respect to the requirement in Rule 19b–4(l) that all SROs post proposed rule changes and amendments to proposed rule changes on their Web sites. The Commission does not believe the rules being adopted today will change those estimated hour burdens because those rules do not affect the current requirement that SROs post proposed rule changes on their Web sites. However, the Commission is increasing the number of respondent SROs given the increased number of 217 See 218 See id. id. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 clearing agencies that have been deemed registered under Section 17A(l) or that may seek to clear security-based swaps in the future. Clearing agencies registered with the Commission are SROs and are required to comply with the requirements in Rule 19b–4, including the requirement in Rule 19b– 4(l) that they post proposed rule changes and amendments to proposed rule changes on their Web sites and to make any related updates. The Commission’s previous PRA estimates are that SROs take four hours to post proposed rule change proposals under Exchange Act Section 19(b) and amendments on their Web sites and four hours to update the posted SRO rules on their Web sites once the proposed rules become effective.219 There were 1,606 proposed rule changes filed with the Commission by 25 SROs in fiscal year 2011. Of these, 1,180 were approved or non-abrogated.220 The Commission has used these numbers to estimate the total annual reporting burden for its estimate of the increased number of SROs that will post proposed rule change proposals on their Web sites and to update their posted rules on their Web sites. Specifically, the Commission divided the total number of filings received in 2011 by the 25 SROs submitting filings that year and multiplied it by the new total of 35 SROs. The new total annual reporting burden will be 15,602 hours ((1,180/25) × 35 SRO respondents) approved rules × four hours) + ((1,606/25) × 35 SRO respondents) rule change proposals × four hours)). In summary, the Commission estimates that the total annual reporting burden for all clearing agencies to post submitted Security-Based Swap Submissions, Advance Notices, notices of changes to rules, procedures or operations referred to in Advance Notices once they take effect and proposed rule changes on their Web sites under Rule 19b–4 and Form 19b– 4 will be 18,882 hours (480 hours for Security-Based Swap Submissions + 1,400 hours for Advance Notices + 1,400 hours for posting notices of changes to rules, procedures or operations referred 219 See id. the Commission was able to ‘‘abrogate’’ an immediately effective proposed rule change filing filed under Section 19(b)(3)(a) of the Exchange Act, and require an SRO to re-file the proposal for consideration, notice, and public comment pursuant to Section 19(b)(2) of the Exchange Act. The Dodd-Frank Act eliminated the concept of ‘‘abrogation.’’ Instead, an immediately effective proposed rule change filing may be temporarily suspended, in which case the Commission would be required to institute proceedings to determine whether to disapprove the proposed rule change. PO 00000 220 Previously, Frm 00033 Fmt 4701 Sfmt 4700 41633 to in Advance Notices + 15,602 hours for proposed rule changes). 4. Amendment To Conform to Section 916 of the Dodd-Frank Act The Commission estimated in the Proposing Release that the requirement that an SRO inform the Commission of the date on which it posted a proposed rule change on its Web site (if the posting did not occur on the same day that the SRO filed the proposal with the Commission) would impose only a minimal burden, if any, on an SRO. The Commission stated in the Proposing Release that it believes that SROs currently post their proposed rule changes on their Web site on the same day on which they file them with the Commission. Further, the Commission believes that it is in the interest of an SRO to continue to do so, since prompt Web site posting triggers the requirement on the Commission to publish notice of the proposal. The new notice requirement would only be applicable in a situation where the SRO is unable to post its proposed rule change on the same day that it files it with the Commission, which the Commission expects would be an unlikely occurrence. However, because the deadline applicable to Commission publication is tied to SRO Web site posting, and the Commission has no means of ascertaining when Web site posting was made other than by receiving that information from the SRO itself, the Commission is imposing this requirement to capture necessary information to allow it to comply with Exchange Act Section 19(b), as amended by Section 916 of the Dodd-Frank Act. Based on the Commission’s experience receiving and reviewing proposed rule changes filed by SROs, the Commission estimated in the Proposing Release that SROs will fail to post proposed rule changes on their Web sites on the same day as the filing was made with the Commission in 1% of all cases, or 16 times each year. Further, the Commission estimated that each SRO will spend approximately one hour preparing and submitting notice to the Commission of the date on which it posted the proposed rule change on its Web site, resulting in a total annual burden of 16 hours. Thus, the Commission estimated that the total annual reporting burden under Rule 19b–4 and Form 19b–4 will be 156,049 hours in the initial year and 155,334 hours thereafter.221 221 In the initial year, the paperwork burden is calculated as follows: 120 hours (one-time paperwork burden to train newly-registered clearing E:\FR\FM\13JYR3.SGM Continued 13JYR3 41634 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Additionally, the Commission estimated that the total annual reporting burden under new Rule 3Ca–1 will be 540 hours. The Commission did not receive any comments on these estimates in the Proposing Release and is using them for the rules as adopted. mstockstill on DSK4VPTVN1PROD with RULES3 5. New Rule 3Ca–1 Prior to issuing the Proposing Release, Commission staff contacted eight clearing agencies, including four that likely would clear security-based swaps, and would therefore be subject to a stay of the clearing requirement and related review under new Rule 3Ca–1. The Commission used these discussions to estimate the collection of information for this rule in the Proposing Release. Those estimates are discussed below; however, the clearing agencies emphasized that the estimated burdens would depend in large part on the number of stays requested annually and the scope of the information requested by the Commission in the course of the related review. Pursuant to Exchange Act Section 3C(c)(1), the Commission on its own initiative or on the application of a counterparty may stay a clearing requirement made pursuant to Exchange agency staff members to use EFFS) + 780 hours (one-time paperwork burden for each newlyregistered clearing agency to draft and implement policies and procedures relating to using EFFS to submit proposed rule changes, Security-Based Swap Submissions and Advance Notices) + 120 hours (one-time paperwork burden for each preDodd-Frank Act clearing agency to draft and implement policies and procedures relating to using EFFS to submit Security-Based Swap Submissions and/or Advance Notices) + 45 hours (one-time paperwork burden for each newly-registered clearing agency to create or update their existing Web sites in order to provide the capability to post proposed rule changes, Security-Based Swap Submissions and Advance Notices online) + 136,086 hours (the total annual reporting burden for all SROs to prepare, review and submit SecurityBased Swap Submissions, proposed rule changes and Advance Notices with the Commission) + 18,882 hours (the total annual burden for all SROs to post Security-Based Swap Submissions, Advance Notices, notices of changes to rules, procedures or operations referred to in Advance Notices and proposed rule changes (including updates to the posted SRO rules) on their Web sites + 16 hours for SROs to notify the Commission of the date on which it posted a proposed rule change on its Web site = 156,049 hours. After the initial year, the paperwork burden is calculated as follows: 136,086 hours (the total annual reporting burden for all SROs to prepare, review and submit Security-Based Swap Submissions, proposed rule changes and Advance Notices with the Commission) + 18,882 hours (the total annual burden for all SROs to post Security-Based Swap Submissions, Advance Notices, notices of changes to rules, procedures or operations referred to in Advance Notices and proposed rule changes on their Web sites) + 350 hours (the total annual burden of training new staff members and updating the training of existing staff members to use EFFS) + 16 hours for SROs to notify the Commission of the date on which it posted a proposed rule change on its Web site = 155,334 hours. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Act Section 3C(a)(1) until it completes a review of the terms of the securitybased swap and the clearing arrangement. The Commission is unable to estimate accurately the number of times it may stay a clearing requirement pursuant to Exchange Act Section 3C(c)(1) because it has not yet made any mandatory clearing determinations and it does not know what counterparties may object to a determination or when they would make an application for a stay. However, the Commission recognizes that there will likely be some applications for stays from clearing requirements made pursuant to a Commission determination and, for purposes of the Proposing Release, the Commission estimated there would be five applications for stays of a clearing requirement per clearing agency per year. This figure would represent one quarter of the estimated number of Security-Based Swap Submissions from each clearing agency per year, for a total of 30 applications for stays per year (5 stay applications × 6 respondent clearing agencies). The Commission did not receive any comments on this estimate in the Proposing Release and is using the same estimate for the rules as adopted. Based on the Commission staff’s discussions with the clearing agencies, the Commission estimated in the Proposing Release that a clearing agency would spend approximately 18 hours to retrieve, review, and submit the information associated with the stay of the clearing requirement. The Commission also estimated that each clearing agency would be required to provide information requested by the Commission in the course of its reviews of five requests for a stay of the clearing requirement, resulting in a total annual reporting burden of 540 hours (five stay applications × 18 hours to retrieve, review, and submit the information × six respondent clearing agencies). Further, the Commission also estimated that a clearing agency would require seven hours of outside legal work to retrieve, review, and submit the information associated with the stay of the clearing requirement. These figures were based on the Commission staff’s discussions with the clearing agencies prior to issuing the Proposing Release. Assuming an hourly cost of $354 for an outside attorney,222 the total estimated annual cost in the aggregate for the six respondent clearing agencies to meet 222 The hourly rate for an outside attorney is from SIFMA’s Management & Professional Earnings in the Securities Industry 2010, modified by the Commission’s staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 these requirements was $74,340 (seven hours × $354 per hour for an outside attorney × five stay of clearing applications × six respondents). The Commission did not receive any comments on these estimates in the Proposing Release and is using them for the rules as adopted. Finally, the Commission estimated in the Proposing Release that 100 hours would be required by a counterparty to a security-based swap to prepare and submit an application requesting a stay of the clearing requirement. The Commission drew a comparison between the amount of time it would take for a clearing agency to prepare a Security-Based Swap Submission and the amount of time it would take a counterparty to prepare an application of a stay of a clearing requirement, given that each filing would likely address similar issues related to the clearing of the particular security-based swap. This 100 hours estimated for the application is less than the 140 hours the Commission estimates it would take for a clearing agency to prepare a full Security-Based Swap Submission because an application for a stay would take less time to prepare than a new submission, due to the fact that some of the information addressed in the application for a stay will have already been provided with the Security-Based Swap Submission when it was published for notice and comment. As discussed above, the Commission estimated in the Proposing Release that counterparties to security-based swaps transactions would submit 30 applications requesting stays of the clearing requirement. Assuming an hourly cost of $354 for an outside attorney,223 the total annual cost in the aggregate for the respondent counterparties to meet these requirements would be $1,062,000 (100 hours × $354 per hour for an outside attorney × 30 stay of clearing applications). The Commission did not receive any comments on these estimates in the Proposing Release and is using them for the rules as adopted. E. Retention Period of Recordkeeping Requirements Clearing agencies will be required to retain records of the collection of information (the manually signed signature page of the Form 19b–4, a file available to interested persons for public inspection and copying, of all Security-Based Swap Submissions, Advance Notices and proposed rule changes made pursuant to Rule 19b–4) and all correspondence and other 223 See E:\FR\FM\13JYR3.SGM id. 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations communications reduced to writing (including comment letters) to and from such SROs concerning any SecurityBased Swap Submissions, Advance Notices and proposed rule changes, for a period of not less than five years, the first two years in an easily accessible place, according to the current recordkeeping requirements set forth in Exchange Act Rule 17a–1.224 The Commission believes that maintaining the physical signature pages, Security-Based Swap Submissions, Advance Notices, proposed rule changes and all related correspondence and other communications would enable interested parties, including the Commission, to access a record of a particular Security-Based Swap Submission, Advance Notice or proposed rule change that was made. The Commission notes that the retention of the physical signature page is an existing maintenance requirement for SROs.225 F. Collection of Information is Mandatory mstockstill on DSK4VPTVN1PROD with RULES3 Any collection of information pursuant to Rule 19b–4 and Form 19b– 4 to require electronic submission of Security-Based Swap Submissions, Advance Notices and proposed rule changes with the Commission is a mandatory collection of information. Any collection of information pursuant to Rule 19b–4 to require Web site posting by clearing agencies of their Security-Based Swap Submissions, Advance Notices and proposed rule changes also is a mandatory collection of information. Any collection of information pursuant to new Rule 3Ca– 1 in connection with the application for the stay of the clearing requirement is a mandatory collection of information. Any collection of information pursuant to Rule 19b–4 to require an SRO to inform the Commission of the date on which it posted a proposed rule change on its Web site (if such date is not the same day that it filed the proposal with the Commission) also is a mandatory collection of information. 224 SROs may also destroy or otherwise dispose of such records at the end of five years according to Rule 17a–6 of the Act. 17 CFR 240.17a–6. 225 Rule 19b–4(j) currently requires SROs to sign Form 19b–4 electronically in connection with filing a proposed rule change and to retain a copy of the signature page in accordance with Rule 17a–1. Under the adopted rules, Rule 19b–4(j) would be modified such that it would apply also to SecurityBased Swap Submissions and Advance Notices. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 41635 G. Responses to Collection of Information Will Not Be Kept Confidential The collection of information pursuant to Rule 19b–4, Form 19b–4 and new Rule 3Ca–1 will not be kept confidential.226 The posting of SecurityBased Swap Submissions, Advance Notices and proposed rule changes would be publicly available on the SRO’s Web site. economic considerations that those requirements, practices, and views may suggest. This discussion then proceeds with an analysis of each procedure established by the final rules—in particular, Security-Based Swap Submissions, stays related to the review of mandatory clearing determinations, and Advance Notices—and the specific economic considerations associated with each procedure. IV. Economic Analysis The rules that the Commission is adopting today are largely concerned with implementing certain processes for clearing agencies and security-based swap counterparties to submit filings to the Commission. These include Security-Based Swap Submissions, Advance Notices, and requests for a stay of an existing mandatory clearing requirement. The economic analysis set forth below focuses on the economic considerations related to those processes. The analysis does not seek to address the full range of considerations that may result from the Commission’s future actions, such as determinations based on the information submitted in specific filings. The Commission believes instead that these considerations are more appropriately addressed at the time such future determinations are made as each filing may raise unique issues that are unrelated to the submission process. The Commission, however, recognizes that the process rules are being adopted in the larger context of substantive reforms to the financial system pertaining to the clearing of securities. The Commission is mindful of the potential economic consequences of this larger substantive effort in considering the more limited economic consequences of these final procedural rules. In particular, the Commission is cognizant of the potential impact future determinations made with respect to mandatory clearing could have on clearing practices, given that central clearing of security-based swaps is a relatively recent development and much of the current security-based swaps market is cleared on a bilateral basis. In recognition of the larger context within which the final rules are being adopted, this analysis begins with a review of the Dodd-Frank Act’s new clearing requirements, current clearing practices, and views on the new clearing requirements, including the broader A. Background 226 While there is a general requirement that information be made publicly available, SROs may request confidential treatment of certain information in accordance with the provisions of the Freedom of Information Act. 5 U.S.C. 552. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 1. Dodd-Frank Act Requirements for Clearing Security-Based Swaps As described above, the Dodd-Frank Act was enacted to, among other things, mitigate systemic risk and promote the financial stability of the U.S. by improving accountability and transparency in the financial system and by providing for enhanced regulation and oversight of institutions designated as systemically important.227 Specifically, Title VII of the Dodd-Frank Act amended the Exchange Act to require that transactions in securitybased swaps must be cleared through a clearing agency that is registered with the Commission (or exempt from registration) if they are of a type that the Commission determines must be cleared, unless an exemption from mandatory clearing applies.228 As one means of accomplishing this objective, the Dodd-Frank Act seeks to ensure that, wherever possible and appropriate, derivatives contracts formerly traded exclusively in the OTC market be centrally cleared.229 Central clearing mitigates counterparty credit risk among dealers and other institutions by shifting that risk from individual counterparties to CCPs, thereby helping protect counterparties from each other’s potential failures. Central clearing also requires that mark-to-market pricing and margin requirements be applied in a consistent manner.230 CCPs generally use liquid margin collateral to manage the risk of a CCP member’s failure, and rely on the accuracy of their margin calculations and their access to that liquid collateral to protect against sudden movements in market prices. A CCP that stands between counterparties 227 See supra part I. See also Pub. L. 111–203, Preamble. 228 See 15 U.S.C. 78c–3(a)(1) (as added by Section 763(a) of the Dodd-Frank Act). 229 See supra note 5 and accompanying text. 230 See Christopher Culp, OTC-Cleared Derivative: Benefits, Costs, and Implications of the ‘‘Dodd-Frank Wall Street Reform and Consumer Protection Act, (Journal of Applied Finance No. 2, 2010), available at: https://www.rmcsinc.com/ articles/OTCCleared.pdf. E:\FR\FM\13JYR3.SGM 13JYR3 41636 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations for OTC derivatives is generally perceived to decrease systemic risk.231 Exchange Act Section 3C(b), which was added pursuant to Title VII of the Dodd-Frank Act, requires the Commission to adopt rules for a clearing agency’s submission of security-based swaps (or any group, category, type or class of security-based swaps) that a clearing agency plans to accept for clearing and to determine the manner of notice the clearing agency must provide to its members of such Security-Based Swap Submission.232 mstockstill on DSK4VPTVN1PROD with RULES3 2. Current Clearing Practices in the Security-Based Swap Market Prior to the enactment of the DoddFrank Act, there was no provision in the Exchange Act or any other laws in the U.S. for the mandatory clearing of OTC derivatives. Although initiatives related to central clearing had been considered before 2008, certain events of September 2008 brought a new focus on CDS as a source of systemic risk and contributed to a more general recognition that CCPs could play a role in helping to manage bilateral counterparty credit risk in OTC CDS.233 The failure of large financial institutions highlighted the concern that bilateral swap agreements can be a 231 See, e.g., Darrell Duffie and Haoxiang Zhu, Does a Central Clearing Counterparty Reduce Counterparty Risk?, (Stanford University, Working Paper, 2010), available at: https://www.stanford.edu/ ∼duffie/DuffieZhu.pdf; Nout Wellink, Mitigating system risk in OTC derivatives markets, (Banque de France, Financial Stability Review, No. 14— Derivatives—Financial innovation and stability, July 2010), available at: https://www.banque-france. fr/fileadmin/user_upload/banque_de_france/ publications/Revue_de_la_stabilite_financiere/ etude15_rsf_1007.pdf; and Manmohan Singh, Collateral, Netting and System Risk in the OTC Derivatives Market,’’ (International Monetary Fund, Working Paper, 2009), available at: https://www.imf. org/external/pubs/ft/wp/2010/wp1099.pdf. 232 See 15 U.S.C. 78c–3(b)(2)(A) and (5) (as added by Section 763(a) of the Dodd-Frank Act). 233 See, e.g., Testimony of Erik Sirri, Director of the Division of Trading and Markets, Securities and Exchange Commission, before the U.S. House of Representatives, Committee on Agriculture, (Nov. 20, 2008) (‘‘In light of the problems involving AIG, Lehman, Fannie, Freddie, and others, attention has focused on the systemic risks posed by CDS * * * A [CCP] for CDS could be an important step in reducing the counterparty risks inherent in the CDS market, and thereby help mitigate potential systemic impacts.’’), available at: https://www.sec. gov/news/testimony/2008/ts112008ers.htm. The President’s Working Group on Financial Markets made the central clearing of OTC derivatives a top policy objective in 2008. See Policy Objectives for the OTC Derivatives Market (Nov. 14, 2008), available at: https://www.treasury.gov/resourcecenter/fin-mkts/Documents/policyobjectives.pdf; see also Policy Statement on Financial Market Developments (Mar. 13, 2008), available at: https:// www.treasury.gov/resource-center/fin-mkts/ Documents/pwgpolicystatemktturmoil_ 03122008.pdf; and Progress Update (Oct. 2008), available at: https://www.treasury.gov/resourcecenter/fin-mkts/Documents/q4progress%20 update.pdf. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 source of systemic risk by, among other things, increasing the likelihood that financial distress in one dealer will contribute to the financial distress in others—a risk that can be mitigated when transactions are cleared by a creditworthy central counterparty that becomes the seller to every clearing member buyer and the buyer to every clearing member seller.234 In November 2008, the Commission, in consultation and coordination with the Board and the CFTC, took steps to help facilitate the prompt development of CCPs for OTC derivatives.235 Specifically, the Commission authorized the clearing of OTC security-based swaps by permitting certain clearing agencies to clear CDS on a temporary conditional basis.236 As the Commission and other regulatory agencies monitored the activities of those clearing agencies, a significant volume of interdealer OTC CDS transactions and a smaller volume of dealer to non-dealer OTC CDS transactions were centrally cleared on a voluntary basis.237 As discussed in greater detail below, the level of voluntary clearing in swaps and security-based swaps has steadily increased since that time. Although the volume of interdealer CDS cleared to date is quite large,238 many securitybased swap transactions are still supra notes 10–11 and accompanying text. November 14, 2008, the Commission executed a Memorandum of Understanding with the Board and CFTC that established a framework for consultation and information sharing on issues related to central counterparties for the OTC derivatives market. See https://www.sec.gov/news/ press/2008/2008-269.htm. 236 The Commission authorized five entities to clear credit default swaps. See supra note 205. 237 Voluntary CCP clearing grew out of a series of meetings beginning in September 2005 hosted by the Federal Reserve Bank of New York with major market participants and their domestic and international supervisors for the purpose of discussing problems in the processing of credit default swaps, and related risk management and control issues. See https://www.ny.frb.org/ newsevents/news/markets/2005/an050915.html. In June 2008 the attendees agreed to an agenda for improvement in the derivatives market infrastructure that included ‘‘developing a central counterparty for credit default swaps that, with a robust risk management regime, can help reduce systemic risk.’’ See https://www.ny.frb.org/ newsevents/news/markets/2008/ma080609.html; see also https://www.theice.com/marketdata/ reports/ReportCenter.shtml. 238 As of March 31, 2012, ICE Clear Credit had cleared approximately $15.4 trillion notional amount of CDS contracts based on indices of securities, approximately $1.4 trillion notional amount of CDS contracts based on individual reference entities or securities and $151 billion notional amount of CDS contracts based on sovereigns. As of March 31, 2012, ICE Clear Europe had cleared approximately Ö7.7 trillion notional amount of CDS contracts based on indices of securities and approximately Ö1.2 trillion notional amount of CDS contracts based on individual reference entities or securities. PO 00000 234 See 235 On Frm 00036 Fmt 4701 Sfmt 4700 ineligible for central clearing, and many transactions in security-based swaps eligible for clearing at a CCP continue to settle bilaterally. Voluntary clearing of security-based swaps in the U.S. is currently limited to CDS products. Central clearing of security-based swaps began in March 2009 for index CDS products, in December 2009 for single-name corporate CDS products, and in November 2011 for single-name sovereign CDS products. At present, there is no central clearing in the U.S. for security based swaps that are not CDS products, such as those based on equity securities. The level of clearing activity appears to have steadily increased as more products have become eligible to be cleared. One illustration of this apparent trend is Figure 1 below, which shows the gross notional volumes of cleared transactions reported by ICE Clear Credit for U.S. CDS index and U.S. single-name corporate CDS products 239 compared to the total gross notional volumes of (a) all transactions for reference entities or indexes, as applicable, that are accepted for clearing in the corresponding calendar year (cleared and uncleared), and (b) the total market, that is, all transactions in all reference underlyings of the same category (single name or index), whether accepted for clearing or not by ICE Clear Credit, in each case calculated based on price-forming, gold record transactions submitted to the Depository Trust and Clearing Corporation’s Trade Information Warehouse (‘‘DTCC–TIW’’).240 239 These amounts are based on information reported by ICE Clear Credit on its public Web site and are based on ‘‘price forming transactions.’’ See infra note 240. This includes the clearing of trades entered into on the same day as the trade was executed as well as the clearing of trades entered into in prior periods that were not previously cleared. These amounts do not include trades that result from the compression of trades previously submitted for clearing. See https://www.theice.com/ marketdata/reports/ReportCenter.shtml#report/26. ICE Clear Credit describes portfolio compression as a process that ‘‘reduces the overall notional size and number of outstanding contracts in credit derivative portfolios without changing the overall risk profile or present value of the portfolios. This is achieved by terminating existing trades and replacing them with a smaller number of new replacement trades that carry the same risk profile and cashflows as the initial portfolio, but require a smaller amount of regulatory capital to be held against the positions.’’ See https://www.theice.com/post_trade_ processing.jhtml. The CME Group also clears CDS index products and has reported clearing $144 billion in gross notional volumes of transactions since inception, with $21 billion in open interest as of the end of 2011. See https:// www.cmegroup.com/trading/cds/. These volumes are small relative to total market activity and are not included in Figure 1. 240 ‘‘Price-forming transactions’’ include all new trades and assignments, increases, and terminations of previously executed trades. Trades terminated or E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations 41637 corporate CDS was only 33% during 2011, with cleared transactions during the same year totaling only 25% of the total trades during the same period. Table 1, below, provides more detail of the data summarized in Figure 1. The Table reports the proportion of gross notional market activity in names accepted for clearing and the proportion of gross notional market activity that was cleared. Because a security-based swap may have been accepted for clearing only late in the calendar year, two measures of transactions that were ‘‘accepted for clearing’’ are provided, which differ by when the applicable reference underlying became accepted for clearing. The first measure, and the measure included in Figure 1, includes all transaction volume in names accepted for clearing at any time during the calendar year, whether or not a trade was accepted for clearing at the time of its execution.241 This measure represents an upper bound for the potential level of clearing—i.e., the level that could have been achieved if all trades in products accepted for clearing had in fact been submitted for clearing and there were no additional constraints on clearing eligibility such as those described above (e.g., a counterparty is not a member of a CCP that accepts the product in question for clearing). The second measure includes only transaction volume in names accepted for clearing at the time of trade execution.242 This measure accounts for the fact that although transactions executed in names prior to the name being accepted for clearing can be cleared later in the same calendar year through ‘‘backloading,’’ names accepted for clearing towards the end of the year allow less time for this to occur. Comparing these two measures within a year and across years measures (a) the entered into in connection with a compression exercise and expiration of a contract at maturity are not considered price-forming and therefore excluded. Transactions reported to the DTCC–TIW used for this analysis considers all global activity, including transactions wholly between foreign counterparties. 241 This calculation was performed by staff in the Division of Risk, Strategy, and Financial Innovation by totaling the sum of price forming transactions reported to DTCC in the calendar year for Index and single-name corporate CDS products that match the list of names accepted for clearing at ICE Clear Credit during the same period. See https:// www.theice.com/publicdocs/clear_credit/ ICE_Clear_Credit_Clearing_Eligible_Products.xls 242 This calculation was performed by staff in the Division of Risk, Strategy, and Financial Innovation by totaling the sum of price forming transactions reported to DTCC in the calendar year for Index and single-name corporate CDS products that match the list of names accepted for clearing at ICE Clear Credit, including only those transactions executed following the accepted for clearing date reported by ICE Clear Credit. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\13JYR3.SGM 13JYR3 ER13JY12.002</GPH> mstockstill on DSK4VPTVN1PROD with RULES3 Figure 1 shows that U.S.-based index CDS products comprise a greater proportion of the CDS market than U.S. single-name corporate CDS products and account for the bulk of current clearing activity in U.S. CDS transactions. The proportion of transactions in names accepted for clearing that are ultimately cleared also appears to be higher in U.S.-based index CDS products than in U.S. corporate single-name CDS products. In calendar years 2010 and 2011, Figure 1 indicates that 90% of the total gross notional volume of transactions in index names was accepted for clearing as of the end of each calendar year and that cleared index transactions correspond to more than 50% of the total gross notional volume of index trades during the same period. By contrast, the figure suggests that the proportion of transactions in accepted names in U.S. single-name 41638 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations increase in percentage from 2009 to 2011 in the volume of new trades in names that have ‘‘accepted for clearing’’ status, and (b) the increase in percentage in the volume of new transactions that are actually being cleared. TABLE 1—CLEARED TRADES AND ACCEPTED TRADES AS A PERCENTAGE OF GROSS NOTIONAL TRANSACTION VOLUME U.S. Index CDS 2009 mstockstill on DSK4VPTVN1PROD with RULES3 Gross notional volume ($ billions) ........................................................... Percent of gross notional in names accepted for clearing —at calendar year end ..................................................................... —at time of trade execution ............................................................. Cleared transactions: % of gross notional ............................................... One important limitation of the calendar year snapshots is that the volumes of cleared transactions reported by ICE Clear Credit likely overstate the percentages of total market activity that are cleared in a particular calendar year because many of the trades submitted for clearing to ICE Clear Credit are bilateral transactions entered into in a prior calendar year before ICE Clear Credit began clearing the particular security-based swap. Such transactions were submitted for clearing retroactively—through a process referred to as ‘‘backloading’’—causing the termination of the original trade and the creation of two new trades with ICE Clear Credit, both of which are reported to DTCC–TIW by ICE Clear Credit as cleared transactions, but only one of which is reported for the purpose of calculating the clearing volume reported in Figure 1. Until April 2011, all newly cleared security-based swaps were submitted for clearing in this manner because same-day clearing was not available. Since April 2011, clearing members have been able to submit new trades in security-based swaps for clearing on the same day the counterparties enter into the trade. With same-day clearing, the trade is first submitted to the CCP for clearing, and the CCP then reports it to the DTCC– TIW as a single transaction. However, some backloading will likely continue to occur as long as CCPs continue to expand the roster of security-based swaps that they accept for clearing, making more past trades eligible for backloading. Although the volume of cleared CDS transactions appears to have steadily increased over time, there is still a large proportion of transactions in securitybased swaps that are accepted for clearing by a CCP but that are nevertheless not actually cleared, particularly with respect to U.S. Index CDS. Currently, only eligible trades where both parties request the CCP to clear the transaction will be cleared. Eligible trades include only those where VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 2010 2010 2011 9,900 4,100 3,900 2,800 88% 55% 32% 90% 87% 54% 91% 91% 57% 1% 0% 0% 23% 16% 16% 33% 29% 25% Taken together, while the Commission is mindful of the limitations discussed above, these data suggest that clearing of security-based swaps has been increasing, but significant segments of the securitybased swap market remain uncleared, even where a CCP is available to clear the product in question on a voluntary basis. Due in part to this data, the Commission recognizes that mandatory Fmt 4701 2009 8,900 3. Views on Clearing Requirements for Security-Based Swaps Frm 00038 2011 10,400 both counterparties are members of the clearing agency and the trade has ‘‘accepted for clearing’’ status at that agency. Because clearing is currently done on a voluntary basis, if both parties do not request the CCP to clear the transactions, then the transaction is not cleared. There may be a number of reasons why one counterparty to a security-based swap transaction may choose not to clear that transaction. For example, some counterparties may so choose because they want to avoid any additional transaction costs or transparency associated with clearing at a CCP. Other counterparties may wish to clear a transaction in a name accepted for clearing by a CCP but may not be eligible for membership in the CCP or may not have a correspondent clearing arrangement in place with a member of the CCP. To these counterparties, clearing is not available for trades that are otherwise eligible to be cleared when executed by other counterparties. It is also possible for counterparties to transact in a currency other than U.S. dollars in a name that is accepted for clearing; use of a currency other than U.S. dollars makes the trade not eligible to be cleared. Finally, because prior to April 2011 clearing was performed exclusively on a backloading basis, some trades have not been cleared because they may have been subject to portfolio compression or otherwise terminated prior to the option to submit the trade for clearing becoming available. PO 00000 U.S. Single name CDS Sfmt 4700 clearing determinations made pursuant to Exchange Act Section 3C(a)(1) could alter current clearing practices at the time such determinations are made. One potential consequence of determinations that require mandatory clearing for certain security-based swaps could be a higher level of clearing for such security-based swaps than would take place under a voluntary system. Where the amount of clearing taking place under a voluntary system is significantly different from the level of clearing that would take place if trading in a product were mandatory and where such difference marks a shift in existing market clearing practices, the mandatory clearing determination could potentially have a material economic impact. New Rule 19b–4(o) and the corresponding amendments to Form 19b–4 focus largely on the process for how a clearing agency is required to make Security-Based Swap Submissions. Interested parties, including a number of academics, have expressed their views on the potential impact of the underlying clearing determinations that will be made by the Commission in response to SecurityBased Swap Submissions or pursuant to the Commission’s own initiative. While these parties generally agree that a wellmanaged CCP would help to mitigate counterparty credit risk in the securitybased swaps markets, their views vary on how effective a clearing requirement would be in controlling risk to the financial system. For example, some believe that central clearing is a core feature of the Dodd-Frank Act and is intended to mitigate systemic risk. According to this view, there should be as much central clearing of securitybased swaps as possible to fulfill the purpose of the Dodd-Frank Act.243 243 See, e.g., Swaps and Derivatives Market Association, ‘‘Lessening Systemic Risk: Removing Final Hurdles to Clearing OTC Derivatives’’, (available at: https://media.ft.com/cms/fe51a53878d7-11df-a312-00144feabdc0.pdf) (‘‘[m]andating the clearing of all standardized OTC derivatives E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 Others contend that concentrating the risk of numerous bilateral counterparties in a single CCP (or a small number of CCPs) could introduce risks and incentives that may not otherwise exist. For example, they believe that risk sharing through a central counterparty may encourage excessive risk taking if the costs of imprudent decisions by one clearing member are borne by other clearing members, and generally would not be more effective in mitigating systemic risk than bilateral clearing arrangements between individual firms.244 Moreover, at least one party believes this moral hazard problem could be exacerbated to the extent that CCPs are viewed as too important to fail and subject to bailout remedies that benefit all CCP members.245 Some market participants, furthermore, are concerned that requiring central clearing of security based swaps may entail unnecessary costs. One commenter stated that an ‘‘inappropriate imposition of mandatory clearing requirements could also adversely affect liquidity in the relevant security-based swap(s) and similarly deter use of otherwise optimal risk management products.’’ 246 In this commenter’s view, ‘‘[w]hile sound, centralized clearing affords clear benefits, it should be noted that centralized clearing also entails increased operational and collateral costs.’’ 247 According to this commenter, without exemptions would lead to broad adoption of CCPs, thus reducing systemic risk.’’). 244 See, e.g., Craig Pirrong, Mutualization of Default Risk, Fungibility, and Moral Hazard: The Economics of Default Risk Sharing in Cleared and Bilateral Markets, available at: https://business.nd. edu/uploadedFiles/Academic_Centers/Study_of_ Financial_Regulation/pdf_and_documents/ clearing_moral_hazard_1.pdf (University of Houston, Working Paper, 2010) (‘‘[c]learing of OTC derivatives has been touted as an essential component of reforms designed to prevent a repeat of the financial crisis. A back-to-basics analysis of the economics of clearing suggests that such claims are overstated, and that traditional OTC mechanisms may be more efficient for some instruments and some counterparties.’’). See also Derivatives Clearinghouses: Opportunities and Challenges: Hearing Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Securities, Insurance, and Investment, 112th Cong. (2011) (statement of Chester Spatt) (‘‘it is unclear whether the extent of use of clearinghouses will ultimately lead to a reduction in systemic risk in the event of a future crisis.’’). 245 See Pirrong, supra note 244. 246 ISDA Letter at 2–3. 247 See id. Although the comment was submitted in response to the proposed process rule, the substance of the comments focused on the statutory requirements of Exchange Act Section 3C, including the Commission’s review of security-based swaps in order to determine whether the Commission should impose a mandatory clearing requirement (either pursuant to a Commission-initiated Review or a Security-Based Swap Submission). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 these additional costs underscore the importance of the Commission ‘‘strik[ing] an appropriate balance in evaluating the relevant statutory standards applicable to a mandatory clearing determination, and weigh[ing] the relevant factors and market impacts with great care.’’ 248 4. Overview of Statutory Requirements Exchange Act Section 3C(b) requires the Commission to adopt rules for a clearing agency’s submission of security-based swaps (or any group, category, type or class of security-based swaps) that a clearing agency plans to accept for clearing and to determine the manner of notice the clearing agency must provide to its members of such Security-Based Swap Submission.249 In addition, Section 806(e)(1)(B) of the Clearing Supervision Act requires each Supervisory Agency to adopt rules, in consultation with the Board, that define and describe when a designated financial market utility is required to file an Advance Notice with its Supervisory Agency.250 To satisfy these requirements, the Commission is today adopting new Rules 19b–4(n) and (o) and making corresponding amendments to Form 19b–4. In addition, Exchange Act Section 3C(c)(4) requires the Commission to adopt rules, pursuant to its authority to stay a mandatory clearing requirement, for reviewing a clearing agency’s clearing of a securitybased swap (or any group, category, type or class of security-based swaps) that the clearing agency has accepted for clearing.251 Today the Commission is adopting new Rule 3Ca–1 to comply with this requirement. In addition, Exchange Act Section 3C(d)(1), which is the basis on which the Commission is adopting new Rule 3Ca–2, directs the Commission to prescribe rules (and interpretations of rules) the Commission determines to be necessary to prevent evasions of the clearing requirements.252 Finally, Section 916 of the Dodd-Frank Act amended Exchange Act Section 19(b) the Dodd-Frank Act to provide for new deadlines by which the Commission must publish and act upon a proposed rule change submitted by an SRO.253 Accordingly, the Commission is adopting amendments to Rule 19b–4 id. 15 U.S.C. 78c–3(b)(2)(A) and (5) (as added by Section 763(a) of the Dodd-Frank Act). 250 See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII). 251 See 15 U.S.C. 78c–3(c)(4) (as added by Section 763(a) of the Dodd-Frank Act). 252 See 15 U.S.C. 78c–3(d)(1) (as added by Section 763(a) of the Dodd-Frank Act). 253 See 15 U.S.C. 78s(b) (as amended by Section 916 of the Dodd-Frank Act). PO 00000 248 See 249 See Frm 00039 Fmt 4701 Sfmt 4700 41639 and Form 19b–4 to implement conform the rule and form to these new requirements. B. Analysis of Final Procedural Rules The Commission is sensitive to the economic effects of all of the rules it is adopting today, including the costs and benefits of those rules. Some of these costs and benefits stem from statutory mandates, while others are affected by the discretion the Commission exercises in implementing the mandates. The Commission requested comment on all aspects of the costs and benefits of the proposal, including any effect the proposed rules may have on efficiency, competition, and capital formation. The first procedure the Commission is adopting implements the requirement of Exchange Act Section 3C(b) to promulgate rules for a clearing agency’s Security-Based Swap Submissions and to determine the manner of notice the clearing agency must provide to its members of such Security-Based Swap Submission.254 The Commission also is adopting two additional process-related rules related to the mandatory clearing of security-based swaps that are contemplated by the Dodd-Frank Act. Specifically, pursuant to Exchange Act Section 3C(c)(1), new Rule 3Ca–1 establishes a procedure for staying a mandatory clearing requirement and for the Commission’s subsequent review of the terms of the security-based swap and the clearing arrangement. Separately, new Rule 3Ca–2, adopted pursuant to the anti-evasion authority granted to the Commission by Exchange Act Section 3C(d)(1), clarifies that the phrase ‘‘submits such security-based swap for clearing to a clearing agency’’ found in Exchange Act Section 3C(a)(1)—which establishes the mandatory clearing requirement for security-based swaps—means that the security-based swap subject to the clearing requirement must be submitted for central clearing to a clearing agency that functions as a CCP. In adopting these rules, the Commission considered the procedural rules recently adopted by the CFTC pursuant to the mandatory clearing requirement in new Section 2(h) of the Commodity Exchange Act, as added by Section 723(a)(3) of the Dodd-Frank Act.255 The procedural rules adopted by the CFTC included, among other things, a rule for the submission of swaps by a DCO to the CFTC for a mandatory 254 See 15 U.S.C. 78c–3(b)(2)(A) and (5) (as added by Section 763(a) of the Dodd-Frank Act). 255 See Section 2(h) of the CEA, 7 U.S.C. 2(h) (as added by Section 723(a) of the Dodd-Frank Act). E:\FR\FM\13JYR3.SGM 13JYR3 41640 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 clearing determination.256 Given the similarity between the clearing requirements for swaps and securitybased swaps under the CEA and the Exchange Act, respectively, the Commission carefully reviewed the rules adopted by the CFTC in formulating the rules the Commission is adopting today. Specifically, the Commission considered the information required by the CFTC for swap submissions filed by DCOs in new Regulation 39.5.257 The Commission believes that these information requirements are substantially similar to the information the Commission is requiring in its rules, or that it may request in connection with a SecurityBased Swap Submission. Similar to the rules the Commission is adopting today, Regulation 39.5(b) requires that a DCO submit information relating to the five factors the CFTC must consider in making a mandatory clearing determination.258 Additionally, Regulation 39.5(b) requires that DCOs submit detailed information relating to the swap and the risk management practices of the DCO.259 The Commission did not add such additional information requirements in the text of the rules being adopted today in order to retain the ability to evaluate the information needed on a case-bycase basis; however, the Commission specifically provided for the ability to request such additional information in connection with each Security-Based Swap Submission and, as previously indicated, the Commission may require production of such information to the extent it believes such information is relevant to the mandatory clearing determination. The rules the Commission is adopting also implement certain process-related provisions of the Clearing Supervision Act. Among other things, Section 806(e) of the Clearing Supervision Act requires any financial market utility designated by the Council as systemically important to file 60 days advance notice of changes to its rules, procedures or operations that could materially affect the nature or level of risk presented by the financial market utility. Specifically, the Commission is adopting new Rule 19b–4(n) and corresponding amendments to Form 19b–4 to set forth the process by which a designated 256 See 76 FR 44464 (Jul. 26, 2011). 17 CFR 39.5(b). Regulation 39.5(b) sets out the process for DCOs to follow when submitting a swap, or a group, category, type or class of swaps to the CFTC, including what information a DCO must include in the submission to assist the CFTC in its review. 258 See 17 CFR 39.5(b)(3)(ii)(A)–(E). 259 See 17 CFR 39.5(b)(3)(iii)–(ix). 257 See VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 clearing agency (for which the Commission is the Supervisory Agency) must file Advance Notices with the Commission. Finally, the Commission is adopting technical, conforming and clarifying amendments to Rule 19b–4 and Form 19b–4 to conform the rule and form with new deadlines and approval, disapproval and temporary suspension standards with respect to proposed rule changes filed under Exchange Act Section 19(b), as modified by Section 916 of the Dodd-Frank Act. The principal benefit of the final rules is that they will facilitate the operation of certain substantive regulations contemplated by the Dodd-Frank Act. Specifically, as described above, the Dodd-Frank Act establishes a number of reforms related to the substantive regulation of securities clearing including, for example, with respect to the mandatory clearing of security-based swaps and enhanced oversight of systemically important financial market utilities. While the final rules do not themselves implement these substantive reforms, they do establish certain processes that clearing agencies and security-based swap counterparties must follow in order for the broader substantive regulations to proceed. For example, Exchange Act Sections 3C(b)(2)(A) and (b)(5) require the Commission to adopt rules for a clearing agency’s submission of security-based swaps (or any group, category, type or class of security-based swaps) that a clearing agency plans to accept for clearing and to determine the manner of notice the clearing agency must provide to its members of such Security-Based Swap Submission.260 The Commission is then required to make a determination, pursuant to Exchange Act Section 3C(b)(2)(C)(ii), whether the security-based swap described in the submission is required to be cleared (i.e., subject to mandatory clearing). New Rule 19b–4(o) and the corresponding amendments to Form 19b–4, while not addressing the underlying mandatory clearing determinations, will facilitate such determinations by providing registered clearing agencies with, among other things, information as to what must be included in a Security-Based Swap Submission and a mechanism for transmitting the submission to the Commission. The rules also specify how and when a clearing agency is required to provide notice of a Security-Based Swap Submission to its members and the public. Similarly, Section 806(e) of the Clearing Supervision Act requires the Commission, in consultation with the Board, to adopt rules that define and describe when a designated clearing agency is required to file with the Commission notice of any change to its rules, procedures or operations that could materially affect the nature or level of risk presented by the clearing agency.261 Upon receiving an Advance Notice, the Commission is required, subject to certain exceptions, to (i) consult with the Board before taking any action on, or completing its review of, the change referred to in the Advance Notice 262 and (ii) notify the designated clearing agency of any objection to a proposed change described in the notice within 60 days of receipt.263 Although new Rule 19b–4(n) and the corresponding amendments to Form 19b–4 do not address how the Commission will ultimately determine whether to object to a particular change, the final rules will facilitate such determinations by helping designated clearing agencies determine when they must file Advance Notices and what information must be included therein. The final rules also provide a method of submission for Advance Notices that should already be familiar to clearing agencies and establish certain requirements related to how the clearing agency must make the Advance Notice available to the public. Finally, Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation.264 In addition, Section 23(a)(2) of the Exchange Act 265 requires the Commission, when adopting rules and regulations under the Exchange Act, to consider the impact such new rule would have on competition. Section 23(a)(2) of the Exchange Act also prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Because these rules focus on the process by which clearing agencies 261 See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII). 262 See 12 U.S.C. 5465(e)(4) (as added by Title VIII). 263 See 15 U.S.C. 78c–3(b)(2)(A) and (5) (as added by Section 763(a) of the Dodd-Frank Act). PO 00000 260 See Frm 00040 Fmt 4701 Sfmt 4700 12 U.S.C. 5465(e)(1)(E). U.S.C. 78c(f). 265 15 U.S.C. 78w(a)(2). 264 15 E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 make Security-Based Swap Submissions, the Commission believes that the rules being adopted today will have a minimal, if any, impact on efficiency, competition, and capital formation. Although in some cases process rules themselves can have a significant impact on efficiency, competition, and capital formation, in this context, the rules are intended to simply facilitate implementation of the larger statutory regime regarding mandatory clearing. The Commission believes the rules are being implemented in a cost-efficient way consistent with the statute (e.g., leveraging existing infrastructure and procedures familiar to clearing agencies), but the rules themselves should have a minimal impact on efficiency, competition, and capital formation. The Commission nevertheless recognizes that its subsequent mandatory clearing determinations, which will be based on the particular facts and circumstances of each individual Security-Based Swap Submission, could potentially have an impact on efficiency, competition, and capital formation in the security-based swap market. 1. Analysis of Final Rules Related to Security-Based Swap Submissions Exchange Act Section 3C requires each clearing agency that plans to accept a security-based swap for clearing to file a Security-Based Swap Submission with the Commission for a determination by the Commission of whether a security-based swap (or any group, category, type or class of security-based swaps) referenced in the submission is required to be cleared.266 Accordingly, the Commission is adopting new Rule 19b–4(o) and corresponding amendments to Form 19b–4 for the purpose of ensuring that the Commission receives the information necessary to conduct its review of Security-Based Swap Submissions received from clearing agencies. In particular, the new rule requires clearing agencies to provide information about the factors the Commission is required to consider under Exchange Act Section 3C(b)(4)(B). These factors include consideration of the effect on competition as well as the size of the market, trading liquidity, and pricing data, as well as the availability of a rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the security-based swap (or group, category, type or class of security-based swaps) 266 See 15 U.S.C. 78c–3(b)(2) (as added by Section 763(a) of the Dodd-Frank Act). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 under consideration.267 In addition, the factors in Exchange Act Section 3C(b)(4)(B) require the Commission to consider the effect of a mandatory clearing determination on the mitigation of systemic risk, taking into account the size of the market for the security-based swap and the resources of the clearing agency available to clear the securitybased swap, as well as the effect on competition and the effect of an insolvency event on customer and security-based swap counterparty positions, funds, and property.268 Furthermore, in taking into account the size of the market, competition, and the mitigation of systemic risk, the factors in Section 3C(b)(4)(B) require the Commission to consider the effect of a mandatory clearing determination on the market, whether market participants trading in the particular security-based swap could all meet a mandatory clearing requirement or if the costs of such a requirement would competitively disadvantage some participants, and whether the clearing agency has the operational and risk management systems in place to effectively mitigate systemic risk. The Commission will conduct each review in accordance with Exchange Act Section 3C(b)(4),269 with determinations made on a case-by-case basis in connection with the unique facts and circumstances of each submission. The Commission will consider the factors in Exchange Act Section 3C(b)(4)(B) at the time the Commission conducts a review, drawing on the information provided by the relevant clearing agency in accordance with new Rule 19b–4(o). In the Proposing Release, the Commission identified potential costs and benefits resulting from Rule 19b– 4(o) and the related amendments to Form 19b–4, as proposed, and requested comment on all aspects of the costbenefit analysis, including the identification and assessment of any costs and benefits that were not discussed in the analysis. Although the Commission did not receive any comments on the specific cost-benefit analysis contained in the Proposing Release, some commenters raised concerns about the overall scope of some of the proposed rules. In particular, one commenter suggested that new Rule 19b–4(o)(3), which sets forth the information that a clearing agency will be required to include in a 267 15 U.S.C. 78c–3(4)(B)(i) and (ii) (as added by Section 763(a) of the Dodd-Frank Act). 268 15 U.S.C. 78c–3(4)(B)(iii), (iv), and (v) (as added by Section 763(a) of the Dodd-Frank Act). 269 See 15 U.S.C. 78c–3(b)(4) (as added by Section 763(a) of the Dodd-Frank Act). PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 41641 Security-Based Swap Submission, is broad and burdensome, not authorized by the Dodd-Frank Act, and would ultimately ‘‘undermine the purposes of Dodd-Frank’’ by ‘‘eliminat[ing] the possibility of a simple, speedy decision on whether a swap transaction can be cleared by a clearing agency.’’ 270 The Commission does not agree with the assertion that the requirements of Rule 19b–4(o)(3) would delay the approval of a request by a clearing agency to list a new security-based swap for clearing. As previously noted, the rules related to Security-Based Swap Submissions apply solely to the process by which the Commission will make a determination, pursuant to Exchange Act Section 3C(b)(2)(C)(ii), whether the security-based swap described in the submission is required to be cleared (i.e., subject to mandatory clearing). Nothing in the rules the Commission is adopting today related to Security-Based Swap Submissions would prevent a registered clearing agency from voluntarily clearing a security-based swap prior to such determination so long as it does so in accordance with its rules. Thus, the Commission does not believe that Rule 19b–4(o)(3), which simply sets forth the information required to be contained in a SecurityBased Swap Submission, would affect the current state of affairs with respect to a clearing agency’s ability to clear a security-based swap transaction, nor does the Commission believe that this rule would undermine the goals of the Dodd-Frank Act as they pertain to the voluntary clearing of security-based swaps. At the same time, the Commission recognizes the concern expressed by commenters that Rule 19b–4(o)(3) could potentially require a clearing agency to submit a large amount of information in connection with a Security-Based Swap Submission. Accordingly, the Commission has sought to narrowly tailor the rule to the specific requirements of the Exchange Act. The list of information required pursuant to new Rule 19b–4(o)(3)(ii) incorporates the identical qualitative and quantitative factors that the Commission is required to consider pursuant to Exchange Act Section 3C(b)(4)(B) when determining whether a security-based swap (or group, category, type or class of security-based swaps) will be subject 270 See CME Letter at 3. Similarly, The Options Clearing Corporation noted that Rule 19b–4(o)(3) identifies a ‘‘a potentially very large amount of data’’ to be provided in a Security-Based Swap Submission and urged Commission staff exercise judgment and flexibility in determining the scope of information required in connection with a submission. See OCC Letter at 3–4. E:\FR\FM\13JYR3.SGM 13JYR3 41642 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 to the mandatory clearing requirement.271 In addition, the information required pursuant to new Rule 19b–4(o)(3)(i) (discussing how the Security-Based Swap Submission is consistent with Section 17A of the Exchange Act) and new Rules 19b– 4(o)(3)(iii)–(iv) (describing how the clearing agency’s rules for open access are applicable to the security-based swap described in the Security-Based Swap Submission) also track statutory requirements contained in Exchange Act Section 3C.272 The Commission therefore believes that it has crafted new Rule 19b–4(o)(3) to allow it to obtain the information necessary to complete its statutory obligation to make the required determination, without imposing undue additional information requirements on clearing agencies. As described in greater detail below, the Commission also believes that the available alternatives to the approach being adopted would have been less cost-efficient because of the concentration of relevant information in the clearing agencies and would not represent the best option for appropriately implementing the statutory mandate. However, the Commission is mindful that the new procedure set forth by Rule 19b–4(o) will result in costs for clearing agencies, even if that procedure were to achieve optimal efficiency. As in the Proposing Release, this analysis looks first to the hourly burdens contained in the PRA analysis in Section IV (which hourly figures have been updated from the estimates provided in the Proposing Release) multiplied by the estimated hourly cost. With respect to the amendments to Rule 19b–4 and Form 19b–4 that require a clearing agency to file Security-Based Swap Submissions with the Commission using EFFS and existing Form 19b–4, the Commission believes that clearing agencies affected by the new rules will likely incur certain one-time and ongoing costs associated with making these filings, which are primarily related to preparing internal policies and procedures with respect to the new filing requirements and training personnel to prepare security-based swap submission and file them on EFFS. The hourly estimates are discussed in detail in the PRA analysis, 271 See 15 U.S.C. 78c–3(b)(4)(B)(i)–(v) (as added by Section 763(a) of the Dodd-Frank Act) (emphasis added). 272 See 15 U.S.C. 78c–3(b)(4)(A) (as added by Section 763(a) of the Dodd-Frank Act) (regarding compliance with Section 17A of the Exchange Act) and 15 U.S.C. 78c–3(a)(2) (as added by Section 763(a) of the Dodd-Frank Act) (setting forth the standards for evaluating whether the rules of a clearing agency provide for open access). VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 although the Commission recognizes that certain of these costs may differ in amount depending on whether the clearing agency is already clearing security-based swaps or will be new to the market and regulatory structure. The Commission has used the hourly estimates in the PRA analysis to estimate the total recurring annual and ongoing costs for the six clearing agencies the Commission has determined may be required to meet the requirements in the rules relating to Security-Based Swap Submissions. The Commission estimates the annual costs will be $8,113,090 in the aggregate and that the one-time costs will be $319,080 in the aggregate.273 In addition, the Commission recognizes that registered clearing agencies may incur some additional costs associated with filing SecurityBased Swap Submissions that are not readily quantifiable. For example, in cases where a clearing agency’s rules already permit it to clear a securitybased swap that is not listed for clearing, the clearing agency’s subsequent decision to list such security-based swap for clearing would result in the requirement to make a Security-Based Swap Submission despite the fact that the clearing agency may have previously filed a proposed rule change with respect to the same security-based swap. As a result, clearing agencies put in this position could incur additional costs by being required to make a greater number of filings than they do currently under Exchange Act Section 19(b). In addition, the Commission notes that SecurityBased Swap Submissions filed before December 10, 2012, will not be filed on Form 19b–4 in order to allow time for the Commission to make the necessary system upgrades to EFFS. Accordingly, a clearing agency that files a SecurityBased Swap Submission prior to December 10, 2012, that is also an Advance Notice or proposed rule change (or both) will be required to submit two separate filings with the Commission. However, the Commission believes that the requirement to file the Security-Based Swap Submission by 273 These figures consist of the total hourly burdens identified in sections III.D.2.b and d, multiplied by the costs per hour attributed to different specialists. Specifically, $320 is attributed per hour for in-house compliance attorneys, $354 per hour for outside attorneys, $259 per hour for a senior systems analyst, and $225 per hour for a Webmaster. These hourly rates were based on the corresponding figures set forth in SIFMA’s Management & Professional Earnings in the Securities Industry 2010, modified by the Commission’s staff to account for an 1800 hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 email, as well as the temporary nature of the requirement, will impose relatively little additional burden on clearing agencies, which can use their existing email systems to make such filings. While the Commission recognizes the importance of considering these costs, and appreciates that some costs may be unavoidable in establishing a new procedure, the Commission believes that new Rule 19b–4(o) is cost-efficient and appropriately implements the provisions identified by Congress as requiring Commission rulemaking. Specifically, while implementing the submission and notice requirements in Exchange Act Section 3C, the Commission anticipates that the rule will minimize unnecessary costs to filers by utilizing a format that clearing agencies should be familiar with and, as they become registered clearing agencies, will be otherwise required to use for all of their proposed rule changes under existing Commission rules. In addition, the Commission also believes that new Rule 19b–4(o) is costefficient and an implementation of the statutory mandate because, as previously noted, a clearing agency would ordinarily consider most, if not all, of the factors set forth in the Exchange Act Section 3C(b)(4) and new Rule 19b–4(o)(3) as part of its internal decision-making process, particularly at the time when it was determining whether to list the relevant securitybased swaps for clearing (and knowing that such listing could result in the Commission determining that the security-based swap may be required to be cleared).274 Accordingly, although the Commission recognizes that clearing agencies may incur costs associated with locating, processing and preparing information required to be included in a Security-Based Swap Submission, the Commission believes that clearing agencies are the most appropriate source for accurate and updated information regarding a security-based swap that it accepts (or plans to accept) for clearing. The Commission is aware of no other source for the scope and nature of the information contemplated by Exchange Act Section 3C. In the alternative, as suggested by a commenter,275 if the Commission were limited to compiling the necessary information using already available material as well as information obtained by the Commission in connection with its supervision of clearing agencies, 274 See 275 See supra section II.A.1.b. supra notes 59 to 61 and accompanying text. E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations there is risk that such material would be incomplete and/or inaccurate and therefore not well-suited to allowing the Commission to make a reasonably informed mandatory clearing determination. Under such circumstances, the Commission may also be required to make potentially costly and time-consuming ad hoc information requests to clearing agencies. Requiring a clearing agency to provide necessary information with its submission will help ensure that the information used by the Commission to evaluate the security-based swap for mandatory clearing is correct and complete in the first instance, reducing the likelihood that further information requests will be required and the associated costs for clearing agencies incurred. Moreover, as described above, new Rule 19b–4(o) limits the information required to be provided to the Commission while, at the same time, allowing the Commission to meet its statutory requirements under specific categories established by the DoddFrank Act. The Commission, in seeking the most cost-efficient solution for the new procedure that also appropriately implements the statutory mandate, chose not to include additional information requests in the rule at this time because the Commission believes that the factors identified in the statute are capable of supporting a reasonable determination with respect to a Security-Based Swap Submission. Nevertheless, the Commission recognizes that a clearing agency may still require additional clarification or guidance with respect to what information must be included in a Security-Based Swap Submission. In that regard, Commission staff is in regular contact with each clearing agency and expects to be able to provide such clarification or guidance as necessary or appropriate based on the relevant facts and circumstances. Finally, although the Commission is still in the process of determining how best to aggregate security-based swaps into groups, categories, types or classes, requiring that Security-Based Swap Submissions aggregate security-based swaps in this manner, to the extent reasonable and practicable to do so, as provided for in new Rule 19b–4(o)(4), could eventually lead to further cost efficiencies by reducing the number of filings required to be made with the Commission, and subsequently reducing the number of submissions that must be processed and reviewed by Commission staff. Separately, with respect to notice, the Commission believes that new Rule VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 19b–4(5) appropriately implements the statutory mandate and creates a costefficient method of providing notice to members of the clearing agency, as well as other interested persons, such as counterparties to security-based swaps, of a Security-Based Swap Submission by requiring posting of the submission on the clearing agency’s Web site within two business days of filing with the Commission. The Commission anticipates that this notice will provide the clearing agency members and other interested persons with the opportunity to comment on the submission with the potential for providing new information about the suitability of the securitybased swap for mandatory clearing. 2. Analysis of Final Rules Related to the Process for Staying a Clearing Requirement While the Clearing of the Security-Based Swap Is Reviewed Under Exchange Act Section 3C(c)(1), after making a determination that a security-based swap (or group, category, type or class of security-based swaps) is required to be cleared, the Commission, on application of a counterparty to a security-based swap or on the Commission’s own initiative, may stay the clearing requirement until the Commission completes a review of the terms of the security-based swap and the clearing arrangement.276 In connection with a stay of the clearing requirement, the Commission is required to adopt rules for reviewing a clearing agency’s clearing of a securitybased swap (or any group, category, type or class of security-based swaps) that the clearing agency has accepted for clearing. Pursuant to new Rule 3Ca–1, a counterparty to a security-based swap subject to the clearing requirement who applies for a stay of the clearing requirement will be required to submit a written statement to the Commission that includes: A request for a stay of the clearing requirement; the identity of the counterparties to the security-based swap and a contact at the counterparty requesting the stay; the identity of the clearing agency clearing the securitybased swap; the terms of the securitybased swap subject to the clearing requirement and a description of the clearing arrangement; and the reasons why a stay should be granted and why the security-based swap should not be subject to a clearing requirement, specifically addressing the same factors a clearing agency must address in its Security-Based-Swap Submission 276 See 15 U.S.C. 78c–3(c)(1) (as added by Section 763(a) of the Dodd-Frank Act). PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 41643 pursuant to Rule 19b–4(o).277 In the Proposing Release, the Commission identified potential costs and benefits resulting from Rule 3Ca–1 as proposed and requested comment on all aspects of the cost-benefit analysis, including the identification and assessment of any costs and benefits that were not discussed in the analysis. The Commission did not receive any responses to this request. The Commission is mindful of the costs associated with the final procedure for the application for a stay. As in the Proposing Release, this analysis looks first to the hourly burdens contained in the PRA analysis in Section IV (which hourly figures have been updated from the estimates provided in the Proposing Release) multiplied by the estimated hourly cost. As previously noted, the Commission is unable to estimate accurately the number of stay applications that it will receive pursuant to new Rule 3Ca–1 and Section 3C(c)(1) because the Commission has not yet made any mandatory clearing determinations, does not know which counterparties may object to a determination, and has no information as to when counterparties would make an application for a stay. Accordingly, the Commission has no reasonable basis for estimating the number of applications. In addition, the mere fact that a counterparty files an request for a stay does not automatically create an obligation on the relevant clearing agency to respond to the application. Rather, new Rule 3Ca–1(d) provides that any clearing agency that has accepted for clearing a security-based swap that is subject to the stay shall provide information requested by the Commission necessary to assess any of the factors it determines to be appropriate in the course of its review. The Commission therefore cannot estimate with precision the quantified costs associated with the new rule regarding procedures for a stay, and no additional information was made available during the pendency of this rule that would aid such an estimate. Nonetheless, the Commission recognizes that there will likely be applications for stays and, for purposes of the Proposing Release, the Commission estimated, by way of illustrating the potential costs of such applications, that there would be 30 applications for stays of a clearing requirement from counterparties each year based on the estimates of section III.D.4. of the PRA analysis. Further, the Proposing Release relied on the 277 Rule E:\FR\FM\13JYR3.SGM 3Ca–1(b). 13JYR3 41644 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 assumption that the Commission would request additional information from the relevant clearing agency after receiving a request for a stay from a counterparty. Based on the figures and assumptions described above, the Commission estimates, as it did in the Proposing Release, that counterparties would incur $1,062,000 in total aggregate costs to prepare and submit applications requesting a stay of a clearing requirement and that clearing agencies will incur $247,140 in total aggregate costs to compile and provide any information requested by the Commission.278 While for the reasons described above, the Commission has no basis to believe that this estimate is an inapt illustration of the potential costs associated with stays, the Commission notes that another indicator of the potential burden may be the ‘‘per stay’’ cost implied by these aggregate figures— namely, approximately $35,400 per counterparty per stay and approximately $8,238 per clearing agency per stay. These estimates of course also assume that there is an application (when in fact there may be none in cases where the Commission exercises its authority under Exchange Act Section 3C(c)(1) to grant a stay on its own initiative) and that it requires a clearing agency to respond (when in fact it may not be required to respond in cases where the Commission does not require the production of additional information pursuant to new Rule 3Ca– 1(d)). After considering these illustrative costs, the Commission believes that new Rule 3Ca–1 appropriately implements the provisions identified by Congress as requiring Commission rulemaking and is cost-efficient for the parties that will most likely be affected by the rule. In particular, the Commission believes that the information required of the counterparty and, if applicable, the clearing agency, is information that is most likely to be in the possession of the relevant party, and that alternative mechanisms for obtaining that information would be comparatively more costly for the parties involved. For example, similar to the analysis conducted with respect to SecurityBased Swap Submissions, one alternative would have been to require 278 This figure consists of the total hourly burden identified in section III.D.4, multiplied by $320 for each hour attributed to in-house compliance attorneys and $354 per hour for outside attorneys. This hourly cost is based on SIFMA’s Management & Professional Earnings in the Securities Industry 2010, modified by the Commission’s staff to account for an 1800 hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 that the Commission rely on information within its possession to make a determination with respect to the application for a stay. However, with respect to the counterparty, the Commission is all but certain not to have the full information required to understand the application—the counterparty alone will likely have its reasons as to why the stay should be granted and why the security-based swap should not be subject to a clearing requirement. Similarly, a clearing agency will only be required to submit information in connection with this process in response to a request by the Commission in order to facilitate the Commission’s review of the application for a stay and, if the stay is granted, the applicable clearing requirement. Under these circumstances, it is likely that such requests will include information that is unique to the clearing agency and not independently available to the Commission. 3. Analysis of Final Rule Related to Preventing Evasion of the Clearing Requirement As described above, new Rule 3Ca–2 clarifies that the phrase ‘‘submits such security-based swap for clearing to a clearing agency’’ found in Exchange Act Section 3C(a)(1) and is intended to prevent potential evasions of the clearing requirement by requiring market participants to submit securitybased swaps to a clearing agency for central clearing as opposed to other clearing functions or services. The Commission does not believe that the Rule 3Ca–2 would impose any additional costs or burdens on clearing agencies or counterparties to securitybased swaps because the rule simply clarifies that security-based swaps must be cleared at a central counterparty, rather than at an entity that meets the technical definition of a clearing agency under the Exchange Act for another reason. This clarification is consistent with the purpose of Section 3C(a)(1), which is to require that security-based swaps are centrally cleared. 4. Analysis of Final Rules Related to Advance Notices As previously noted, the Clearing Supervision Act, which was enacted into law pursuant to Title VIII of the Dodd-Frank Act, provides for enhanced regulation of financial market utilities, such as clearing agencies, that manage or operate a multilateral system for the purpose of transferring, clearing or settling payments, securities or other financial transactions among financial institutions or between financial institutions and the financial market PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 utility. Among other things, Section 806(e) of the Clearing Supervision Act requires any financial market utility designated by the Council as systemically important to provide ‘‘60 days in advance notice to its Supervisory Agency of any proposed change to its rules, procedures or operations that could, as defined in rules of each Supervisory Agency, materially affect the nature or level of risks presented by the designated financial market utility.’’ 279 In addition, Congress mandated that each Supervisory Agency, including the Commission, adopt rules, in consultation with the Board, that define and describe when a designated financial market utility is required to file an Advance Notice with its Supervisory Agency.280 Accordingly, new Rule 19b–4(n) was intended to define and describe when Advance Notices are required to be filed by designated clearing agencies and to set forth the process for filing such notices with the Commission. In the Proposing Release, the Commission identified potential costs and benefits resulting from Rule 19b– 4(n) and the related amendments to Form 19b–4 as proposed, and requested comment on all aspects of the costbenefit analysis, including the identification and assessment of any costs and benefits that were not discussed in the analysis. Although the Commission did not receive any comments on the specific cost-benefit analysis contained in the Proposing Release, some commenters suggested that proposed 19b–4(n)(2), which defines the phrase ‘‘materially affect the nature or level of risks presented’’ for purposes of determining when a designated clearing agency will be required to submit an Advance Notice with the Commission, was overly broad and burdensome.281 Specifically, these commenters generally argued that the definition would result in a requirement to submit Advance Notices to the Commission regarding matters that were risk-reducing, impractical, and potentially of lesser importance to the designated clearing agency and its regulators, which could potentially place an unnecessary strain on the existing resources of the clearing agency.282 While the Commission recognizes that new Rule 19b–4(n)(2), which is being 279 See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII). 280 See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII). 281 See supra notes 154 to 162 and accompanying text. 282 See E:\FR\FM\13JYR3.SGM id. 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations adopted as proposed, will impose certain costs and burdens on designated clearing agencies (which costs and burdens are discussed in greater detail below), the Commission believes that the rule is cost-efficient method and represents an appropriate method for implementing the statutory mandate. Specifically, Section 806(e) requires all financial market utilities to file Advance Notices with their Supervisory Agencies whenever the change referred to in the notice materially affects the nature or level of risks presented by the designated financial market utility.283 While the Commission recognizes that a more narrowly tailored definition of the phrase ‘‘materially affect the nature or level of risks presented’’ could potentially result in designated clearing agencies being required to file fewer Advance Notices, new Rule 19b–4(n)(2) was drafted to follow closely the statutory language set forth in Section 806(e)(1)(A). As such, the Commission believes that the definition set forth in the new rule strikes an appropriate balance between the objectives of the Dodd-Frank Act and the potential costs and burdens on financial market utilities in that it does not expand on the language included in the statute, either by including specific types of changes not contemplated in Section 806(e) or by excluding changes that were not expressly identified by Congress. Furthermore, the Commission has previously encouraged designated clearing agencies to discuss proposed changes with Commission staff to help determine whether an Advance Notice under Section 806(e) would need to be filed and continues to encourage clearing agencies to avail themselves of this approach.284 However, the Commission is mindful that the new procedure set forth for Advance Notices will result in costs for financial market utilities, even if that procedure were to achieve optimal efficiency. As in the Proposing Release, this analysis looks first to the hourly burdens contained in the PRA analysis in Section IV (which hourly figures have been updated from the estimates provided in the Proposing Release) multiplied by the estimated hourly cost. The Commission estimates the total annual cost related to filing and posting Advance Notices to be $15,890,000 in the aggregate for ten respondent clearing agencies.285 283 See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII). 284 See supra section II.C.1. figure consists of the total hourly burdens identified in sections III.D.2.e and III.3, multiplied by the costs per hour attributed to different specialists. Specifically, $320 is attributed per hour 285 This VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 In addition, the Commission recognizes that registered clearing agencies may incur some additional costs associated with filing Advance Notices that are not readily quantifiable. For example, some proposed changes may be required to be filed only as Advance Notices under Section 806(e) and not as proposed rule changes under Exchange Act Section 19(b). In these circumstances, clearing agencies will likely incur additional costs by being required to make a greater number of filings than they do currently under Exchange Act Section 19(b), which would result from the application of different standards for triggering a filing under the two statutory provisions. In addition, the Commission notes that Advance Notices filed before December 10, 2012, will not be filed on Form 19b– 4 in order to allow time for the Commission to make the necessary system upgrades to EFFS. Accordingly, a designated clearing agency that is required to file a change as both an Advance Notice and a proposed rule change will be required to submit two separate filings with the Commission. However, the Commission believes that the requirement to file the Advance Notice by email, as well as the temporary nature of the requirement, will impose relatively little additional burden on clearing agencies, which can use their existing email systems to make such filings. While the Commission recognizes the importance of considering these costs, and appreciates that some costs may be unavoidable in establishing a new procedure, the Commission believes that new Rule 19b–4(n) implements the provisions identified by Congress as requiring Commission rulemaking and is cost-efficient for the parties that will most likely be affected by the rule. Specifically, by defining the term ‘‘materially affect the nature or level of risks presented,’’ new Rule 19b–4(n)(2) provides designated clearing agencies with an understanding, as required by Congress pursuant to Section 806(e)(1)(B), of when an Advance Notice is required. While the Commission could have taken a more prescriptive approach by specifying which types of groups of changes would or would not trigger the requirement, the Commission believes that interpretative issues would for in-house compliance attorneys, $354 per hour for outside attorneys and $225 per hour for a Webmaster. These hourly rates were based on the corresponding figures set forth in SIFMA’s Management & Professional Earnings in the Securities Industry 2010, modified by the Commission’s staff to account for an 1800 hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 41645 remain and questions whether such alternative would be consistent with the statutory language in Section 806(e)(1)(A). In addition, because the requirement to file notices under Section 806(e) is similar to the filing requirement for proposed rule changes under Exchange Act Section 19(b), the Commission is requiring that Advance Notices be filed on Form 19b–4 and EFFS. In many cases, it is likely that a proposed change for purposes of Section 806(e) will also be a proposed rule change for purposes of Exchange Act Section 19(b). Although the Commission could have required that Advance Notices be filed on a separate form, the Commission believes that requiring submissions using existing Form 19b–4 and EFFS represents a particularly cost-efficient approach to implementing the statutory mandate to submit Security-Based Swap Submissions, particularly since designated clearing agencies will already be familiar with this method of submission. Further, in situations where a single clearing agency action would trigger more than one of these filing requirements, allowing for each filing to be made pursuant to a single Form 19b– 4 submission would improve efficiency in the filing process including, for example, by allowing the clearing agency to refer to and cross-reference information in one part of the submission if the information is relevant to a separate filing that is part of the same submission (so long as the requirements of each applicable rule are individually satisfied and if the clearing agency clearly explains how the information in one filing is applicable to the specific information required to be provided in the other filing). 5. Analysis of Final Rules To Amend Rule 19b–4 To Conform to the Requirements of Section 916 of the Dodd-Frank Act The Commission has made a number of modifications to Rule 19b–4 and Form 19b–4 to conform to the requirements specified in Exchange Act Section 19(b), as amended by Section 916 of the Dodd Frank Act. These amendments were designed to incorporate changes required by Section 916, which provided for new deadlines by which the Commission must publish and act upon a proposed rule change submitted by all SROs and new standards for the approval, disapproval, and temporary suspension of a proposed rule change. In the Proposing Release, the Commission identified potential costs and benefits resulting from these amendments, as proposed, and requested comment on all aspects of the E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 41646 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations cost-benefit analysis, including the identification and assessment of any costs and benefits that were not discussed in the analysis. The Commission did not receive any responses to this request. The Commission estimates that the requirement that an SRO inform the Commission of the date on which it posted a proposed rule change on its Web site (if the posting did not occur on the same day that the SRO filed the proposal with the Commission) will impose only a minimal burden, if any, on the SRO. As discussed in Section IV.B.4., the Commission believes that SROs currently post their proposed rule changes on their Web site on the same day on which they file them with the Commission. It would be unlikely that an SRO would fail to post its proposed rule change on the same day that it files with the Commission, since prompt Web site posting triggers the requirement on the Commission to publish notice of the proposed rule change. The Commission also identified certain isolated or unusual circumstances that could result in unforeseen costs associated with the requirement that an SRO, if it does not post a proposed rule change on its Web site on the same day that it files the proposal with the Commission, inform the Commission of the date on which it posted such proposal on its Web site. In conducting an evaluation of the costs of this amendment, as in the Proposing Release, the Commission relies on the hourly burdens contained in the PRA analysis in Section IV (which hourly figures have been updated from the estimates provided in the Proposing Release) multiplied by the estimated hourly cost. In addition, the Commission estimates that SROs will fail to post proposed rule changes on their Web sites on the same day as the filing was made with the Commission in 1% of all cases, or 16 times each year, and that each SRO will spend approximately one hour preparing and submitting notice to the Commission of the date on which it posted the proposed rule change on its Web site, resulting in a total annual burden of 14 hours. Based on these assumptions, the Commission estimates that the total annual cost of this amendment will be $5,120 in the aggregate for all SROs.286 286 This figure consists of the total hourly burdens identified in section III.D.4, multiplied by $320 per hour for in-house compliance attorneys. This hourly cost is based on SIFMA’s Management & Professional Earnings in the Securities Industry 2010, modified by the Commission’s staff to account for an 1800 hour work-year and multiplied VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 V. Regulatory Flexibility Certification The Regulatory Flexibility Act (‘‘RFA’’) 287 requires the Commission, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) 288 of the Administrative Procedure Act,289 as amended by the RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all rules it has proposed to determine the impact of such rulemaking on ‘‘small entities.’’ 290 Section 605(b) of the RFA states that this requirement shall not apply to any proposed rule which, if adopted, would not have a significant economic impact on a substantial number of small entities.291 A. Self-Regulatory Organizations New Rule 19b–4(n) and the corresponding amendments to Form 19b–4 will apply to all designated clearing agencies. New Rule 19b–4(o) and the corresponding amendments to Form 19b–4 will apply to all securitybased swap clearing agencies. New rules 3Ca–1 and 3Ca–2 also will apply to all security-based swap clearing agencies. All of the remaining amendments to Rule 19b–4 and Form 19b–4, including those made to Rule 19b–4(l) to reflect the revisions to Exchange Act Section 19(b) pursuant to Section 916 of the Dodd-Frank Act, will apply to all SROs. Three entities are currently registered to provide central clearing services for CDS, a class of security-based swaps. The Commission believes, based on its understanding of the market, that likely no more than six security-based swap clearing agencies could be subject to the requirements of new Rule 19b–4(o) and new Rules 3Ca–1 and 3Ca–2. In addition, the Commission believes that approximately ten registered clearing agencies could be designated by the Council as systemically important (and for which the Commission will be the Supervisory Agency) and subject to the requirements of new Rule 19b–4(n), which includes the four securities clearing agencies in existence prior to the enactment of the Dodd-Frank Act and the six estimated clearing agencies that may clear security-based swaps. by 5.35 to account for bonuses, firm size, employee benefits and overhead. 287 5 U.S.C. 601 et seq. 288 5 U.S.C. 603(a). 289 5 U.S.C. 551 et seq. 290 Section 601(b) of the RFA permits agencies to formulate their own definitions of ‘‘small entities.’’ The Commission has adopted definitions for the term ‘‘small entity’’ for the purposes of rulemaking in accordance with the RFA. These definitions, as relevant to this rulemaking, are set forth in Rule 0– 10, 17 CFR 240.0–10. 291 See 5 U.S.C. 605(b). PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 Finally, there are currently 32 SROs registered with the Commission (including registered clearing agencies). When combined with the additional clearing agencies that could potentially register with the Commission in the future to clear security-based swaps, the Commission believes that approximately 35 SROs will be subject to all of the other technical amendments to Rule 19b–4, including the amendments to Rule 19–4(l). For the purposes of Commission rulemaking in connection with the RFA, a small entity includes, when used with reference to a clearing agency, a clearing agency that: (i) Compared, cleared and settled less than $500 million in securities transactions during the preceding fiscal year; (ii) had less than $200 million of funds and securities in its custody or control at all times during the preceding fiscal year (or at any time that it has been in business, if shorter); and (iii) is not affiliated with any person (other than a natural person) that is not a small business or small organization.292 With respect to SROs that are not clearing agencies, the RFA analysis would apply to national securities exchanges, national securities associations and the Municipal Securities Rulemaking Board. Exchange Act Rule 0–10(d) provides that a small entity includes, when used in reference to an exchange, any exchange that: (i) Has been exempted from the reporting requirements of Rule 601 of Regulation NMS 293 and (ii) is not affiliated with any person (other than a natural person) that is not a small business or small organization.294 Under the standards adopted by the Small Business Administration, small entities in the finance industry include the following: (i) For entities engaged in investment banking, securities dealing and securities brokerage activities, entities with $6.5 million or less in annual receipts; (ii) for entities engaged in trust, fiduciary and custody activities, entities with $6.5 million or less in annual receipts; and (iii) funds, trusts and other financial vehicles with $6.5 million or less in annual receipts.295 Based on the Commission’s existing information about SROs, the Commission believes that such entities will not be small entities, but rather part of large business entities that exceed the thresholds defining ‘‘small entities’’ set out above. Additionally, while other clearing agencies may become eligible to operate as central counterparties for 292 17 CFR 240.0–10(d). CFR 242.601. 294 17 CFR 240.0–10(e). 295 13 CFR 121.201, Sector 52. 293 17 E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 security-based swaps, the Commission does not believe that any such entities will be ‘‘small entities’’ as defined in Exchange Act Rule 0–10.296 Furthermore, the Commission believes it is unlikely that clearing agencies acting as central counterparties for security-based swaps would have annual receipts of less than $6.5 million. Accordingly, the Commission believes that any clearing agencies clearing security-based swaps by acting as central counterparties for such transactions will exceed the thresholds for ‘‘small entities’’ set forth in Exchange Act Rule 0–10. B. Security-Based Swap Counterparties New Rule 3Ca–1 will apply to any counterparty to a security-based swap subject to the clearing requirement that applies for a stay of a mandatory clearing requirement. For the purposes of Commission rulemaking and as applicable to new Rule 3Ca–1, a small entity includes: (i) When used with reference to a clearing agency, a clearing agency that (a) compared, cleared and settled less than $500 million in securities transactions during the preceding fiscal year, (b) had less than $200 million of funds and securities in its custody or control at all times during the preceding fiscal year (or at any time that it has been in business, if shorter) and (c) is not affiliated with any person (other than a natural person) that is not a small business or small organization; 297 (ii) when used as reference to an ‘‘issuer’’ or a ‘‘person,’’ other than an investment company, an ‘‘issuer’’ or a ‘‘person’’ that, on the last day of its most recent fiscal year, had total assets of $5 million or less; 298 or (iii) when used as reference to brokerdealer, a broker-dealer (a) with total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a–5(d) under the Exchange Act, or, if not required to file such statements, a broker-dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in that time that it has been in business, if shorter) and (b) is not affiliated with any person (other than a natural person) that is not a small business or small organization.299 Under the standards adopted by the Small Business Administration, small entities in the 296 See 17 CFR 240.0–10(d). CFR 240.0–10(d). 298 17 CFR 240.0–10(a). 299 17 CFR 240.0–10(c). 297 17 VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 finance industry include the following: (i) For entities engaged in investment banking, securities dealing and securities brokerage activities, entities with $6.5 million or less in annual receipts; (ii) for entities engaged in trust, fiduciary and custody activities, entities with $6.5 million or less in annual receipts; and (iii) funds, trusts and other financial vehicles with $6.5 million or less in annual receipts.300 While the Commission is unable to anticipate whether any counterparties to security-based swap transactions that apply for a stay of a mandatory clearing requirement would meet the definition of a ‘‘small entity’’ under Exchange Act Rule 0–10, the Commission believes that it is unlikely that the stay application process of new Rule 3Ca–1 will have a significant economic impact upon such an entity. Given that the new stay application process entails the submission of a written statement to the Commission setting forth information about the security-based swap transaction for which the stay is sought, the Commission believes the impact of the application process on a counterparty would be minimal.301 Furthermore, even if the stay application process were to have a significant economic impact upon such non-clearing agency counterparty, the Commission believes that the number of entities so impacted will be no more than 30.302 Accordingly, in respect of non-clearing agency counterparties to security-based swap transactions, the Commission believes that new Rule 3Ca–1 will not have a significant CFR 121.201, Sector 52. the economic analysis, the Commission estimated that the 30 counterparties would incur $1,062,000 in total aggregate costs to prepare and submit applications requesting a stay of a clearing requirement, which breaks down to $35,400 per stay. See supra note 278 and accompanying text. 302 As previously noted, the Commission is unable to estimate accurately the number of times it will receive an application for a stay pursuant to Section 3C(c)(1) because it has not yet made any mandatory clearing determinations and it does not know what counterparties may object to a determination or when they would make an application for a stay. However, the Commission recognizes that there will likely be applications for stays and, for purposes of conducting the PRA analysis, the Commission estimated there would be five applications for stays of a clearing requirement per clearing agency per year. This figure represents one quarter of the estimated number of SecurityBased Swap Submissions from each clearing agency per year, for a total of 30 applications for stays per year. While the Commission recognizes that a counterparty may submit multiple stay applications, in order to use the most conservative estimate possible, the Commission is assuming that each of the 30 estimated applications will be submitted by different counterparties. See supra section III.D.4. PO 00000 300 13 301 In Frm 00047 Fmt 4701 Sfmt 4700 41647 economic impact on a substantial number of small entities. C. Certification For the reasons stated above, the Commission certifies that the amendments to Rule 19b–4, including new Rules 19b–4(n) and (o) and all corresponding amendments to Form 19b–4, and new Rules 3Ca–1 and 3Ca– 2 will not have a significant economic impact on a substantial number of small entities for the purposes of the RFA. VI. Statutory Authority Pursuant to the Exchange Act, and particularly Sections 3C, 17A and 19(b) thereof, 15 U.S.C. 78c–3, 78q–1 and 78s(b) and Section 806(e) of the Clearing Supervision Act, 12 U.S.C 5465(e), the Commission is amending Rule 19b–4 and Form 19b–4 and adding Rules 3Ca– 1 and 3Ca–2, as set forth below. List of Subjects in 17 CFR Parts 240 and 249 Brokers, Reporting and recordkeeping requirements, Securities. Text of the Final Rule In accordance with the foregoing, Title 17, chapter II of the Code of Federal Regulations is amended as follows: PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The general authority citation for part 240 is revised and a sub-authority is added in section number order to read as follows: ■ Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78o–4, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 80b–11, and 7201 et seq.; 18 U.S.C. 1350, 12 U.S.C. 5221(e)(3), and Pub. L. 111–203, § 939A, 124 Stat. 1376, (2010), unless otherwise noted. * * * * * Section 240.19b–4 is also issued under 12 U.S.C. 5465(e). * * * * * 2. Add an undesignated center heading and §§ 240.3Ca–1 and 240.3Ca– 2 following § 240.3b–19 to read as follows: ■ Clearing of Security-Based Swaps 240.3Ca–1 Stay of clearing requirement and review by the Commission. 240.3Ca–2 Submission of security-based swaps for clearing. * E:\FR\FM\13JYR3.SGM * 13JYR3 * * * 41648 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 § 240.3Ca–1 Stay of clearing requirement and review by the Commission. (a) After making a determination pursuant to a clearing agency’s securitybased swap submission that a securitybased swap, or any group, category, type or class of security-based swaps, is required to be cleared, the Commission, on application of a counterparty to a security-based swap or on the Commission’s own initiative, may stay the clearing requirement until the Commission completes a review of the terms of the security-based swap (or group, category, type, or class of security-based swaps) and the clearing of the security-based swap (or group, category, type, or class of security-based swaps) by the clearing agency that has accepted it for clearing. (b) A counterparty to a security-based swap applying for a stay of the clearing requirement for a security-based swap (or group, category, type, or class of security-based swaps) shall submit a written statement to the Commission that includes: (1) A request for a stay of the clearing requirement; (2) The identity of the counterparties to the security-based swap and a contact at the counterparty requesting the stay; (3) The identity of the clearing agency clearing the security-based swap; (4) The terms of the security-based swap subject to the clearing requirement and a description of the clearing arrangement; and (5) Reasons why such stay should be granted and why the security-based swap should not be subject to a clearing requirement, specifically addressing the same factors a clearing agency must address in its security-based-swap submission pursuant to § 240.19b– 4(o)(3). (c) A stay of the clearing requirement may be granted with respect to a security-based swap, or the group, category, type, or class of security-based swaps, as determined by the Commission. (d) The Commission’s review shall include a quantitative and qualitative assessment of the factors specified in § 240.19b–4(o)(3). Any clearing agency that has accepted for clearing a securitybased swap, or any group, category, type or class of security-based swaps, that is subject to the stay of the clearing requirement shall provide information requested by the Commission as necessary to assess any of the factors it determines to be appropriate in the course of its review. (e) Upon completion of its review, the Commission may: (1) Determine, subject to any terms and conditions that the Commission VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 determines to be appropriate in the public interest, that the security-based swap, or group, category, type, or class of security-based swaps must be cleared; or (2) Determine that the clearing requirement will not apply to the security-based swap, or group, category, type, or class of security-based swaps, but clearing may continue on a nonmandatory basis. § 240.3Ca–2 Submission of security-based swaps for clearing. Pursuant to section 3C(a)(1) of the Act (15 U.S.C. 78c–3(a)(1)), it shall be unlawful for any person to engage in a security-based swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration under the Act if the security-based swap is required to be cleared. The phrase submits such security-based swap for clearing to a clearing agency in the clearing requirement of Section 3C(a)(1) of the Act shall mean that the securitybased swap will be submitted for central clearing to a clearing agency that functions as a central counterparty. ■ 3. § 240.19b–4 is amended by: ■ a. Removing the phrase ‘‘Preliminary Note:’’ in the introductory text; ■ b. Removing paragraph (b); ■ c. Redesignating paragraph (a) as paragraph (b); ■ d. Adding new paragraph (a); ■ e. In paragraph (i), adding the phrase ‘‘, notices and submissions’’ after ‘‘of all filings’’; ■ f. In paragraph (i), adding the words ‘‘notice or submission,’’ after the phrase ‘‘any such filing,’’; ■ g. In paragraph (i), removing the phrase ‘‘the filing of the proposed rule change.’’ and adding in its place ‘‘the filing, notice or submission of the proposed rule change, advance notice or security-based swap submission, as applicable.’’; ■ h. In paragraph (j), first sentence, removing the words ‘‘with respect to proposed rule changes’’; ■ i. Revising paragraph (l), introductory text; ■ j. Adding paragraph (n); and ■ k. Adding paragraph (o). The additions and revisions read as follows: § 240.19b–4 Filings, notices or submissions with respect to proposed rule changes, advance notices or security-based swap submissions by self-regulatory organizations. * * * * * (a) Definitions. As used in this section: PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 (1) The term advance notice means a notice required to be made by a designated clearing agency pursuant to Section 806(e) of the Payment, Clearing and Settlement Supervision Act (12 U.S.C. 5465(e)); (2) The term designated clearing agency means a clearing agency that is registered with the Commission, and for which the Commission is the Supervisory Agency (as determined in accordance with section 803(8) of the Payment, Clearing and Settlement Supervision Act (12 U.S.C. 5462(8)), that has been designated by the Financial Stability Oversight Council pursuant to section 804 of the Payment, Clearing and Settlement Supervision Act (12 U.S.C. 5463) as systemically important or likely to become systemically important; (3) The term Payment, Clearing and Settlement Supervision Act means Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (124 Stat. 1802, 1803, 1807, 1809, 1811, 1814, 1816, 1818, 1820, 1821; 12 U.S.C. 5461 et seq.); (4) The term proposed rule change has the meaning set forth in Section 19(b)(1) of the Act (15 U.S.C. 78s(b)(1)); (5) The term security-based swap submission means a submission of identifying information required to be made by a clearing agency pursuant to section 3C(b)(2) of the Act (15 U.S.C. 78c–3(b)(2)) for each security-based swap, or any group, category, type or class of security-based swaps, that such clearing agency plans to accept for clearing; (6) The term stated policy, practice, or interpretation means: (i) Any material aspect of the operation of the facilities of the selfregulatory organization; or (ii) Any statement made generally available to the membership of, to all participants in, or to persons having or seeking access (including, in the case of national securities exchanges or registered securities associations, through a member) to facilities of, the self-regulatory organization (‘‘specified persons’’), or to a group or category of specified persons, that establishes or changes any standard, limit, or guideline with respect to: (A) The rights, obligations, or privileges of specified persons or, in the case of national securities exchanges or registered securities associations, persons associated with specified persons; or (B) The meaning, administration, or enforcement of an existing rule. * * * * * (l) The self-regulatory organization shall post each proposed rule change, E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations and any amendments thereto, on its Web site within two business days after the filing of the proposed rule change, and any amendments thereto, with the Commission. If a self-regulatory organization does not post a proposed rule change on its Web site on the same day that it filed the proposal with the Commission, then the self-regulatory organization shall inform the Commission of the date on which it posted such proposal on its Web site. Such proposed rule change and amendments shall be maintained on the self-regulatory organization’s Web site until: * * * * * (n)(1)(i) A designated clearing agency shall provide an 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 such designated clearing agency. Except as provided in paragraph (n)(1)(ii) of this section, such advance notice shall be submitted to the Commission electronically on Form 19b–4 (referenced in 17 CFR 249.819). The Commission shall, upon the filing of any advance notice, provide for prompt publication thereof. (ii) Any designated clearing agency that files an advance notice with the Commission prior to December 10, 2012, shall file such advance notice in electronic format to a dedicated email address to be established by the Commission. The contents of an advance notice filed pursuant to this paragraph (n)(1)(ii) shall contain the information required to be included for advance notices in the General Instructions for Form 19b–4 (referenced in 17 CFR 249.819). (2)(i) For purposes of this paragraph (n), the phrase materially affect the nature or level of risks presented, when used to qualify determinations on a change to rules, procedures, or operations at the designated clearing agency, means matters as to which there is a reasonable possibility that the change could affect the performance of essential clearing and settlement functions or the overall nature or level of risk presented by the designated clearing agency. (ii) Changes to rules, procedures, or operations that could materially affect the nature or level of risks presented by a designated clearing agency may include, but are not limited to, changes that materially affect participant and product eligibility, risk management, daily or intraday settlement procedures, default procedures, system safeguards, VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 governance or financial resources of the designated clearing agency. (iii) Changes to rules, procedures, or operations that may not materially affect the nature or level of risks presented by a designated clearing agency include, but are not limited to: (A) Changes to an existing procedure, control, or service that do not modify the rights or obligations of the designated clearing agency or persons using its payment, clearing, or settlement services and that do not adversely affect the safeguarding of securities, collateral, or funds in the custody or control of the designated clearing agency or for which it is responsible; or (B) Changes concerned solely with the administration of the designated clearing agency or related to the routine, daily administration, direction, and control of employees; (3) The designated clearing agency shall post the advance notice, and any amendments thereto, on its Web site within two business days after the filing of the advance notice, and any amendments thereto, with the Commission. Such advance notice and amendments shall be maintained on the designated clearing agency’s Web site until the earlier of: (i) The date the designated clearing agency withdraws the advance notice or is notified that the advance notice is not properly filed; or (ii) The date the designated clearing agency posts a notice of effectiveness as required by paragraph (n)(4)(ii) of this section. (4)(i) The designated clearing agency shall post a notice on its Web site within two business days of the date that any change to its rules, procedures, or operations referred to in an advance notice has been permitted to take effect as such date is determined in accordance with Section 806(e) of the Payment, Clearing and Settlement Supervision Act (12 U.S.C. 5465). (ii) The designated clearing agency shall post a notice on its Web site within two business days of the effectiveness of any change to its rules, procedures, or operations referred to in an advance notice. (5) A designated clearing agency shall provide copies of all materials submitted to the Commission relating to an advance notice with the Board of Governors of the Federal Reserve System contemporaneously with such submission to the Commission. (6) The publication and Web site posting requirements contained in paragraphs (n)(1), (n)(3), and (n)(4) of this section do not apply to any information contained in an advance PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 41649 notice for which a designated clearing agency has requested confidential treatment following the procedures set forth in § 240.24b–2. (o)(1) Every clearing agency that is registered with the Commission that plans to accept a security-based swap, or any group, category, type, or class of security-based swaps for clearing shall submit to the Commission a securitybased swap submission and provide notice to its members of such securitybased swap submission. (2)(i) Except as provided in paragraph (o)(2)(ii) of this section, a clearing agency shall submit each security-based swap submission to the Commission electronically on Form 19b–4 (referenced in 17 CFR 249.819) with the information required to be submitted for a security-based swap submission, as provided in § 240.19b–4 and Form 19b–4. Any information submitted to the Commission electronically on Form 19b–4 that is not complete or otherwise in compliance with this section and Form 19b–4 shall not be considered a security-based swap submission and the Commission shall so inform the clearing agency within twenty-one business days of the submission on Form 19b–4 (referenced in 17 CFR 249.819). (ii) Any clearing agency that files a security-based swap submission with the Commission prior to December 10, 2012, shall file such security-based swap submission in electronic format to a dedicated email address to be established by the Commission. The contents of a security-based swap submission filed pursuant to this paragraph (o)(2)(ii) shall contain the information required to be included for security-based swap submissions in the General Instructions for Form 19b–4. (3) A security-based swap submission submitted by a clearing agency to the Commission shall include a statement that includes, but is not limited to: (i) How the security-based swap submission is consistent with Section 17A of the Act (15 U.S.C. 78q–1); (ii) Information that will assist the Commission in the quantitative and qualitative assessment of the factors specified in Section 3C of the Act (15 U.S.C. 78c–3), including, but not limited to: (A) The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data; (B) The availability of a rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded; E:\FR\FM\13JYR3.SGM 13JYR3 41650 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 (C) The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the clearing agency available to clear the contract; (D) The effect on competition, including appropriate fees and charges applied to clearing; and (E) The existence of reasonable legal certainty in the event of the insolvency of the relevant clearing agency or one or more of its clearing members with regard to the treatment of customer and security-based swap counterparty positions, funds, and property; (iii) A description of how the rules of the clearing agency prescribe that all security-based swaps submitted to the clearing agency with the same terms and conditions are economically equivalent within the clearing agency and may be offset with each other within the clearing agency, as applicable to the security-based swaps described in the security-based swap submission; and (iv) A description of how the rules of the clearing agency provide for nondiscriminatory clearing of a securitybased swap executed bilaterally or on or through the rules of an unaffiliated national securities exchange or securitybased swap execution facility, as applicable to the security-based swaps described in the security-based swap submission. (4) A clearing agency shall submit security-based swaps to the Commission for review by group, category, type or class of security-based swaps, to the extent reasonable and practicable to do so. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 (5) A clearing agency shall post each security-based swap submission, and any amendments thereto, on its Web site within two business days after the submission of the security-based swap submission, and any amendments thereto, with the Commission. Such security-based swap submission and amendments shall be maintained on the clearing agency’s Web site until the Commission makes a determination regarding the security-based swap submission or the clearing agency withdraws the security-based swap submission, or is notified that the security-based swap submission is not properly filed. (6) In connection with any securitybased swap submission that is submitted by a clearing agency to the Commission, the clearing agency shall provide any additional information requested by the Commission as necessary to assess any of the factors it determines to be appropriate in order to make the determination of whether the clearing requirement applies. (7) Notices of orders issued pursuant to Section 3C of the Act (15 U.S.C. 78c– 3), regarding security-based swap submissions will be given by prompt publication thereof, together with a statement of written reasons therefor. Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted. PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 ■ 4. The general authority citation for part 249 is revised and a sub-authority is added in section number order to read as follows: Note: The text of Form 19b–4 does not and the amendments will not appear in the Code of Federal Regulations. ■ PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 * * * * * Section 249.819 is also issued under 12 U.S.C. 5465(e). * ■ * * * * 5. Revise § 249.819 to read as follows: § 249.819 Form 19b–4, for electronic filings with respect to proposed rule changes, advance notices and securitybased swap submissions by all selfregulatory organizations. This form shall be used by all selfregulatory organizations, as defined in Section 3(a)(26) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(26)), to file electronically proposed rule changes with the Commission pursuant to Section 19(b) of the Act (15 U.S.C. 78s(b)) and § 240.19b–4 of this chapter, advance notices with the Commission pursuant to Section 806(e) of the Payment, Clearing and Settlement Supervision Act (12 U.S.C. 5465(e)) and § 240.19b– 4 of this chapter and security-based swap submissions with the Commission pursuant to Section 3C(b)(2) of the Act (15 U.S.C. 78c–3(b)(2)) and § 240.19b–4 of this chapter. 6. Form 19b–4 (referenced in § 249.819) is revised to read as follows: BILLING CODE 8011–01–P E:\FR\FM\13JYR3.SGM 13JYR3 VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4725 E:\FR\FM\13JYR3.SGM 13JYR3 41651 ER13JY12.003</GPH> mstockstill on DSK4VPTVN1PROD with RULES3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations BILLING CODE 8011–01–C General Instructions for Form 19b–4 A. Use of the Form All self-regulatory organization proposed rule changes (except filings with respect to proposed rule changes VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 by self-regulatory organizations submitted pursuant to Section 19(b)(7) 1 1 Because Section 19(b)(7)(C) of the Act states that filings abrogated pursuant to this Section should be re-filed pursuant to paragraph (b)(1) of Section 19 E:\FR\FM\13JYR3.SGM 13JYR3 ER13JY12.004</GPH> mstockstill on DSK4VPTVN1PROD with RULES3 41652 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 of the Securities Exchange Act of 1934 (‘‘Act’’)), security-based swap submissions, and advance notices shall be filed in an electronic format through the Electronic Form 19b–4 Filing System (‘‘EFFS’’), a secure Web site operated by the Commission. This form shall be used for filings of proposed rule changes by all self-regulatory organizations pursuant to Section 19(b) of the Act, except filings with respect to proposed rule changes by self-regulatory organizations submitted pursuant to Section 19(b)(7) of the Act. National securities exchanges, registered securities associations, registered clearing agencies, and the Municipal Securities Rulemaking Board are selfregulatory organizations for purposes of this form. This form shall be used for all security-based swap submissions and advance notices filed by registered clearing agencies. A proposed change that is required to be filed with the Commission under more than one of these three processes (a proposed rule change, security-based swap submission, or advance notice) shall be submitted on the same Form 19b–4. B. Need for Careful Preparation of the Completed Form, Including Exhibits This form, including the exhibits, is intended to elicit information necessary for the public to provide meaningful comment on the proposed rule change, security-based swap submission, or advance notice and for the Commission to determine whether the proposed rule change, security-based swap submission, or advance notice is consistent with the requirements of the Act and the rules and regulations thereunder or the Payment, Clearing and Settlement Supervision Act and the rules and regulations thereunder, in each case as applicable to the selfregulatory organization and in accordance with the requirements for each type of filing. The self-regulatory organization must provide all the information called for by the form, including the exhibits, and must present the information in a clear and comprehensible manner. The proposed rule change, securitybased swap submission, or advance notice shall be considered filed on the date on which the Commission receives the proposed rule change, securitybased swap submission, or advance notice if the filing complies with all requirements of this form. Any filing that does not comply with the requirements of this form may be of the Act, SROs are required to file electronically such proposed rule changes in accordance with this form. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 returned to the self-regulatory organization. Any filing so returned shall for all purposes be deemed not to have been filed with the Commission. See also Rule 0–3 under the Act (17 CFR 240.0–3). C. Documents Comprising the Completed Form The completed form filed with the Commission shall consist of the Form 19b–4 Page 1, numbers and captions for all items, responses to all items, and exhibits required in Item 11. In responding to an item, the completed form may omit the text of the item as contained herein if the response is prepared to indicate to the reader the coverage of the item without the reader having to refer to the text of the item or its instructions. Each filing shall be marked on the Form 19b–4 with the initials of the self-regulatory organization, the four-digit year, and the number of the filing for the year (e.g., SRO–YYYY–XX). If the SRO is filing Exhibits 2 or 3 via paper, the exhibits must be filed within 5 calendar days of the electronic submission of all other required documents. D. Amendments If information on this form is or becomes inaccurate before the Commission takes action on the proposed rule change or the securitybased swap submission, or prior to the expiration of the statutory review period with respect to advance notices (as determined in accordance with Section 806(e) of the Payment, Clearing and Settlement Supervision Act), the selfregulatory organization shall correct any such inaccuracy. Amendments shall be filed as specified in Instruction F. Amendments to a filing shall include the Form 19b–4 Page 1 marked to number consecutively the amendments, numbers and captions for each amended item, amended response to the item, and required exhibits. The amended response to Item 3 shall explain the purpose of the amendment and, if the amendment changes the purpose of or basis for the proposed rule change, security-based swap submission, or advance notice, the amended response shall also provide a revised purpose and basis statement. Exhibit 1 or Exhibit 1A, as applicable, shall be re-filed if there is a material change from the immediately preceding filing in the language of the proposed rule change or in the information provided relating to the proposed rule change, security-based swap submission, or advance notice. If the amendment alters the text of an existing rule, the amendment shall include the text of the existing rule, PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 41653 marked in the manner described in Item 1(a) using brackets to indicate words to be deleted from the existing rule and underscoring to indicate words to be added. The purpose of this marking requirement is to maintain a current copy of how the text of the existing rule is being changed. If the amendment alters the text of the proposed rule change as it appeared in the immediately preceding filing (even if the proposed rule change does not alter the text of an existing rule), the amendment shall include, as Exhibit 4, the entire text of the rule as altered. This full text shall be marked, in any convenient manner, to indicate additions to and deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit the staff to identify immediately the changes made from the text of the rule with which it has been working. If the self-regulatory organization is amending only part of the text of a lengthy proposed rule change, it may, with the Commission’s permission, file only those portions of the text of the proposed rule change in which changes are being made if the filing (i.e., partial amendment) is clearly understandable on its face. Such partial amendment shall be clearly identified and marked to show deletions and additions. If, after the Form 19b–4 is filed but before the Commission takes final action on it, the self-regulatory organization receives or prepares any correspondence or other communications reduced to writing (including comment letters) to and from such self-regulatory organization concerning the proposed rule change, security-based swap submission, or advance notice, the communications shall be filed as Exhibit 2. If information in the communication makes the filing inaccurate, the filing shall be amended to correct the inaccuracy. If such communications cannot be filed electronically in accordance with Instruction F, the communications shall be filed in accordance with Instruction G. E. Completion of Action by the SelfRegulatory Organization on the Proposed Rule Change The Commission will not approve a proposed rule change or make a determination regarding a securitybased swap submission or raise no objection to an advance notice before the self-regulatory organization has completed all action required to be taken under its constitution, articles of incorporation, bylaws, rules, or instruments corresponding thereto (excluding action specified in any such E:\FR\FM\13JYR3.SGM 13JYR3 41654 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations instrument with respect to (i) compliance with the procedures of the Act or (ii) the formal filing of amendments pursuant to state law). mstockstill on DSK4VPTVN1PROD with RULES3 F. Signature and Filing of the Completed Form All proposed rule changes, securitybased swap submissions, advance notices, amendments, extensions, and withdrawals of proposed rule changes, security-based swap submissions, and advance notices shall be filed through the EFFS. In order to file Form 19b–4 through EFFS, self-regulatory organizations must request access to the SEC’s External Application Server by completing a request for an external account user ID and password. Initial requests will be received by contacting the Trading and Markets Administrator located on our Web site (https:// www.sec.gov). An email will be sent to the requestor that will provide a link to a secure Web site where basic profile information will be requested. A duly authorized officer of the selfregulatory organization shall electronically sign the completed Form 19b–4 as indicated on Page 1 of the Form. In addition, a duly authorized officer of the self-regulatory organization shall manually sign one copy of the completed Form 19b–4, and the manually signed signature page shall be maintained pursuant to Section 17 of the Act. A registered clearing agency for which the Commission is not the appropriate regulatory agency also shall file with its appropriate regulatory agency three copies of the form, one of which shall be manually signed, including exhibits. A clearing agency that also is a designated clearing agency shall file with the Board of Governors of the Federal Reserve System (‘‘Federal Reserve’’) three copies of any form containing an advance notice, one of which shall be manually signed, including exhibits; provided, however, that this requirement may be satisfied instead by providing the copies to the Federal Reserve in an electronic format as permitted by the Federal Reserve. The Municipal Securities Rulemaking Board also shall file copies of the form, including exhibits, with the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. G. Procedures for Submission of Paper Documents for Exhibits 2 and 3 To the extent that Exhibits 2 and 3 cannot be filed electronically in accordance with Instruction F, four copies of Exhibits 2 and 3 shall be filed with the Division of Trading and Markets, Securities and Exchange VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Commission, 100 F Street NE., Washington, DC 20549. Page 1 of the electronic Form 19b–4 shall accompany paper submissions of Exhibits 2 and 3. If the SRO is filing Exhibits 2 and 3 via paper, they must be filed within five calendar days of the electronic filing of all other required documents. H. Withdrawals of Proposed Rule Changes, Security-Based Swap Submissions or Advance Notices If a self-regulatory organization determines to withdraw a proposed rule change, security-based swap submission, or advance notice, it must complete Page 1 of the Form 19b–4 and indicate by selecting the appropriate check box to withdraw the filing. I. Procedures for Granting an Extension of Time for Commission Final Action After the Commission publishes notice of a proposed rule change or security-based swap submission, if a self-regulatory organization wishes to grant the Commission an extension of the time to take final action as specified in Section 19(b)(2) or Section 3C, the self-regulatory organization shall indicate on the Form 19b–4 Page 1 the granting of said extension as well as the date the extension expires. Information To Be Included in the Completed Form (‘‘Form 19b–4 Information’’) 1. Text of the Proposed Rule Change (a) Include the text of the proposed rule change, security-based swap submission, or advance notice. Text of the proposed rule change should be included either in Exhibit 5 or Exhibit 1 (or Exhibit 1A in the filing of a clearing agency). Changes in, additions to, or deletions from, any existing rule shall be set forth with brackets used to indicate words to be deleted and underscoring used to indicate words to be added. If any form, report, or questionnaire is: (i) proposed to be used in connection with the implementation or operation of the proposed rule change, securitybased swap submission, or advance notice, or (ii) prescribed or referred to in the proposed rule change, security-based swap submission, or advance notice, then the form, report, or questionnaire must be attached to and shall be considered as part of the proposed rule change, security-based swap submission, or advance notice. If completion of the form, report, or questionnaire is voluntary or is required pursuant to an existing rule of the selfregulatory organization, then the form, PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 report, or questionnaire, together with a statement identifying any existing rule that requires completion of the form, report, or questionnaire, shall be attached as Exhibit 3. If the form, report, or questionnaire cannot be filed electronically in accordance with Instruction F, the documents shall be filed in accordance with Instruction G. (b) If the self-regulatory organization reasonably expects that the proposed rule change, security-based swap submission, or advance notice will have any direct effect, or significant indirect effect, on the application of any other rule of the self-regulatory organization, set forth the designation or title of any such rule and describe the anticipated effect of the proposed rule change, security-based swap submission, or advance notice on the application of such other rule. (c) Include the file numbers for prior filings with respect to any existing rule specified in response to Item 1(b). 2. Procedures of the Self-Regulatory Organization Describe action on the proposed rule change, security-based swap submission, or advance notice taken by the members or board of directors or other governing body of the selfregulatory organization. See Instruction E. 3. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Provide a statement of the purpose of the proposed rule change and its basis under the Act and the rules and regulations thereunder applicable to the self-regulatory organization. With respect to proposed rule changes filed pursuant to Section 19(b)(1) of the Act, except for proposed rule changes that have been abrogated pursuant to Section 19(b)(7)(C) of the Act, the statement should be sufficiently detailed and specific to support a finding that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the self-regulatory organization. With respect to proposed rule changes filed pursuant to Section 19(b)(1) of the Act that have been abrogated pursuant to Section 19(b)(7)(C) of the Act, the statement should be sufficiently detailed and specific to support a finding under Section 19(b)(7)(D) of the Act that the proposed rule change does not unduly burden competition or efficiency, does not conflict with the securities laws, and is not inconsistent with the public E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 interest or the protection of investors. At a minimum, the statement should: (a) Describe the reasons for adopting the proposed rule change, any problems the proposed rule change is intended to address, the manner in which the proposed rule change will operate to resolve those problems, the manner in which the proposed rule change will affect various persons (e.g., brokers, dealers, issuers, and investors), and any significant problems known to the selfregulatory organization that persons affected are likely to have in complying with the proposed rule change; and (b) Explain why the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the self-regulatory organization. A mere assertion that the proposed rule change is consistent with those requirements is not sufficient. With respect to a proposed rule change filed pursuant to Section 19(b)(1) of the Act that has been abrogated pursuant to Section 19(b)(7)(C) of the Act, explain why the proposed rule change does not unduly burden competition or efficiency, does not conflict with the securities laws, and is not inconsistent with the public interest and the protection of investors, in accordance with Section 19(b)(7)(D) of the Act. A mere assertion that the proposed rule change satisfies these requirements is not sufficient. In the case of a registered clearing agency, also explain how the proposed rule change will be implemented consistently with the safeguarding of securities and funds in its custody or control or for which it is responsible. Certain limitations that the Act imposes on self-regulatory organizations are summarized in the notes that follow. Failure to describe and justify the proposed rule change in the manner described above may result in the Commission not having sufficient information to make an affirmative finding that the proposed rule change is consistent with the Act and the rules and regulations issued thereunder that are applicable to the self-regulatory organization. Note 1. National Securities Exchanges and Registered Securities Associations. Under Sections 6 and 15A of the Act, rules of a national securities exchange or registered securities association may not permit unfair discrimination between customers, issuers, brokers, or dealers, and may not regulate, by virtue of any authority conferred by the Act, matters not related to the purposes of the Act or the administration of the self-regulatory organization. Rules of a registered securities association may not fix minimum profits or impose any schedule of or fix rates of commissions, allowances, discounts, or other fees to be charged by its members. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 Under Section 11A(c)(5) of the Act, a national securities exchange or registered securities association may not limit or condition the participation of any member in any registered clearing agency. Note 2. Registered Clearing Agencies. Under Section 17A of the Act, rules of a registered clearing agency may not permit unfair discrimination in the admission of participants or among participants in the use of the clearing agency, may not regulate, by virtue of any authority conferred by the Act, matters not related to the purposes of Section 17A of the Act or the administration of the clearing agency, and may not impose any schedule of prices, or fix rates or other fees, for services rendered by its participants. Note 3. Municipal Securities Rulemaking Board. Under Section 15B of the Act, rules of the Municipal Securities Rulemaking Board may not permit unfair discrimination between customers, issuers, municipal securities brokers, or municipal securities dealers, may not fix minimum profits, or impose any schedule or fix rates of commissions, allowances, discounts, or other fees to be charged by municipal securities brokers or municipal securities dealers, and may not regulate, by virtue of any authority conferred by the Act, matters not related to the purposes of the Act with respect to municipal securities or the administration of the Municipal Securities Rulemaking Board. 4. Self-Regulatory Organization’s Statement on Burden on Competition State whether the proposed rule change will have an impact on competition and, if so, (i) state whether the proposed rule change will impose any burden on competition or whether it will relieve any burden on, or otherwise promote, competition and (ii) specify the particular categories of persons and kinds of businesses on which any burden will be imposed and the ways in which the proposed rule change will affect them. If the proposed rule change amends an existing rule, state whether that existing rule, as amended by the proposed rule change, will impose any burden on competition. If any impact on competition is not believed to be a significant burden on competition, explain why. Explain why any burden on competition is necessary or appropriate in furtherance of the purposes of the Act. In providing those explanations, set forth and respond in detail to written comments as to any significant impact or burden on competition perceived by any person who has made comments on the proposed rule change to the selfregulatory organization. A mere assertion that the proposed rule change satisfies these requirements is not sufficient. The statement concerning burdens on competition should be sufficiently detailed and specific to PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 41655 support a Commission finding that the proposed rule change does not impose any unnecessary or inappropriate burden on competition. Failure to describe and justify the proposed rule change in the manner described above may result in the Commission not having sufficient information to make an affirmative finding that the proposed rule change is consistent with the Act and the rules and regulations issued thereunder that are applicable to the self-regulatory organization. 5. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others If written comments were received (whether or not comments were solicited) from members of or participants in the self-regulatory organization or others, summarize the substance of all such comments received and respond in detail to any significant issues that those comments raised about the proposed rule change. If an issue is summarized and responded to in detail under Item 3 or Item 4, that response need not be duplicated if appropriate cross-reference is made to the place where the response can be found. If comments were not or are not to be solicited, so state. 6. Extension of Time Period for Commission Action If the proposed rule change is subject to Commission approval, state whether the self-regulatory organization consents to an extension of the time period specified in Section 19(b)(2) or Section 19(b)(7)(D) of the Act and the duration of the extension, if any, to which the self-regulatory organization consents. 7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2) or Section 19(b)(7)(D) (a) If the proposed rule change is to take, or to be put into, effect, pursuant to Section 19(b)(3), state whether the filing is made pursuant to paragraph (A) or (B) thereof. (b) In the case of paragraph (A) of Section 19(b)(3), designate that the proposed rule change: (i) Is a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule, (ii) Establishes or changes a due, fee, or other charge, (iii) Is concerned solely with the administration of the self-regulatory organization, (iv) Effects a change in an existing service of a registered clearing agency E:\FR\FM\13JYR3.SGM 13JYR3 mstockstill on DSK4VPTVN1PROD with RULES3 41656 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations that either (A)(1) does not adversely affect the safeguarding of securities or funds in the custody or control of the clearing agency or for which it is responsible and (2) does not significantly affect the respective rights or obligations of the clearing agency or persons using the service or (B)(1) primarily affects the futures clearing operations of the clearing agency with respect to futures that are not security futures and (2) does not significantly affect any securities clearing operations of the clearing agency or any related rights or obligations of the clearing agency or persons using such service, and set forth the basis on which such designation is made, (v) Effects a change in an existing order-entry or trading system of a selfregulatory organization that (A) does not significantly affect the protection of investors or the public interest; (B) does not impose any significant burden on competition; and (C) does not have the effect of limiting the access to or availability of the system, or (vi) Effects a change that (A) does not significantly affect the protection of investors or the public interest; (B) does not impose any significant burden on competition; and (C) by its terms, does not become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest; provided that the self-regulatory organization has given the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. If it is requested that the proposed rule change become operative in less than 30 days, provide a statement explaining why the Commission should shorten this time period. (c) In the case of paragraph (B) of Section 19(b)(3), set forth the basis upon which the Commission should, in the view of the self-regulatory organization, determine that the protection of investors, the maintenance of fair and orderly markets, or the safeguarding of securities and funds requires that the proposed rule change should be put into effect summarily by the Commission. Note. The Commission has the power under Section 19(b)(3)(C) of the Act to summarily temporarily suspend within sixty days of its filing any proposed rule change which has taken effect upon filing pursuant to Section 19(b)(3)(A) of the Act or was put into effect summarily by the Commission pursuant to Section 19(b)(3)(B) of the Act. In VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 exercising its summary power under Section 19(b)(3)(B), the Commission is required to make one of the findings described above but may not have a full opportunity to make a determination that the proposed rule change otherwise is consistent with the requirements of the Act and the rules and regulations thereunder. The Commission will generally exercise its summary power under Section 19(b)(3)(B) on condition that the proposed rule change to be declared effective summarily shall also be subject to the procedures of Section 19(b)(2) of the Act. Accordingly, in most cases, a summary order under Section 19(b)(3)(B) shall be effective only until such time as the Commission shall enter an order, pursuant to Section 19(b)(2)(A) of the Act, to approve such proposed rule change or, depending on the circumstances, until such time as the Commission shall institute proceedings to determine whether to disapprove such proposed rule change or, alternatively, such time as the Commission shall, at the conclusion of such proceedings, enter an order, pursuant to Section 19(b)(2)(B), approving or disapproving such proposed rule change. (d) If accelerated effectiveness pursuant to Section 19(b)(2) or Section 19(b)(7)(D) of the Act is requested, provide a statement explaining why there is good cause for the Commission to accelerate effectiveness. 8. Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission State whether the proposed rule change is based on a rule either of another self-regulatory organization or of the Commission, and, if so, identify the rule and explain any differences between the proposed rule change and that rule, as the filing self-regulatory organization understands it. In explaining any such differences, give particular attention to differences between the conduct required to comply with the proposed rule change and that required to comply with the other rule. 9. Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act (a) A clearing agency shall submit to the Commission on this Form 19b–4, a security-based swap submission for any security-based swap, or any group, category, type or class of security-based swaps that the clearing agency plans to accept for clearing. (b) The clearing agency shall include in the security-based swap submission a statement that includes, but is not limited to: (i) How the security-based swap submission is consistent with Section 17A of the Act (15 U.S.C. 78q–1); (ii) Information that will assist the Commission in the quantitative and qualitative assessment of the factors PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 specified in Section 3C of the Act (15 U.S.C. 78c–3), including, but not limited to: (A) The existence of significant outstanding notional exposures, trading liquidity and adequate pricing data; (B) The availability of a rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded; (C) The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the clearing agency available to clear the contract; (D) The effect on competition, including appropriate fees and charges applied to clearing; and (E) The existence of reasonable legal certainty in the event of the insolvency of the relevant clearing agency or one or more of its clearing members with regard to the treatment of customer and security-based swap counterparty positions, funds, and property; (iii) A description of how the rules of the clearing agency prescribe that all security-based swaps submitted to the clearing agency with the same terms and conditions are economically equivalent within the clearing agency and may be offset with each other within the clearing agency, as applicable to the security-based swaps described in the security-based swap submission; and (iv) A description of how the rules of the clearing agency provide for nondiscriminatory clearing of a securitybased swap executed bilaterally or on or through the rules of an unaffiliated national securities exchange or securitybased swap execution facility, as applicable to the security-based swaps described in the security-based swap submission. Note. In connection with the factor specified in Item 9(b)(ii)(A) above, the statement describing the existence of outstanding notional exposures, trading liquidity and adequate pricing data could address pricing sources, models and procedures demonstrating an ability to obtain price data to measure credit exposures in a timely and accurate manner, as well as measures of historical market liquidity and trading activity, and expected market liquidity and trading activity if the securitybased swap is required to be cleared (including information on the sources of such measures). With respect to the factor specified in Item 9(b)(ii)(B) above, the statement describing the availability of a rule framework could include a discussion of the rules, policies or procedures applicable to the clearing of the relevant security-based swap. Additionally, the discussion of credit support E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations mstockstill on DSK4VPTVN1PROD with RULES3 infrastructure specified in Item 9(b)(ii)(B) above could include the methods to address and communicate requests for, and posting of, collateral. With respect to the factor specified in Item 9(b)(ii)(C) above, the discussion of systemic risk could include a statement on the clearing agency’s risk management procedures including, among other things, the measurement and monitoring of credit exposures, initial and variation margin methodology, methodologies for stress testing and back testing, settlement procedures and default management procedures. With respect to the factor specified in Item 9(b)(ii)(D) above, the discussion of fees and charges could address any volume incentive programs that may apply or impact the fees and charges. With respect to the factor specified in Item 9(b)(ii)(E) above, the discussion of legal certainty in the event of an insolvency could address segregation of accounts and all other customer protection measures under insolvency. In describing the security-based swap (or group, category, type or class of securitybased swaps) referenced in the security-based swap submission, the clearing agency could discuss the relevant product specifications, including copies of any standardized legal documentation, generally accepted contract terms, standard practices for managing and communicating any life cycle events associated with the security-based swap and related adjustments, and the manner in which the information contained in the confirmation of the security-based swap trade is transmitted. The clearing agency also could discuss its financial and operational capacity to provide clearing services to all customers potentially subject to the clearing requirements as applicable to the particular security-based swap. Finally, the clearing agency could include an analysis of the effect of a clearing requirement on the market for the group, category, type, or class of securitybased swaps, both domestically and globally, including the potential effect on market liquidity, trading activity, use of securitybased swaps by direct and indirect market participants and any potential market disruption or benefits. This analysis could include whether the members of the clearing agency are operationally and financially capable of absorbing clearing business (including indirect access market participants) that may result from a determination that the security-based swap (or group, category, type or class of securitybased swaps) is required to be cleared. (c) A clearing agency shall submit security-based swaps to the Commission for review by group, category, type or class of security-based swaps, to the extent reasonable and practicable to do so. (d) A clearing agency shall file as an amendment to this Form 19b–4 any additional information necessary to assess any of the factors the Commission determines to be appropriate in order to make a determination regarding the clearing requirement. (e) A security-based swap submission pursuant to Section 3C that also is VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 required to be filed as a proposed rule change under Section 19(b) or an advance notice under Section 806(e) of the Payment, Clearing and Settlement Supervision Act shall not take effect until determinations are obtained under each of the other applicable statutory provisions. 10. Advance Notices Filed Pursuant to Section 806(e) of the Payment, Clearing and Settlement Supervision Act (a) A designated clearing agency shall provide notice on this Form 19b–4 sixty (60) days in advance of any proposed change to its rules, procedures, or operations that could, as defined in Rule 19b–4, materially affect the nature or level of risks presented by the designated clearing agency. (b) A designated clearing agency shall include in the advance notice a description of: (i) The nature of the change and expected effects on risks to the designated clearing agency, its participants, or the market; and (ii) how the designated clearing agency plans to manage any identified risks. (c) A designated clearing agency shall file as amendment to this Form 19b–4 any additional information that is required to be filed by the Commission as necessary to assess the effect the proposed change would have on the nature or level of risks associated with the designated clearing agency’s payment, clearing, or settlement activities and the sufficiency of any proposed risk management techniques. (d) A designated clearing agency that implements a proposed change on an emergency basis must file notice with the Commission on Form 19b–4 within 24 hours of implementing the change. In addition to the information required for advance notices, the notice of an emergency change shall include a description of the nature of the emergency and the reason the change was necessary for the designated clearing agency to continue to operate in a safe and sound manner. Any change implemented by a designated clearing agency on an emergency basis also must comply with Section 19(b) and Section 3C of the Act to the extent those sections are applicable. (e) A proposed change filed pursuant to Section 806(e) that is also required to be filed as a proposed rule change under Section 19(b) or a security-based swap submission under Section 3C shall not take effect until determinations are obtained under each of the other applicable statutory provisions. PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 41657 11. Exhibits List of exhibits to be filed, as specified in Instructions C and D: Exhibit 1. Completed Notice of Proposed Rule Change for publication in the Federal Register. Amendments to Exhibit 1 should be filed in accordance with Instructions D and F. Exhibit 1A. Completed Notice of Proposed Rule Change, Security-Based Swap Submission, or Advance Notice filed by Clearing Agencies for publication in the Federal Register. Amendments to Exhibit 1A should be filed in accordance with Instructions D and F. Exhibit 2 (a) Copies of notices issued by the self-regulatory organization soliciting comment on the proposed rule change, security-based swap submission, or advance notice and copies of all written comments on the proposed rule change, security-based swap submission, or advance notice received by the self-regulatory organization (whether or not comments were solicited), presented in alphabetical order, together with an alphabetical listing of such comments. If such notices and comments cannot be filed electronically in accordance with Instruction F, the notices and comments shall be filed in accordance with Instruction G. (b) Copies of any transcript of comments on the proposed rule change, security-based swap submission, or advance notice made at any public meeting or, if a transcript is not available, a copy of the summary of comments on the proposed rule change, security-based swap submission, or advance notice made at such meeting. If such transcript of comments or summary of comments cannot be filed electronically in accordance with Instruction F, the transcript of comments or summary of comments shall be filed in accordance with Instruction G. (c) If after the proposed rule change, security-based swap submission, or advance notice is filed but before the Commission takes final action on it, the self-regulatory organization prepares or receives any correspondence or other communications reduced to writing (including comment letters) to and from such self-regulatory organization concerning the proposed rule change, security-based swap submission, or advance notice, the communications shall be filed in accordance with Instruction F. If such communications cannot be filed electronically in accordance with Instruction F, the communications shall be filed in accordance with Instruction G. E:\FR\FM\13JYR3.SGM 13JYR3 41658 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Exhibit 3. Copies of any form, report, or questionnaire covered by Item 1(a). If such form, report, or questionnaire cannot be filed electronically in accordance with Instruction F, the form, report, or questionnaire shall be filed in accordance with Instruction G. Exhibit 4. For amendments to a filing, marked copies, if required by Instruction D, of the text of the proposed rule change as amended. Exhibit 5. The SRO may choose to attach as Exhibit 5 proposed changes to rule text in place of providing it in Item I and which may otherwise be more easily readable if provided separately from Form 19b–4. Exhibit 5 shall be considered part of the proposed rule change. SPECIFIC INSTRUCTIONS FOR EXHIBIT 1—NOTICE OF PROPOSED RULE CHANGE EXHIBIT 1 SECURITIES AND EXCHANGE COMMISSION [Release No. 34– ; File No. SR ] [Date] Self-Regulatory Organizations; [Name of Self-Regulatory Organization]; Notice of Filing [and Immediate Effectiveness] of a Proposed Rule Change Relating to [brief description of subject matter of proposed rule change] mstockstill on DSK4VPTVN1PROD with RULES3 General Instructions A. Format Requirements The notice must comply with the guidelines for publication in the Federal Register, as well as any requirements for electronic filing as published by the Commission (if applicable). For example, all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote. All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote. All references to Securities Exchange Act Releases must include the release number, release date, Federal Register cite, Federal Register date, and corresponding file number (e.g., SR–[SRO]–XX–XX). A material failure to comply with these guidelines will result in the proposed rule change being deemed not properly filed. See also Rule 0–3 under the Act (17 CFR 240.0–3). Leave a 1-inch margin at the top, bottom, and right hand side, and a 11⁄2 inch margin at the left hand side. Number all pages consecutively, consistent with Rule 0–3 under the Act (17 CFR 240.0–3). Double space all primary text and single space lists of items, quoted material when set apart from primary text, footnotes, and notes to tables. VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 B. Need for Careful Preparation of the Notice The self-regulatory organization must provide all information required in the notice and present it in a clear and comprehensible manner. It is the responsibility of the self-regulatory organization to prepare Items I, II and III of the notice. The Commission cautions self-regulatory organizations to pay particular attention to assure that the notice accurately reflects the information provided in the Form 19b– 4 it accompanies. Any filing that does not comply with the requirements of Form 19b–4, including the requirements applicable to the notice, may be returned to the self-regulatory organization. Any document so returned shall for all purposes be deemed not to have been filed with the Commission. See Instruction B to Form 19b–4. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on (date) *, the (name of selfregulatory organization) filed with the Securities and Exchange Commission the proposed rule change as described in Items I, II and III below, which Items have been prepared by the selfregulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. Information to Be Included in the Completed Notice I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change (Supply a brief statement of the terms of substance of the proposed rule change. If the proposed rule change is relatively brief, a separate statement need not be prepared, and the text of the proposed rule change may be inserted in lieu of the statement of the terms of substance. If the proposed rule change amends an existing rule, indicate changes in the rule by brackets for words to be deleted and underlined for words to be added.) II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received * To be completed by the Commission. This date will be the date on which the Commission receives the proposed rule change if the filing complies with all requirements of this form. See Instruction B to Form 19b–4. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (Reproduce the headings, and summarize briefly the most significant aspects of the responses, to Items 3, 4, and 5 of Form 19b–4, redesignating them as A, B, and C, respectively.) III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action (If the proposed rule change is to be considered by the Commission pursuant to Section 19(b)(2) of the Act, the following paragraph should be used.) Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. (If the proposed rule change is to take, or to be put into, effect pursuant to Section 19(b)(3)(A) of the Act and paragraph (f)(6) of Rule 19b-4 thereunder, the following paragraph should be used.) Because the foregoing proposed rule change does not: (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6) thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. (If the proposed rule change is to take, or to be put into, effect pursuant to Section 19(b)(3)(A) of the Act and subparagraphs (1)–(5) of paragraph (f) of Rule 19b–4 thereunder, the following paragraph should be used.) E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and paragraph (f) of Rule 19b–4 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. (If the proposed rule change is to be considered by the Commission pursuant to Section 19(b)(7)(D) of the Act, the following paragraph should be used.) Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve such proposed rule change, or (B) after consultation with the Commodity Futures Trading Commission, institute proceedings to determine whether the proposed rule change should be disapproved. with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the [self-regulatory organization]. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number XX and should be submitted on or before [insert date 21 days from publication in the Federal Register]. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.1 Secretary IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: SPECIFIC INSTRUCTIONS FOR EXHIBIT 1A—NOTICE OF PROPOSED RULE CHANGE, SECURITY-BASED SWAP SUBMISSION, OR ADVANCE NOTICE FILED BY CLEARING AGENCIES mstockstill on DSK4VPTVN1PROD with RULES3 Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number XX on the subject line. Paper Comments • Send paper comments in triplicate to [Name of Secretary], Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. All submissions should refer to File Number XX. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 EXHIBIT 1A SECURITIES AND EXCHANGE COMMISSION [Release No. 34; File No. SR ] [Date] Self-Regulatory Organizations; [Name of Clearing Agency]; Proposed Rule Change, Security-Based Swap Submission, or Advance Notice Relating to [brief description of subject matter of proposed rule change, security-based swap submission, or advance notice] General Instructions A. Format Requirements The notice must comply with the guidelines for publication in the Federal Register, as well as any requirements for electronic filing as published by the Commission (if applicable). For example, all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote. All references to SEC rules must include the corresponding PO 00000 1 17 CFR 200.30–3(a)(12). Frm 00059 Fmt 4701 Sfmt 4700 41659 cite to the Code of Federal Regulations in a footnote. All references to Securities Exchange Act Releases must include the release number, release date, Federal Register cite, Federal Register date, and corresponding file number (e.g., SR–[SRO]–XX–XX). A material failure to comply with these guidelines will result in the proposed rule change, security-based swap submission, or advance notice being deemed not properly filed. See also Rule 0–3 under the Act (17 CFR 240.0–3). Leave a 1-inch margin at the top, bottom, and right hand side, and a 11⁄2 inch margin at the left hand side. Number all pages consecutively, consistent with Rule 0–3 under the Act (17 CFR 240.0–3). Double space all primary text and single space lists of items, quoted material when set apart from primary text, footnotes, and notes to tables. B. Need for Careful Preparation of the Notice The clearing agency must provide all information required in the notice and present it in a clear and comprehensible manner. It is the responsibility of the clearing agency to prepare Items I, II and III of the notice. The Commission cautions clearing agencies to pay particular attention to assure that the notice accurately reflects the information provided in the Form 19b– 4 it accompanies. Any filing that does not comply with the requirements of Form 19b–4, including the requirements applicable to the notice, may be returned to the clearing agency. Any document so returned shall for all purposes be deemed not to have been filed with the Commission. See Instruction B to Form 19b–4 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(b)(1) and Rule 19b–4, 17 CFR 240.19b–4, notice is hereby given that on (date)*, the (name of clearing agency) filed with the Securities and Exchange Commission the proposed rule change, security-based swap submission, or advance notice as described in Items I, II and III below, which Items have been prepared by the clearing agency. The Commission is publishing this notice to solicit comments on the proposed rule change, security-based swap submission, or advance notice from interested persons. * To be completed by the Commission. This date will be the date on which the Commission receives the proposed rule change, security-based swap submission, or advance notice filing if the filing complies with all requirements of this form. See Instruction B to Form 19b–4. E:\FR\FM\13JYR3.SGM 13JYR3 41660 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Information to Be Included in the Completed Notice I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice (Supply a brief statement of the terms of substance of the proposed rule change, security-based swap submission, or advance notice. If the proposed rule change is relatively brief, a separate statement need not be prepared, and the text of the proposed rule change may be inserted in lieu of the statement of the terms of substance. If the proposed rule change amends an existing rule, indicate changes in the rule by brackets for words to be deleted and underlined for words to be added.) II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the proposed rule change, securitybased swap submission, or advance notice and discussed any comments it received on the proposed rule change, security-based swap submission, or advance notice. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (Reproduce the headings, and summarize briefly the most significant aspects of the responses, to Items 3, 4, 5, 9 or 10 of Form 19b–4, as applicable, redesignating them as A, B, C, D or E, as applicable, respectively.) mstockstill on DSK4VPTVN1PROD with RULES3 III. Date of Effectiveness of the Proposed Rule Change, Security-Based Swap Submission, and Advance Notice and Timing for Commission Action (If the proposed rule change is to be considered by the Commission pursuant to Section 19(b)(2) of the Act, the following paragraph should be used.) Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove such proposed rule change, or VerDate Mar<15>2010 17:35 Jul 12, 2012 Jkt 226001 (B) institute proceedings to determine whether the proposed rule change should be disapproved. (If the proposed rule change is to take, or to be put into, effect pursuant to Section 19(b)(3)(A) of the Act and paragraph (f)(6) of Rule 19b–4 thereunder, the following paragraph should be used.) Because the foregoing proposed rule change does not: (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6) thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. (If the proposed rule change is to take, or to be put into, effect pursuant to Section 19(b)(3)(A) of the Act and subparagraphs (1)–(5) of paragraph (f) of Rule 19b–4 thereunder, the following paragraph should be used.) The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and paragraph (f) of Rule 19b–4 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. (If the proposed rule change is to be considered by the Commission pursuant to Section 19(b)(7)(D) of the Act, the following paragraph should be used.) Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve such proposed rule change, or (B) after consultation with the Commodity Futures Trading Commission institute proceedings to PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 determine whether the proposed rule change should be disapproved. (If the proposed change is filed as a security-based swap submission pursuant to Section 3C of the Act, the following paragraph should be used.) Within 90 days after receiving a security-based swap submission, unless the submitting clearing agency agrees to an extension of time limitation, the Commission shall by order make its determination whether the securitybased swap, or group, category, type or class of security-based swaps, described in the security-based swap submission is required to be cleared. In making its determination that the clearing requirement shall apply, the Commission may include such terms and conditions to the requirement as the Commission determines to be appropriate in the public interest. The clearing agency shall post notice on its Web site of any clearing requirement that is implemented. (If the proposed change is filed as an advance notice pursuant to the Payment, Clearing and Settlement Supervision Act, the following paragraph should be used.) The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date that the proposed change was filed with the Commission or (ii) the date that any additional information requested by the Commission is received. The clearing agency shall not implement the proposed change if the Commission has any objection to the proposed change. The Commission may extend period for review by an additional 60 days if the proposed change raises novel or complex issues, subject to the Commission or the Board of Governors of the Federal Reserve System providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission. The clearing agency shall post notice on its Web site of proposed changes that are implemented. (If the proposed change is filed following the implementation of a change on an emergency basis pursuant to the Payment, Clearing and E:\FR\FM\13JYR3.SGM 13JYR3 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules and Regulations Settlement Supervision Act, the following paragraph should be used.) The clearing agency implemented a proposed change that otherwise would be required to be filed as an advance notice because the clearing agency determined that (i) an emergency existed and (ii) immediate implementation was necessary for the clearing agency to continue to provide its services in a safe and sound manner. The Commission may require modification or recision of the proposed change if it finds it is not consistent with the purposes of the Payment, Clearing and Settlement Supervision Act or any applicable rules, orders, or standards prescribed under Section 805(a). (If the proposal is submitted pursuant to more than one filing requirement, the clearing agency shall add the following language in addition to the language above.) The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed. IV. Solicitation of Comments mstockstill on DSK4VPTVN1PROD with RULES3 Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, security-based swap submission, or advance notice is VerDate Mar<15>2010 19:45 Jul 12, 2012 Jkt 226001 consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number XX on the subject line. Paper Comments • Send paper comments in triplicate to [Name of Secretary], Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. All submissions should refer to File Number XX. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change, security-based swap submission, or advance notice that are filed with the Commission, and all written communications relating to the proposed rule change, security-based swap submission, or advance notice PO 00000 Frm 00061 Fmt 4701 Sfmt 9990 41661 between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the [clearing agency]. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number XX and should be submitted on or before [insert date 21 days from publication in the Federal Register]. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.1 Secretary By the Commission. Dated: June 28, 2012. Elizabeth M. Murphy, Secretary. [FR Doc. 2012–16233 Filed 7–12–12; 8:45 am] BILLING CODE 8011–01–P 1 17 E:\FR\FM\13JYR3.SGM CFR 200.30–3(a)(12). 13JYR3

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 135 (Friday, July 13, 2012)]
[Rules and Regulations]
[Pages 41601-41661]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16233]



[[Page 41601]]

Vol. 77

Friday,

No. 135

July 13, 2012

Part IV





Securities and Exchange Commission





-----------------------------------------------------------------------





17 CFR Parts 240 and 249





Process for Submissions for Review of Security-Based Swaps for 
Mandatory Clearing and Notice Filing Requirements for Clearing 
Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable 
to All Self-Regulatory Organizations; Final Rule

Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Rules 
and Regulations

[[Page 41602]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-67286; File No. S7-44-10]
RIN 3235-AK87


Process for Submissions for Review of Security-Based Swaps for 
Mandatory Clearing and Notice Filing Requirements for Clearing 
Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable 
to All Self-Regulatory Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In accordance with Section 763(a) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act''), 
the Securities and Exchange Commission (``Commission'') is adopting 
rules under the Securities Exchange Act of 1934 (``Exchange Act'') to 
specify the process for a registered clearing agency's submission for 
review of any security-based swap, or any group, category, type or 
class of security-based swaps, that the clearing agency plans to accept 
for clearing, the manner of notice the clearing agency must provide to 
its members of such submission and the procedure by which the 
Commission may stay the requirement that a security-based swap is 
subject to mandatory clearing while the clearing of the security-based 
swap is reviewed. The Commission also is adopting a rule to specify 
that when a security-based swap is required to be cleared, the 
submission of the security-based swap for clearing must be for central 
clearing to a clearing agency that functions as a central counterparty. 
In addition, the Commission is adopting rules to define and describe 
when notices of proposed changes to rules, procedures or operations are 
required to be filed by designated financial market utilities in 
accordance with Section 806(e) of Title VIII of the Dodd-Frank Act and 
to set forth the process for filing such notices with the Commission. 
Finally, the Commission is adopting rules to make conforming changes as 
required by the amendments to Section 19(b) of the Exchange Act 
contained in Section 916 of the Dodd-Frank Act.

DATES: Effective Dates: August 13, 2012 for Sec. Sec.  240.3Ca-1, 
240.3Ca-2, and the amendments to 240.19b-4; December 10, 2012 for all 
amendments to Sec.  249.819 and Form 19b-4.
    Compliance Dates: August 13, 2012 for Sec. Sec.  240.3Ca-1, 
240.3Ca-2, and the amendments to Sec.  240.19b-4, except for the 
compliance date for Sec.  240.19b-4(o), which is discussed in the 
section of the release titled ``II.G. Effective and Compliance Dates''; 
December 10, 2012 for all amendments to Sec.  249.819 and Form 19b-4.

FOR FURTHER INFORMATION CONTACT: Catherine Moore, Senior Special 
Counsel, Kenneth Riitho, Special Counsel or Andrew Bernstein, Special 
Counsel, at (202) 551-5710; Division of Trading and Markets, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Discussion
    A. Security-Based Swap Submissions
    1. Process for Making Security-Based Swap Submission to the 
Commission
    a. Substance of Security-Based Swap Submissions: Consistency 
With Section 17A of the Exchange Act
    b. Substance of Security-Based Swap Submissions: Quantitative 
and Qualitative Factors
    c. Substance of Security-Based Swap Submissions: Open Access
    d. Timing of Security-Based Swap Submissions
    e. Notice to Clearing Agency Members
    f. Submissions of a Group, Type or Class of Security-Based Swaps
    g. Other Issues Related to Security-Based Swap Submissions
    h. Additional Comments
    2. Prevention of Evasion of the Clearing Requirement
    B. Stay of the Clearing Requirement and Review by the Commission
    C. Title VIII Notice Filing Requirements for Designated Clearing 
Agencies
    1. Standards for Determining When Advance Notice Is Required
    2. Providing Notice of the Matters Included in an Advance Notice 
to the Board and Interested Persons
    3. Timing and Determination of Advance Notice Pursuant to 
Section 806(e)
    4. Implementation of Proposed Changes and Emergency Changes 
Pursuant to Section 806(e)
    D. Amendments to Form 19b-4
    E. Amendments to Rule 19b-4 Relating to Section 916 of the Dodd-
Frank Act
    F. New Requirements Under Exchange Act Section 3C and Section 
806(e) and the Existing Filing Requirements in Exchange Act Section 
19(b)
    G. Effective and Compliance Dates
III. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Amendments to Rule 19b-4 and Form 19b-4
    2. Stay of Clearing Requirement
    B. Use of Information
    1. Amendments to Rule 19b-4 and Form 19b-4
    2. Stay of Clearing Requirements
    C. Respondents
    1. Amendments to Rule 19b-4 and Form 19b-4
    2. Stay of Clearing Requirement
    D. Total Annual Reporting and Recordkeeping Burden
    1. Background
    2. Rule 19b-4 and Form 19b-4
    a. Introduction
    b. Internal Policies and Procedures
    c. Proposed Rule Changes
    d. Security-Based Swap Submissions
    e. Advance Notices
    f. Summary
    3. Posting of Security-Based Swap Submissions, Advance Notices 
and Proposed Rule Changes on Clearing Agency Web sites
    4. Amendment To Conform to Section 916 of the Dodd-Frank Act
    5. New Rule 3Ca-1
    E. Retention Period of Recordkeeping Requirements
    F. Collection of Information Is Mandatory
    G. Responses to Collection of Information Will Not Be Kept 
Confidential
IV. Economic Analysis
    A. Background
    1. Dodd-Frank Act Requirements for Clearing Security-Based Swaps
    2. Current Clearing Practices in the Security-Based Swap Market
    3. Views on Clearing Requirements for Security-Based Swaps
    4. Overview of Statutory Requirements
    B. Analysis of Final Procedural Rules
    1. Analysis of Final Rules Related to Security-Based Swap 
Submissions
    2. Analysis of Final Rules Related to the Process for Staying a 
Clearing Requirement While the Clearing of the Security-Based Swap 
Is Reviewed
    3. Analysis of Final Rule Related to Preventing Evasion of the 
Clearing Requirement
    4. Analysis of Final Rules Related to Advance Notices
    5. Analysis of Final Rules To Amend Rule 19b-4 to Conform To the 
Requirements of Section 916 of the Dodd-Frank Act
V. Regulatory Flexibility Certification
    A. Self-Regulatory Organizations
    B. Security-Based Swap Counterparties
    C. Certification
VI. Statutory Authority

I. Background

    On July 21, 2010, the President signed the Dodd-Frank Act into 
law.\1\ The Dodd-Frank Act was enacted, among other reasons, to promote 
the financial stability of the United States by improving 
accountability and transparency in the financial system.\2\ Title VII 
and Title VIII of the Dodd-Frank Act, among other things, impose new 
requirements with respect to clearance and settlement systems.
---------------------------------------------------------------------------

    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Pub. L. 111-203, H.R. 4173).
    \2\ See Pub. L. 111-203, Preamble.
---------------------------------------------------------------------------

    Title VII of the Dodd-Frank Act (``Title VII'') provides the 
Commission and the Commodity Futures Trading

[[Page 41603]]

Commission (``CFTC'') with authority to regulate certain over-the-
counter (``OTC'') derivatives in response to the recent financial 
crisis.\3\ The Dodd-Frank Act is intended to bolster the existing 
regulatory structure and provide regulatory tools to oversee the OTC 
derivatives market, which has grown exponentially in recent years. 
Title VII provides that the CFTC will regulate ``swaps,'' the 
Commission will regulate ``security-based swaps,'' and the CFTC and the 
Commission will jointly regulate ``mixed swaps.'' \4\
---------------------------------------------------------------------------

    \3\ See, e.g., Report of the Senate Committee on Banking, 
Housing, and Urban Affairs regarding The Restoring American 
Financial Stability Act of 2010, S. Rep. No. 111-176 at 29 (2010) 
(stating that ``[m]any factors led to the unraveling of this 
country's financial sector and the government intervention to 
correct it, but a major contributor to the financial crisis was the 
unregulated [OTC] derivatives market.'')
    \4\ Section 712(d) of the Dodd-Frank Act provides that the 
Commission and the CFTC, in consultation with the Board of Governors 
of the Federal Reserve System (``Board''), shall further define the 
terms ``swap,'' ``security-based swap,'' ``swap dealer,'' 
``security-based swap dealer,'' ``major swap participant,'' ``major 
security-based swap participant,'' ``eligible contract 
participant,'' and ``security-based swap agreement.'' The Commission 
and the CFTC jointly have proposed to further define the terms 
``swap,'' ``security-based swap,'' and ``security-based swap 
agreement.'' See Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement;'' Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, Securities Act Release 
No. 9204, Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 
76 FR 29818 (May 23, 2011), corrected in Securities Act Release No. 
9204A, Securities Exchange Act Release No. 64372A (June 1, 2011), 76 
FR 32880 (June 7, 2011) (``Product Definition Proposing Release''). 
Further, the Commission and CFTC jointly have adopted rules to 
further define the terms ``swap dealer,'' ``security-based swap 
dealer,'' ``major swap participant,'' ``major security-based swap 
participant,'' and eligible contract participant,'' See Further 
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' 
``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant'', Securities 
Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 
2012). Moreover, section 712(a)(8) of the Dodd-Frank Act provides 
that the Commission and the CFTC, after consultation with the Board, 
shall jointly promulgate such regulations regarding ``mixed swaps'' 
as may be necessary to carry out the purposes of Title VII. The 
Commission and the CFTC have jointly proposed such regulations. See 
Product Definition Proposing Release.
---------------------------------------------------------------------------

    Title VII was designed to provide greater certainty that, wherever 
possible and appropriate, swap and security-based swap contracts 
formerly traded exclusively in the OTC market are centrally cleared.\5\ 
The swaps and security-based swaps markets traditionally have been 
characterized by privately negotiated transactions entered into by two 
counterparties, in which each assumes the credit risk of the other 
counterparty.\6\ Clearing of swaps and security-based swaps was at the 
heart of Congressional reform of the derivatives markets in Title 
VII.\7\
---------------------------------------------------------------------------

    \5\ See, e.g., Report of the Senate Committee on Banking, 
Housing, and Urban Affairs regarding The Restoring American 
Financial Stability Act of 2010, S. Rep. No. 111-176 at 34 (stating 
that ``[s]ome parts of the OTC market may not be suitable for 
clearing and exchange trading due to individual business needs of 
certain users. Those users should retain the ability to engage in 
customized, uncleared contracts while bringing in as much of the OTC 
market under the centrally cleared and exchange-traded framework as 
possible.'').
    \6\ See, e.g., Financial Stability Board, Implementing OTC 
Derivatives Market Reforms (Oct. 25, 2010), available at: https://www.financialstabilityboard.org/publications/r_101025.pdf.
    \7\ As previously noted, the Dodd-Frank Act seeks to ensure 
that, wherever possible and appropriate, derivatives contracts 
formerly traded exclusively in the OTC market be cleared. See supra 
note 5; see also Letter from Christopher Dodd, Chairman, Committee 
on Banking, Housing and Urban Affairs, United States Senate and 
Blanche Lincoln, Chairman, Committee on Agriculture, Nutrition, and 
Forestry, United States Senate, to Barney Frank, Chairman, Financial 
Services Committee, United States House of Representatives and Colin 
Peterson, Chairman, Committee on Agriculture, United States House of 
Representatives (June 30, 2010) (on file with the United States 
Senate).
---------------------------------------------------------------------------

    Clearing agencies are broadly defined under the Exchange Act and 
undertake a variety of functions.\8\ One such function is to act as a 
central counterparty (``CCP''), which is an entity that interposes 
itself between the counterparties to a trade.\9\ For example, when a 
security-based swap contract between two counterparties that are 
members of a CCP is executed and submitted for clearing, it is 
typically replaced by two new contracts--separate contracts between the 
CCP and each of the two original counterparties. At that point, the 
original counterparties are no longer counterparties to each other. 
Instead, each acquires the CCP as its counterparty, and the CCP assumes 
the counterparty credit risk of each of the original counterparties 
that are members of the CCP.\10\ Structured and operated appropriately, 
CCPs may improve the management of counterparty risk and may provide 
additional benefits such as multilateral netting of trades.\11\
---------------------------------------------------------------------------

    \8\ Section 3(a)(23)(A) of the Exchange Act defines the term 
``clearing agency'' to mean any person who acts as an intermediary 
in making payments or deliveries or both in connection with 
transactions in securities or who provides facilities for the 
comparison of data regarding the terms of settlement of securities 
transactions, to reduce the number of settlements of securities 
transactions, or the allocation of securities settlement 
responsibilities. Such term also means any person, such as a 
securities depository, who acts as a custodian of securities in 
connection with a system for the central handling of securities 
whereby all securities of a particular class or series of any issuer 
deposited within the system are treated as fungible and may be 
transferred, loaned, or pledged by bookkeeping entry without 
physical delivery of securities certificates, or otherwise permits 
or facilitates the settlement of securities transactions or the 
hypothecation or lending of securities without physical delivery of 
securities certificates. 15 U.S.C. 78c(a)(23)(A).
    \9\ See id. An entity that acts as a CCP for securities 
transactions is a clearing agency as defined in the Exchange Act and 
is required to register with the Commission.
    \10\ See Cecchetti, Gyntelberg and Hollanders, Central 
counterparties for over-the-counter derivatives, BIS Quarterly 
Review, Sept. 2009, available at: https://www.bis.org/publ/qtrpdf/r_qt0909f.pdf.
    \11\ See id. at 46 (stating that the structure of a CCP ``has 
three clear benefits. First, it improves the management of 
counterparty risk. Second, it allows the CCP to perform multilateral 
netting of exposures as well as payments. Third, it increases 
transparency by making information on market activity and 
exposures--both prices and quantities--available to regulators and 
the public''); see also Bank for International Settlements' 
Committee on Payment and Settlement Systems and Technical Committee 
of the International Organization of Securities Commissions, 
Guidance on the application of the 2004 CPSS-IOSCO Recommendations 
for Central Counterparties to OTC derivatives CCPs: Consultative 
report, (May 2010), available at: https://www.bis.org/publ/cpss89.pdf.
---------------------------------------------------------------------------

    One key way in which the Dodd-Frank Act promotes clearing of such 
contracts is by requiring a process by which the Commission would 
determine whether a security-based swap is required to be cleared. 
Section 3C of the Exchange Act, as added by Section 763(a) of the Dodd-
Frank Act (``Exchange Act Section 3C''),\12\ creates, among other 
things, a clearing requirement with respect to certain security-based 
swaps. Specifically, this section provides that ``[i]t shall be 
unlawful for any person to engage in a security-based swap unless that 
person submits such security-based swap for clearing to a clearing 
agency that is registered under this Act or a clearing agency that is 
exempt from registration under this Act if the security-based swap is 
required to be cleared.'' \13\ Exchange Act Section 3C requires the 
Commission to adopt rules for a clearing agency's submission of 
security-based swaps, or any group, category, type or class of 
security-based swaps, that a clearing agency plans to accept for

[[Page 41604]]

clearing (``Security-Based Swap Submission'') and to determine the 
manner of notice the clearing agency must provide to its members of 
such Security-Based Swap Submission.\14\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78c-3 et seq.
    \13\ See 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of 
the Dodd-Frank Act). The requirement that a security-based swap be 
cleared will stem from the determination to be made by the 
Commission. Such determination may be made in connection with the 
review of a clearing agency's submission regarding a security-based 
swap, or any group, category, type or class of security-based swaps, 
that the clearing agency plans to accept for clearing. See 15 U.S.C. 
78c-3(b)(2)(C)(ii) (as added by Section 763(a) of the Dodd-Frank 
Act) (``[t]he Commission shall * * * review each submission made 
under subparagraphs (A) and (B), and determine whether the security-
based swap, or group, category, type, or class of security-based 
swaps, described in the submission is required to be cleared.''). In 
addition, Exchange Act Section 3C(b)(1) provides that ``[t]he 
Commission on an ongoing basis shall review each security-based 
swap, or any group, category, type, or class of security-based swaps 
to make a determination that such security-based swap, or group, 
category, type, or class of security-based swaps should be required 
to be cleared.''
    \14\ See 15 U.S.C. 78c-3(b)(2)(A) and (5) (as added by Section 
763(a) of the Dodd-Frank Act). For purposes of the amendments to 
Rule 19b-4 and Form 19b-4 that the Commission is adopting today, and 
as generally used in this release, the term ``Security-Based Swap 
Submission'' means both the identifying information that clearing 
agencies are required to submit to the Commission pursuant to 
Exchange Act Section 3C(b)(2) for each security-based swap (or any 
group, category, type or class of security-based swaps) that such 
clearing agency plans to accept for clearing, and, in addition, the 
accompanying information that a clearing agency is required to 
provide pursuant to new Rule 19b-4(o)(3).
    Exchange Act Section 3C(b)(2)(C)(i) requires that the Commission 
make available to the public any submission received under Exchange 
Act Section 3C(b)(2)(A). 15 U.S.C. 78c3-1(b)(2)(C)(i) (as added by 
Section 763(a) of the Dodd-Frank Act). Also, the additional 
information that clearing agencies are required to provide pursuant 
to the amendments being adopted today with respect to Rule 19b-4 and 
Form 19b-4 in general will be published in the notice of the 
Security-Based Swap Submission and required to be posted on the 
clearing agency's Web site. The Commission notes, however, that a 
clearing agency may request confidential treatment of the additional 
information pursuant to Rule 24b-2 under the Exchange Act regarding 
information it desires be kept undisclosed. 17 CFR 240.24b-2.
---------------------------------------------------------------------------

    If the Commission makes a determination that a security-based swap 
is required to be cleared, then parties may not engage in such 
security-based swap without submitting it for clearing to a clearing 
agency that is either registered with the Commission (or exempt from 
registration) unless an exception to the clearing requirement 
applies.\15\ If the Commission determines that a security-based swap is 
not required to be cleared, such security-based swap may still be 
cleared on a non-mandatory basis by the clearing agency if the clearing 
agency has rules that permit it to clear such security-based swap. In 
addition, Exchange Act Section 3C(b)(1) provides that ``[t]he 
Commission on an ongoing basis shall review each security-based swap, 
or any group, category, type, or class of security-based swaps to make 
a determination that such security-based swap, or group, category, 
type, or class of security-based swaps should be required to be 
cleared'' (``Commission-initiated Review'').\16\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of the 
Dodd-Frank Act).
    \16\ See 15 U.S.C. 78c-3(b)(1) (as added by Section 763(a) of 
the Dodd-Frank Act). The Dodd-Frank Act does not require rulemaking 
with respect to Commission-initiated Reviews.
---------------------------------------------------------------------------

    Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing, 
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'' or 
``Title VIII''), provides for enhanced regulation of financial market 
utilities, such as clearing agencies, that manage or operate a 
multilateral system for the purpose of transferring, clearing or 
settling payments, securities or other financial transactions among 
financial institutions or between financial institutions and the 
financial market utility.\17\ The regulatory regime in Title VIII will 
only apply, however, to financial market utilities that the Financial 
Stability Oversight Council (``Council'') designates as systemically 
important (or likely to become systemically important) in accordance 
with Section 804 of the Clearing Supervision Act.\18\ Among other 
requirements prescribed under Title VIII, Section 806(e) of the 
Clearing Supervision Act (``Section 806(e)'') requires any financial 
market utility designated by the Council as systemically important to 
file 60 days advance notice of changes to its rules, procedures or 
operations that could materially affect the nature or level of risk 
presented by the financial market utility (``Advance Notice'').\19\ In 
addition, Section 806(e) requires each Supervisory Agency \20\ to adopt 
rules, in consultation with the Board, that define and describe when a 
designated financial market utility is required to file an Advance 
Notice with its Supervisory Agency.\21\
---------------------------------------------------------------------------

    \17\ The definition of ``financial market utility'' in Section 
803(6) of the Clearing Supervision Act contains a number of 
exclusions that include, but are not limited to, certain designated 
contract markets, registered futures associations, swap data 
repositories, swap execution facilities, national securities 
exchanges, national securities associations, alternative trading 
systems, security-based swap data repositories, security-based swap 
execution facilities, brokers, dealers, transfer agents, investment 
companies and futures commission merchants. 12 U.S.C. 5462(6)(B) (as 
added by Title VIII).
    \18\ Pursuant to Section 803(9) of the Clearing Supervision Act, 
a financial market utility is systemically important if the failure 
of or a disruption to the functioning of such 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. 12 U.S.C. 5462(9) (as added by Title VIII). Under 
Section 804 of the Clearing Supervision Act, the Council has the 
authority, on a non-delegable basis and by a vote of not fewer than 
two-thirds of the members then serving, including the affirmative 
vote of its chairperson, to designate those financial market 
utilities that the Council determines are, or are likely to become, 
systemically important. The Council may, using the same procedures 
as discussed above, rescind such designation if it determines that 
the financial market utility no longer meets the standards for 
systemic importance. Before making either determination, the Council 
is required to consult with the Board and the relevant Supervisory 
Agency (as determined in accordance with Section 803(8) of the 
Clearing Supervision Act). Finally, Section 804 of the Clearing 
Supervision Act sets forth the procedures for giving entities a 30-
day notice and the opportunity for a hearing prior to a designation 
or rescission of the designation of systemic importance. 12 U.S.C. 
5463 (as added by Title VIII). On July 18, 2011, the Council adopted 
final rules describing the criteria that will inform and the 
processes and procedures established under the Clearing Supervision 
Act for the Council's designation of financial market utilities as 
systemically important. See Authority to Designate Financial Market 
Utilities as Systemically Important, 76 FR 44763 (July 27, 2011).
    \19\ See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII).
    \20\ Section 803(8) of the Clearing Supervision Act defines the 
term ``Supervisory Agency'' in reference to the primary regulatory 
authority for the financial market utility. For example, Section 
803(8) of the Clearing Supervision Act provides that the Commission 
is the Supervisory Agency for any financial market utility that is a 
Commission-registered clearing agency. See 12 U.S.C. 5462(8) (as 
added by Title VIII). To the extent that an entity is both a 
Commission-registered clearing agency and registered with another 
agency, such as a CFTC-registered derivatives clearing organization, 
the statute requires the two agencies to agree on one agency to act 
as the Supervisory Agency, and if the agencies cannot agree on which 
agency has primary jurisdiction, the Council shall decide which 
agency is the Supervisory Agency for purposes of the Clearing 
Supervision Act. 12 U.S.C. 5462(8) (as added by Title VIII).
    \21\ See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII).
---------------------------------------------------------------------------

    Clearing agencies registered with the Commission are financial 
market utilities, as defined in Section 803(6) of Title VIII; \22\ 
thus, the Commission may be the Supervisory Agency of a clearing agency 
that is designated as systemically important by the Council 
(``designated clearing agency'').\23\ A clearing agency must begin 
filing Advance Notices pursuant to Section 806(e) once the Council 
designates the clearing agency as systemically important as of the 
compliance date of new Rule 19b-4(o), which the Commission is adopting 
today.
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 5462(6) (as added by Title VIII).
    \23\ See supra note 20 discussing the definition of 
``Supervisory Agency'' under the Dodd-Frank Act.
---------------------------------------------------------------------------

    On December 15, 2010, the Commission proposed amendments to Rule 
19b-4 under the Exchange Act to implement these new requirements by 
requiring that Security-Based Swap Submissions under Exchange Act 
Section 3C and Advance Notices under Section 806(e) be filed with the 
Commission on Form 19b-4.\24\ The Proposing Release also contained two 
new rules that were proposed in accordance with the authority granted 
to the Commission pursuant to Exchange Act Section 3C: (i) Proposed 
Rule 3Ca-1, which would establish a procedure by which the Commission, 
at the request of a counterparty or on its

[[Page 41605]]

own initiative, may stay the requirement that a security-based swap is 
subject to mandatory clearing, and (ii) proposed Rule 3Ca-2, which was 
intended to prevent evasions of the clearing requirement by specifying 
that security-based swaps required to be cleared must be submitted for 
central clearing to a clearing agency that functions as a CCP. Finally, 
the Commission proposed technical, conforming and clarifying amendments 
to Rule 19b-4 and Form 19b-4 to conform the rule and form with new 
deadlines and approval, disapproval and temporary suspension standards 
with respect to proposed rule changes filed under Section 19(b) of the 
Exchange Act, as modified by Section 916 of the Dodd-Frank Act 
(``Exchange Act Section 19(b)'').\25\
---------------------------------------------------------------------------

    \24\ See Process for Submissions for Review of Security-Based 
Swaps for Mandatory Clearing and Notice Filing Requirements for 
Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 
Applicable to All Self-Regulatory Organizations, Securities Exchange 
Act Release No. 34-63557 (Dec. 15, 2010), 75 FR 82490 (Dec. 30, 
2010) (``Proposing Release'').
    \25\ 15 U.S.C. 78s(b) (as amended by Section 916 of the Dodd-
Frank Act).
---------------------------------------------------------------------------

    The Commission received 19 comment letters on the Proposing Release 
from clearing agencies, financial institutions, industry trade groups 
and other interested persons.\26\ Commenters were generally supportive 
of the Commission's proposals. Some commenters did, however, urge the 
Commission to take a different approach to certain parts of the 
proposal. For example, a number of commenters provided suggestions on 
the proposed rules setting forth the information that clearing agencies 
will need to provide to the Commission in connection with a Security-
Based Swap Submission. As discussed below, the Commission is adopting 
these rules substantially as proposed, with certain modifications to 
address commenters' concerns.\27\
---------------------------------------------------------------------------

    \26\ Copies of comments received on the proposal are available 
on the Commission's Web site at: https://www.sec.gov/comments/s7-44-10/s74410.shtml.
    \27\ In addition to the changes discussed throughout this 
release, the Commission has made a number of minor typographical and 
clarifying revisions to the final rules as compared to what was 
included in the Proposing Release, including: (i) Inserting a 
missing word in each of new Rule 3Ca-1(d) and new Rule 19b-4(n)(3), 
(ii) amending the header to Rule 19b-4 to reflect the two new types 
of filings, (iii) replacing the word ``or'' with ``of'' in new Rule 
19b-4(n)(2)(iii), (iv) replacing the term ``designated financial 
market utility'' with ``designated clearing agency'' in new Rules 
19b-4(n)(2)(iii)(A) and (B) and (v) making numerous changes to the 
rule text to reflect the style requirements for proper inclusion of 
the final rules into the Code of Federal Regulations. Based on the 
non-substantive nature of these revisions, the Commission finds 
notice of the revisions is not necessary. See 5 U.S.C. 553(b).
---------------------------------------------------------------------------

II. Discussion

    The Commission is adopting rules to implement the new requirements 
imposed by Title VII and Title VIII discussed above. In accordance with 
the requirements set forth in Exchange Act Section 3C (as added by 
Title VII), the Commission is adopting amendments to Rule 19b-4 and 
Form 19b-4 and new Rule 3Ca-1 under the Exchange Act to establish 
processes for (i) how clearing agencies registered with the Commission 
must submit Security-Based Swap Submissions to the Commission for a 
determination by the Commission of whether the security-based swap (or 
group, category, type or class of security-based swaps) referenced in 
the submission is required to be cleared, and to determine the manner 
of notice the clearing agency must provide to its members of such 
submission and (ii) how the Commission may stay the requirement that a 
security-based swap is subject to mandatory clearing. The Commission 
also is adopting new Rule 3Ca-2 to prevent evasion of the clearing 
requirement.
    In addition, the Commission is adopting amendments to Rule 19b-4 
and Form 19b-4 to implement Section 806(e), which requires any 
designated clearing agency for which the Commission is the Supervisory 
Agency to provide an Advance Notice to the Commission. Moreover, the 
Commission is adopting amendments to Rule 19b-4 and Form 19b-4 to 
conform to the requirements specified in Exchange Act Section 19(b), as 
amended by Section 916 of the Dodd Frank Act.\28\ Section 916 provided 
for new deadlines by which the Commission must publish and act upon a 
proposed rule change submitted by a self-regulatory organization 
(``SRO'') and new standards for the approval, disapproval and temporary 
suspension of a proposed rule change. Finally, the Commission is 
adopting a number of technical and clarifying amendments to Rule 19b-4 
and Form 19b-4.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78s(b) (as amended by Section 916 of the Dodd-
Frank Act).
---------------------------------------------------------------------------

    As set forth in the Proposing Release, Security-Based Swap 
Submissions and Advance Notices will be required to be filed with the 
Commission on Form 19b-4 using the existing Electronic Form 19b-4 
Filing System (``EFFS''). Currently, EFFS is used by SROs, which 
include registered clearing agencies,\29\ to file proposed rule changes 
electronically with the Commission pursuant to Exchange Act Section 
19(b) and Rule 19b-4.\30\ The Commission is requiring clearing agencies 
to use EFFS for the filing of Security-Based Swap Submissions and 
Advance Notices because registered clearing agencies already use this 
system for Exchange Act Section 19(b) filings and because there are 
similarities between the existing requirement to file proposed rule 
changes with the Commission under Exchange Act Section 19(b) and the 
new requirements under the Dodd-Frank Act to file Security-Based Swap 
Submissions and under the Clearing Supervision Act to file Advance 
Notices.
---------------------------------------------------------------------------

    \29\ The definition of SRO in Section 3(a)(26) of the Exchange 
Act includes any registered clearing agency. 15 U.S.C. 78c(a)(26).
    \30\ SROs are required to file with the Commission, in 
accordance with rules prescribed by the Commission, copies of any 
proposed rule or any proposed change in, addition to, or deletion 
from the rules of the SRO (collectively referred to as a ``proposed 
rule change''). See 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

A. Security-Based Swap Submissions

1. Process for Making Security-Based Swap Submissions to the Commission
    Exchange Act Section 3C requires each clearing agency that plans to 
accept a security-based swap for clearing to file a Security-Based Swap 
Submission with the Commission for a determination by the Commission of 
whether the security-based swap (or any group, category, type or class 
of security-based swaps) referenced in the submission is required to be 
cleared.\31\ Accordingly, the Commission is adopting new Rule 19b-
4(o)(1), which sets forth the underlying requirement to make these 
submissions, substantially as proposed, with slight modifications made 
solely for the purpose of eliminating duplicative language in other 
parts of the rule and conforming the rule as necessary for certain 
other non-substantive changes made to other parts of Rule 19b-4 (as 
discussed below).
---------------------------------------------------------------------------

    \31\ See 15 U.S.C. 78c-3(b)(2) (as added by Section 763(a) of 
the Dodd-Frank Act).
---------------------------------------------------------------------------

    To facilitate this filing requirement, the Commission is adopting 
Rule 19b-4(o)(2) to require clearing agencies to use EFFS and Form 19b-
4 for Security-Based Swap Submissions. As discussed in the Proposing 
Release, registered clearing agencies, as SROs, are already required to 
file proposed rule changes on Form 19b-4 on EFFS. Using the same filing 
process for Security-Based Swap Submissions would leverage existing 
technology and reduce the resources clearing agencies would have to 
expend on meeting Commission filing requirements. Moreover, in 
situations where a single clearing agency action would trigger more 
than one filing requirement, allowing for each filing to be made 
pursuant to a single Form 19b-4 submission would improve efficiency in 
the filing process. The Commission is adopting the requirements in new 
Rule 19b-4(o)(2) substantially as proposed, with modifications made to 
allow for

[[Page 41606]]

the transition to EFFS filing. Specifically, the Commission is 
currently in the process of designing and implementing the Commission 
system upgrades that are necessary in order for Security-Based Swap 
Submissions to be filed on EFFS. The Commission expects the system 
upgrades to EFFS to be completed no later than December 10, 2012. In 
order to avoid delaying clearing agencies from making Security-Based 
Swap Submissions, the Commission has decided to provide for a temporary 
means of submission. As a result, the Commission is adopting Rule 19b-
4(o)(2) to provide that Security-Based Swap Submissions filed before 
December 10, 2012 must be filed with the Commission by submitting the 
Security-Based Swap Submission to a dedicated email inbox to be 
established by the Commission. A clearing agency that files a Security-
Based Swap Submission by email must include in the submission the same 
information that is required to be included for Security-Based Swap 
Submissions in the General Instructions for Form 19b-4, as such form 
has been modified by the rules the Commission is adopting today. 
Security-Based Swap Submissions filed on or after December 10, 2012 on 
Form 19b-4 would include the same substantive information.\32\ 
Additional conforming changes have been made to Rule 19b-4(o)(2) to 
accommodate the phased implementation of the submission process.
---------------------------------------------------------------------------

    \32\ The Commission notes that a clearing agency must also 
continue to meet the filing requirements of Rule 19b-4 and Form 19b-
4. For example, if the decision to clear a security-based swap 
referenced in a Security-Based Swap Submission also requires the 
clearing agency to file a proposed rule change under Exchange Act 
Section 19(b), the clearing agency must file the proposed rule 
change with the Commission on Form 19b-4 using EFFS and separately 
file the Security-Based Swap Submission with the Commission by 
email.
---------------------------------------------------------------------------

    The Commission did not receive any comments on its proposal to use 
EFFS and the existing Form 19b-4 filing process for Security-Based Swap 
Submissions. Some commenters did, however, raise questions related to 
other processes involving the clearing of security-based swaps, namely 
the interplay between the process by which the Commission will 
determine whether to approve a new security-based swap for clearing and 
the process by which the Commission will determine whether a security-
based swap is required to be cleared.\33\ Although these comments were 
not directly responsive to the proposed process by which clearing 
agencies will file Security-Based Swap Submissions, the Commission 
appreciates receiving feedback and questions from interested persons 
regarding how it should ultimately make determinations on which 
security-based swaps will be subject to mandatory clearing. Of the 
commenters that discussed the relationship between a mandatory clearing 
determination and an action approving the voluntary clearing of 
security-based swaps, one commenter requested that the Commission 
clarify the circumstances under which a clearing agency would be 
required to make a Security-Based Swap Submission with the Commission 
when it already has Commission-approved rules permitting it to clear 
the security-based swap in question.\34\ Another commenter requested 
that the Commission ``de-couple the determination that a clearing 
agency may clear a security-based swap from the determination that a 
security-based swap should be subject to a mandatory clearing 
obligation.'' \35\ Finally, one commenter asked for confirmation that 
``the Commission intends that a clearing agency `eligibility to clear' 
review is to be separate from and precede a security-based swap 
mandatory clearing review and [that] it is not intended that both 
reviews can commence simultaneously.'' \36\
---------------------------------------------------------------------------

    \33\ See, e.g., comment letter of CME Group, Inc. (Feb. 14, 
2011) (``CME Letter''); comment letter of LCH.Clearnet Group (Feb. 
14, 2011) (``LCH.Clearnet Letter''); comment letter of the 
International Swaps and Derivatives Association, Inc. (``ISDA'') 
(Feb. 14, 2011) (``ISDA Letter''); and comment letter of The Options 
Clearing Corporation (Feb. 14, 2011) (``OCC Letter'').
    \34\ See OCC Letter at 3.
    \35\ See LCH.Clearnet Letter at 2-3.
    \36\ See ISDA Letter at 4.
---------------------------------------------------------------------------

    In response to the three comments described above, the Commission 
notes that its process for determining whether a security-based swap is 
required to be cleared pursuant to Exchange Act Section 3C (which 
process is triggered by the filing of a Security-Based Swap Submission 
in accordance with the amendments being adopted today to Rule 19b-4 and 
Form 19b-4) is separate and distinct from the Commission's process for 
determining whether to approve a request by a clearing agency to 
commence voluntary clearing of a security-based swap (which process 
will be triggered by the filing of a proposed rule change pursuant to 
Exchange Act Section 19(b)).\37\ Each filing process, as well as each 
resulting Commission determination, is governed by separate sections of 
the Exchange Act, and each operates under separate timeframes. Thus, a 
clearing agency will be required to make a Security-Based Swap 
Submission regardless of whether it has existing rules permitting it to 
clear the security-based swap referred to in the submission.
---------------------------------------------------------------------------

    \37\ A more detailed discussion regarding the separation of the 
two filing requirements (and subsequent Commission actions) is 
contained in section II.F of this release. Notably, the requirement 
to submit a proposed rule change is not affected by the rules the 
Commission is adopting today related to the process for filing 
Security-Based Swap Submissions.
---------------------------------------------------------------------------

    However, the Commission anticipates that a clearing agency's 
decision to plan to clear a security-based swap (or any group, 
category, type or class of security-based swaps) could require filings 
under both Exchange Act Section 19(b) and Exchange Act Section 3C. This 
is because a clearing agency's decision to clear a security-based swap 
may require the clearing agency to change its rules and thus file with 
the Commission a proposed rule change under Exchange Act Section 19(b). 
In this scenario, the clearing agency would be required to file a 
Security-Based Swap Submission with the Commission for a determination 
by the Commission of whether the security-based swap (or any group, 
category, type or class of security-based swaps) referenced in the 
submission is required to be cleared.\38\ In other words, the two 
filing requirements are not mutually exclusive. Because a clearing 
agency may be required to file the same proposal under Exchange Act 
Section 3C and Exchange Act Section 19(b), and because there may be 
instances where the same information is required under both statutory 
provisions,\39\ the Commission believes that the most efficient use of 
the Commission's and clearing agencies' resources would be to require 
clearing agencies to use the existing EFFS system for these two 
related, though legally separate, types of filings (and, to the extent 
that the filings are made at the same time, pursuant to a single Form 
19b-4 submission).
---------------------------------------------------------------------------

    \38\ A clearing agency rule is defined broadly in the Exchange 
Act to include ``the constitution, articles of incorporation, 
bylaws, and rules, or instruments corresponding to the foregoing * * 
* and such of the stated policies, practices, and interpretations of 
such exchange, association, or clearing agency as the Commission, by 
rule, may determine to be necessary or appropriate in the public 
interest or for the protection of investors to be deemed to be rules 
of such exchange, association, or clearing agency.'' See 15 U.S.C. 
78c(a)(27). The Commission anticipates that a proposal to clear a 
new type, category or class of security-based swap will, in many 
cases, also be a change to the rules of a registered clearing agency 
that must be filed with the Commission for approval pursuant to 
Exchange Act Section 19(b).
    \39\ See infra section II.F.
---------------------------------------------------------------------------

    In addition, while the Commission recognizes the concerns raised by 
the commenter requesting that these two processes not commence

[[Page 41607]]

simultaneously,\40\ the Commission notes that the timing and sequencing 
of each of these processes ultimately will be determined based on the 
individual facts and circumstances of a particular filing. The 
Commission generally believes that when a security-based swap is 
submitted for review under Exchange Act Section 3C and concurrently 
filed under Exchange Act Section 19(b) as a proposed rule change, the 
two separate reviews will be carried out on the same general timeline 
and likely involving the same staff, both as a practical matter and to 
promote efficiency in the use of Commission resources. However, in 
circumstances where no proposed rule change filing would be required, 
such as a case where a clearing agency's rules already permit it to 
clear the security-based swap in question, EFFS and Form 19b-4 still 
will be used for the Security-Based Swap Submission.
---------------------------------------------------------------------------

    \40\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    The Commission also received a comment letter that attached a copy 
of a separate letter that the commenter submitted to the CFTC 
requesting, among other things, that the CFTC clarify that a designated 
clearing organization (``DCO'') would not be required to make any 
submission to the CFTC for swaps previously listed for clearing by a 
DCO prior to the date of enactment of Section 723 of the Dodd-Frank Act 
(``pre-enactment swaps'') or for any swaps that a DCO cleared prior to 
the effective date of the CFTC's final rules setting forth its swap 
submission process.\41\ While this commenter did not explicitly make a 
concurrent request with respect to security-based swaps, the Commission 
notes that it will need to have certain information regarding any 
security-based swap (or any group, category, type, or class of 
security-based swaps) listed for clearing by a clearing agency as of 
the date of enactment of Exchange Act Section 3C (i.e., July 21, 2010) 
(``pre-enactment security-based swaps'') in light of Exchange Act 
Section 3C(b)(2)(B) on which to base its determination of whether the 
security-based swap is required to be cleared.\42\ Accordingly, the 
Commission will continue to work directly with any clearing agency that 
listed pre-enactment security-based swaps as of the date of enactment 
of Exchange Act Section 3C to obtain any information necessary for 
making a mandatory clearing determination.\43\
---------------------------------------------------------------------------

    \41\ See Exhibit A to CME Letter.
    \42\ 15 U.S.C. 78c-3(b)(2)(B) (as added by Section 763(a) of the 
Dodd-Frank Act) (``[a]ny security-based swap or group, category, 
type, or class of security-based swaps listed for clearing by a 
clearing agency as of the date of enactment of this subsection shall 
be considered submitted to the Commission.'').
    \43\ The Commission notes that only two clearing agencies listed 
security-based swaps for clearing as of July 21, 2010. To begin the 
process of reviewing pre-enactment swaps, Commission staff has 
requested, pursuant to Section 17A of the Exchange Act, that each 
registered clearing agency submit information similar to that which 
will be required under Rule 19b-4(o)(3) so that the Commission can 
make the statutorily required determination. The Commission believes 
that receiving this information directly from the clearing agencies, 
as opposed to having to gather it from other sources, should help 
ensure that the Commission is able to make mandatory clearing 
determinations. Moreover, such information would be based on timely, 
accurate and comprehensive information obtained from the party most 
directly involved in the clearing process as it pertains to a 
particular security-based swap. In addition, providing this 
information in response to a Commission request is consistent with a 
clearing agency's general obligations in connection with its 
registration with the Commission. After the effective date of Rule 
19b-4(o) and once the Commission has verified that the previously 
submitted information is complete on its face, the Commission will 
publish the submissions for public comment. The Commission confirms 
that a clearing agency that is clearing pre-enactment security-based 
swaps may continue to clear them on a voluntary basis and does not 
have to wait for a determination from the Commission as to whether 
the security-based swaps are required to be cleared.
---------------------------------------------------------------------------

    Finally, one commenter requested that the Commission clarify that, 
to the extent that a rule of a clearing agency is changed ``not through 
any action of the clearing agency but through the action of ISDA or 
other external authority, such an event would not constitute a rule 
change or necessitate an additional [Security-Based Swap] Submission.'' 
\44\ This commenter noted that clearing agencies sometimes have rules 
that incorporate ISDA terms by reference or state that determinations 
made by an ISDA committee will apply to the security-based swaps that 
the clearing agency clears.\45\ In response to this commenter, the 
Commission notes that as a general matter, registered clearing agencies 
have an ongoing responsibility to ensure that their rules are in 
compliance with Section 17A of the Exchange Act, regardless of the 
source of, or justification behind, a new rule or rule change. 
Accordingly, the Commission would need to review actions on a case-by-
case basis to determine whether specific actions taken by ISDA or 
another industry organization would require the filing of a separate 
proposed rule change or Security-Based Swap Submission. In that 
respect, the Commission encourages clearing agencies to discuss 
particular actions with Commission staff in order to determine whether 
a filing is required.
---------------------------------------------------------------------------

    \44\ See OCC Letter at 4.
    \45\ See id.
---------------------------------------------------------------------------

a. Substance of Security-Based Swap Submissions: Consistency With 
Section 17A of the Exchange Act
    New Rule 19b-4(o)(3)(i), which the Commission is adopting as 
proposed, requires that each Security-Based Swap Submission contain a 
statement explaining how the submission is consistent with Section 17A 
of the Exchange Act. The requirement to submit the information 
specified in Rule 19b-4(o)(3)(i) is intended to assist the Commission 
in its review of the Security-Based Swap Submission in accordance with 
the standards set forth in Exchange Act Section 3C(b)(4)(A).\46\ 
Section 17A specifies, among other things, that the Commission is 
directed, having due regard for the public interest, the protection of 
investors, the safeguarding of securities and funds and maintenance of 
fair competition among brokers and dealers, clearing agencies, and 
transfer agents, to use its authority to facilitate the establishment 
of a national system for the prompt and accurate clearance and 
settlement of transactions in securities.\47\
---------------------------------------------------------------------------

    \46\ See 15 U.S.C. 78c-3(b)(4)(A) (as added by Section 763(a) of 
the Dodd-Frank Act) (``[i]n reviewing a [Security-Based Swap 
Submission], the Commission shall review whether the submission is 
consistent with section 17A.'').
    \47\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    In complying with this requirement, registered clearing agencies 
should be able to utilize their prior experience with the requirement 
to comply with a similar rule in the context of filing proposed rule 
changes with the Commission pursuant to Exchange Act Section 19(b). 
Specifically, Exchange Act Section 19(b)(2)(C)(i) requires the 
Commission, prior to approving a proposed rule change filed by any SRO 
(including a registered clearing agency), to determine that the 
proposed rule change is consistent with the requirements of the 
Exchange Act (which would include Section 17A) and the rules and 
regulations issued thereunder applicable to such organization.\48\ In 
connection with proposed rule changes, an SRO is required to ``explain 
why the proposed rule change is consistent with the requirements of the 
[Exchange] Act and the rules and regulations thereunder applicable to 
the [SRO]. A mere assertion that the proposed rule change is consistent 
with those requirements is not sufficient.'' \49\
---------------------------------------------------------------------------

    \48\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \49\ Item 3(b) of the General Instructions for Form 19b-4. 17 
CFR 240.819. See also Exchange Act Section 19(b), which requires 
that an SRO provide a statement of the basis of the proposed rule 
change and provides that the Commission shall approve a proposed 
rule change only if it finds that it is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder. 15 U.S.C. 78s(b).

---------------------------------------------------------------------------

[[Page 41608]]

    Presently, in complying with the requirement to file proposed rule 
changes with the Commission pursuant to Exchange Act Section 19(b), 
registered clearing agencies are required to specify, among other 
things, how the proposed rule change is consistent with the 
requirements under Section 17A(b)(3) of the Exchange Act. In addition, 
all registered clearing agencies must comply with the standards in 
Section 17A of the Exchange Act, which include requirements under 
Section 17A(b)(3) of the Exchange Act to maintain rules for promoting 
the prompt and accurate clearance and settlement of securities 
transactions, assuring the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible, fostering cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions, 
removing impediments to and perfecting the mechanism of a national 
system for the prompt and accurate clearance and settlement of 
securities transactions, and, in general, protecting investors and the 
public interest.\50\ A registered clearing agency also is required 
under Section 17A(b)(3) of the Exchange Act to provide fair access to 
clearing and to have the capacity to facilitate the prompt and accurate 
clearance and settlement of securities transactions and derivative 
agreements, contracts, and transactions for which it is responsible, as 
well as to safeguard securities and funds in its custody or control or 
for which it is responsible.\51\
---------------------------------------------------------------------------

    \50\ See 15 U.S.C. 78q-1(b)(3)(F).
    \51\ See 15 U.S.C. 78q-1(b)(3)(A), (B) and (F).
---------------------------------------------------------------------------

    The Commission did not receive any comments on the requirement 
contained in Rule 19b-4(o)(3)(i) that a clearing agency explain how the 
Security-Based Swap Submission is consistent with Section 17A of the 
Exchange Act. However, one commenter recommended that the Commission 
provide further specificity as to precisely what elements of Section 
17A(b)(3) of the Exchange Act ``are relevant to the decision to clear a 
security-based swap and thus must be addressed in a clearing agency's 
submission.'' \52\ Because each Security-Based Swap Submission will be 
tailored to a particular security-based swap (or group, category, type 
or class of security-based swaps) and to the clearing arrangement 
established by the particular clearing agency filing the submission, 
each submission will raise different issues for the Commission to 
consider. As such, the Commission is unable to state definitely which 
elements of Section 17A(b)(3) would be relevant to individual 
submissions. However, the Commission notes that all registered clearing 
agencies are required to maintain compliance with each of the standards 
set forth in Section 17A of the Exchange Act as a condition to 
registration, and a clearing agency should have considered whether 
clearing a security-based swap (or group, category, type or class of 
security-based swaps) is consistent with the requirements of Section 
17A of the Exchange Act at the time the clearing agency first reached a 
decision to clear the particular instrument. Accordingly, and in 
response to the question raised by the commenter, a clearing agency 
should consider whether it needs to include a statement in the 
submission discussing the process the clearing agency followed when it 
reached its initial decision to clear the security-based swap (or 
group, category, type or class of security-based swaps). To the extent 
possible, such discussion could include information on the clearing 
agency's consideration of the factors set forth in Rule 19b-4(o)(3)(ii) 
at the time the clearing agency decided to commence clearing the 
product and the weight, if any, each such factor (or other factors 
determined to be appropriate by the clearing agency) was given in 
reaching its conclusion. If additional procedures were followed, over 
and above those associated with other types of rule changes or designed 
to assist the clearing agency in considering the particular risk or 
other characteristics of the security-based swap (or group, category, 
type or class of security-based swaps) that is the subject of the 
submission, the clearing agency could specify such procedures. The 
Commission also encourages clearing agencies to specify and briefly 
describe any departures from processes contemplated by clearing agency 
rules in reaching a decision to commence clearing the security-based 
swap, such as exercises of discretion not to consult established 
management committees, board committees or participant committees.
---------------------------------------------------------------------------

    \52\ See CME Letter at 2, n.1. In its comment letter, CME Group, 
Inc. states that Exchange Act Section 3C ``governs the Commission's 
responsibility to determine whether a security-based swap that a 
clearing agency chooses to clear may be cleared'' and also 
``requires the Commission to make determinations respecting whether 
a security-based swap is subject to the mandatory clearing 
requirement.'' The Commission notes, however, that Exchange Act 
Section 3C only relates to mandatory clearing determinations. The 
question of whether a clearing agency may clear a security-based 
swap will depend on whether clearing of the security-based swap is 
permitted under the clearing agency's rules. To the extent that a 
clearing agency's rules must also be modified to permit clearing of 
a new security-based swap (or group, category, type or class of 
security-based swaps), such change would need to be approved as a 
proposed rule change governed by Exchange Act Section 19(b). Other 
than certain technical changes made pursuant to Section 916 of the 
Dodd-Frank Act, the process for submitting proposed rule changes 
with the Commission is not being modified by the rules being adopted 
today. See supra note 37 and accompanying text.
---------------------------------------------------------------------------

    To the extent relevant to its initial conclusion to clear a 
security-based swap, the clearing agency could include a clear 
statement whether it believes that the security-based swap (or group, 
category, type or class of security-based swaps) that is the subject of 
the Security-Based Swap Submission should or should not be required to 
be cleared by the Commission, together with a discussion of the reasons 
for its belief. If the Commission's decision to require or not to 
require the security-based swap (or group, category, type or class of 
security-based swaps) that is the subject of the submission to be 
cleared would or would not materially affect the clearing agency's 
judgment that the clearing proposal is consistent with Section 17A of 
the Exchange Act, the clearing agency is encouraged to include a 
statement of this nature and explain why this is the case.\53\
---------------------------------------------------------------------------

    \53\ As compliance with each of the standards of Section 17A of 
the Exchange Act is required of each registered clearing agency, the 
information specified throughout this paragraph is expected to be 
provided by each clearing agency for any security-based swap (or 
group, category, type or class of security-based swaps) being 
considered by the Commission, including pre-enactment swaps.
---------------------------------------------------------------------------

b. Substance of Security-Based Swap Submissions: Quantitative and 
Qualitative Factors
    The Commission also is adopting new Rule 19b-4(o)(3)(ii) to specify 
what qualitative and quantitative factors should be discussed by a 
clearing agency in its Security-Based Swap Submission. This rule is 
being adopted substantially as proposed, with certain non-substantive 
changes having been made to correct paragraph numbering. To provide 
context for the requirements to provide this information, Exchange Act 
Section 3C(b)(4)(B) requires the Commission, prior to making a 
mandatory clearing determination, to analyze five specific qualitative 
and quantitative factors.\54\ New Rule 19b-4(o)(3)(ii) requires 
clearing agencies to submit information to assist the Commission in its 
consideration of the five factors specified in Exchange Act

[[Page 41609]]

Section 3C(b)(4)(B), including, but not limited to:
---------------------------------------------------------------------------

    \54\ See 15 U.S.C. 78c-3(b)(4)(B)(i)-(v) (as added by Section 
763(a) of the Dodd-Frank Act).
---------------------------------------------------------------------------

    (i) The existence of significant outstanding notional exposures, 
trading liquidity and adequate pricing data.
    (ii) The availability of a rule framework, capacity, operational 
expertise and resources, and credit support infrastructure to clear the 
contract on terms that are consistent with the material terms and 
trading conventions on which the contract is then traded.
    (iii) The effect on the mitigation of systemic risk, taking into 
account the size of the market for such contract and the resources of 
the clearing agency available to clear the contract.
    (iv) The effect on competition, including appropriate fees and 
charges applied to clearing.
    (v) The existence of reasonable legal certainty in the event of the 
insolvency of the relevant clearing agency or one or more of its 
clearing members with regard to the treatment of customer and security-
based swap counterparty positions, funds, and property.
    Some commenters requested that the Commission limit the breadth of 
the information that clearing agencies will be required to submit to 
the Commission pursuant to Rule 19b-4(o)(3)(ii) pertaining to the five 
qualitative and quantitative factors.\55\ For example, one commenter 
urged Commission staff to exercise judgment and flexibility in 
determining the scope of information required in connection with the 
five qualitative and quantitative factors, noting that some of these 
factors would require ``at most a very cursory mention'' in a specific 
Security-Based Swap Submission, particularly where the responsive 
information is already well-known to the Commission or where the 
Commission has extensive knowledge of the clearing agency's rules or 
operations.\56\ Further, this commenter requested that the Commission 
clarify that when a Rule 19b-4 filing is both a proposed rule change 
and a Security-Based Swap Submission, any information that is self-
evident from the text of the proposed rule need not be repeated for the 
Security-Based Swap Submission aspect of the filing.\57\
---------------------------------------------------------------------------

    \55\ See, e.g., CME Letter, LCH.Clearnet Letter and OCC Letter.
    \56\ See OCC Letter at 3-5.
    \57\ See id.
---------------------------------------------------------------------------

    In response to this comment, the Commission reiterates that 
registered clearing agencies will be required to submit Security-Based 
Swap Submissions for the sole purpose of submitting the information 
necessary for the Commission to determine, pursuant to Exchange Act 
Section 3C(b)(2)(C)(ii), whether the security-based swap described in 
the submission is required to be cleared (i.e., subject to mandatory 
clearing). As discussed in section II.A.1 and throughout this release, 
the process by which the Commission will determine whether a security-
based swap is required to be cleared following the submission of a 
Security-Based Swap Submission is separate and distinct from the 
process by which the Commission will determine whether to approve a new 
security-based swap for voluntary clearing following the filing of a 
proposed rule change pursuant to Exchange Act Section 19(b).\58\ In 
cases where the Rule 19b-4 filing is both a proposed rule change and a 
Security-Based Swap Submission, each filing should be complete in 
accordance with the particular rules applicable to the different types 
of filings. At the same time, the Commission agrees with this commenter 
that clearing agencies should not be required to provide unnecessarily 
duplicative information. Accordingly, if more than one type of filing 
is made pursuant to a single Form 19b-4 submission, clearing agencies 
may be able to refer to and cross-reference relevant information in the 
proposed rule change that also is relevant to the Security-Based Swap 
Submission filing so long as the requirements of each applicable rule 
are individually satisfied and if the clearing agency clearly explains 
how the information included in the proposed rule change is applicable 
to the specific information required to be provided in the Security-
Based Swap Submission.
---------------------------------------------------------------------------

    \58\ As previously noted, although the Commission will accept 
both Security-Based Swap Submissions and proposed rule changes on 
Form 19b-4 through EFFS for the sake of efficiency, each filing will 
be considered a separate submission to be reviewed in accordance 
with the appropriate statutory provision--even to the extent that 
both filings are made at the same time using the same form.
---------------------------------------------------------------------------

    Another commenter suggested that the Commission should limit the 
information required to be in a Security-Based Swap Submission to 
include only information addressing whether clearing a security-based 
swap comports with Section 17A of the Exchange Act.\59\ In particular, 
this commenter maintained that the qualitative and quantitative factors 
set forth in Exchange Act Section 3C(b)(4)(B) were most relevant to the 
Commission in making its determination as to whether a security-based 
swap is required to be cleared and less relevant in the context of a 
submission by a clearing agency seeking approval to clear a security-
based swap.\60\ This commenter maintained that requiring clearing 
agencies to perform an analysis of the qualitative and quantitative 
factors set forth in Exchange Act Section 3C(b)(4)(B) in connection 
with seeking approval to clear a security-based swap would be ``broad 
and burdensome,'' noting that the Commission has a great deal of 
information necessary to address the statutory factors by virtue of the 
extensive reporting requirements under the Dodd-Frank Act.\61\
---------------------------------------------------------------------------

    \59\ See CME Letter at 3. In addition, the CME Letter attached 
as an exhibit a comment letter, dated Jan. 3, 2011, that CME Group, 
Inc. submitted to the CFTC in connection with a similar set of 
proposed rules. See Exhibit A to CME Letter. In this letter, CME 
Group, Inc. recommended that the CFTC delete a number of items 
required to be included in a submission to the CFTC in connection 
with a mandatory clearing determination for swaps. These recommended 
deletions included each of the five qualitative and quantitative 
factors set forth in Section 2(h)(2)(D) of the Commodity Exchange 
Act (which are identical to the factors contained in Exchange Act 
Section 3C(b)(4)(B)). Specifically, CME Group, Inc. expressed its 
belief that these requirements were unclear, unduly burdensome, 
could defeat the purposes of the Dodd-Frank Act and, in some cases, 
called for information that the clearing agency does not possess.
    \60\ See id.
    \61\ See id.
---------------------------------------------------------------------------

    Similarly, a separate commenter requested that the Commission amend 
the information requirements in the proposed rule ``such that a 
clearing agency is required to include in its submission only that 
information which is necessary for determining the suitability of a 
security-based swap for clearing and the eligibility of a clearing 
agency to clear that security-based swap (but not the information 
required to support the determination of whether a security-based swap 
should be subject to a mandatory clearing obligation).'' \62\ In 
furtherance of this suggestion, the commenter suggested specific 
deletions to the information requirements in the proposed rules that 
were based on the five statutory factors set forth in Exchange Act 
Section 3C(b)(4)(B).\63\
---------------------------------------------------------------------------

    \62\ See LCH.Clearnet Letter at 3.
    \63\ See id. at 4
---------------------------------------------------------------------------

    In response to the commenters discussed in the two preceding 
paragraphs, the Commission notes that the factors specified in new Rule 
19b-4(o)(3)(ii) are identical to the qualitative and quantitative 
factors that the Commission is required to consider pursuant to 
Exchange Act Section 3C(b)(4)(B) when determining whether a security-
based swap (or group, category, type or class of security-based swaps) 
will be subject to a mandatory clearing requirement. Moreover, and in 
response to the commenter that requested that the information required 
in the submission relate only to the suitability of the security-based 
swap for clearing and the

[[Page 41610]]

eligibility of the clearing agency to clear the security-based swap, 
the Commission notes that the information related to the statutory 
factors are necessary in connection with the Commission's statutory 
obligation to make a mandatory clearing determination. The Commission 
believes that it is appropriate to require such information to be 
included in Security-Based Swap Submissions because clearing agencies 
ordinarily have primary access to this information, making it easier 
for them to submit the information to the Commission than it would be 
for the Commission to gather the information from other sources, 
resulting in a more effective and efficient process for both the 
Commission and clearing agencies.
    Furthermore, the Commission does not believe that requiring 
clearing agencies to submit information responsive to new Rule 19b-
4(o)(3)(ii) would be overly burdensome or require clearing agencies to 
provide material that is not in their possession. In particular, and 
based on its prior experience with the operations and governance of 
clearing agencies, the Commission would expect that clearing agencies 
would consider the factors set forth in the statute and the rule as 
part of their decision-making process, particularly in connection with 
determining whether to list the relevant security-based swaps for 
clearing (and knowing that such listing could result in the Commission 
determining that the security-based swap may be required to be 
cleared). Based on all of the reasons outlined above, particularly the 
requirement that the Commission consider each of the factors set forth 
in Exchange Act Section 3C(b)(4)(B) prior to making a mandatory 
clearing determination, each Security-Based Swap Submission will be 
required to include information regarding the factors listed in 
paragraphs (A) through (E) of Rule 19b-4(o)(3)(ii).
    In addition, the Proposing Release included examples of information 
that a clearing agency ``could'' consider including in its Security-
Based Swap Submission in order to respond to the quantitative and 
qualitative factors specified in Exchange Act Section 3C.\64\ Some 
commenters urged the Commission to incorporate these examples into its 
final rules, thereby requiring all of this information to be included 
in a clearing agency's Security-Based Swap Submission.\65\ For example, 
one commenter suggested that the proposed rules did not include 
requirements to ensure that Security-Based Swap Submissions provide 
sufficiently detailed information; this commenter stated that the range 
of information discussed in the proposed rule as information a clearing 
agency ``could'' include appears to be essential information that the 
Commission could use to ``efficiently and effectively determine whether 
the clearing agency should be allowed to clear the swap, or whether the 
swap should be required to clear.'' \66\ A second commenter requested 
that the Commission, at a minimum, replace the word ``could'' with 
``shall'' in the list of disclosures required to be included in a 
Security-Based Swap Submission.\67\
---------------------------------------------------------------------------

    \64\ See Proposing Release, supra note 24, at section II.A.1.b.
    \65\ See, e.g., comment letter of Americans for Financial Reform 
(Feb. 14, 2011) (``AFR Letter''); comment letter of American 
Federation of State, County and Municipal Employees (``AFSCME'') 
(Feb. 14, 2011) (``AFSCME Letter''); and comment letter of Better 
Markets, Inc. (Feb. 14, 2011) (``Better Markets Letter'').
    \66\ See AFR Letter at 2.
    \67\ See AFSCME Letter at 3-4. While AFSCME suggested that all 
of the examples identified in the release be incorporated into the 
rule, it highlighted as particularly relevant the reference to 
information on product specifications, including copies of any 
standardized legal documentation, generally accepted contract terms, 
standard practices for managing and communicating any life cycle 
events associated with the security-based swap and related 
adjustments, and the manner in which the information contained in 
the confirmation of the security-based swap trade is transmitted.
---------------------------------------------------------------------------

    A third commenter urged the Commission to ``require every clearing 
agency to submit all of the information identified in the [Proposing] 
Release and in the instructions as potentially relevant to the five 
factors'' set forth in Exchange Act Section 3C(b)(4)(B).\68\ The same 
commenter also requested that the proposed rules be expanded to require 
clearing agencies to submit additional information regarding pricing, 
liquidity and risk management as part of a Security-Based Swap 
Submission, and to include an explicit statement in the final rules 
whereby the Commission would make clear that ``a given level of 
contract-specific systemic risk is not a prerequisite for a 
determination that a security-based swap is subject to mandatory 
clearing.'' \69\ Finally, this commenter urged the Commission to 
require clearing agencies to include information regarding the 
decision-making process they follow when deciding whether or not to 
make a Security-Based Swap Submission.\70\
---------------------------------------------------------------------------

    \68\ See Better Markets Letter at 3-5.
    \69\ See id at 5-7. The additional information suggested by 
Better Markets, Inc. (``Better Markets'') includes: (1) Information 
about any price indices used for pricing the security-based swap; 
(2) information regarding liquidity over the life of a security-
based swap; (3) information regarding risk management procedures, 
particularly with respect to cross-contract netting and credits 
relating to initial margin, including correlations to be used and 
algorithms that result in the netting or credits; and (4) certain 
information on the hedging relationships between the security-based 
swaps proposed to be cleared and other security-based swaps that are 
cleared by the clearing agency or by other clearing agencies.
    \70\ See Better Markets Letter at 7-8. Specifically, Better 
Markets urged the Commission to require clearing agencies to: (1) 
Include a summary of member support for clearing the security-based 
swap as proposed, as well as member objections; (2) notify the 
Commission and the public of the type of security-based swap being 
considered at the time it notifies members of the submission or 
possible submission; (3) submit input from both the public and 
customers regarding the decision to make a submission, which can be 
considered alongside member views (including the methods used to 
solicit such input and the outcome); and (4) notify the Commission 
of the decision not to make a submission if the decision is made 
after the clearing agency risk committee (or similar body) solicits 
input from members, customers or others regarding a submission, 
which notification should include the objections and supporting 
statements received regarding the proposed submission. Similarly, 
Americans for Financial Reform urged the Commission to require 
clearing agencies to file submissions (which should be made publicly 
available) when the clearing agency ``rejects a class of swaps for 
clearing.'' See AFR Letter at 2.
    While the Commission has provided full responses to these 
comments later in this section, with respect to the commenters 
requesting that a clearing agency notify the Commission when it 
decides not to make a Security-Based Swap Submission or when it 
``rejects a class'' of security-based swaps for clearing, the 
Commission notes that, to the extent that these commenters' 
suggestion is directed toward the Commission's ability to ensure 
that clearing agencies do not reject new security-based swaps for 
clearing for improper reasons, such as anticompetitive reasons, 
other provisions of the Exchange Act provide the Commission with the 
ability to investigate and address potential anticompetitive 
behavior if it occurs. For example, Section 17A of the Exchange Act 
provides that clearing agency rules must not be designed to permit 
unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency and that the rules 
may not impose a burden of competition that is not necessary or 
appropriate in furtherance of the provisions of the Exchange Act. 
See 15 U.S.C. 78q-1(b)(3)(F) and (I). All proposed rule changes 
filed by clearing agency with the Commission under Exchange Act 
Section 19(b)(2) are subject to approval by the Commission and all 
Security-Based Swap Submissions will be subject to Commission review 
to determine whether a security-based swap should be required to be 
cleared. Pursuant to Rule 17a-1, a registered clearing agency must 
keep copies of all documents made or received by it in the course of 
its business as such and provide copies of any such documents to the 
Commission upon request. See 17 CFR 17a-1. The Commission has broad 
authority under Section 17(b) of the Exchange Act to conduct 
examinations of clearing agencies. See 15 U.S.C. 78q. And 
ultimately, under Section 19(h) of the Exchange Act, the Commission 
has the authority to bring an enforcement action against a clearing 
agency that has violated or is unable to comply with any provision 
of the Exchange Act, the rules or regulations thereunder, or its own 
rules. See 15 U.S.C. 78s.
---------------------------------------------------------------------------

    In response to the three commenters discussed above, the Commission 
believes that the requirements contained in new Rule 19b-4(o)(3)(ii) 
strike an appropriate balance by requiring clearing agencies to submit 
the

[[Page 41611]]

information necessary to allow the Commission to make informed and 
timely mandatory clearing determinations. In particular, the Commission 
believes that the information requirements contained in Rule 19b-
4(o)(3)(ii) provide for the submission of a comprehensive set of 
information to be included in a preliminary Security-Based Swap 
Submission. For example, the Commission believes that most of the 
information discussed in the proposed rule as information a clearing 
agency ``could'' include in a Security-Based Swap Submission is already 
contemplated by the rules the Commission is adopting today. In fact, in 
the discussion set forth both the Proposing Release and in the 
paragraph immediately below, the Commission has attempted to tie each 
example identified as information a clearing agency ``could'' include 
in a Security-Based Swap Submission to a specific section of new Rule 
19b-4(o)(3)(ii). As a result, the Commission does not believe that it 
is necessary to incorporate this information directly into the rule 
text, as suggested by three commenters.\71\ Similarly, the Commission 
believes that the information identified by the commenter who suggested 
that the final rules be expanded by requiring, among other things, 
information regarding pricing, liquidity, risk management, and certain 
decision-making processes also is generally contemplated by one of the 
requirements of new Rule 19b-4(o).\72\ Moreover, to the extent that 
information suggested to be included in the final rules by commenters 
is not addressed in other provisions (including, for example, 
information on certain hedging relationships between security-based 
swaps and information on decisions not to accept a security-based swap 
for clearing) or omitted from a Security-Based Swap Submission, the 
Commission notes that it can require the production of additional 
information from clearing agencies pursuant to Rule 19b-4(o)(6) (to the 
extent that the information is requested in connection with an actual 
Security-Based Swap Submission) or in all cases pursuant to the 
Commission's general supervisory authority to the extent that it 
believes such information will be relevant to its consideration of the 
Security-Based Swap Submission or otherwise.
---------------------------------------------------------------------------

    \71\ See supra notes 65 to 68 and accompanying text.
    \72\ See supra notes 69 to 70 and accompanying text. For 
example, Better Markets suggested that the Commission require 
clearing agencies to submit certain information on price indices 
used for pricing the security-based swap and information on 
liquidity over the life of the security-based swap. The Commission 
believes that this information generally falls within the scope of 
new Rule 19b-4(o)(3)(ii)(A), which requires the clearing agency to 
provide information about the existence of significant outstanding 
notional exposures, trading liquidity and adequate pricing data. In 
addition, Better Markets suggested that the Commission require 
clearing agencies to submit certain information regarding the 
clearing agency's risk management procedures which the Commission 
believes is already contemplated by new Rule19b-4(o)(3)(ii)(B) and 
(C), which require the clearing agency to provide information about 
the availability of a rule framework, capacity, operational 
expertise and resources, and credit support infrastructure to clear 
the contract on terms that are consistent with the material terms 
and trading conventions on which the contract is then traded as well 
as the effect on the mitigation of systemic risk, taking into 
account the size of the market for such contract and the resources 
of the clearing agency available to clear the contract. With respect 
to the information suggested by Better Markets regarding certain 
decision-making processes used by the clearing agency when it makes 
a Security-Based Swap Submission, the Commission believes that much 
of this information is contemplated by new Rule 19b-4(o)(3)(i), 
which requires clearing agencies to explain how the submission is 
consistent with Section 17A of the Exchange Act.
---------------------------------------------------------------------------

    Nevertheless, and as described in the Proposing Release, the 
Commission believes that while the content of each Security-Based Swap 
Submission will depend on the specific product referenced therein and 
the particular set of circumstances related to the clearing 
arrangement, many common types of information likely will be responsive 
to a large number of these types of submissions. For example, with 
respect to Rule 19b-4(o)(3)(ii)(A), a statement describing the 
existence of outstanding notional exposures, trading liquidity and 
adequate pricing data could address pricing sources, models and 
procedures demonstrating an ability to obtain price data to measure 
credit exposures in a timely and accurate manner, as well as measures 
of historical market liquidity and trading activity, and expected 
market liquidity and trading activity if the security-based swap is 
required to be cleared (including information on the sources of such 
measures). With respect to Rule 19b-4(o)(3)(ii)(B), a statement 
describing the availability of a rule framework could include a 
discussion of the rules, policies or procedures applicable to the 
clearing of the relevant security-based swap. Additionally, a 
discussion of credit support infrastructure could include the methods 
to address and communicate requests for, and posting of, collateral. 
With respect to Rule 19b-4(o)(3)(ii)(C), a discussion of systemic risk 
could include a statement on the clearing agency's risk management 
procedures including, among other things, the measurement and 
monitoring of credit exposures, initial and variation margin 
methodology, methodologies for stress testing and back testing, 
settlement procedures and default management procedures. With respect 
to Rule 19b-4(o)(3)(ii)(D), a discussion of fees and charges could 
address any volume incentive programs that may apply or impact the fees 
and charges. With respect to Rule 19b-4(o)(3)(ii)(E), a discussion of 
legal certainty in the event of an insolvency could address segregation 
of accounts and all other customer protection measures under 
insolvency.
    In addition, the Commission continues to believe that when 
describing the security-based swap (or group, category, type or class 
of security-based swaps) referenced in the Security-Based Swap 
Submission, the clearing agency could discuss the relevant product 
specifications, including any standardized legal documentation, 
generally accepted contract terms,\73\ standard practices for managing 
and communicating any life cycle events associated with the security-
based swap and related adjustments,\74\ and the manner in which the 
information contained in the confirmation of the security-based swap 
trade is transmitted. Further, the clearing agency also could discuss 
its financial and operational capacity to provide clearing services to 
all customers potentially subject to the clearing requirements as 
applicable to the particular security-based swap. Finally, the clearing 
agency could include an analysis of the effect of a clearing 
requirement on the market for the group, category, type, or class of 
security-based swaps, both domestically and globally, including the 
potential effect on market liquidity, trading activity, use of 
security-based swaps by direct and indirect market participants and any 
potential market disruption or benefits. This analysis could include 
whether the members of the clearing agency are operationally and 
financially capable of absorbing clearing business (including indirect 
access market participants) that may result from a determination that 
the security-based swap (or group, category, type or class of security-
based swaps) is required to be cleared.\75\
---------------------------------------------------------------------------

    \73\ For example, for some security-based swaps, industry 
standard documentation would include the applicable ISDA Master 
Agreement and any related asset-class-specific definitions.
    \74\ The Commission included a definition of ``life cycle 
event'' in proposed Regulation SBSR. See Regulation SBSR--Reporting 
and Dissemination of Security-Based Swap Information, Securities 
Exchange Act Release No. 63346 (Nov. 19, 2010), 75 FR 75208 (Dec. 2, 
2010).
    \75\ In addition to the information required to be submitted to 
the Commission pursuant to new Rule 19b-4(o)(3), and any information 
identified in this release as an example of information that 
clearing agencies may wish to provide in their submissions, the 
Commission may also require additional information as necessary to 
assess any of the factors it determines to be appropriate in order 
to make a determination of whether the clearing requirement applies. 
See infra section II.A.1.g (discussing new Rule 19b-4(o)(6)).

---------------------------------------------------------------------------

[[Page 41612]]

    The Commission believes that basing the information submission 
requirements in new Rule 19b-4(o)(3)(ii) on the five statutory factors 
set forth in Exchange Act Section 3C(b)(4)(B), and supplementing these 
requirements by providing the above examples of information that the 
Commission believes could be responsive, is an appropriate approach to 
implementing the statute because it retains the flexibility provided 
for in the Proposing Release to allow clearing agencies to address the 
statutory factors based on the facts and circumstances of a particular 
submission without requiring specific data points that could be overly 
prescriptive at the outset. At the same time, the Commission recognizes 
that a requirement that does not provide enough detail could result in 
an inefficient use of clearing agency and Commission resources if 
Security-Based Swap Submissions contain a large amount of unnecessary 
or irrelevant information. To that extent, the Commission encourages 
clearing agencies to discuss, at least initially, prospective Security-
Based Swap Submissions with Commission staff to help determine what 
materials would be responsive to the requirements of new Rule 19b-
4(o)(3)(ii) and Exchange Act Section 3C(b)(4)(B) in the context of a 
particular submission.
c. Substance of Security-Based Swap Submissions: Open Access
    Exchange Act Section 3C also requires that the rules of a clearing 
agency that clears security-based swaps subject to the clearing 
requirement provide for open access.\76\ In the course of reviewing a 
Security-Based Swap Submission, the Commission may assess whether a 
clearing agency's rules provide for open access, particularly with 
respect to the relevant Security-Based Swap Submission. Accordingly, 
new Rule 19b-4(o)(3)(ii), which is being adopted as proposed, requires 
that a Security-Based Swap Submission include a statement regarding how 
the clearing agency's rules:
---------------------------------------------------------------------------

    \76\ See 15 U.S.C. 78c-3(a)(2) (``OPEN ACCESS.--The rules of a 
clearing agency described in paragraph (1) shall--(A) prescribe that 
all security-based swaps submitted to the clearing agency with the 
same terms and conditions are economically equivalent within the 
clearing agency and may be offset with each other within the 
clearing agency; and (B) provide for non-discriminatory clearing of 
a security-based swap executed bilaterally or on or through the 
rules of an unaffiliated national securities exchange or security-
based swap execution facility.'').
---------------------------------------------------------------------------

    (i) Prescribe that all security-based swaps submitted to the 
clearing agency with the same terms and conditions are economically 
equivalent within the clearing agency and may be offset with each other 
within the clearing agency; and
    (ii) Provide for non-discriminatory clearing of a security-based 
swap executed bilaterally or on or through the rules of an unaffiliated 
national securities exchange or security-based swap execution facility.
    One commenter requested that the Commission delete the requirement 
that a clearing agency submit information responsive to the factors 
related to open access in its Security-Based Swap Submission on the 
basis that requiring this information is ``broad and burdensome'' and 
outside of the authority granted to the Commission by the Dodd-Frank 
Act.\77\ While the Commission recognizes that the factors related to 
open access are not included in the five qualitative and quantitative 
factors that the Commission is required to consider when reviewing a 
Security-Based Swap Submission, the Commission notes that Exchange Act 
Section 3C(a)(2) provides the authority for including this requirement 
in new Rule 19b-4(o)(3)(ii) in that it requires that the rules of a 
clearing agency that clears security-based swaps subject to the 
clearing requirement be in compliance with the two open access 
provisions.\78\ By requiring that compliance with the open access 
requirements be assessed each time a clearing agency files a Security-
Based Swap Submission, the clearing agency will be required to 
demonstrate that it continues to satisfy these ongoing conditions prior 
to listing a new security-based swap (or group, category, type, or 
class of security-based swap) for clearing. Because clearing in a 
particular security-based swap is limited to a small number of clearing 
agencies, it is critical that access to the clearing agency be open and 
available to market participants having due regard for risk management 
considerations.\79\ Further, the Commission believes that requiring 
clearing agencies to address the two open access requirements in a 
Security-Based Swap Submission generally would not require a clearing 
agency to conduct a completely novel analysis or to consider factors 
with which it is unfamiliar as clearing agencies are already required 
to address open access issues as part of their compliance with certain 
requirements contained in Section 17A of the Exchange Act.\80\ 
Accordingly, the rules the Commission is adopting today, which are 
unchanged from what was proposed, require that clearing agencies 
address in their Security-Based Swap Submission how their rules meet 
such open access requirements.
---------------------------------------------------------------------------

    \77\ See CME Letter at 3.
    \78\ See 15 U.S.C. 78c-3(a)(2) (as added by Section 763(a) of 
the Dodd-Frank Act).
    \79\ The Commission has previously recognized that certain 
conflicts of interest at clearing agencies or among their members 
could restrict open access to the clearing agency. See Ownership 
Limitations and Governance Requirements for Security-Based Swap 
Clearing Agencies, Security-Based Swap Execution Facilities, and 
National Securities Exchanges with Respect to Security-Based Swaps 
under Regulation MC, Securities Exchange Act Release No. 63107 (Oct. 
14, 2010), 75 FR 65882 (Oct. 26, 2010) (noting that ``[a] 
consequence of increased use of central clearing services, however, 
is that participants that control or influence a security-based swap 
clearing agency may gain a competitive advantage in the security-
based swaps market by restricting access to the clearing agency. If 
that occurred, financial institutions and marketplaces that do not 
have access to central clearing would have limited ability to trade 
in or list security-based swaps.''). The Commission also recognized, 
however, that clearing agencies may legitimately impose minimum 
participation standards that could affect open access. See id (``The 
provisions in Section 17A recognize that a clearing agency may 
discriminate among persons in the admission to, or the use of, the 
clearing agency, by requiring that participants meet certain 
financial, operational, and other fitness standards. However, 
Section 17A also requires that sanctioned discriminations must not 
be unfair.'').
    \80\ See 15 U.S.C. 78q-1(b)(3)(F) (requiring that the rules of a 
clearing agency, among other things, not be designed ``to permit 
unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency'').
---------------------------------------------------------------------------

d. Timing of Security-Based Swap Submissions
    Pursuant to Exchange Act Section 3C(b)(3), the Commission is 
required to make its determination of whether a security-based swap 
described in a clearing agency's Security-Based Swap Submission is 
required to be cleared not later than 90 days after receiving such 
Security-Based Swap Submission.\81\ The statute further provides that 
this 90-day determination period may be extended with the consent of 
the clearing agency making such Security-Based Swap Submission.\82\ In 
addition, the statute requires the Commission to make available to the 
public any Security-

[[Page 41613]]

Based Swap Submission it receives and to ``provide at least a 30-day 
public comment period regarding its determination whether the clearing 
requirement shall apply to the submission.'' \83\
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78c-3(b)(3) (as added by Section 763(a) of the 
Dodd-Frank Act). Further, pursuant to new Rule 19b-4(o)(2), if any 
information submitted to the Commission by a clearing agency on Form 
19b-4 were not complete or otherwise in compliance with Rule 19b-4 
and Form 19b-4, such information would not be considered a Security-
Based Swap Submission and the Commission would be required to inform 
the clearing agency within twenty-one business days of such 
submission.
    \82\ 15 U.S.C. 78c-3(b)(3) (as added by Section 763(a) of the 
Dodd-Frank Act).
    \83\ 15 U.S.C. 78c-3(b)(2)(C)(iii) (as added by Section 763(a) 
of the Dodd-Frank Act).
---------------------------------------------------------------------------

    Because the Commission's obligation to provide for notice and 
public comment of Security-Based Swap Submissions is set forth in 
detail in Exchange Act Section 3C, it was not necessary for the 
Commission to adopt rules regarding these procedures. However, the 
Commission believes that it is important to provide guidance on how it 
intends to implement these statutory requirements in practice. 
Specifically, the Commission believes that the statutory requirement to 
``provide at least a 30-day public comment'' was intended, at least in 
part, to enable the public to have an opportunity to comment on the 
Security-Based Swap Submission and to provide information for the 
Commission to consider as part of making its determination whether the 
clearing requirement should apply to the submission. Accordingly, the 
Commission will indicate in each notice that it publishes of a 
Security-Based Swap Submission that public comment will be accepted 
during the period specified in the notice (which will in no event be 
less than 30 days). In addition, the comment period will begin and end 
within the 90-day determination period (as opposed to beginning after 
the Commission has made its final determination). The Commission 
expects to publish notice of the Security-Based Swap Submission in the 
Federal Register and it also intends to publish notice on the 
Commission's publicly-available Web site at www.sec.gov. Such notice 
would include the solicitation of public comment for the period 
specified in the notice. This process is consistent with the current 
process that is in place for proposed rule changes under Exchange Act 
Section 19(b)(2) and Rule 19b-4.
    Although the Commission did not propose rules with respect to the 
procedure it will follow in publishing Security-Based Swap Submissions 
for public comment, one commenter requested that the Commission extend 
the minimum public review period to 45 days.\84\ This commenter also 
recommended that the comment period should not commence until after: 
(1) The clearing agency has proven the ability to clear the product 
through testing; (2) the clearing agency has sufficient operational 
resources and established connectivity to the market using standard 
protocols; (3) all market standardization issues defining the product, 
life events, etc. have been resolved; (4) pricing standards and margin 
calculations have been agreed by the clearing agency's risk committee; 
and (5) the Commission has all the information it needs and such 
information has been verified as consistent with data received from 
security-based swap data repositories, security-based swap dealers and 
major security-based swap participants.\85\ In response to this comment 
letter, the Commission notes that the comment period specified in the 
notice will be at least 30 days, as is required under the statute.\86\ 
The Commission believes the statute permits it to specify a comment 
period that is longer than 30 days, and the Commission will state the 
length of the comment period in each notice. Generally, however, the 
Commission believes that a 30-day comment period for Security-Based 
Swap Submissions strikes an appropriate balance by providing commenters 
with sufficient time to formulate their ideas while still giving the 
Commission time to consider all of the comments received and to factor 
them into the mandatory clearing determination, particularly as the 
Commission has a statutory obligation to make a clearing determination 
not later than 90 days after receiving the submission. In response to 
the comment suggesting that the Commission should delay the 
commencement of the comment period until the actions outlined by the 
above commenter are completed, the Commission notes that most of the 
information identified by the commenter is already required by the five 
quantitative and qualitative factors set forth in Exchange Act Section 
3C(b)(4)(B) and new Rule 19b-4(o)(3)(ii).\87\ Moreover, the Commission 
is concerned that delaying the commencement of the public comment 
process would delay the Commission's potential receipt of feedback from 
the public which, in the Commission's experience reviewing proposed 
rule changes, is often an important source of information for 
supplementing or challenging the material submitted by the SRO.
---------------------------------------------------------------------------

    \84\ See ISDA Letter at 11.
    \85\ See id.
    \86\ See 15 U.S.C. 78c-3(b)(2)(C)(iii) (as added by Section 
763(a) of the Dodd-Frank Act).
    \87\ To the extent that a Security-Based Swap Submission does 
not include the minimum information set forth in new Rule 19b-
4(o)(3), such incomplete submission would, pursuant to new Rule 19b-
4(o)(2), be deemed not to have been submitted and the Commission 
would be required to notify that clearing agency of the rejection of 
the Security-Based Swap Submission within twenty-one business days 
of the original submission.
---------------------------------------------------------------------------

    In addition, a commenter recommended that the Commission adopt an 
extended transition period between the date that a determination is 
made that a security-based swap is required to be cleared and the date 
clearing becomes mandatory for that product.\88\ This commenter also 
recommended a second transition period from ``when the `exchange/
security-based swap execution facility trading' requirement is 
determined to when such requirement takes effect.'' \89\ Finally, this 
commenter recommended ``full transparency of clearing agency 
requirements and performance during such period(s).'' \90\ Although the 
substance of the Commission's mandatory clearing determinations and the 
timing of implementation of those determinations are not addressed in 
the rules being adopted today, which focus on the process by which 
clearing agencies submit filings, the Commission understands the 
importance of ensuring that clearing agencies and market participants 
are given an appropriate amount of time and guidance to comply with a 
clearing mandate. In many cases, the determination of when and how a 
clearing requirement should be implemented will depend on the 
particular product that the Commission determines is required to be 
cleared. The Commission further notes that Exchange Act Section 
3C(b)(4)(C) provides that the Commission, in making a mandatory 
clearing determination, may require such terms and conditions as the 
Commission determines to be appropriate.\91\
---------------------------------------------------------------------------

    \88\ See ISDA Letter at 10-11.
    \89\ See id.
    \90\ See id. at 11.
    \91\ See 15 U.S.C. 78c-3(b)(4)(C).
---------------------------------------------------------------------------

e. Notice to Clearing Agency Members
    Exchange Act Section 3C(b)(2)(A) requires that a clearing agency 
provide notice to its members, in a manner determined by the 
Commission, of its Security-Based Swap Submissions.\92\ To meet this 
requirement, new Rule 19b-4(o)(5), which is being adopted as proposed, 
requires clearing agencies to post all Security-Based Swap Submissions, 
and any amendments thereto, on their Web sites. This public posting 
must be completed within two business days following the submission to 
the Commission. The Commission received one comment expressing general 
support for this requirement.\93\
---------------------------------------------------------------------------

    \92\ See 15 U.S.C. 78c-3(b)(2)(A) (as added by Section 763(a) of 
the Dodd-Frank Act).
    \93\ See AFR Letter at 2.

---------------------------------------------------------------------------

[[Page 41614]]

    This Commission believes that a two-business-day timeframe is 
appropriate because it is consistent with the notice requirement that 
currently applies to proposed rule changes,\94\ and that such timeframe 
will provide members of the clearing agency and the public with timely 
notice of the submission. New Rule 19b-4(o)(5) requires a clearing 
agency to maintain this posting on its Web site until the Commission 
makes a determination regarding the Security-Based Swap Submission, the 
clearing agency withdraws the Security-Based Swap Submission or the 
clearing agency is notified that the Security-Based Swap Submission is 
not properly filed.\95\ These requirements should help ensure that 
submissions that are being actively considered by the Commission are 
readily available to the members of the clearing agency and the public 
and help provide for a more transparent process.
---------------------------------------------------------------------------

    \94\ Commission rules currently require SROs to post on their 
Web sites a copy of any proposed rule change the SRO filed with the 
Commission, and any amendments thereto. Such posting is required 
within two business days after filing the proposed rule change with 
the Commission. See 17 CFR 240.19b-4(l). In adopting this rule, the 
Commission stated that all market participants, investors and other 
interested parties should have access to proposed rule changes filed 
with the Commission, and any amendments, as soon as practicable, and 
that it did not believe that a two-business-day timeframe would be 
impractical or unduly burdensome on SROs. See Final Rules Regarding 
Proposed Rule Changes of Self-Regulatory Organizations, Securities 
Exchange Act Release No. 50486 (Oct. 4, 2004), 69 FR 60287 (Oct. 8, 
2004).
    \95\ Proposed Rule 19b-4(o)(5).
---------------------------------------------------------------------------

    The Commission notes that the current instructions for Form 19b-4 
require an SRO to file with the Commission copies of notices issued by 
the SRO soliciting comment on the proposed rule change and copies of 
all written comments on the proposed rule change received by the SRO 
(whether or not comments were solicited) from its members or 
participants.\96\ Any correspondence the SRO receives after it files a 
proposed rule change, but before the Commission takes final action on 
the proposed rule change, also is required to be filed with the 
Commission.\97\ The SRO is required to summarize the substance of all 
such comments received and respond in detail to any significant issues 
raised in the comments about the proposed rule change.\98\ In 
accordance with the changes the Commission is adopting today, clearing 
agencies will be subject to these same requirements in connection with 
Security-Based Swap Submissions. The Commission believes that applying 
these requirements in the instructions to Form 19b-4 to Security-Based 
Swap Submissions will provide the Commission with an opportunity to 
consider the various viewpoints expressed by commenters by making sure 
relevant comments are included in the Security-Based Swap Submission.
---------------------------------------------------------------------------

    \96\ See Items 5 and 9 (Exhibit 2) of the General Instructions 
for Form 19b-4. 17 CFR 240.819.
    \97\ See id.
    \98\ Item 5 of the General Instructions for Form 19b-4. 17 CFR 
240.819.
---------------------------------------------------------------------------

    Finally, one commenter requested that the Commission require 
clearing agencies ``to notify the Commission, as well as the public, of 
the type of swap being considered at the time it notifies members of 
the submission or possible submission.'' \99\ The Commission 
appreciates this suggestion, but has ultimately decided not to modify 
new Rule 19b-4(o)(5) in this manner as the Commission believes that 
requiring Web site disclosure of the Security-Based Swap Submission 
within two business days of the submission itself will provide 
interested persons and the public with sufficient opportunity to 
provide feedback on the submission before the Commission makes a 
mandatory clearing determination.
---------------------------------------------------------------------------

    \99\ See Better Markets Letter at 8.
---------------------------------------------------------------------------

f. Submissions of a Group, Category, Type or Class of Security-Based 
Swaps
    New Rule 19b-4(o)(4), which is being adopted as proposed, requires 
that clearing agencies submit security-based swaps to the Commission 
for review by group, category, type, or class to the extent that doing 
so is practicable and reasonable. Any aggregation will require a clear 
description in the applicable Security-Based Swap Submission so that 
market participants and the public know which security-based swaps may 
be subject to a clearing requirement. The Proposing Release contained a 
number of requests for comment with respect to how the Commission 
should apply this rule including, among other things, questions 
pertaining to how a clearing agency should identify the scope of the 
group, category, type or class of security-based swaps it plans to 
clear, the relevant characteristics of security-based swaps that permit 
aggregation by group, category, type or class, factors that would make 
aggregation more difficult, and factors that may be specific to a 
particular clearing agency.
    Two commenters requested that the Commission further define the 
meaning and scope of the terms ``category,'' ``class,'' ``type,'' and 
``group'' with respect to security-based swaps.\100\ In particular, one 
of these commenters further suggested using the following 
characteristics of security-based swaps to define different products: 
(1) Instrument description; (2) acceptable currencies (and whether the 
contract is single currency); (3) acceptable indices; (4) types (e.g., 
total return or price return); (5) maximum residual term; (6) notional 
amount (minimum to maximum of the relevant currency unit); (7) 
applicable day count fraction; (8) applicable business day convention; 
(9) minimum residual term of the trade (i.e., the period from the date 
of submission of the trade to the date of termination); and (10) 
applicable calculation periods.\101\
---------------------------------------------------------------------------

    \100\ See Exhibit A to CME Letter and ISDA Letter.
    \101\ See ISDA Letter at 3-4.
---------------------------------------------------------------------------

    Although the commenter did provide specific suggestions of certain 
characteristics that could be used to create groups, categories, types 
or classes of security-based swaps, the Commission did not receive any 
comment letters responding to its requests for suggestions as to how 
best to utilize the individual characteristics, which may include among 
other things the underlying security, tenor, and coupon of the 
security-based swap, to aggregate security-based swaps into groups, 
categories, types or classes. In addition, the Commission notes that it 
has not yet received any Security-Based Swap Submissions and does not 
have detailed information about how clearing agencies would create 
groups, categories, types or classes of security-based swaps in 
determining whether to clear such security-based swaps. For these 
reasons, the Commission believes that allowing these key terms to 
evolve over time as an iterative process between the clearing agencies 
and the Commission is preferable to prematurely hard-coding definitions 
into the rules without the benefit of experience.
    Nevertheless, the Commission continues to believe that requiring 
multiple security-based swaps in each submission--to the extent that 
such groupings are practicable and reasonable (e.g., by taking into 
consideration appropriate risk management issues applicable to the 
aggregation)--would streamline the submission process for Commission 
staff and the clearing agencies. This approach would allow more 
security-based swaps to be reviewed in a timely manner. At the same 
time, the manner in which the Commission will ultimately determine 
which security-based swaps are appropriately aggregated into groups, 
categories, types, or classes likely will depend on the particular 
facts and circumstances of the products under consideration. This in 
turn will be informed by how the clearing agency defines the relevant 
security-based swap (or relevant group,

[[Page 41615]]

category, type, or class of security-based swaps), how the clearing 
agency manages the product (both operationally and in its rulebook) and 
the comments received by the Commission during the public comment 
period.
    Prior to the Commission providing further guidance regarding 
aggregation, clearing agencies may organize their Security-Based Swap 
Submissions using a reasonable basis that they determine to be 
appropriate and responsive to the requirements of the Exchange Act. For 
example, to the extent possible, the groups, categories, types or 
classes of security-based swaps that are filed with the Commission as a 
Security-Based Swap Submission could mirror the groups, categories, 
types or classes that the clearing agency evaluates in determining 
whether to list such security-based swap for clearing. In addition, 
clearing agencies could also consider other factors that they deem to 
be appropriate, including the characteristics identified in the comment 
letter referred to above.\102\ In reaching a determination regarding 
any aggregation, the Commission also expects to conduct its own 
analysis, which will take into account, at a minimum, the five 
qualitative and quantitative factors that the Commission is required to 
consider pursuant to Exchange Act Section 3C(b)(4)(B) when making a 
mandatory clearing determination.
---------------------------------------------------------------------------

    \102\ See id.
---------------------------------------------------------------------------

g. Other Issues Related to Security-Based Swap Submissions
    Proposed Rule 19b-4(o)(6)(i) provided that, in making a mandatory 
clearing determination, the Commission would take into account the 
factors addressed in the Security-Based Swap Submission and any 
additional factors the Commission determines to be appropriate. 
Proposed Rule 19b-4(o)(6)(i) also required a clearing agency to provide 
any additional information requested by the Commission as necessary to 
make a determination. In addition, proposed Rule 19b-4(o)(6)(ii) 
provided that, in making a determination of whether or not the clearing 
requirement would apply to the security-based swap (or any group, 
category, type, or class of security-based swaps) described in the 
submission, the Commission may require such terms and conditions as the 
Commission determines to be appropriate in the public interest.\103\
---------------------------------------------------------------------------

    \103\ See 15 U.S.C. 78c-3(b)(4)(C) (as added by Section 763(a) 
of the Dodd-Frank Act) and proposed Rule 19b-4(o)(6)(ii).
---------------------------------------------------------------------------

    In connection with proposed Rule 19b-4(o)(6), one commenter urged 
the Commission to remove the language allowing the Commission, in 
addition to considering the five statutory factors set forth in 
Exchange Act Section 3C(b)(4)(B), to consider ``any additional factors 
the Commission determines to be appropriate'' in connection with a 
mandatory clearing determination. The commenter believes that this 
language exceeds the Commission's statutory authority and would expose 
the proposed rules to potential litigation.\104\
---------------------------------------------------------------------------

    \104\ See Better Markets Letter at 8-10.
---------------------------------------------------------------------------

    The Commission has carefully considered the comments it received in 
respect of proposed Rule 19b-4(o)(6). While the Commission disagrees 
with the commenter that the Commission lacks authority to promulgate a 
rule allowing it to consider ``any additional factors the Commission 
determines to be appropriate'' in connection with a mandatory clearing 
determination,\105\ the Commission has nonetheless decided not to adopt 
the language in the final rule. The Commission believes the language is 
unnecessary because Exchange Act Section 3C already requires that the 
Commission shall take into account the five factors in Exchange Act 
Section 3C(b)(4)(B) in making a mandatory clearing determination and 
new Rule 19b-4(o)(6)(i), as adopted, requires clearing agencies to 
provide any additional information requested by the Commission as 
necessary to assess any of the factors it determines to be appropriate 
in order to make a mandatory clearing determination in connection with 
a Security-Based Swap Submission. The Commission believes that this 
rule, as adopted, already empowers it to require the provision of any 
additional information relevant to making mandatory clearing 
determinations under Exchange Act Section 3C.
---------------------------------------------------------------------------

    \105\ The Commission does not read Exchange Act Section 3C as 
restricting its existing authority to obtain information from 
registered clearing agencies. The Commission notes that Section 
23(a) of the Exchange Act allows the Commission to ``make such rules 
and regulations as may be necessary or appropriate to implement the 
provisions of this title for which [it is] responsible or for the 
execution of the functions vested in [it] by this title.'' See 15 
U.S.C. 78w(a)(1).
---------------------------------------------------------------------------

    The Commission also has decided not to adopt: (i) The preamble to 
proposed Rule 19b-4(o)(6), which had stated that upon receipt of a 
Security-Based Swap Submission, the Commission was required to review 
the submission and determine whether the relevant security-based swap 
(or group, category, type or class of security-based swaps) would be 
required to be cleared and (ii) proposed Rule 19b-4(o)(6)(ii), which 
had stated that the Commission may include such terms and conditions as 
it determined to be appropriate in the public interest in connection 
with making a mandatory clearing determination. In each case, the 
Commission notes that these provisions simply mirror statutory 
provisions set forth in Exchange Act 3C.\106\ As noted above in 
connection with the Commission's modifications to proposed Rule 
19b(o)(6)(i), promulgating rules to reiterate existing Commission 
powers and obligations is unnecessary, and the Commission believes that 
it would be prudent to remove these types of provisions so as to 
simplify the final rule to focus on the process by which clearing 
agencies will be required to make Security-Based Swap Submissions with 
the Commission.
---------------------------------------------------------------------------

    \106\ See 15 U.S.C. 78c-3(b)(2)(C)(ii) (as added by Section 
763(a) of the Dodd-Frank Act) (requiring the Commission to review 
each Security-Based Swap Submission and determine whether the 
security-based swap, or group, category, type, or class of security-
based swaps, described in the submission is required to be cleared) 
and 15 U.S.C. 78c-3(b)(4)(C) (as added by Section 763(a) of the 
Dodd-Frank Act) (providing that the Commission, in making a 
mandatory clearing determination, may require such terms and 
conditions to the requirement as the Commission determines to be 
appropriate).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission also requested comment on 
whether a clearing agency, in connection with each submission or in 
some circumstances, should be required to include an independent 
validation of its margin methodology and its ability to maintain 
sufficient financial resources. In response to this request, one 
commenter expressed an opinion that independent validations may be 
helpful in verifying elements of a submission, but that the Commission 
should use caution in allowing them to become a substitute for the 
Commission's own judgment. This commenter also urged the Commission to 
pay careful attention to the question of what constitutes 
``independence'' for these purposes.\107\ Another commenter noted that 
a clearing agency should have an ongoing internal process for 
validating its internal risk models, which process should be 
independent of the internal models' development, implementation, and 
operation.\108\ As such, this commenter believes that it should be 
permissible for the review personnel to be employed by the clearing 
agency, so long as they are not involved in the development, 
implementation, and operation of the risk models.\109\ This

[[Page 41616]]

commenter further recommended that the independent validation evaluate 
``empirical evidence and documentation supporting the methodologies 
used, important model assumptions and their limitations, adequacy and 
robustness of empirical data used in parameter estimation and model 
calibration, and evidence of a model's strengths and weaknesses.'' 
\110\ After reviewing the comments received, the Commission has 
determined that it is not necessary to include an express requirement 
in new Rule 19b-4(o)(3) that a Security-Based Swap Submission refer to 
an independent validation of the clearing agency's margin methodology 
and its ability to maintain sufficient financial resources. The 
Commission believes such requirement is already contemplated by the 
final rules, particularly new Rule 19b-4(o)(3)(ii)(B). Specifically, in 
discussing a clearing agency's rule framework, capacity, operational 
expertise and resources, and credit support infrastructure to clear the 
security-based swap (or group, category, type or class of security-
based swaps) under consideration, as required by this provision, it may 
be appropriate for a Security-Based Swap Submission to refer to any 
independent validation of the clearing agency's margin methodology or 
other processes satisfactory to the clearing agency that have assessed 
the fundamental soundness of all of the assumptions contained in the 
model as it exists at the time of the submission and that have assessed 
the appropriateness of the model during a relevant time period.
---------------------------------------------------------------------------

    \107\ See AFR Letter at 3.
    \108\ See OCC Letter at 3.
    \109\ See id.
    \110\ See id.
---------------------------------------------------------------------------

    Finally, one commenter requested that the Commission promulgate 
rules governing Commission-initiated Reviews.\111\ The commenter 
further stated that these rules should make clear that during a 
Commission-initiated Review, the Commission will apply standards that 
are no different than the standards applied to a review of Security-
Based Swap Submissions.\112\ The Commission notes that the Dodd-Frank 
Act does not require rulemaking regarding Commission-initiated Reviews. 
Commission staff are in the process of determining how these reviews 
will proceed, particularly with respect to sources of and access to the 
information the Commission will need to conduct Commission-initiated 
Reviews, and whether any rulemaking related to these reviews is 
necessary, either now or in the future.
---------------------------------------------------------------------------

    \111\ See Better Markets Letter at 11-12.
    \112\ See id.
---------------------------------------------------------------------------

h. Additional Comments
    The Commission also received a number of comments that did not 
directly relate to the process of filing Security-Based Swap 
Submissions or to any specific provision in new Rule 19b-4(o). In 
particular, many of these comments related to the clearing of security-
based swaps in general and to the rationale underlying the Commission's 
specific mandatory clearing determinations. While the Commission 
appreciates receiving the benefit of the public's views on a wide range 
of issues, the Commission nevertheless reiterates that the rules that 
are being adopted today are limited solely to the process by which 
clearing agencies will be required to make Security-Based Swap 
Submissions with the Commission. Accordingly, the Commission is not 
modifying the final rules in response to the comments summarized below. 
However, the Commission continues to consider a number of important 
issues related to its substantive mandatory clearing determinations, 
including many of the points raised in these comment letters. To the 
extent that these issues are raised by a particular Security-Based Swap 
Submission, the Commission will address them at the appropriate time.
    For example, one commenter urged the Commission to exempt certain 
structured security-based swaps from the mandatory clearing requirement 
on the basis that such instruments are ``not clearable'' as they are 
not standardized, their underlying collateral pool cannot be evaluated, 
they would transfer risk to the clearing entity and clearing would 
require the posting of collateral.\113\ This comment was related to the 
determinations to be made by the Commission under Exchange Act Section 
3C and not to the process for filing Security-Based Swap Submissions 
with the Commission. Another commenter provided detailed suggestions to 
the Commission with respect to how it should evaluate information 
responsive to the five qualitative and quantitative factors set forth 
in Exchange Act Section 3C(b)(4)(B), and additional considerations 
regarding: (1) Standardization, (2) exceptions, (3) affiliate (intra-
group) transactions, (4) wrong way risk, (5) implementation timing, and 
(6) moral hazard concerns.\114\ Similarly, a commenter advocated that 
the Commission consider information that is different from what was 
included in a clearing agency's Security-Based Swap Submission and to 
draw upon information provided by other members of the Council.\115\
---------------------------------------------------------------------------

    \113\ See comment letter of American Securitization Forum (Feb. 
14, 2011).
    \114\ See ISDA Letter at 9-12.
    \115\ See AFR Letter at 4.
---------------------------------------------------------------------------

    Commenters representing seven foreign headquartered banks requested 
that the Commission adopt implementing regulations under the Dodd-Frank 
Act ``that enable and encourage foreign banks engaged in swap dealing 
activities to book their swaps businesses in a single well-capitalized, 
highly rated foreign-based banking institution.'' \116\ As a follow-up 
to this request, 12 foreign-headquartered financial institutions 
provided specific suggestions of a possible framework for achieving 
this goal and for dealing with other aspects of the potential 
extraterritorial application of certain parts of Title VII.\117\ 
Similarly, commenters representing three Japanese bank groups requested 
that the Commission adopt regulations under the Dodd-Frank Act ``with 
the effect that Japanese banks, including their U.S. branches, are not 
made subject to the application of Title VII requirements.'' \118\
---------------------------------------------------------------------------

    \116\ See comment letter of Barclays Bank PLC, BNP Paribas S.A., 
Deutsche Bank AG, Royal Bank of Canada, The Royal Bank of Scotland 
Group plc, Soci[eacute]t[eacute] G[eacute]n[eacute]rale and UBS AG 
(Jan. 11, 2011).
    \117\ See comment letter of Barclays Bank PLC, BNP Paribas S.A., 
Credit Suisse AG, Deutsche Bank AG, HSBC, Nomura Securities 
International, Inc., Rabobank Nederland, Royal Bank of Canada, The 
Royal Bank of Scotland Group plc, Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale, The Toronto-Dominion Bank and UBS AG (Feb. 
17, 2011).
    \118\ See comment letter from the Bank of Tokyo-Mitsubishi UFJ, 
Ltd., Mizuho Corporate Bank, Ltd., and Sumitomo Mitsui Banking 
Corporation (May 6, 2011). In the alternative, these commenters 
requested that the regulations issued pursuant to Title VII: (1) Not 
apply to transactions between affiliates of a bank group regulated 
as a bank holding company and (2) not apply to a foreign dealer--
particularly one that is subject to comprehensive home country 
regulation--with respect to requirements that would otherwise apply 
due to transactions entered into by the foreign dealer with a U.S. 
based dealer regulated as a swap dealer or security-based swap 
dealer pursuant to Title VII. Finally, these commenters requested 
that the effective dates of all adopting regulations under Title VII 
be deferred until December 31, 2012, which is the deadline for 
compliance with the G-20 mandate, so as to avoid overlapping and 
inconsistent regulatory regimes.
---------------------------------------------------------------------------

    In addition, one commenter provided the Commission with a copy of a 
separate comment that it submitted to the Commission in connection with 
proposed rules regarding the registration and regulation of security-
based swap execution facilities (``SB SEFs''), suggesting that one 
aspect of proposed Rule 19b-4(o) relates to a proposed rule for SB 
SEFs.\119\ Another commenter

[[Page 41617]]

provided a number of suggestions for expanding access to central 
clearing of security-based swaps for buy-side participants.\120\ Two 
commenters urged the Commission to clarify explicitly in its rules that 
security-based swap transactions entered into between affiliates within 
the same corporate group should not be subject to the mandatory 
clearing requirement.\121\ Finally, two commenters expressed support 
for the Commission's proposed rules in the context of actions the 
Commission could take to reduce potential short selling abuses in the 
securities markets.\122\
---------------------------------------------------------------------------

    \119\ See comment letter of GFI Group Inc. (``GFI'') (Apr. 4, 
2011) and Registration and Regulation of Security-Based Swap 
Execution Facilities, Securities Exchange Act Release No. 34-63825 
(Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (``SB SEF Release''). 
Specifically, in the SB SEF Release, the Commission proposed Rule 
812 to implement Section 3D(d)(3) of the Exchange Act, which would 
require that an SB SEF permit trading only in security-based swaps 
that are not readily to susceptible to manipulation. Proposed Rule 
812(b) would provide that, prior to permitting the trading of any 
security-based swap, an SB SEF's swap review committee must have 
determined, after taking into account all of the terms and 
conditions of the security-based swap and the markets for the 
security-based swap and any underlying security or securities, that 
such swap is not readily susceptible to manipulation. GFI requested 
that the Commission specify that an SB SEF would be deemed to have 
satisfied the requirement in proposed Rule 812 with respect to a 
security-based swap if the Commission has previously required such 
security-based swap to be cleared. The Commission notes that this 
comment is unrelated to the process rules being adopted today. 
However, the Commission notes that it will consider this comment in 
the context of the SB SEF Release.
    \120\ See comment letter of the Managed Funds Association (Mar. 
24, 2011). Specifically, the Managed Funds Association addressed, 
among other things, issues regarding: (1) Requirements that dealers 
be prepared to onboard buy-side market participants on the basis of 
reasonable objective criteria and reasonable commercial terms; (2) 
the removal of open interest caps at CCPs and the implementation of 
a ``reasonable cohort of initial products available for clearing'' 
and a detailed cleared product roll-out schedule; (3) requirements 
that CCPs that clear buy-side transactions ``have a robust, 
transparent, and efficient margin mechanism, well defined and 
understood default waterfalls, efficient and robust trade processing 
and reporting that can handle block trading and allocations, 
effective and efficient risk compression, proven segregation of 
customer funds and pre- and post-default portability of positions, 
clear legal documentation of give-up agreements and trade 
confirmations, and appropriate buy-side representation on governance 
boards;'' and (4) the elimination of regulatory uncertainty.
    \121\ See comment letter of J.P. Morgan (June 3, 2011) and 
comment letter of the ABA Securities Association, American Council 
of Life Insurers, Financial Services Roundtable, Futures Industry 
Association, Institute of International Bankers, International Swaps 
and Derivatives Association and the Securities Industry and 
Financial Markets Association (Sept. 8, 2011).
    \122\ See comment letter of Naphtali M. Hamlet (Jan. 22, 2011) 
and comment letter of Suzanne H. Shatto (Jan. 21, 2011).
---------------------------------------------------------------------------

    As previously noted, all of the comments discussed above pertain to 
areas that are not governed by Rule 19b-4(o), which is limited entirely 
to the process by which clearing agencies will be required to make 
Security-Based Swap Submissions with the Commission and the information 
that is required to be included in Security-Based Swap Submissions. 
These comments do not address the process or information requirements 
in the proposed rules. Although some of the comments relate to future 
actions that may be taken by the Commission, such as mandatory clearing 
determinations or future rulemakings, those comments are outside the 
context of the process rules being adopted today, but the Commission 
will consider the issues raised in these letters as they pertain to 
relevant areas outside of this rulemaking.\123\
---------------------------------------------------------------------------

    \123\ For example, with respect to the international application 
of mandatory clearing determinations, rather than addressing the 
international implications of Title VII in a piecemeal approach, the 
Commission is considering addressing the relevant international 
issues holistically in a single proposal. Such a proposal would give 
investors, market participants, foreign regulators, and other 
interested parties an opportunity to consider the Commission's 
proposed approach to the application of Title VII to cross-border 
security-based swap transactions and non-U.S. persons that act in 
capacities regulated under the Dodd-Frank Act. This approach should 
generate thoughtful and constructive comments for us to consider 
regarding the application of Title VII to cross-border transactions.
---------------------------------------------------------------------------

2. Prevention of Evasion of the Clearing Requirement
    New Rule 3Ca-2 is being adopted as proposed. Specifically, the new 
rule clarifies that the phrase ``submits such security-based swap for 
clearing to a clearing agency'' found in Exchange Act Section 
3C(a)(1)--which establishes the mandatory clearing requirement for 
security-based swaps--to mean that the security-based swap subject to 
the clearing requirement must be submitted for central clearing to a 
clearing agency that functions as a CCP. Exchange Act Section 3C(d)(1) 
directs the Commission to prescribe rules (and interpretations of 
rules) the Commission determines to be necessary to prevent evasions of 
the clearing requirements.\124\
---------------------------------------------------------------------------

    \124\ See 15 U.S.C. 78c-3(d)(1) (as added by Section 763(a) of 
the Dodd-Frank Act) (stating that ``[t]he Commission shall prescribe 
rules under this section (and issue interpretations of rules 
prescribed under this section), as determined by the Commission to 
be necessary to prevent evasions of the mandatory clearing 
requirements under this Act.'').
---------------------------------------------------------------------------

    Specifically, the term ``clearing agency'' is defined broadly under 
the Exchange Act,\125\ and clearing agencies may offer a spectrum of 
clearing services. The Commission has identified the following entities 
and activities as falling within the definition of clearing agency: (i) 
Clearing corporations; (ii) securities depositories; and (iii) matching 
services.\126\ As a result, there may be entities that operate as 
registered clearing agencies for security-based swaps that do not 
provide central clearing and act as a CCP. The Commission believes that 
the broad definition of the term ``clearing agency'' could be used by 
market participants to evade the clearing requirement of Exchange Act 
Section 3C(a)(1), which states that ``[i]t shall be unlawful for any 
person to engage in a security-based swap unless that person submits 
such security-based swap for clearing to a clearing agency that is 
registered under this Act or a clearing agency that is exempt from 
registration under this Act if the security-based swap is required to 
be cleared.'' \127\ For example, market participants seeking to evade 
the requirement to clear a security-based swap set forth in Exchange 
Act Section 3C(a)(1) could, in the absence of new Rule 3Ca-2, attempt 
to satisfy the clearing requirement by submitting the security-based 
swap for matching services (rather than for central clearing) to a 
clearing agency that is either registered with the Commission or exempt 
from registration under the Exchange Act.
---------------------------------------------------------------------------

    \125\ See supra note 8 (discussing the definition of ``clearing 
agency'' pursuant to Exchange Act Section 3(a)(23)).
    \126\ See Order Approving the Clearing Agency Registration of 
Four Depositories and Four Clearing Corporations, Securities 
Exchange Act Release No. 20221 (Sept. 23, 1983), 48 FR 45167 (Oct. 
3, 1983), and Confirmation and Affirmation of Securities Trades; 
Matching, Securities Exchange Act Release No. 39829 (Apr. 6, 1998), 
63 FR 17943 (Apr. 13, 1998).
    \127\ See 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of 
the Dodd-Frank Act).
---------------------------------------------------------------------------

    The Commission believes that other types of clearing functions and 
services offered by clearing agencies would not achieve the goal of 
central clearing articulated under the Dodd-Frank Act--improving the 
management of counterparty risk. As previously noted, a CCP guarantees 
both sides of a trade executed by two counterparties and, accordingly, 
lowers the counterparty credit risk of each of the original 
counterparties that are members of the CCP.\128\ The Commission 
believes that new Rule 3Ca-2 will prevent potential evasions of the 
clearing requirement by requiring market participants to submit 
security-based swaps to a clearing agency for central clearing as 
opposed to other clearing functions or services. Accordingly, Rule 3Ca-
2 clarifies the reference to ``submits such security-based swap for 
clearing to a clearing agency'' in Exchange Act Section 3C(a)(1) to 
mean that the security-based swap must be submitted for central 
clearing to a clearing agency that functions as a CCP. Upon the 
effective

[[Page 41618]]

and compliance dates for Rule 3Ca-2, counterparties must submit 
security-based swaps to a clearing agency for central clearing in order 
to meet the clearing requirement set forth in Exchange Act Section 
3C(a)(1).\129\ The Commission believes that submission to a clearing 
agency for clearing services other than central clearing would not 
satisfy a mandatory clearing requirement because only a clearing agency 
that functions as a CCP guarantees performance on the trade and thus 
mitigates counterparty credit risk between the bilateral parties to the 
trade.
---------------------------------------------------------------------------

    \128\ See supra notes 10-11 and accompanying text.
    \129\ See 15 U.S.C. 78c-3(a)(1).
---------------------------------------------------------------------------

    The Commission received two comments on Rule 3Ca-2, of which one 
expressed strong support for the rule to be adopted as proposed.\130\ 
The second commenter suggested that the Commission propose rules to 
address the potential for evasion through ``spurious customization,'' 
such as situations where parties to a security-based swap intentionally 
include terms in the relevant contract that have no economic purpose 
other than to cause the contract to fall outside the scope of the 
clearing agency's rules.\131\ The Commission is adopting Rule 3Ca-2 as 
proposed, but will continue to monitor the clearing of security-based 
swaps as the market develops and will consider whether additional 
action should be taken to implement the anti-evasion provisions of 
Exchange Act Section 3C, including the suggestion raised by the 
commenter described above.
---------------------------------------------------------------------------

    \130\ See AFR Letter at 2-3.
    \131\ See OCC Letter at 5-6.
---------------------------------------------------------------------------

B. Stay of the Clearing Requirement and Review by the Commission

    New Rule 3Ca-1 establishes a procedure for staying a mandatory 
clearing requirement and for the Commission's subsequent review of the 
terms of the relevant security-based swap (or group, category, type or 
class of security-based swaps) and the clearing arrangement pursuant to 
Exchange Act Section 3C(c)(1).\132\ Pursuant to new Rule 3Ca-1, a 
counterparty to a security-based swap subject to the clearing 
requirement wishing to apply for a stay of the clearing requirement is 
required to submit a written statement to the Commission that includes 
(i) a request for a stay of the clearing requirement, (ii) the identity 
of the counterparties to the security-based swap and a contact at the 
counterparty requesting the stay, (iii) the identity of the clearing 
agency clearing the security-based swap, (iv) the terms of the 
security-based swap subject to the clearing requirement and a 
description of the clearing arrangement and (v) the reasons a stay 
should be granted and the security-based swap should not be subject to 
a clearing requirement, specifically addressing the same factors a 
clearing agency must address in its Security-Based-Swap Submission 
pursuant to new Rule 19b-4(o)(3).
---------------------------------------------------------------------------

    \132\ See 15 U.S.C. 78c-3(c)(1) (as added by Section 763(a) of 
the Dodd-Frank Act) (providing that, after making a determination 
that a security-based swap (or group, category, type or class of 
security-based swaps) is required to be cleared, the Commission, on 
application of a counterparty to a security-based swap or on the 
Commission's own initiative, may stay the clearing requirement until 
the Commission completes a review of the terms of the security-based 
swap and the clearing arrangement). In connection with a stay of the 
clearing requirement and subsequent review of the terms of the 
security-based swap and the clearing arrangement, the Commission is 
required to adopt rules for reviewing a clearing agency's clearing 
of a security-based swap, or any group, category, type or class of 
security-based swaps, that the clearing agency has accepted for 
clearing. See 15 U.S.C. 78c-3(c)(4) (as added by Section 763(a) of 
the Dodd-Frank Act).
---------------------------------------------------------------------------

    The Commission believes that such information will assist the 
Commission in determining whether to grant the stay and, if the stay is 
granted, in conducting a review during the stay period of the terms of 
the relevant security-based swap (or group, category, type or class of 
security-based swaps) and the clearing arrangement. In particular, 
there is likely to be considerable overlap in the Commission's prior 
justification and analysis for requiring that a security-based swap be 
cleared (i.e., the initial mandatory clearing determination) and the 
factors the Commission would consider when determining whether to 
subsequently reverse the prior determination. Accordingly, requiring a 
party seeking a stay to address the same factors that a clearing agency 
was required to include in the original Security-Based Swap Submission 
provides the Commission with a logical point from which to begin its 
analysis. Moreover, because the application for the stay will, pursuant 
to Exchange Act Section 3C(c)(1), be made by a counterparty to a 
security-based swap subject to a clearing requirement,\133\ the 
Commission will need basic information on the clearing agency that 
clears the relevant security-based swap, particularly if the Commission 
needs to request additional information from the clearing agency in 
order to make a determination whether to grant the stay or whether to 
modify the existing clearing requirement. As such, to the extent that 
the Commission determines that it requires additional information in 
the possession of the clearing agency (as distinguished from the 
information it received from the counterparty), new Rule 3Ca-1(d) 
requires that any clearing agency that has accepted for clearing the 
security-based swap subject to the stay provide information requested 
by the Commission in the course of its review during the stay.\134\
---------------------------------------------------------------------------

    \133\ See 15 U.S.C. 78c-3(c)(1) (as added by Section 763(a) of 
the Dodd-Frank Act) (indicating that a stay could be initiated 
either pursuant to an application of a counterparty to a security-
based swap or on the Commission's own initiative).
    \134\ Rule 3Ca-1(d) is being adopted substantially as proposed, 
with the one modification being the deletion of the phrase ``but 
need not be limited to'' when describing what the Commission's 
review of a request for a stay should consider. The reasons for this 
deletion from the proposal and the Commission's explanation as to 
why it does not substantively affect the rule are discussed at the 
end of this section. 17 CFR 240.3Ca-1(d).
---------------------------------------------------------------------------

    New Rule 3Ca-1(e)(1), which is being adopted as proposed, provides 
that, upon completion of its review,\135\ the Commission may determine 
unconditionally, or subject to such terms and conditions as the 
Commission determines to be appropriate in the public interest, that 
the security-based swap (or group, category, type or class of security-
based swaps) must be cleared.\136\ Alternatively, new Rule 3Ca-1(e)(2), 
which also is being adopted as proposed, provides that the Commission 
may determine that the clearing requirement does not apply to the 
security-based swap (or group, category, type or class of security-
based swaps).\137\ If the Commission were to make a determination that 
the clearing requirement does not apply to a security-based swap (or 
group, category, type or class of security-based swaps), the new rule 
provides that clearing may continue on a non-mandatory basis.\138\
---------------------------------------------------------------------------

    \135\ Exchange Act Section 3C(c)(2) requires the Commission to 
complete such clearing review not later than 90 days after issuance 
of the stay, unless the clearing agency that clears the security-
based swap agrees to an extension of the time limit. See 15 U.S.C. 
78c-3(c)(2) (as added by Section 763(a) of the Dodd-Frank Act).
    \136\ 17 CFR 240.3Ca-1(e)(1). New Rule 3Ca-1(c) provides that a 
stay of the clearing requirement may be granted with respect to a 
security-based swap, or the group, category, type, or class of 
security-based swaps, as determined by the Commission.
    \137\ 17 CFR 240.3Ca-1(e)(2).
    \138\ See id.
---------------------------------------------------------------------------

    In order to provide the public with notice of the submission of a 
counterparty's request for a stay of the clearing requirement, the 
Commission intends to make each application for a stay available to the 
public on the Commission's Web site. A stay of the clearing requirement 
may be applicable to the counterparty requesting the stay or more 
broadly, to the security-based swap (or any group, category, type or 
class of security-based swaps) subject to the clearing requirement. The

[[Page 41619]]

Commission intends to provide notice to the public each time it grants 
a stay of a mandatory clearing requirement.
    The Commission received two comment letters regarding proposed Rule 
3Ca-1.\139\ One commenter provided examples of circumstances that may 
warrant a stay of the mandatory clearing requirement.\140\ 
Specifically, this commenter cited situations in which there is an 
absence of competition, where there is an unresolved clearing member 
default at the only clearing agency then clearing the relevant product, 
where the Commission determines to impose a mandatory clearing 
requirement where no clearing agency has elected to clear the product, 
or where a product subject to mandatory clearing becomes so illiquid as 
to threaten the clearing agency's ability to calculate margin or to 
manage a default.\141\ In response to these comments, the Commission 
notes that the purpose of new Rule 3Ca-1 is, similar to new Rules 19b-
4(n) and (o), to establish the process by which certain parties are 
required to submit information to the Commission. Nevertheless, the 
Commission appreciates the commenter's views and will consider them to 
the extent the issues raised by the commenter are implicated in a 
particular application for a stay.
---------------------------------------------------------------------------

    \139\ See ISDA Letter and Better Markets Letter.
    \140\ See ISDA Letter at 12.
    \141\ See id.
---------------------------------------------------------------------------

    A second commenter requested that the Commission delete the phrase 
``but need not be limited to'' from proposed Rule 3Ca-1(d) when 
describing what the Commission's review of a request for a stay should 
consider.\142\ The commenter believes that this language exceeds the 
Commission's statutory authority and that the language in Exchange Act 
Section 3C permits the Commission only to consider the five qualitative 
and quantitative factors that the Commission is required to consider 
when making an initial mandatory clearing determination. The commenter 
further believes that the purpose of the stay provision is to ``afford 
the Commission more time to complete its review.'' \143\ In response to 
these comments, the Commission notes that statutory provisions 
regarding the Commission's ability to grant a stay of the clearing 
requirement refers expressly to security-based swaps for which the 
Commission already has made a mandatory clearing determination.\144\ 
The stay provides time for the Commission to re-consider its initial 
determination or to re-evaluate the determination in light of changed 
circumstances or new information. The statute does not address specific 
factors the Commission must consider when making a stay determination. 
As such, the Commission believes that it may consider any relevant 
factors (including ones beyond the five qualitative and quantitative 
factors set forth in Exchange Act Section 3C(b)(4)) when making a 
determination regarding a potential stay of the clearing requirement 
without exceeding the statutory authority set forth in Exchange Act 
Section 3C(c)(3).\145\ Nevertheless, the Commission has chosen not to 
adopt the phrase ``but need not be limited to'' in proposed Rule 3Ca-
1(d) so as to simplify the final rule to focus on the process by which 
information is submitted to the Commission in connection with an 
application by a counterparty requesting a stay of a mandatory clearing 
requirement, particularly since the Commission already has the power to 
consider other factors in making a determination on the request for a 
stay without the inclusion of this language.\146\
---------------------------------------------------------------------------

    \142\ See Better Markets Letter at 10-11.
    \143\ See id.
    \144\ See 78c-3(c)(1) (``[a]fter making a determination pursuant 
to subsection (b)(2), the Commission, on application of a 
counterparty to a security-based swap or on its own initiative, may 
stay the clearing requirement of subsection (a)(1) until the 
Commission completes a review of the terms of the security-based 
swap (or the group, category, type, or class of security-based 
swaps) and the clearing arrangement.'') (emphasis added).
    \145\ See supra note 105 and accompanying text.
    \146\ See also supra section II.A.1.g.
---------------------------------------------------------------------------

C. Title VIII Notice Filing Requirements for Designated Clearing 
Agencies

    As proposed, the Commission also is amending Rule 19b-4 to add a 
new paragraph (n) in order to implement the requirement to file Advance 
Notices in accordance with Title VIII. As discussed in Section I of 
this release, Section 806(e) requires any financial market utility 
designated by the Council as systemically important to file 60 days 
advance notice of changes to its rules, procedures or operations that 
could materially affect the nature or level of risk presented by the 
financial market utility.\147\ To implement this filing requirement, 
new Rule 19b-4(n) will require that an Advance Notice be submitted to 
the Commission electronically on Form 19b-4. In addition, Rule 19b-4(n) 
will define when a proposed change to a clearing agency's rules, 
procedures or operations could materially affect the nature or level of 
risks presented by the designated financial market utility. This 
definition will determine when an Advance Notice under Section 806(e) 
must be filed with the Commission. Further, the Commission is adopting, 
as proposed, corresponding amendments to Form 19b-4 as discussed in 
more detail in section II.D.
---------------------------------------------------------------------------

    \147\ See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII).
---------------------------------------------------------------------------

    As with Security-Based Swap Submissions filed pursuant to Exchange 
Act Section 3C, the Commission anticipates that in many cases a 
proposed change may be required to be filed as an Advance Notice under 
Section 806(e) and as a proposed rule change under Exchange Act Section 
19(b). This is because a proposal that qualifies as a proposed change 
to a rule, procedure or operation that materially affects the nature or 
level of risk presented by the designated clearing agency under Section 
806(e) may also qualify as a proposed rule change under Exchange Act 
Section 19(b).\148\ As a result, a designated clearing agency may be 
required to file a proposal as an Advance Notice and as a proposed rule 
change. Designated clearing agencies, as SROs, will already be required 
to file proposed rule changes on Form 19b-4 using EFFS.\149\ 
Accordingly, and consistent with the proposal for Security-Based Swap 
Submissions, the Commission is requiring designated clearing agencies 
to use the existing filing system, EFFS, and Form 19b-4 for the filing 
of Advance Notices under Section 806(e). This will allow designated 
clearing agencies to comply with the advance notice requirement in 
Section 806(e) using the same system they use for submitting proposed 
rule changes under Exchange Act Section 19(b) and, as applicable, 
Security-Based Swap Submissions under Exchange Act

[[Page 41620]]

Section 3C. Leveraging the existing filing system, EFFS, for the 
submission of Advance Notices is intended to utilize efficiently 
Commission and designated clearing agency resources. The Commission did 
not receive any comments related to its decision to require Advance 
Notices to be submitted using EFFS and is adopting this aspect of Rule 
19b-4(n)(1), substantially as proposed, with one minor technical 
modification to account for the need to finalize certain technological 
changes.
---------------------------------------------------------------------------

    \148\ For example, if the proposed change described in the 
Advance Notice requires a change in addition to, or a deletion from, 
the rules of a designated clearing agency, the action also would 
require the filing of a proposed rule change under Exchange Act 
Section 19(b). Section 3(a)(27) of the Exchange Act defines 
``rules'' broadly to include ``the constitution, articles of 
incorporation, bylaws, and rules, or instruments corresponding to 
the foregoing * * * and such of the stated policies, practices, and 
interpretations of such exchange, association, or clearing agency as 
the Commission, by rule, may determine to be necessary or 
appropriate in the public interest or for the protection of 
investors to be deemed to be rules of such exchange, association, or 
clearing agency.'' 15 U.S.C. 78c(a)(27).
    \149\ As discussed below in Section I.F., the processes under 
Exchange Act Section 19(b) and Section 806(e) may not always 
overlap. For example, certain changes to the operations of a 
designated clearing agency may not be required to be filed as a 
proposed rule change pursuant to Exchange Act Section 19(b), which 
does not specifically apply to changes in operations. Such changes 
may, however, trigger a requirement to file an Advance Notice if 
they would materially affect the nature or level of risks presented 
by the designated clearing agency. Nevertheless, the two processes 
are sufficiently similar as to warrant using the same method for 
filing.
---------------------------------------------------------------------------

    Specifically, the Commission is currently in the process of 
designing and implementing the system upgrades that are necessary in 
order for Advance Notices to be filed on EFFS. The Commission expects 
the system upgrades to EFFS to be completed no later than December 10, 
2012. However, the Commission recognizes that there is a possibility 
that the Council may designate a clearing agency as systemically 
important before the system upgrades are completed. In such a 
circumstance, a designated clearing agency would be unable to file the 
Advance Notice on Form 19b-4 and would need to file the Advance Notice 
with the Commission by other means. As a result, the Commission is 
revising proposed Rule 19b-4(n)(1) to provide that Advance Notices 
filed before December 10, 2012 must be filed with the Commission by 
submitting the Advance Notice to a dedicated email inbox to be 
established by the Commission.\150\ A designated clearing agency that 
files an Advance Notice by email must include in the notice the same 
information that is required to be included for Advance Notices in the 
General Instructions for Form 19b-4, as such form has been modified by 
the rules the Commission is adopting today.\151\ Advance Notices filed 
on or after December 10, 2012 on Form 19b-4 would include the same 
substantive information.
---------------------------------------------------------------------------

    \150\ The Commission's Office of Information Technology 
maintains a system, known as the EMail Encryption Solution, that 
allows persons outside the agency to compose and send encrypted 
emails to users within the Commission. The guide for external users 
wishing to utilize the EMail Encryption Solution is available at: 
https://wapps.sec.gov/oitintranet/oit_learn/pdf/Smail-external-guide-01-05-2011.pdf.
    \151\ The Commission notes that a designated clearing agency 
must also continue to meet the filing requirements of Rule 19b-4 and 
Form 19b-4. For example, if the change that requires the designated 
clearing agency to file an Advance Notice with the Commission is 
also a proposed rule change under Exchange Act Section 19(b), the 
designated clearing agency must file the proposed rule change with 
the Commission on Form 19b-4 using EFFS and separately file the 
Advance Notice with the Commission by email.
---------------------------------------------------------------------------

1. Standards for Determining When Advance Notice Is Required
    Section 806(e)(1)(A) requires a designated financial market utility 
to provide 60 days advance notice to its Supervisory Agency of any 
proposed change to its rules, procedures or operations that could 
materially affect the nature or level of risks presented by the 
designated financial market utility.\152\ For purposes of this 
requirement, the phrase ``materially affect the nature or level of 
risks presented'' is defined in new Rule 19b-4(n)(2)(i) to mean the 
existence of a ``reasonable possibility that the change could affect 
the performance of essential clearing and settlement functions or the 
overall nature or level of risk presented by the designated clearing 
agency.'' This definition was designed to include all changes that 
would affect the risk management functions performed by the clearing 
agency that are related to systemic risk, as well as changes that could 
affect the clearing agency's ability to continue to perform its core 
clearance and settlement functions because the Commission believes that 
such changes could materially affect the nature or level of risk 
presented by the clearing agency.\153\
---------------------------------------------------------------------------

    \152\ 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII).
    \153\ Core clearance and settlement functions may include, but 
are not limited to, the processing, comparison, netting, or 
guaranteeing of securities transactions as well as any processes or 
procedures, such as internal risk management controls, that support 
these functions.
---------------------------------------------------------------------------

    In order to help designated clearing agencies determine whether an 
Advance Notice is required, new Rule 19b-4(n)(2)(ii), which is being 
adopted as proposed, includes a list of categories of changes to rules, 
procedures or operations that the Commission believes could materially 
affect the nature or level of risks presented by a designated clearing 
agency. The list of such changes includes, but is not limited to, 
changes that materially affect participant and product eligibility, 
daily or intraday settlement procedures, default procedures, system 
safeguards, governance or financial resources of the designated 
clearing agency. The Commission believes that changes in these areas 
pertain to core functions of a clearing agency and, as a result, may 
affect the ability of a designated clearing agency to manage its risks 
appropriately and to continue to conduct systemically important 
clearance and settlement services. For example, participant and product 
eligibility requirements of a designated clearing agency are designed 
to ensure that the clearing agency's members have sufficient financial 
resources and operational capacity to meet obligations arising from 
participation in the clearing agency, and to ensure that the products 
cleared by the clearing agency are sufficiently liquid and that 
adequate pricing data is available. In addition, a designated clearing 
agency's default procedures exist to ensure that, should a default 
occur, the clearing agency has the financial resources, liquidity and 
operational abilities to continue to make payments to non-defaulting 
participants on time. Additional examples of the types of matters that 
could fall within the categories listed above include changes to the 
methods for making margin calculations, liquidity arrangements and 
significant new services of the clearing agency.
    Moreover, while a broad interpretation of the materiality threshold 
is consistent with the underlying principles of the Clearing 
Supervision Act and desirable to permit a review of all matters that 
affect the risks presented by clearing agencies, not every change to a 
designated clearing agency's rules, procedures or operations will be 
material. Accordingly, new Rule 19b-4(n)(2)(iii), which is being 
adopted as proposed, includes two broad categories of examples of 
changes to rules, procedures or operations that the Commission believes 
would not materially affect the nature or level of risks presented by a 
designated clearing agency, and therefore would not require the filing 
of an Advance Notice. The first category includes, but is not limited 
to, changes to an existing procedure, control, or service that do not 
modify the rights or obligations of the designated clearing agency or 
persons using its payment, clearing, or settlement services and that do 
not adversely affect the safeguarding of securities, collateral, or 
funds in the custody or control of the designated clearing agency or 
for which it is responsible. The second category includes, but is not 
limited to, changes concerned solely with the administration of the 
designated clearing agency or related to the routine, daily 
administration, direction and control of employees. The Commission 
believes that both categories of changes do not pertain to the core 
functions performed by a clearing agency and, therefore, would not 
materially affect the nature or level of risk presented by the clearing 
agency.
    The Commission received two comments about the scope of the 
definition of ``materially affect the nature or level of risks 
presented,'' as set

[[Page 41621]]

forth in proposed Rule 19b-4(n)(2).\154\ One commenter suggested that 
the proposed definition is too broad and could require unnecessary or 
impractical submissions of Advance Notices.\155\ This commenter argued 
that the definition would include ``all changes that would affect the 
risk management functions performed by the clearing agency that are 
related to systemic risk, as well as changes that could affect the 
clearing agency's ability to continue to perform its core clearance and 
settlement functions.'' \156\ This commenter also suggested that the 
Commission distinguish between ``changes that tend to increase systemic 
risk and those that tend to decrease it.'' \157\ This commenter urged 
the Commission to ``consider limiting the changes for which Advance 
Notice is required to those changes that are reasonably likely to have 
a materially adverse effect on the nature or level of risks 
presented.'' \158\
---------------------------------------------------------------------------

    \154\ See OCC Letter at 6-7; and comment letter of The 
Depository Trust & Clearing Corporation (Oct. 3, 2011) (``DTCC 
Letter'') at 3-5.
    \155\ See OCC Letter at 6-7.
    \156\ See id.
    \157\ See id.
    \158\ See id.
---------------------------------------------------------------------------

    The same commenter also expressed the view that providing Advance 
Notice to the Commission of the terms of a line of credit in accordance 
with Section 806(e), prior to finalizing the financing, would be 
impractical.\159\ This commenter further requested that a renewal of a 
liquidity facility be excluded from the requirement to file Advance 
Notices with the Commission.\160\ At most, the commenter believes that 
it would be ``practical and appropriate to require an Advance Notice 
for a termination or reduction of a liquidity arrangement at the 
instance of the clearing agency.'' \161\
---------------------------------------------------------------------------

    \159\ See id.
    \160\ See id.
    \161\ See id.
---------------------------------------------------------------------------

    A second commenter expressed concern regarding the potential scope 
and burden of the requirement to submit Advance Notices in general, 
with a specific emphasis on the Commission's proposed definition of 
``materially affect the nature or level of risks presented'' in Rule 
19b-4(n)(2).\162\ In particular, the commenter argued that the 
requirement to submit Advance Notices should apply only to ``matters of 
true importance that require attention by the Commission and comment by 
the public.'' \163\ Accordingly, the commenter urged the Commission to 
avoid an overly expansive application of the requirement so as not to 
create undue strain on the designated clearing agency's resources, and 
to take into account the designated clearing agency's prior experience 
and judgment in filing proposed rule changes with the Commission 
pursuant to Exchange Act Section 19(b), the positions taken by the 
designated clearing agency during its consultations with the Commission 
regarding a change that could potentially result in an obligation to 
file an Advance Notice and the role and views of other entities 
responsible for supervising the designated clearing agency.\164\
---------------------------------------------------------------------------

    \162\ See DTCC Letter at 3-4.
    \163\ See id. The Commission notes that Section 806(e) of the 
Clearing Supervision Act, which establishes the requirement that a 
financial market utility submit Advance Notices to its Supervisory 
Agency, also contemplates review of the Advance Notice by the Board 
and consultation between the Board and the applicable Supervisory 
Agency. See 12 U.S.C. 5465(e)(3) and (4) (as added by Title VIII).
    \164\ See id.
---------------------------------------------------------------------------

    After careful consideration of these two commenters' views that the 
definition of ``materially affect the nature or level of risk 
presented'' is over broad, the Commission has decided to adopt Rule 
19b-4(n)(2), as proposed. As discussed in the Proposing Release, the 
Commission believes that the proposed definition of ``materially affect 
the nature or level of risks presented'' provides sufficient guidance 
to allow designated clearing agencies to know when an Advance Notice 
under Section 806(e) is required, while also being broad enough to 
capture all relevant proposed changes as specific circumstances 
warrant. The Commission does not believe the definition is so broad as 
to include proposed changes to be made by a designated clearing agency 
that would not materially affect the nature or level of risk presented 
by the clearing agency, and the Commission included examples in the 
rule to provide guidance regarding when a proposed change would or 
would not be required to be filed with the Commission. Furthermore, the 
Commission believes that a standard that would require Advance Notices 
be filed only for ``matters of true importance,'' as suggested by one 
commenter, would provide less clarity and be more open to 
interpretation than the definition the Commission is adopting today. As 
suggested by the same commenter, the Commission does intend to take 
into account a clearing agency's prior experience and judgment in 
determining whether a proposed change would materially affect the 
nature or level of risk presented by the clearing agency. As stated in 
the Proposing Release, the Commission encourages designated clearing 
agencies to discuss proposed changes with Commission staff to help 
determine whether an Advance Notice under Section 806(e) is required to 
be filed with respect to a proposed change to the clearing agency's 
rules, procedures or operations.\165\
---------------------------------------------------------------------------

    \165\ One commenter agreed with the approach of encouraging 
designated clearing agencies to consult with staff and commended the 
Commission's recognition of the need for cooperation and dialogue in 
this area. See OCC Letter at 7.
---------------------------------------------------------------------------

    In response to one commenter's suggestion that Advance Notices be 
required only when a proposed change would be reasonably likely to have 
a materially adverse effect on the nature or level of risks presented 
by a designated clearing agency (as opposed to changes that would 
decrease risk), the Commission notes that as a practical matter, many 
changes to the rules, procedures or operations of a designated clearing 
agency may have both risk-increasing effects in some respects of a 
designated clearing agency's operations and risk-reducing effects in 
other respects. For example, a change in the clearing agency's margin 
calculation methodology could result in increased margin requirements 
for some members of the clearing agency and decreased margin 
requirements for other members. For that reason, Section 806(e) 
establishes the requirement to file Advance Notices with the Commission 
without distinguishing between changes that could materially increase 
or decrease the nature or level of risk.
    Finally, and in response to a commenter's suggestion that proposed 
changes relating to a line of credit or the renewal of a liquidity 
facility be excluded from the Advance Notice requirement on the basis 
that imposing a 60 day delay in a designated clearing agency's ability 
to rely on such financing could be impractical and potentially increase 
risk for the clearing agency, the Commission notes that Section 
806(e)(1)(I) permits a designated clearing agency to implement a change 
in less than 60 days if the Commission notifies the designated clearing 
agency in writing that it does not object to the proposed change to the 
designated clearing agency's rules, procedures or operations and 
authorizes the designated clearing agency to implement the change on an 
earlier date, subject to any conditions imposed by the Commission.\166\ 
Accordingly, a designated clearing agency that wishes to implement a 
change in less than 60 days may request that the Commission expedite 
review of the Advance Notice

[[Page 41622]]

and provide the written notification under Section 806(e)(1)(I).
---------------------------------------------------------------------------

    \166\ 12 U.S.C. 5465(e)(1)(I) (as added by Title VIII).
---------------------------------------------------------------------------

2. Providing Notice of the Matters Included in an Advance Notice to the 
Board and Interested Persons
    Given the role of clearing agencies in supporting financial 
markets, the Commission recognizes that members of the public may have 
an interest in proposed changes to the rules, procedures or operations 
of systemically important clearing agencies. New Rule 19b-4(n)(1) 
provides that, upon the filing of any Advance Notice by a designated 
clearing agency, the Commission would provide for prompt publication 
thereof in the Federal Register, together with the terms of the 
substance of the proposed change to the rules, procedures or operations 
of the designated clearing agency and a description of the subjects and 
issues involved. This requirement is consistent with the existing 
procedures for proposed rule changes under Exchange Act Section 19(b) 
and the new procedures for Security-Based Swap Submissions under 
Exchange Act Section 3C. In addition, new Rule 19b-4(n)(3) requires 
designated clearing agencies to post Advance Notices and any amendments 
thereto on their Web sites within two business days of filing the 
notice or amendments in order to ensure that interested parties have 
timely and transparent access to the matters discussed therein, 
particularly in circumstances where a proposed change is not required 
to be filed under Exchange Act Section 19(b) and, as a result, would 
not otherwise be published for comment. These two provisions were 
intended to allow the Commission to give interested persons an 
opportunity to review and to submit written data, views and arguments 
concerning the matters referred to in the Advance Notice.\167\ The 
Commission will consider all comments and other information received 
when determining whether to object to an Advance Notice.
---------------------------------------------------------------------------

    \167\ Under the Commission's current practice with respect to 
Exchange Act Section 19(b), proposed rule changes are generally 
published with a twenty-one day comment period. The Commission 
expects that Advance Notices will be published for the same comment 
period.
---------------------------------------------------------------------------

    One commenter requested that the Commission modify the public 
notice provisions contained in new Rule 19b-4(n) in order to permit 
designated clearing agencies to request confidential treatment with 
respect to an Advance Notice and any related material (including, in 
certain circumstances, the fact of the filing itself) where the public 
disclosure of the notice or any such related material would (i) 
jeopardize the ability of the designated clearing agency to 
successfully achieve the objective of the proposed change which is the 
subject of the Advance Notice or (ii) disclose sensitive non-public 
information.\168\ This commenter noted specifically that because 
changes requiring the filing of an Advance Notice by their nature 
affect risk and risk management controls, ``they may intrinsically 
involve matters of great sensitivity, which are not appropriate for 
public disclosure.'' \169\ Section 806(e) does not require that an 
Advance Notice be made publicly available. However, the Commission is 
requiring publication of these notices by rule in order to give 
interested persons an opportunity to express their views with respect 
to a proposed change filed under Section 806(e). Although as a general 
matter the Commission believes that providing for a public comment 
period will benefit its review of Advance Notices, the Commission also 
understands the commenter's concern that changes requiring the filing 
of an Advance Notice could, in some cases intrinsically involve 
proprietary information regarding a designated clearing agency's risk 
management, the public disclosure of which could potentially harm the 
operations of the clearing agency. In such circumstances, the 
Commission believes that it is appropriate that an Advance Notice be 
permitted to be non-public. Accordingly, the Commission has added new 
Rule 19b-4(n)(6) to provide that the provisions of new Rule 19b-4(n) 
requiring publication of the Advance Notice in the Federal Register and 
the posting of the notice on the designated clearing agency's Web site 
will not apply to any information contained in an Advance Notice for 
which the designated clearing agency has requested confidential 
treatment following the procedures set forth in Rule 24b-2 of the 
Exchange Act.\170\ The Commission emphasizes, however, that new Rule 
19b-4(n)(6) applies only to information submitted to the Commission as 
an Advance Notice under Section 806(e). Specifically, Rule 19b-4(n)(6) 
does not relieve a designated clearing agency of its obligation to post 
any information on its Web site in connection with a Security-Based 
Swap Submission pursuant to Exchange Act Section 3C or a proposed rule 
change pursuant to Exchange Act Section 19(b), nor does it affect the 
Commission's publication of either a Security-Based Swap Submission or 
a proposed rule change in the Federal Register pursuant to those 
statutory provisions.\171\
---------------------------------------------------------------------------

    \168\ See DTCC Letter at 7-8.
    \169\ See id.
    \170\ 17 CFR 240.24b-2.
    \171\ See infra section II.F. Both Exchange Act Sections 3C and 
19(b) contain statutory requirements providing for public comment 
with respect to Security-Based Swap Submissions and proposed rule 
changes, respectively. See 15 U.S.C. 78c-3(b)(3) (as amended by 
Section 763(a) of the Dodd-Frank Act) (requiring the Commission to 
make available to the public any Security-Based Swap Submission it 
receives and to provide at least a 30-day public comment period 
``regarding its determination whether the clearing requirement shall 
apply to the submission'') and 15 U.S.C. 78s(b)(1) (requiring that 
the Commission, ``upon the filing of any proposed rule change, 
publish notice thereof together with the terms of substance of the 
proposed rule change or a description of the subjects and issues 
involved.''). Although a similar requirement does not exist in 
Section 806(e), the Commission believes that requiring an 
opportunity for public input on the changes discussed in an Advance 
Notice is an important step toward ensuring transparency with 
respect to proposed changes to the rules, procedures, or operations 
of designated clearing agencies.
---------------------------------------------------------------------------

    In addition, new Rule 19b-4(n)(4), which is being adopted as 
proposed, requires a designated clearing agency to post a notice on its 
Web site that the proposed change described in an Advance Notice has 
been permitted to take effect within two business days of such date as 
determined in accordance with the timeframe set forth in Section 
806(e). The purpose of this rule is to provide a means for public 
notice when a proposed change under Title VIII is permitted to become 
effective, since the Commission will not affirmatively approve an 
Advance Notice under Section 806(e). Because Sections 806(e)(1)(G) and 
(I) provide that a designated clearing agency may implement a proposed 
change that is the subject of an Advance Notice if the Commission does 
not object to it, the Commission will not issue a public order granting 
approval of the relevant change, as it does with proposed rule changes 
under Exchange Act Section 19(b). Because there will not be a 
Commission action to indicate when an Advance Notice has been permitted 
to take effect, the Commission is adopting new Rule 19b-4(n)(4)(i) to 
require the designated clearing agency to post notice on its Web site. 
Moreover, new Rule 19b-4(b)(n)(ii), which is being adopted as proposed, 
requires the designated clearing agency to post notice on its Web site 
of the time at which the proposed change becomes effective if that date 
is different from the date on which the proposed change is permitted to 
become effective. In order to give interested parties timely notice of 
the change, this notice will be required to be posted within two 
business days of the effective date. The Commission is allowing two 
business days for the designated clearing agency

[[Page 41623]]

to post such notice because the existing notice requirement in Rule 
19b-4(l), which requires SROs to post a proposed rule change filed 
under Exchange Act Section 19(b) and any amendments thereto on its Web 
site, is two business days after filing of the proposed rule change, 
and any amendments thereto, with the Commission.\172\ Once the notice 
of the effectiveness of the proposed change has been posted, the 
designated clearing agency will be permitted to remove its original 
posting of the Advance Notice (and any amendments thereto) from its Web 
site because notice of the change will no longer be necessary after the 
public is notified that the change has taken effect. Pursuant to new 
Rule 19b-4(n)(3)(i), which is being adopted as proposed, a designated 
clearing agency also may remove the Advance Notice from its Web site if 
it withdrew the notice or if it was notified that such notice was not 
properly filed. The Commission did not receive any comments related to 
any of the provisions described above.
---------------------------------------------------------------------------

    \172\ 17 CFR 240.19b-4(l).
---------------------------------------------------------------------------

    Section 806(e)(3) also requires that the Commission provide the 
Board with a complete copy of any information it receives in connection 
with the Advance Notice.\173\ To satisfy this requirement, new Rule 
19b-4(n)(5) requires a designated clearing agency to provide to the 
Board copies of all materials submitted to the Commission relating to 
an Advance Notice contemporaneously with such submission to the 
Commission. Such copies were proposed to be provided to the Board in 
triplicate and in hard copy format, pursuant to proposed changes to the 
General Instructions for Form 19b-4. Two commenters suggested that the 
requirement to provide these copies in hard copy format was inefficient 
and burdensome and encouraged the Commission to work with the Board to 
facilitate the submission of filings pursuant to Section 806(e)(3) in 
electronic format absent a highly compelling reason to do 
otherwise.\174\ In response to this comment, the Commission is amending 
the General Instructions for Form 19b-4 to make clear that filers may 
instead provide the copies to the Board in an electronic format 
permitted by the Board. Along with this change to the General 
Instructions for Form 19b-4, the Commission is adopting Rule 19b-
4(n)(5), as proposed.
---------------------------------------------------------------------------

    \173\ 12 U.S.C. 5465(e)(3) (as added by Title VIII). In 
addition, the Commission is required to provide the Board with any 
information it issues or submits in connection therewith.
    \174\ See OCC Letter at 7-8 and DTCC Letter at 8.
---------------------------------------------------------------------------

3. Timing and Determination of Advance Notices Pursuant to Section 
806(e)
    Section 806(e)(1)(E) requires that the Commission notify a 
designated clearing agency of any objection to a proposed change 
included in an Advance Notice within 60 days of the Commission's 
receipt of the Advance Notice, unless the Commission requests 
additional information in consideration of the notice, in which case 
the 60-day period will recommence on the date such information is 
received by the Commission.\175\ The Commission, may however, pursuant 
to Section 806(e)(1)(H), extend the review period for an additional 60 
days for proposed changes that raise novel or complex issues, subject 
to the Commission providing the designated clearing agency with prompt 
written notice of the extension.\176\ Finally, Section 806(e)(4) 
requires that the Commission consult with the Board before taking any 
action on, or completing its review of, the change referred to in the 
Advance Notice.\177\ The timeframes set forth in Section 806(e) 
determine when a proposed change to a designated clearing agency's 
rules, procedures or operations will become effective, and the 
Commission does not believe additional rulemaking related to these 
timeframes is necessary at this time.
---------------------------------------------------------------------------

    \175\ 12 U.S.C. 5465(e)(1)(E) (as added by Title VIII). The 
Commission expects that a designated clearing agency would submit a 
comment letter to the Secretary of the Commission each time that it 
provides any additional information to the Commission on EFFS in 
response to a Commission request for information made pursuant to 
Section 806(e)(1)(D). For purposes of the time periods set forth in 
Sections 806(e)(1)(E) and (G), the new 60-day period will begin on 
the date the Commission receives the additional information and the 
comment letter. Because the Commission will include a copy of this 
letter in its specific comment file for the Advance Notice, which is 
available on the Commission's Web site, this approach will provide 
the means for notifying the public that the information was 
submitted.
    \176\ 12 U.S.C. 5465(e)(1)(H) (as added by Title VIII).
    \177\ 12 U.S.C. 5465(e)(4) (as added by Title VIII).
---------------------------------------------------------------------------

4. Implementation of Proposed Changes and Emergency Changes Pursuant to 
Section 806(e)
    Section 806(e)(1)(F) provides generally that a designated clearing 
agency may not implement a proposed change filed as an Advance Notice 
during the applicable review period,\178\ which is typically 60 days 
from the Commission's receipt of the Advance Notice, but may be longer 
if the Commission requests additional information or extends the review 
period in accordance with the statute.\179\ Section 806(e), however, 
provides two mechanisms by which a designated clearing agency could 
implement a proposed change prior to the expiration of the applicable 
review period. First, Section 806(e)(1)(I) permits the designated 
clearing agency to implement a change before the review period expires 
if the Commission notifies the designated clearing agency in writing 
that it does not object to the proposed change to the designated 
clearing agency's rules, procedures or operations and authorizes the 
designated clearing agency to implement the change on an earlier date, 
subject to any conditions imposed by the Commission.\180\ As noted 
above, however, before taking any action on, or completing its review 
of, a change proposed by a designated clearing agency in an Advance 
Notice, the Commission is required to consult with the Board.\181\
---------------------------------------------------------------------------

    \178\ 12 U.S.C. 5465(e)(1)(F) (as added by Title VIII).
    \179\ 12 U.S.C. 5465(e)(1)(E) and (H) (as added by Title VIII).
    \180\ 12 U.S.C. 5465(e)(1)(I) (as added by Title VIII).
    \181\ 12 U.S.C. 5465(e)(4) (as added by Title VIII).
---------------------------------------------------------------------------

    Second, Section 806(e)(2) allows a designated clearing agency to 
implement a change that would otherwise require providing an Advance 
Notice to the Commission if the designated clearing agency determines 
that (i) an emergency exists and (ii) immediate implementation of the 
change is necessary for the designated clearing agency to continue to 
provide its services in a safe and sound manner.\182\ If a designated 
clearing agency determines to implement an emergency change, it must 
provide notice to the Commission as soon as practicable, and in no 
event later than 24 hours after implementation of the relevant 
change.\183\ Such emergency notice must contain all of the information 
otherwise required to be in an Advance Notice as well as a description 
of (i) the nature of the emergency and (ii) the reason the change was 
necessary in order for the designated clearing agency to continue to 
provide its services in a safe and sound manner.\184\ In reviewing the 
emergency notice, the Commission may require modification or rescission 
of the relevant change if it determines that the change is not 
consistent with the purposes of the Clearing Supervision Act, including 
all applicable rules, orders, or the risk management

[[Page 41624]]

standards prescribed under Section 805(a) of the Clearing Supervision 
Act.\185\ The Commission did not receive any comments on a designated 
clearing agency's ability to act on an emergency basis. Designated 
clearing agencies would be required to provide such emergency notice on 
Form 19b-4, pursuant to the General Instructions, which are being 
adopted substantially as proposed.
---------------------------------------------------------------------------

    \182\ 12 U.S.C. 5465(e)(2)(A) (as added by Title VIII).
    \183\ 12 U.S.C. 5465(e)(2)(B) (as added by Title VIII).
    \184\ 12 U.S.C. 5465(e)(2)(C) (as added by Title VIII).
    \185\ 12 U.S.C. 5465(e)(2)(D) (as added by Title VIII). Pursuant 
to Section 806(e)(3), the Commission is required to provide the 
Board concurrently with a complete copy of any notice, request or 
other information it receives. However, the Commission is proposing 
that the designated clearing agency file copies of any such notice, 
requests or other information directly with the Board in order to 
help meet this requirement.
---------------------------------------------------------------------------

D. Amendments to Form 19b-4

    In conjunction with new Rules 19b-4(n) and (o), the Commission is 
adopting amendments to Form 19b-4 to reflect the requirements to file 
Security-Based Swap Submissions and Advance Notices with the 
Commission. Specifically, the Commission is modifying the cover page of 
Form 19b-4 to add additional checkboxes so that a clearing agency may 
indicate that the filing is being submitted as a Security-Based Swap 
Submission or an Advance Notice (in the case of a designated clearing 
agency) as well as a proposed rule change under Exchange Act Section 
19(b), in each case to the extent applicable. A clearing agency will be 
able to select more than one filing type, check the appropriate box or 
boxes to indicate the filing type and submit all related information as 
a single filing. In other words, in cases where a proposed change must 
be filed pursuant to all three filing requirements, the clearing agency 
would be able, after December 10, 2012, to meet all applicable filing 
requirements by submitting a single Form 19b-4 electronically on the 
existing filing system, EFFS, to the Commission.
    The Commission also is amending the General Instructions for Form 
19b-4 regarding the filing requirements for Security-Based Swap 
Submissions and Advance Notices. The Commission is revising the 
instructions to include specific information that is required to be 
filed as part of a Security-Based Swap Submission or an Advance Notice.
    With respect to Security-Based Swap Submissions, the amendments to 
the Form 19b-4 General Instructions will require clearing agencies to 
include a statement that includes, but is not limited to: (i) How the 
submission is consistent with Section 17A of the Exchange Act; (ii) 
information that will assist the Commission in the quantitative and 
qualitative assessment of the factors specified in Exchange Act Section 
3C; and (iii) how the rules of the clearing agency meet the criteria 
for open access. Additionally, in order to facilitate the Commission's 
review of a Security-Based Swap Submission, the revised instructions 
provide examples of the types of information the clearing agency could 
consider including in its Security-Based Swap Submission in order to 
respond to the quantitative and qualitative factors specified in 
Exchange Act Section 3C and the requirements set forth in new Rule 19b-
4(o)(3).
    With respect to Advance Notices, the Commission is adopting 
amendments to the General Instructions for Form 19b-4 to require the 
designated clearing agency to provide a description of the nature of 
the proposed change and the expected effects on risks to the designated 
clearing agency, its participants, or the market, along with a 
description of how the designated clearing agency will manage any 
identified risks. These instructions also require that a designated 
clearing agency provide any additional information requested by the 
Commission necessary to assess the effect the proposed change would 
have on the nature or level of risks associated with the designated 
clearing agency's payment, clearing or settlement activities and the 
sufficiency of any proposed risk management techniques.
    The Commission also is adopting a new Exhibit 1A to the General 
Instructions for the Federal Register notice template used by clearing 
agencies as an exhibit to the Form 19b-4 filing. New Exhibit 1A will be 
used only by clearing agencies. All other SROs will continue to use the 
current Exhibit 1 to prepare the Federal Register notice for proposed 
rule changes. The Commission is adopting a separate exhibit for 
clearing agencies because the rules requiring notice of Security-Based 
Swap Submissions and Advance Notices to be published in the Federal 
Register will apply only to clearing agencies. Instructions on 
preparing a Federal Register notice for Security-Based Swap Submissions 
and Advance Notices are unnecessary for all other SROs. In order to 
avoid any confusion, the Commission is providing clearing agencies with 
Exhibit 1A to use to prepare a Federal Register notice for a proposed 
rule change, Security-Based Swap Submission, or Advance Notice, or any 
combination of the three. The amendments to the General Instructions 
for Form 19b-4 also incorporate the statutory timeframes and other 
procedural requirements that are contained in Exchange Act Section 3C 
and Section 806(e).
    Moreover, pursuant to existing Rule 19b-4(j), SROs are required to 
sign Form 19b-4 electronically in connection with filing a proposed 
rule change and to retain a copy of the signature page in accordance 
with Rule 17a-1. Under the rules the Commission is adopting today, Rule 
19b-4(j) has been modified such that it also would apply to Security-
Based Swap Submissions filed in accordance with Exchange Act Section 3C 
and Advance Notices filed in accordance with Section 806(e).
    In addition, the Commission is adopting changes to the General 
Instructions for Form 19b-4, as proposed, to reflect the new deadlines 
by which the Commission must publish and act upon proposed rule changes 
submitted by SROs and the new standards for approval, disapproval or 
suspension of proposed rule changes pursuant to the amendments to 
Exchange Act Section 19(b) contained in Section 916 of the Dodd-Frank 
Act. The Commission is also adopting a number of technical and 
clarifying amendments to Rule 19b-4 and Form 19b-4 to make the 
instructions consistent with the new requirements in Section 916 of the 
Dodd-Frank Act and with current practices of SRO filers.\186\
---------------------------------------------------------------------------

    \186\ See amendments to the General Instructions for Form 19b-4.
---------------------------------------------------------------------------

    Section 916 of the Dodd-Frank Act also modified Exchange Act 
Section 19(b)(3)(A), which permits certain types of proposed rule 
changes to take effect immediately upon filing with the Commission and 
without the notice and approval procedures required by Exchange Act 
Section 19(b)(2), to make clear that any rule establishing or changing 
a fee, due or other charge imposed by the SRO qualifies for this 
designation, regardless of whether the fee, due or other charge is 
applicable only to a member.\187\ The Commission

[[Page 41625]]

is also adopting modifications to the General Instructions for Form 
19b-4 to reflect this clarification.
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 78s(b)(3)(A). When an SRO submits a proposed 
rule change to the Commission pursuant to Section 19(b)(3)(A) of the 
Exchange Act, the Commission still reviews the filing and has the 
power summarily to temporarily suspend the change in rules of the 
SRO within sixty days of its filing if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Exchange Act. If the Commission takes such action, 
it is then required to institute proceedings to determine whether 
the proposed rule change should be approved or disapproved. 
Temporary suspension of a proposed rule change and any subsequent 
action to approve or disapprove such change shall not affect the 
validity or force of the rule change during the period it was in 
effect and shall not be reviewable under Section 25 of the Exchange 
Act, nor shall it be deemed to be ``final agency action'' for 
purposes of 5 U.S.C. 704. See 15 U.S.C. 78s(b)(3)(A).
---------------------------------------------------------------------------

    The Commission did not receive any comments on the proposed 
amendments to Form 19b-4, and the Commission is adopting these 
amendments substantially as proposed. Several minor conforming edits 
and corrections have, however, been made to Form 19b-4 and the General 
Instructions thereto, as compared to the version that was included in 
the Proposing Release, to conform to changes made to new Rule 19b-
4(o)(3), as described in detail in section II.A.1.b of this release, 
and to make other necessary clarifications to the form to reflect 
typographical edits, changes to the form made pursuant to an interim 
final rule that was adopted after publication of the Proposing 
Release,\188\ and other non-substantive revisions to eliminate or 
correct potentially vague or confusing language.\189\
---------------------------------------------------------------------------

    \188\ See Amendment to Rule Filing Requirements for Dually-
Registered Clearing Agencies, Securities Exchange Act Release No. 
34-64832 (July 7, 2011), 76 FR 41056 (July 13, 2011).
    \189\ In addition to the changes described in this section, the 
Commission has also made a number of minor typographical and 
clarifying revisions to the form as compared to what was included in 
the Proposing Release, including: (i) Correcting typographical 
errors and inserting missing graphics on the face of the form, (ii) 
correcting typographical errors in the descriptions of the 
components of the form and inserting missing language in the 
description of Exhibit 1A, (iii) inserting parentheses to 
distinguish existing language from new language in Item A of the 
General Instructions, (iv) inserting language into Item B of the 
General Instructions to make clear that Advance Notices and 
Security-Based Swap Submissions are submitted to the Commission 
pursuant to different statutes, (v) inserting a missing word and 
closed parenthesis in Item D of the General Instructions, (vi) 
deleting the word ``also'' in the second sentence in Item 1(a) to 
make clear that the text of the proposed rule change should be 
included ``either'' in Exhibit 5 or Exhibit 1 (or Exhibit 1A in the 
filing of a clearing agency) (vii) revising the title of Exhibit 1A 
in Item 11 of the General Instructions, (viii) clarifying a defined 
term in Item 3 of the General Instructions (Note 3), (ix) adding the 
phrase ``If the proposed rule change is subject to Commission 
approval'' to the beginning of the sentence in Item 6 to reflect the 
fact that only certain types of proposed rule changes are subject to 
Commission approval and (x) modifying Item II of Exhibit 1A to 
clarify which items of the General Instructions are specifically 
applicable to the exhibit. Based on the non-substantive nature of 
these revisions, the Commission finds notice of the revisions is not 
necessary. See 5 U.S.C. 553(b).
---------------------------------------------------------------------------

E. Amendments to Rule 19b-4 Relating to Section 916 of the Dodd-Frank 
Act

    Under Exchange Act Section 19(b)(2)(E),\190\ as added by the Dodd-
Frank Act, the Commission is required to send the notice of a proposed 
rule change filed by an SRO to the Federal Register for publication 
thereof within 15 days of the date on which the SRO's Web site 
publication is made. The Commission is amending Rule 19b-4(l) to 
provide that if an SRO does not post a proposed rule change on its Web 
site on the same day that it files the proposal with the Commission, 
then the SRO shall inform the Commission of the date on which it posted 
such proposal on its Web site. The purpose of this change is to advise 
the Commission of the date the SRO posted the proposed rule change 
filing to its Web site, as such posting initiates the Commission's 
requirement to send notice of the proposed rule change to the Federal 
Register. The Commission did not receive any comments on the amendments 
and is adopting them as proposed.
---------------------------------------------------------------------------

    \190\ 15 U.S.C. 78s(b)(2)(E).
---------------------------------------------------------------------------

F. New Requirements Under Exchange Act Section 3C and Section 806(e) 
and the Existing Filing Requirements in Exchange Act Section 19(b)

    As discussed previously, the Commission is adopting amendments to 
Rule 19b-4 and Form 19b-4 to incorporate two new requirements under the 
Dodd-Frank Act that are similar to the existing filing requirement for 
proposed rule changes under Exchange Act Section 19(b). The first is 
the requirement to file Security-Based Swap Submissions under new 
Exchange Act Section 3C. The second is the requirement to file Advance 
Notices under Section 806(e). The Commission anticipates that in many 
cases a clearing agency may take an action that would trigger more than 
one of these filing requirements,\191\ and the Commission seeks to 
streamline the filing processes for Exchange Act Section 3C, Section 
806(e) and Exchange Act Section 19(b) by proposing that all such 
filings be made electronically on Form 19b-4.
---------------------------------------------------------------------------

    \191\ Title VII contains a clause, which provides in pertinent 
part, that ``[u]nless otherwise provided by its terms, [Subtitle B] 
does not divest * * * the Securities and Exchange Commission * * * 
of any authority derived from any other provision of applicable 
law.'' See Section 771 of the Dodd-Frank Act. Similarly, Section 811 
of the Dodd-Frank Act provides that ``[u]nless otherwise provided by 
its terms, this title does not divest any appropriate financial 
regulator, any Supervisory Agency, or any other Federal or State 
agency, of any authority derived from any other applicable law, 
except that any [risk management] standards prescribed by the 
[Board] under section 805 shall supersede any less stringent 
requirements established under other authority to the extent of any 
conflict.'' Accordingly the new requirements under Titles VII and 
VIII do not supersede the existing requirements under the Exchange 
Act that would require clearing agencies (which are all SROs) to 
file a proposed rule change when the matter described in a Security-
Based Swap Submission or Advance Notice also meets the criteria for 
a proposed rule change.
---------------------------------------------------------------------------

    New Rules 19b-4(n) and (o) and the corresponding amendments to Form 
19b-4 are being adopted to avoid duplicative filings and to streamline 
the process and burden on clearing agencies and the Commission. 
However, the filing requirements of Exchange Act Section 3C, Section 
806(e) and Exchange Act Section 19(b) are distinct from each other and 
subject to different statutory standards for Commission review. As a 
result, a clearing agency that files pursuant to more than one of these 
sections must meet the requirements of the applicable regulatory scheme 
before the applicable change may become effective.
    Accordingly, it is likely that many proposals made by clearing 
agencies may be filed and require review under more than one of the 
three Commission review procedures discussed herein. For example, a 
designated clearing agency may be required to submit an Advance Notice 
in connection with its Security-Based Swap Submission if the 
requirement to clear the security-based swap described in the 
submission would materially affect the nature or level of risks 
presented by the designated clearing agency. Moreover, if the 
designated clearing agency did not have existing authority under its 
rules to clear the relevant security-based swap, such action also would 
require a proposed rule change filing under Exchange Act Section 19(b).
    In other cases, only one of the three Commission-review procedures 
may apply because the scope of proposals requiring review under each of 
Section 806(e) and Exchange Act Section 3C is in some ways broader and 
in other ways narrower in comparison to Exchange Act Section 19(b). 
There is, for example, the potential that certain changes to the 
operations of a designated clearing agency may not require the filing 
of a proposed rule change under Exchange Act Section 19(b) or a 
Security-Based Swap Submission under Exchange Act Section 3C, but may 
trigger a requirement to file an Advance Notice under Section 806(e). 
By contrast, because the notice requirement under Section 806(e) 
applies only to matters that materially affect the nature or level of 
risk presented by a designated clearing agency, in some cases a rule 
change filed under Exchange Act Section 19(b) would not trigger the 
advance notice requirement under Section 806(e).
    When a clearing agency submits a filing for more than one purpose 
(i.e., proposed rule change, Security-Based Swap Submission and/or 
Advance Notice), the Commission will endeavor to evaluate such filings 
in tandem as part of a parallel process. Although the timing for review 
under each of Exchange Act Section 3C, Section 806(e) and Exchange Act 
Section 19(b) is

[[Page 41626]]

different,\192\ all three processes contain some degree of flexibility, 
and the Commission will attempt to streamline the review processes to 
avoid any unnecessary delays or duplicative requests for information.
---------------------------------------------------------------------------

    \192\ See 15 U.S.C. 78s(b)(2) (as amended by Section 916 of the 
Dodd-Frank Act) (establishing the timeframes under which the 
Commission must either approve, disapprove or institute proceedings 
with respect to a proposed rule change following receipt of the 
filing); 15 U.S.C. 78c-3(b)(3) (as added by Section 763(a) of the 
Dodd-Frank Act) (stating that the Commission must make its 
determination on a Security-Based Swap Submission within 90 days 
after receipt, unless the clearing agency agrees to an extension of 
this time limitation) and 12 U.S.C. 5465(e)(1)(G) (as added by Title 
VIII) (explaining that the Commission must notify a designated 
clearing agency of any objection to a proposed change filed as an 
Advance Notice under Section 806(e) within 60 days after receiving 
the notice filing, unless the Commission requests additional 
information in consideration of the notice, in which case the 60-day 
period will recommence on the date such information is received by 
the Commission).
---------------------------------------------------------------------------

    However, each of the three processes will remain distinct from the 
other processes. Each proposed rule change, Security-Based Swap 
Submission and Advance Notice will be reviewed and evaluated 
independently by the Commission in accordance with the applicable 
statute and regulatory authority. Moreover, the new requirements being 
adopted today to file Advance Notices with the Commission and to make 
Security-Based Swap Submissions would not replace the existing Exchange 
Act Section 19(b) rule filing process, nor will a filing made under 
Exchange Act Section 3C or Section 806(e) eliminate the need to satisfy 
the requirements of the other processes to the extent they are 
applicable. In other words, the Commission review required by Exchange 
Act Section 3C is different from the review required under Section 
806(e), which in turn is different from the review required under 
Exchange Act Section 19(b).
    Section 806(e) requires an analysis of the risk management issues 
that may impact the clearing agency, its participants, or the market. 
Exchange Act Section 19(b), by contrast, requires a broader evaluation 
and an analysis as to whether the proposed rule change is consistent 
with the requirements of the Exchange Act and the rules thereunder. 
Finally, Exchange Act Section 3C only applies when a clearing agency 
plans to accept for clearing a security-based swap (or a group, 
category, type or class of security-based swaps), and the standard for 
review is based on a number of specified factors, including but not 
limited to: (i) How the submission is consistent with Section 17A of 
the Exchange Act and (ii) the factors specified in Exchange Act Section 
3C relating to the security-based swap, the market for the security-
based swaps, and the clearing agency.
    The Commission believes that these distinct reviews make it 
possible for a submission made on Form 19b-4 to be acceptable under the 
standards for review for one of the three purposes but not under the 
others.\193\ For example, in cases where a clearing agency's plan to 
accept a new security-based swap (or any group, category, type or class 
of security-based swaps) for clearing requires it to file both a 
proposed rule change and a Security-Based Swap Submission, once the 
proposed rule change is approved and effective, the clearing agency may 
begin clearing the security-based swap on a voluntary basis, subject to 
any separate determination that may be made related to the Security-
Based Swap Submission to require mandatory clearing. Even if a 
determination is made not to require mandatory clearing, such security-
based swap may continue to be cleared on a voluntary basis. In cases 
where only the requirements of one of Exchange Act Section 19(b), 
Exchange Act Section 3C or Section 806(e) are implicated, only the 
applicable process would need to be completed before the proposal could 
become effective. The Commission discussed its views regarding the 
distinct processes under Sections 19(b), 3C, and 806(e) in the 
Proposing Release and did not receive any comments on these views.
---------------------------------------------------------------------------

    \193\ The Commission notes, however, that when a proposal is 
required to be filed as both a proposed rule change and an Advance 
Notice, the proposal would not become effective until the statutory 
provisions applicable to both types of filings are satisfied. For 
example, a rule proposal may provide for sound risk management 
practices but also have an anticompetitive aspect that would not 
satisfy the requirements of the Exchange Act.
---------------------------------------------------------------------------

G. Effective and Compliance Dates

    The effective date for Sec. Sec.  240.3Ca-1, 240.3Ca-2, and the 
amendments to Sec.  240.19b-4, is August 13, 2012. Similarly, the 
compliance date for Sec. Sec.  240.3Ca-1, 240.3Ca-2, and the amendments 
to Sec.  240.19b-4, except for Sec.  240.19b-4(o), which is discussed 
below, is August 13, 2012.
    With respect to the compliance date for new Rule 19b-4(o), which 
sets forth the process for filing Security-Based Swaps, the Commission 
recognizes that clearing agencies will require time to gather and 
synthesize the information required to be included in a submission. To 
accommodate this transition period, the Commission believes that it is 
appropriate to delay the compliance date for Rule 19b-4(o) to allow 
clearing agencies to make any changes to their internal procedures to 
incorporate the statutory factors and to make any related adjustments, 
particularly as commenters have stated that a significant amount of 
data would need to be provided in connection with a Security-Based Swap 
Submission. More broadly, the Commission is cognizant of the general 
need to provide for the orderly and methodical implementation of 
mandatory clearing determinations, commencing with the determinations 
made with respect to pre-enactment security-based swaps.\194\ After 
considering these issues, the Commission has determined that the 
compliance date for new Rule 19b-4(o) will be the date that is 60 days 
after the date the Commission issues its first written determination 
pursuant to Exchange Act Section 3C(b)(2)(C)(ii) \195\ determining 
whether a security-based swap, or group, category, type, or class of 
security-based swaps, is required to be cleared.
---------------------------------------------------------------------------

    \194\ See supra note 43 and accompanying text.
    \195\ 15 U.S.C. 78c-3(b)(2)(C)(iii) (as added by Section 763(a) 
of the Dodd-Frank Act).
---------------------------------------------------------------------------

    The Commission expects that such first determination will address 
pre-enactment security-based swaps (i.e., security-based swaps listed 
for clearing by a clearing agency as of the date of enactment of 
Exchange Act Section 3C), which, pursuant to Exchange Act Section 
3C(b)(2)(B), were deemed to be submitted to the Commission as of such 
date.\196\ Two clearing agencies listed security-based swaps for 
clearing as of July 21, 2010, and provided an extension to the 90-day 
review period in Exchange Act Section 3C(b)(3), which otherwise would 
have commenced on July 21, 2010. However, as with other Security-Based 
Swap Submissions, the Commission is required by the Exchange Act 
Section 3C to make a determination with respect to such pre-enactment 
submissions within the applicable review period. As described above, 
that section also requires the Commission to make the submission of 
pre-enactment security-based swaps available to the public and to 
provide at least a 30-day public comment period regarding its 
determination whether a clearing requirement should apply to such 
security-based swaps.\197\ Accordingly, the Commission believes that 
the compliance date is appropriate since there will be a public notice 
and comment process prior to the first written determination pursuant 
to Exchange Act Section 3C(b)(2)(C)(ii). The Commission expects to 
include in

[[Page 41627]]

such notice and written determination references to the impending 
compliance date and thus clearing agencies will be on notice and will 
have time to prepare for the filing of their Submissions. Sixty days 
following the date that the Commission issues that first written 
determination, clearing agencies will be required to begin filing 
Security-Based Swap Submissions with the Commission under new Rule 19b-
4(o).
---------------------------------------------------------------------------

    \196\ See 15 U.S.C. 78c-3(b)(2)(B).
    \197\ See 15 U.S.C. 78c-3(b)(2)(C)(i) and (iii).
---------------------------------------------------------------------------

    In addition, the Commission is currently in the process of 
designing and implementing the system upgrades that are necessary in 
order for Advance Notices and Security-Based Swap Submissions to be 
filed on EFFS. The Commission intends to have the system upgrades to 
EFFS operational by December 10, 2012. Because of the time required to 
finalize these upgrades, the final rules provide that Advance Notices 
and Security-Based Swap Submissions filed prior to December 10, 2012 
must be filed with the Commission by submitting the applicable filing 
to a dedicated email inbox to be established by the Commission. 
Accordingly, the compliance and effective dates for the amendments to 
Sec.  249.819 and Form 19b-4 is December 10, 2012.

III. Paperwork Reduction Act

    Rule 19b-4, Form 19b-4 and Rule 3Ca-1 contain ``collection of 
information requirements'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\198\ Accordingly, the Commission has 
submitted the information to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507 and 5 CFR 
1320.11. Specifically, the Commission has submitted revisions to the 
current collection of information titled ``Rule 19b-4 Filings with 
Respect to Proposed Rule Changes by Self-Regulatory Organizations'' 
(OMB Control No. 3235-0045). The Commission also has submitted 
revisions to the current collection of information titled ``Form 19b-4 
under the Securities Exchange Act of 1934'' (OMB Control No. 3235-
0045). Finally, the Commission has submitted a new collection of 
information titled ``Rule 3Ca-1 Stay of Clearing Requirement and Review 
by the Commission under the Securities Exchange Act of 1934'' to OMB 
for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. OMB has 
not yet assigned a control number to the new collection of information. 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number. Any information submitted to the Commission will 
be made publicly available.
---------------------------------------------------------------------------

    \198\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission solicited comments on the 
collection of information requirements.\199\ No written comments were 
received on the estimates in the Proposing Release, although the 
Commission received informal comments from eight clearing agencies 
prior to issuing the Proposing Release in order to inform its estimates 
in that release. For the most part, the Commission is not making any 
changes to the estimates in the Proposing Release; however, some 
initial burden estimates have been adjusted, as discussed below, to 
reflect updated information on such burden estimates.
---------------------------------------------------------------------------

    \199\ See Proposing Release, supra note 24.
---------------------------------------------------------------------------

A. Summary of Collection of Information

1. Amendments to Rule 19b-4 and Form 19b-4
    Rule 19b-4 currently requires an SRO seeking Commission approval 
for a proposed rule change to provide the information stipulated in 
Form 19b-4. Form 19b-4 currently requires a description of the terms of 
a proposed rule change, the proposed rule change's impact on various 
market segments and the relationship between the proposed rule change 
and the SRO's existing rules. Form 19b-4 also requires an accurate 
statement of the authority and statutory basis for, and purpose of, the 
proposed rule change, the proposal's impact on competition and a 
summary of any written comments received by the SRO from SRO members. 
An SRO also is required to submit Form 19b-4 to the Commission 
electronically, post a proposed rule change on its Web site within two 
business days of its filing, and to post and maintain a current and 
complete set of its rules on its Web site.
    The Commission is amending Rule 19b-4 to require two new 
collections of information on Form 19b-4 related to new filing 
requirements applicable to clearing agencies under the Dodd-Frank Act. 
The amendments will not otherwise change the collection of information 
requirements currently in Rule 19b-4 and Form 19b-4. These new 
reporting requirements are in addition to the information currently 
required by Rule 19b-4 and Form 19b-4.
    New Rules 19b-4(n) and (o) will require clearing agencies to file 
information with the Commission under Section 806(e) and Exchange Act 
Section 3C, respectively, on Form 19b-4. Clearing agencies that are 
required to file a Security-Based Swap Submission or an Advance Notice 
prior to December 3, 2012 will file such notice with the Commission by 
email. Exchange Act Section 3C requires clearing agencies to submit for 
a Commission determination of whether mandatory clearing applies, any 
security-based swap (or any group, category, type or class of security-
based swaps) that the clearing agency plans to accept for clearing and 
to provide notice to its members of such submission. Section 806(e) 
requires that a clearing agency designated as systemically important by 
the Council file with the Commission advance notice of proposed changes 
to its rules, procedures or operations that could materially affect the 
nature or level of risk presented by the designated clearing agency.
    The Commission anticipates that in many cases, a clearing agency 
will be required to file a proposal under Exchange Act Section 3C or 
Section 806(e) when it is already required to file a proposed rule 
change under Exchange Act Section 19(b). Accordingly, clearing agencies 
will be able to submit on the same Form 19b-4, proposals required to be 
filed with the Commission under Exchange Act Section 3C or Section 
806(e) that they are already required to submit under Exchange Act 
Section 19(b). In some cases, however, a clearing agency will be 
required to file a proposal under Exchange Act Section 3C or Section 
806(e) and not under Exchange Act Section 19(b), for example where a 
proposal materially affects the nature or level of risks presented by 
the clearing agency but does not change the rules of the clearing 
agency.
    In addition, Exchange Act Section 3C and Section 806(e) each 
require information to be provided as part of the filing that is in 
addition to the information required to be filed with a proposed rule 
change under Exchange Act Section 19(b). A clearing agency will be 
required to include as part of a Security-Based Swap Submission a 
statement that includes, but is not limited to: (i) How the submission 
is consistent with Exchange Act Section 17A; (ii) information that will 
assist the Commission in the quantitative and qualitative assessment of 
the factors specified in Exchange Act Section 3C; and (iii) how the 
rules of the clearing agency meet the criteria for open access.
    Section 806(e) provides that the Advance Notice include a 
description of the nature of the proposed change and the expected 
effects on risks to the designated clearing agency, its participants, 
or the market and it must provide a description of how the designated 
clearing agency will manage any identified risks. A designated

[[Page 41628]]

clearing agency also will be required to provide any additional 
information requested by the Commission as necessary to assess the 
effect the proposed change would have on the nature or level of risks 
associated with the designated clearing agency's payment, clearing or 
settlement activities and the sufficiency of any proposed risk 
management techniques.
    The amendments to Rule 19b-4 also will require a clearing agency to 
post certain information on its Web site, and require an SRO that does 
not post a proposed rule change on its Web site on the same day that it 
files the proposal with the Commission to inform the Commission of the 
date on which it posted such proposal on its Web site.\200\ Security-
Based Swap Submissions and Advance Notices, and any amendments thereto, 
will be required to be posted on the clearing agency's Web site within 
two business days of filing the information with the Commission. Except 
for any filing or information for which a clearing agency has submitted 
a proper confidential treatment request, the information generally 
shall remain posted on the clearing agency's Web site until: (i) In the 
case of a Security-Based Swap Submission, the Commission makes a 
mandatory clearing determination, (ii) in the case of an Advance 
Notice, the date the clearing agency posts a notice of effectiveness in 
accordance with new Rule 19b-4(n)(4)(ii), or (iii) in the case of 
either type of filing, the date the clearing agency withdraws the 
filing or is notified by the Commission that it was not properly filed. 
A clearing agency also will be required to post notice on its Web site 
of the effectiveness of any change to its rules, procedures or 
operations referred to in an Advance Notice within two business days of 
the effective date determined in accordance with Section 806(e).
---------------------------------------------------------------------------

    \200\ Rule 19b-4(l).
---------------------------------------------------------------------------

2. Stay of Clearing Requirement
    New Rule 3Ca-1 provides that the Commission, on application of a 
counterparty to a security-based swap (or group, category, type, or 
class of security-based swaps), or on the Commission's own initiative, 
may stay the clearing requirement until the Commission completes a 
review of the terms of the security-based swap and the clearing of the 
security-based swap that the clearing agency has accepted for clearing. 
A counterparty to a security-based swap that applies for a stay of the 
clearing requirement for a security-based swap (or group, category, 
type, or class of security-based swaps) will be required to submit to 
the Commission the information set forth in new Rule 3Ca-1(b).\201\
---------------------------------------------------------------------------

    \201\ See Supra section II.B.
---------------------------------------------------------------------------

    Any clearing agency that has accepted for clearing a security-based 
swap (or group, category, type, or class of security-based swaps) that 
is subject to the stay of the clearing requirement will be required to 
provide information requested by the Commission as it determines to be 
necessary and appropriate to assess any of the factors in the course of 
the Commission's review.

B. Use of Information

1. Amendments to Rule 19b-4 and Form 19b-4
    The information currently required under Rule 19b-4 and reported on 
Form 19b-4 is used by the Commission to review proposed rule changes 
filed by SROs pursuant to Exchange Act Section 19(b)(1) \202\ and to 
provide notice of the proposals to the general public. The Commission 
relies upon the information received in SRO filings, as well as public 
comments regarding the information, in reviewing and reaching decisions 
about whether to approve a proposed rule change.
---------------------------------------------------------------------------

    \202\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    The information to be provided by clearing agencies pursuant to the 
amendments to Rule 19b-4 and Form 19b-4 will be used by the Commission 
to evaluate Security-Based Swap Submissions and Advance Notices. The 
Commission will use the information filed on Form 19b-4 related to 
Security-Based Swap Submissions to determine whether the security-based 
swap (or any group, category, type or class of security-based swaps) 
described in the Security-Based Swap Submission will be required to be 
cleared pursuant to Exchange Act Section 3C(a)(1).
    The Commission will use the information on Form 19b-4 related to 
Advance Notices filed under Section 806(e) to determine the effect on 
the nature or level of risks that would be presented by a designated 
clearing agency based on a proposed change to its rules, procedures or 
operations, and the expected effects on risk to the designated clearing 
agency, its participants and the market and to determine whether the 
Commission should make an objection to the proposed change. In 
addition, the information on the form will be provided to the Board 
because the Commission is required to provide copies of all Advance 
Notices and any additional information provided by the designated 
clearing agency relating to the Advance Notice to the Board and to 
consult with the Board before taking any action on or completing its 
review of the Advance Notice.\203\ In some instances, the Commission 
also may use the information on the form to determine whether to allow 
a proposed change to take effect in less than 60 days following the 
receipt of the Advance Notice and to determine whether a change made on 
an emergency basis is warranted or whether it should be modified or 
rescinded.
---------------------------------------------------------------------------

    \203\ 12 U.S.C. 5465(e)(3) and (4) (as added by Title VIII).
---------------------------------------------------------------------------

    The information to be filed on Form 19b-4 relating to Exchange Act 
Section 3C and Section 806(e) also will be used by participants of the 
clearing agency, market participants, other clearing agencies, or the 
general public to comment on the proposal, as the Commission requires 
that a clearing agency post the information on its Web site. In 
addition, pursuant to Exchange Act Section 3C, a clearing agency will 
be required to provide its members with notice of the Security-Based 
Swap Submission. As with proposed rule changes under Exchange Act 
Section 19(b), the Commission will solicit comment from interested 
parties on proposals filed under Exchange Act Section 3C and Section 
806(e). Interested parties could use the information to comment on the 
proposed change and to provide feedback on the development of the 
clearing agency's service offerings and the rules, procedures and 
operations of the clearing agency.
    The information collected by the Commission with respect to the 
date on which the SRO posted a proposed rule change on its Web site (if 
such posting date is not the same as the filing date) will be used to 
inform the Commission of the date by which the Commission must send the 
SRO notice to the Federal Register for publication.
2. Stay of Clearing Requirement
    The information provided as required by new Rule 3Ca-1 will be used 
by the Commission to determine whether to grant the stay of the 
clearing requirement sought by a counterparty and to review whether the 
clearing requirement will continue to apply to the security-based swap 
(or group, category, type, or class of security-based swaps) referenced 
in the request for a stay.

[[Page 41629]]

C. Respondents

1. Amendments to Rule 19b-4 and Form 19b-4
    Prior to the enactment of the Dodd-Frank Act, 25 SROs were making 
filings with the Commission subject to the collection of information 
under Rule 19b-4 and Form 19b-4. In fiscal year 2011, these SRO 
respondents filed 1,606 proposed rule changes subject to the current 
collection of information, of which 1,180 proposed rule changes 
ultimately became effective.\204\
---------------------------------------------------------------------------

    \204\ Filings of proposed rule changes are available on the 
Commission's Web site at https://www.sec.gov/rules/sro.shtml. To 
avoid duplication, the total figure does not include certain pre-
filings made with the Commission pursuant to Rule 19b-4(f)(6), which 
allows an SRO to designate certain proposed rule changes as 
effective upon filing if, among other things, the SRO provides 
written notice of its intent to file, along with a brief description 
and proposed rule text (a ``pre-filing''), to the Commission at 
least five business days prior to an actual filing.
---------------------------------------------------------------------------

    Although Rule 19b-4 and Form 19b-4 apply to all SROs, the new 
collection of information requirements in the new rules will apply to 
clearing agencies and, in the case of the amendments pursuant to 
Section 916 of the Dodd-Frank Act, to all SROs (i.e,, more than the 
number of estimated clearing agencies below). The amendments relating 
to Exchange Act Section 3C will apply to the clearing agencies that 
currently clear security-based swaps or that the Commission estimates 
may do so in the future. The obligation to centrally clear security-
based swap transactions is a new requirement under Title VII, and three 
clearing agencies that had previously operated under temporary 
conditional exemptions under Section 36 of the Exchange Act are now 
registered security-based swap clearing agencies.\205\ These three 
clearing agencies currently clear or plan to clear \206\ security-based 
swaps and there could conceivably be a few more in the foreseeable 
future.\207\ In the Proposing Release, the Commission noted that four 
clearing agencies were at that time authorized to clear security-based 
swaps pursuant to the temporary conditional exemptions and estimated 
that four to six clearing agencies could in the future clear security-
based swaps and be subject to the information collection requirements 
in the rules relating to Exchange Act Section 3C. The Commission used 
the higher estimate (six) for the PRA analysis in the Proposing Release 
and the Commission believes that such estimate is still appropriate 
given the potential for additional clearing agencies to clear security-
based swaps in the future.
---------------------------------------------------------------------------

    \205\ Chicago Mercantile Exchange Inc., ICE Clear Credit LLC 
(formerly ICE Trust US LLC), and ICE Clear Europe Limited are 
registered with the Commission to clear security-based swaps. The 
Commission previously authorized five entities to clear credit 
default swaps, which are security-based swaps. See CDS clearing by 
ICE Clear Europe Limited, Securities Exchange Act Release Nos. 60372 
(July 23, 2009), 74 FR 37748 (July 29, 2009) and 61973 (Apr. 23, 
2010), 75 FR 22656 (Apr. 29, 2010); CDS clearing by Eurex Clearing 
AG, Securities Exchange Act Release Nos. 60373 (July 23, 2009), 74 
FR 37740 (July 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 
(Apr. 29, 2010); CDS clearing by Chicago Mercantile Exchange Inc., 
Securities Exchange Act Release Nos. 59578 (Mar. 13, 2009), 74 FR 
11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 
2009) and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010); CDS 
clearing by ICE Clear Credit LLC (formerly ICE Trust US LLC), 
Securities Exchange Act Release Nos. 59527 (Mar. 6, 2009), 74 FR 
10791 (Mar. 12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 
2009) and 61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010); 
Temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd. Securities 
Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 
2009). Eurex Clearing AG, LIFFE A&M, and LCH.Clearnet Ltd. are not 
currently registered with the Commission to clear security-based 
swaps.
    \206\ By referring to a clearing agency that plans to clear 
security-based swaps, the Commission means a clearing agency that is 
permitted to do so under its rules but that has not yet begun 
clearing security-based swaps.
    \207\ Based on the significant level of capital and other 
financial resources necessary for the formation of a clearing 
agency, the Commission does not expect there to be a large number of 
clearing agencies that seek to clear security-based swaps.
---------------------------------------------------------------------------

    The amendments to Rule 19b-4 and Form 19b-4 relating to the 
requirement to file Advance Notices with the Commission pursuant to 
Section 806(e) will only apply to clearing agencies that are registered 
with the Commission, designated by the Council as systemically 
important, and for which the Commission is the Supervisory Agency. 
There are currently nine clearing agencies registered with the 
Commission; this includes four clearing agencies that were registered 
with the Commission to clear securities transactions prior to the 
effectiveness of the Dodd-Frank Act, two clearing agencies that 
currently do not clear any securities transactions, and three clearing 
agencies that were deemed registered under Section 17A(l) after the 
effective date of Title VII of the Dodd-Frank Act and that are 
currently clearing or that plan to clear security-based swaps.\208\ In 
addition, and as noted above and in the Proposing Release, a few 
additional security-based swap clearing agencies could conceivably 
register with the Commission in the foreseeable future. Accordingly, 
the number of security-based swap clearing agencies used in the PRA 
analysis has been increased beyond the ones that currently exist to a 
total of six in order to account for such future clearing agencies. For 
purposes of the PRA analysis, the Commission estimates that the four 
securities clearing agencies that are currently clearing non-security-
based swap securities and the six estimated clearing agencies that 
either currently clear or may clear security-based swaps in the future 
would be subject to the applicable collection of information 
requirements.
---------------------------------------------------------------------------

    \208\ Of the four clearing agencies that were authorized to 
clear security-based swaps at the time the Proposing Release was 
issued, one was not deemed registered with the Commission under 
Section 17A(l) of the Exchange Act after the temporary exemptions 
expired. Accordingly, the Commission has adjusted its estimate of 
clearing agencies that currently clear or plan to clear security-
based swaps. However, the Commission recognizes that this clearing 
agency, as well as others, may seek to clear security-based swaps in 
the future and the Commission has maintained the earlier estimate of 
six clearing agencies for purposes of the PRA analysis.
---------------------------------------------------------------------------

2. Stay of Clearing Requirement
    The Commission estimates that six security-based swap clearing 
would potentially be subject to the collection of information under new 
Rule 3Ca-1 in connection with any counterparty requesting a stay of 
clearing requirement.

D. Total Annual Reporting and Recordkeeping Burden

1. Background
    The amendments to Rule 19b-4 and Form 19b-4 are designed to 
facilitate the processes for providing the Commission with Security-
Based Swap Submissions and Advance Notices and to make these processes 
efficient by utilizing the existing infrastructure for proposed rule 
changes, thereby conserving both clearing agency and Commission 
resources. As amended, Form 19b-4 enables clearing agencies to submit 
Security-Based Swap Submissions and Advance Notices electronically with 
the Commission. The amendments to Rule 19b-4 also will require a 
clearing agency to post on its Web site any Security-Based Swap 
Submissions, Advance Notices, and any amendments thereto, within two 
business days of the date on which they are submitted to the 
Commission. A further amendment to Rule 19b-4 will require an SRO that 
files a proposed rule change with the Commission to inform the 
Commission of the date on which it posted such proposal on its Web site 
if the posting did not occur on the same day that the SRO filed the 
proposal with the Commission. Finally, new Rule 3Ca-1 specifies the 
process for a security-based swap counterparty to apply to the 
Commission for a stay of the clearing requirement.

[[Page 41630]]

2. Rule 19b-4 and Form 19b-4
a. Introduction
    As noted in the Proposing Release, the Commission conducted a 
survey and received informal comments from the staff of eight clearing 
agencies that will be subject to the new requirements in the amendments 
to Rule 19b-4 and Form 19b-4. These comments were received prior to the 
publication of the Proposing Release and the Commission did not receive 
any additional comments from clearing agencies or any other parties on 
these estimates after the Proposing Release was published. Clearing 
agencies indicated they would have to train personnel and develop 
policies and procedures in order to implement the new filing 
requirements under Rule 19b-4 and Form 19b-4 in connection with 
Security-Based Swap Submissions and Advance Notices. In addition, 
clearing agencies indicated they would have to submit additional 
information to the Commission on Form 19b-4 in order to meet the 
requirements for filing Security-Based Swap Submissions or Advance 
Notices, either as separate filings or as part of filings also 
submitted as proposed rule changes under Exchange Act Section 19(b).
    The clearing agencies emphasized that the estimated burdens would 
depend in large part on the rules ultimately adopted by the Commission 
to define and determine how frequently Security-Based Swap Submissions 
and Advance Notices will be required to be filed and the nature and 
extent of information that will be required with each filing. In 
addition, the clearing agencies stated that the burden per filing could 
vary widely, depending on the complexity of each individual filing. For 
example, some clearing agency proposals may require more information or 
analysis to be submitted as part of the filing. The clearing agencies 
also stated that the annual burden also could vary widely from year to 
year depending on the number of new proposals the clearing agency makes 
in a particular year. The Commission noted in the Proposing Release 
that the estimates provided in that release were preliminary and could 
change after clearing agencies had the opportunity to review and 
closely evaluate the rules. However, the Commission did not receive any 
comments on these estimates, from clearing agencies or from other 
parties and, as a result, has not adjusted these estimates. The 
estimates of the burden per filing also varied among clearing agencies, 
which may reflect the different internal processes, training programs, 
and review procedures for new projects currently in place at the 
different clearing agencies. In addition, prior to the effective date 
of the Dodd-Frank Act some clearing agencies were registered with the 
Commission (``pre-Dodd-Frank Act clearing agencies'') while others were 
not. Pre-Dodd-Frank Act clearing agencies had been filing proposed rule 
changes under Exchange Act Section 19(b) prior to the effective date of 
the Dodd-Frank Act and have more familiarity with the collection of 
information requirements related to Rule 19b-4 and Form 19b-4, while 
the newly registered \209\ clearing agencies may not be as familiar 
with these requirements and may incur a greater burden in connection 
with using EFFS and training personnel.
---------------------------------------------------------------------------

    \209\ Newly-registered clearing agencies refers to clearing 
agencies registered with the Commission to clear security-based 
swaps after the effective date of the Dodd-Frank Act (which includes 
clearing agencies that the Commission has estimated may be 
registered in the future to clear security-based swaps).
---------------------------------------------------------------------------

    The Commission used the more conservative numbers estimated by the 
clearing agencies for its estimates for the PRA. The Commission 
believed the more conservative estimate was appropriate because the 
estimates of the burden per filing varied among clearing agencies and 
could vary among the filings submitted (i.e., some proposals may be 
more complex and require more time for the clearing agency to prepare a 
Security-Based Swap Submission or an Advance Notice). In addition, the 
Commission calculated the burden for the requirements related to 
Advance Notices assuming that they would apply to ten clearing agencies 
and the burden for the requirements related to Security-Based Swap 
Submissions assuming they would apply to six clearing agencies.
    Finally, the Commission recognized that there will likely be some 
substantive and procedural overlap with respect to the processes for 
preparing and submitting Security-Based Swap Submissions, Advance 
Notices and proposed rule changes that relate to the same subject 
matter. For example, in connection with a decision to accept for 
clearing a new type of security-based swap that was not previously 
permitted under the clearing agency's rules, a clearing agency could be 
required to make a filing as a Security-Based Swap Submission, an 
Advance Notice and a proposed rule change. In this case, because these 
submissions all relate to the same underlying proposal, the amount of 
time required to prepare a single Form 19b-4 for all three purposes is 
likely to be less than the aggregate amount of time ordinarily required 
to prepare and submit three separate filings. Nevertheless, in the 
Proposing Release the Commission calculated the PRA burden for each 
process individually without accounting for any reduction due to the 
anticipated overlap in order to assure that the Commission did not 
underestimate the burdens. Additionally, the estimates in the Proposing 
Release were derived from discussions between the Commission's staff 
and staff of the clearing agencies, as described above. A detailed 
description of the estimated burdens related to Rule 19b-4 and Form 
19b-4 is set forth in the sections below. The Commission did not 
receive any comments on the PRA estimates published in the Proposing 
Release and, other than a minor adjustment to reflect a change in 
status for recently registered clearing agencies, the burden estimates 
for the rules have not changed.
b. Internal Policies and Procedures
    At the time it issued the Proposing Release, the Commission 
believed that the six estimated clearing agencies that were either 
going to be deemed registered to clear security-based swaps pursuant to 
Section 17A(l) of the Exchange Act or that could on their own 
initiative seek to be regulated by the Commission in the future in 
order to clear security-based swaps could incur some one-time costs 
associated with training their personnel about the procedures for 
submitting Security-Based Swap Submissions, Advance Notices, and/or 
proposed rule changes in electronic format through EFFS. Based on staff 
discussions with the clearing agencies prior to issuing the Proposing 
Release, the Commission estimated that each newly-registered clearing 
agency would spend approximately 20 hours training all staff members 
who will use EFFS to submit Security-Based Swap Submissions, Advance 
Notices and/or proposed rule changes electronically. Accordingly, the 
Commission estimated that the total one-time burden of training staff 
members of newly-registered clearing agencies to use EFFS will be 120 
hours (six respondent clearing agencies x 20 hours). After the 
Proposing Release was issued, three of these clearing agencies were 
deemed registered with the Commission pursuant to Section 17A(l) and 
began being required to file proposed rule changes with the Commission 
on EFFS. However, these clearing agencies will still need to train 
staff members on filing Advance Notices and Security-Based Swap 
Submissions. Accordingly, the Commission does not believe it necessary 
to modify the estimate used in the Proposing Release with respect to 
initial training on EFFS.

[[Page 41631]]

Accordingly, the Commission is using the estimates in the Proposing 
Release for the rules being adopted today.
    In the Proposing Release, the Commission estimated that, after the 
initial training was completed, each SRO (including pre-Dodd-Frank Act 
clearing agencies) would spend approximately 10 hours annually training 
new compliance staff members and updating the training of existing 
compliance staff members to use EFFS. The Commission believed that only 
a minimal amount of EFFS training would be submission-specific and that 
training a person to submit either a proposed rule change, Security-
Based Swap Submission or Advance Notice would generally be sufficient 
to allow such person to make one or more of the other types of 
submissions. The Commission did not receive any comments on these 
estimates in the Proposing Release and is using them for the rules as 
they are being adopted today, resulting in a total annual burden of 350 
hours ((six respondent clearing agencies x 10 hours) + (29 respondent 
SROs that are not clearing agencies x 10 hours)).
    Based on staff discussions with the clearing agencies prior to 
issuing the Proposing Release, the Commission estimated in the 
Proposing Release that there would be a one-time paperwork burden of 
130 hours for each newly-registered clearing agency to draft and 
implement internal policies and procedures relating to using EFFS to 
submit Security-Based Swap Submissions, Advance Notices and proposed 
rule changes with the Commission, for a total of 780 hours (130 hours x 
six newly-registered clearing agencies). In addition, and based on 
conversations with staff from the clearing agencies prior to issuing 
the Proposing Release, the Commission estimated that there would be a 
one-time paperwork burden of 30 hours for each pre-Dodd-Frank Act 
clearing agency to draft and implement modifications to existing 
internal policies and procedures for using EFFS in order to update them 
for submitting Security-Based Swap Submissions and/or Advance Notices 
with the Commission for a total of 120 hours (30 hours x four pre-Dodd-
Frank Act clearing agencies). The Commission believes, based on its 
experience with clearing agencies, that such internal policies and 
procedures will be drafted and updated by the in-house counsel at the 
clearing agencies. The Commission did not receive any comments on the 
burden estimates in the Proposing Release and is using these estimates 
for the rules the Commission is adopting today.
c. Proposed Rule Changes
    An SRO rule change proposal generally is filed with the Commission 
after an SRO's staff has obtained approval of its board of directors. 
The time required to complete a filing varies significantly and is 
difficult to separate from the time an SRO spends in developing 
internally the proposed rule change. In a PRA analysis conducted in 
2004 in connection with amendments to Rule 19b-4 and Form 19b-4 (``2004 
PRA''), the Commission estimated that 34 hours is the amount of time 
that would be required to complete an average proposed rule change 
filing and 129 hours is the amount of time required to complete a novel 
or complex proposed rule change filing.\210\ The Commission stated in 
the Proposing Release that it preliminarily believed that these 
estimates remained valid based on its experience with the filings 
currently received from SROs and relied on these figures to prepare the 
analysis in the Proposing Release.\211\
---------------------------------------------------------------------------

    \210\ See Securities Exchange Act Release No. 50486 (Oct. 4, 
2004), 69 FR 60287 (Oct. 8, 2004), supra note 94.
    \211\ In 2011, the Commission submitted to OMB a request for 
approval of an extension of the existing collection of information 
provided for in Rule 19b-4 and Form 19b-4 (``2011 PRA''). 
Submissions for OMB review; comment requests, 76 FR 22740 (Apr. 22, 
2011) and 76 FR 37161 (June 24, 2011). The 2011 PRA used the 2004 
PRA estimates to determine the amount of time required to complete 
proposed rule change filings. Consistent with the 2011 PRA, the 
Commission has used the figures contained in the 2011 PRA analysis 
in calculating the PRA estimates in this final rule.
---------------------------------------------------------------------------

    In fiscal year 2011, 25 SRO respondents filed 1,606 rule change 
proposals subject to the current collection of information. Of this 
total, and based on the Commission's experience in reviewing SRO 
filings and past estimates for Rule 19b-4 and Form 19b-4, the 
Commission estimates that 80 proposed rule changes could be 
characterized as novel or complex and 1,526 proposed rule changes could 
be characterized as average. The Commission estimates that the total 
annual reporting burden for filing proposed rule changes with the 
Commission under the amendments to Rule 19b-4 and Form 19b-4 will be 
87,086 hours (((1,526/25) x 35 \212\ average rule change proposals x 34 
hours) + ((80/25) x 35 complex rule change proposals x 129 hours)). 
Thus, on average, the reporting burden for filing proposed rule changes 
is 38.74 hours (87,086 hours/(2,136 average rule change proposals + 112 
complex rule change proposals)). The Commission made similar estimates 
in the Proposing Release, only using 2009 fiscal year numbers, and did 
not receive any comments on those estimates. Accordingly, the 
Commission believes the modified estimates with 2011 fiscal year 
numbers are appropriate and, accordingly, these estimates have been 
used for the rules being adopted today.
---------------------------------------------------------------------------

    \212\ This figure includes the 32 SROs registered with the 
Commission as of June 15, 2012 plus the additional clearing agencies 
that the Commission has estimated could potentially register in the 
future to clear security-based swaps.
---------------------------------------------------------------------------

d. Security-Based Swap Submissions
    The Commission stated in the Proposing Release that the time 
required by clearing agencies to prepare, review and submit Security-
Based Swap Submissions to comply with new Rule 19b-4(o) likely would 
vary significantly based on the unique characteristics of each 
Security-Based Swap Submission and the submitting clearing agency. The 
Commission estimated based on previous discussions with staff from 
clearing agencies that the amount of time that a clearing agency would 
require to internally prepare, review and submit a Security-Based Swap 
Submission would be 140 hours. The Commission also estimated that each 
clearing agency would submit 20 Security-Based Swap Submissions 
annually based on previous discussions with staff from the clearing 
agencies. The Commission did not receive any comments on these 
estimated burdens in the Proposing Release. The Commission is modifying 
Rule 19b-4(o)(2) from the proposal to provide that clearing agencies 
that file a Security-Based Swap Submission before December 3, 2012 
shall file such submission with the Commission by email. However, the 
Commission does not believe the requirement to submit Security-Based 
Swap Submissions electronically by email instead of on EFFS for a 
limited period of time would change the estimated amount of time for 
clearing agencies to prepare, review, and file these submissions since 
the information to be provided in the filing remains the same and the 
filing method would still be electronic. Accordingly, the Commission 
estimates that the total annual reporting burden for clearing agencies 
submitting Security-Based Swap Submissions electronically with the 
Commission under the amendments to Rule 19b-4 and Form 19b-4 will be 
16,800 hours (20 Security-Based Swap Submissions x 140 hours x six 
respondent clearing agencies).
    The Commission also estimated in the Proposing Release that a 
clearing agency would require 60 hours of outside legal work to assist 
in the process preparing, reviewing and submitting a Security-Based 
Swap Submission, based on previous discussions with staff from the

[[Page 41632]]

clearing agencies. Assuming an hourly cost of $354 for an outside 
attorney,\213\ the Commission estimated that the total annual cost in 
the aggregate for the six respondent clearing agencies to meet these 
requirements would be $2,548,800 (60 hours x $354 per hour for an 
outside attorney x 20 Security-Based Swap Submissions x six respondent 
clearing agencies). The Commission did not receive any comments on 
these estimated burdens in the Proposing Release and is using the 
estimates for the rules as adopted.
---------------------------------------------------------------------------

    \213\ The hourly rate used for an attorney was from SIFMA's 
Management & Professional Earnings in the Securities Industry 2010, 
modified by the Commission's staff to account for an 1800 hour work-
year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

e. Advance Notices
    In the Proposing Release, the Commission estimated that the amount 
of time that designated clearing agency representatives will require to 
internally prepare, review and electronically file each Advance Notice 
with the Commission to comply with Rule 19b-4(n)(1) would be 90 hours. 
This estimate in the Proposing Release was based on the staff's 
previous discussions with the clearing agencies. The Commission did not 
receive any comments on this estimate. The Commission is modifying Rule 
19b-4(n)(1) from the proposal to provide that designated clearing 
agencies that file an Advance Notice before December 3, 2012 shall file 
such notice with the Commission by email. However, the Commission does 
not believe the requirement to submit Advance Notices by email for a 
limited period of time would change the estimated amount of time for 
clearing agencies to prepare, review, and electronically file the 
notices since the material required to be provided in the filing 
remains the same and the method for submitting the filing remains 
electronic. The Commission also estimated in the Proposing Release that 
two hours should be added to the time required to prepare each Advance 
Notice to comply with the requirement contained in new Rule 19b-4(n)(5) 
to provide to the Board copies of all materials submitted to the 
Commission relating to an Advance Notice contemporaneously with such 
submission to the Commission. The Commission estimated in the Proposing 
Release based on previous conversations with staff from clearing 
agencies that each designated clearing agency would submit 35 Advance 
Notices to the Commission annually. The Commission did not receive any 
comments on these estimated burdens in the Proposing Release and is 
using the estimates for the rules being adopted today. Accordingly, the 
Commission estimates that the total annual reporting burden on 
designated clearing agencies submitting Advance Notices electronically 
with the Commission pursuant to new Rule 19b-4(n) and Form 19b-4 will 
be 32,200 hours (35 Advance Notices x 92 hours x ten respondent 
clearing agencies).
    In the Proposing Release, the Commission also estimated that a 
designated clearing agency would require 40 hours of outside legal work 
to assist in the process preparing, reviewing and submitting an Advance 
Notice with the Commission based on previous discussions with staff 
from the clearing agencies. Assuming an hourly cost of $354 for an 
outside attorney,\214\ the total annual cost in the aggregate for ten 
respondent clearing agencies to meet these requirements would be 
$4,956,000 (40 hours x $354 per hour for an outside attorney x 35 
Advance Notices x ten respondent clearing agencies). The Commission did 
not receive any comments on these estimates and is using them for the 
rule as adopted.
---------------------------------------------------------------------------

    \214\ See id.
---------------------------------------------------------------------------

f. Summary
    The Commission estimates that the total annual reporting burden for 
clearing agencies to internally prepare, file and submit Security-Based 
Swap Submissions, proposed rule changes and Advance Notices 
electronically with the Commission under the Rule 19b-4 and Form 19b-4 
will be 136,086 hours (16,800 hours for Security-Based Swap Submissions 
+ 32,200 hours for Advance Notices + 87,086 hours for proposed rule 
changes). The Commission also estimates that the total annual cost in 
the aggregate for the respondent clearing agencies to engage outside 
counsel to assist in the process of preparing, filing and submitting 
Security-Based Swap Submissions and Advance Notices electronically with 
the Commission under the new Rules 19b-4(n) and (o) and Form 19b-4 will 
be $7,504,800 ($2,548,800 for Security-Based Swap Submissions + 
$4,956,000 for Advance Notices).
3. Posting of Security-Based Swap Submissions, Advance Notices and 
Proposed Rule Changes on Clearing Agency Web Sites
    In the Proposing Release, the Commission stated that it believes 
clearing agencies that were to be deemed registered under Section 
17A(l) or that may be regulated by the Commission in the future to 
clear security-based swaps could incur some one-time costs associated 
with posting Security-Based Swap Submissions, Advance Notices and 
proposed rule changes on their Web sites. The Commission estimated that 
each newly-registered clearing agency would spend approximately 15 
hours creating or updating its existing Web site in order to provide 
the capability to post these submissions online resulting in a total 
one-time burden of 90 hours (six respondent clearing agencies x 15 
hours). Three of those clearing agencies were deemed registered under 
Section 17A(l) in July 2012 and were required to begin posting proposed 
rule changes on their Web sites pursuant to existing Rule 19b-
4(l).\215\ Because new Rules 19b-4(o)(5) and (n)(3) will require 
Security-Based Swap Submissions and Advance Notices to be posted on a 
clearing agencies' Web sites in the same manner as is required for 
proposed rule changes, the Commission does not believe these three 
clearing agencies would incur any additional costs to create or update 
their Web sites to post Security-Based Swap Submissions or Advance 
Notices pursuant to the new rules. Accordingly, the Commission is 
modifying the number of respondent clearing agencies to include only 
the three clearing agencies it estimates may be regulated by the 
Commission in the future in order to clear security-based swaps. The 
Commission did not receive any comments on the estimated burden in the 
Proposing Release regarding the number of hours to create or update a 
Web site and is using this estimated hours burden for the rules as 
adopted. The revised estimate is a one-time total burden of 45 hours 
(three respondent clearing agencies x 15 hours).
---------------------------------------------------------------------------

    \215\ 17 CFR 240.19b-4(l).
---------------------------------------------------------------------------

    With respect to annual burdens, the Commission estimated in the 
Proposing Release that four hours would be required by a clearing 
agency to post a Security-Based Swap Submission on its Web site to 
comply with Rule 19b-4(o)(5). This figure was based on the current 
estimate for the requirement that SROs post proposed rule changes on 
their Web sites under Rule 19b-4(l) given the similarities between the 
two requirements.\216\ The Commission estimated that the total annual 
reporting burden for clearing agencies to post Security-Based Swap 
Submissions on their Web sites would be 480 hours (20

[[Page 41633]]

Security-Based Swap Submissions x four hours x six respondent clearing 
agencies). The Commission did not receive any comments on these 
estimates in the Proposing Release and is using them for the rules as 
adopted.
---------------------------------------------------------------------------

    \216\ See Securities and Exchange Commission, Submission for OMB 
Review, Comment Request, 76 FR 37161 (June 24, 2011). The Supporting 
Statement containing the detailed estimates for Rule 19b-4 and Form 
19b-4 is available at: https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201104-3235-013.
---------------------------------------------------------------------------

    The Commission also estimated in the Proposing Release that four 
hours would be required by a designated clearing agency to post an 
Advance Notice on its Web site to comply with Rule 19b-4(n)(3). This 
figure was based on the current estimate for the requirement that SROs 
post proposed rule changes on their Web sites under Rule 19b-4(l) given 
the similarities between the two requirements.\217\ The Commission 
estimated that the total annual reporting burden for designated 
clearing agencies to post Advance Notices on their Web sites would be 
1,400 hours (35 Advance Notices x four hours x 10 respondent clearing 
agencies). The Commission did not receive any comments on these 
estimates in the Proposing Release and is using them for the rules as 
adopted.
---------------------------------------------------------------------------

    \217\ See id.
---------------------------------------------------------------------------

    The Commission estimated in the Proposing Release that four hours 
would be required for a designated clearing agency to comply with 
proposed Rule 19b-4(n)(4) and post notice on its Web site of any change 
to its rules, procedures or operations referred to in an Advance Notice 
once it has been permitted to take effect. This figure was based on the 
current estimate for the requirement that SROs post proposed rule 
changes on their Web sites under Rule 19b-4(l) given the similarities 
between the two requirements.\218\ The Commission therefore estimated 
that the total annual reporting burden for designated clearing agencies 
to post notice on their Web sites of any changes to their rules, 
procedures or operations referred to in Advance Notices will be 1,400 
hours (35 Advance Notices x four hours x 10 respondent clearing 
agencies). The Commission did not receive any comments on these 
estimates in the Proposing Release and is using them for the rules as 
adopted.
---------------------------------------------------------------------------

    \218\ See id.
---------------------------------------------------------------------------

    The Commission has previously provided PRA estimates with respect 
to the requirement in Rule 19b-4(l) that all SROs post proposed rule 
changes and amendments to proposed rule changes on their Web sites. The 
Commission does not believe the rules being adopted today will change 
those estimated hour burdens because those rules do not affect the 
current requirement that SROs post proposed rule changes on their Web 
sites. However, the Commission is increasing the number of respondent 
SROs given the increased number of clearing agencies that have been 
deemed registered under Section 17A(l) or that may seek to clear 
security-based swaps in the future. Clearing agencies registered with 
the Commission are SROs and are required to comply with the 
requirements in Rule 19b-4, including the requirement in Rule 19b-4(l) 
that they post proposed rule changes and amendments to proposed rule 
changes on their Web sites and to make any related updates. The 
Commission's previous PRA estimates are that SROs take four hours to 
post proposed rule change proposals under Exchange Act Section 19(b) 
and amendments on their Web sites and four hours to update the posted 
SRO rules on their Web sites once the proposed rules become 
effective.\219\ There were 1,606 proposed rule changes filed with the 
Commission by 25 SROs in fiscal year 2011. Of these, 1,180 were 
approved or non-abrogated.\220\ The Commission has used these numbers 
to estimate the total annual reporting burden for its estimate of the 
increased number of SROs that will post proposed rule change proposals 
on their Web sites and to update their posted rules on their Web sites. 
Specifically, the Commission divided the total number of filings 
received in 2011 by the 25 SROs submitting filings that year and 
multiplied it by the new total of 35 SROs. The new total annual 
reporting burden will be 15,602 hours ((1,180/25) x 35 SRO respondents) 
approved rules x four hours) + ((1,606/25) x 35 SRO respondents) rule 
change proposals x four hours)).
---------------------------------------------------------------------------

    \219\ See id.
    \220\ Previously, the Commission was able to ``abrogate'' an 
immediately effective proposed rule change filing filed under 
Section 19(b)(3)(a) of the Exchange Act, and require an SRO to re-
file the proposal for consideration, notice, and public comment 
pursuant to Section 19(b)(2) of the Exchange Act. The Dodd-Frank Act 
eliminated the concept of ``abrogation.'' Instead, an immediately 
effective proposed rule change filing may be temporarily suspended, 
in which case the Commission would be required to institute 
proceedings to determine whether to disapprove the proposed rule 
change.
---------------------------------------------------------------------------

    In summary, the Commission estimates that the total annual 
reporting burden for all clearing agencies to post submitted Security-
Based Swap Submissions, Advance Notices, notices of changes to rules, 
procedures or operations referred to in Advance Notices once they take 
effect and proposed rule changes on their Web sites under Rule 19b-4 
and Form 19b-4 will be 18,882 hours (480 hours for Security-Based Swap 
Submissions + 1,400 hours for Advance Notices + 1,400 hours for posting 
notices of changes to rules, procedures or operations referred to in 
Advance Notices + 15,602 hours for proposed rule changes).
4. Amendment To Conform to Section 916 of the Dodd-Frank Act
    The Commission estimated in the Proposing Release that the 
requirement that an SRO inform the Commission of the date on which it 
posted a proposed rule change on its Web site (if the posting did not 
occur on the same day that the SRO filed the proposal with the 
Commission) would impose only a minimal burden, if any, on an SRO. The 
Commission stated in the Proposing Release that it believes that SROs 
currently post their proposed rule changes on their Web site on the 
same day on which they file them with the Commission. Further, the 
Commission believes that it is in the interest of an SRO to continue to 
do so, since prompt Web site posting triggers the requirement on the 
Commission to publish notice of the proposal. The new notice 
requirement would only be applicable in a situation where the SRO is 
unable to post its proposed rule change on the same day that it files 
it with the Commission, which the Commission expects would be an 
unlikely occurrence. However, because the deadline applicable to 
Commission publication is tied to SRO Web site posting, and the 
Commission has no means of ascertaining when Web site posting was made 
other than by receiving that information from the SRO itself, the 
Commission is imposing this requirement to capture necessary 
information to allow it to comply with Exchange Act Section 19(b), as 
amended by Section 916 of the Dodd-Frank Act.
    Based on the Commission's experience receiving and reviewing 
proposed rule changes filed by SROs, the Commission estimated in the 
Proposing Release that SROs will fail to post proposed rule changes on 
their Web sites on the same day as the filing was made with the 
Commission in 1% of all cases, or 16 times each year. Further, the 
Commission estimated that each SRO will spend approximately one hour 
preparing and submitting notice to the Commission of the date on which 
it posted the proposed rule change on its Web site, resulting in a 
total annual burden of 16 hours.
    Thus, the Commission estimated that the total annual reporting 
burden under Rule 19b-4 and Form 19b-4 will be 156,049 hours in the 
initial year and 155,334 hours thereafter.\221\

[[Page 41634]]

Additionally, the Commission estimated that the total annual reporting 
burden under new Rule 3Ca-1 will be 540 hours. The Commission did not 
receive any comments on these estimates in the Proposing Release and is 
using them for the rules as adopted.
---------------------------------------------------------------------------

    \221\ In the initial year, the paperwork burden is calculated as 
follows: 120 hours (one-time paperwork burden to train newly-
registered clearing agency staff members to use EFFS) + 780 hours 
(one-time paperwork burden for each newly-registered clearing agency 
to draft and implement policies and procedures relating to using 
EFFS to submit proposed rule changes, Security-Based Swap 
Submissions and Advance Notices) + 120 hours (one-time paperwork 
burden for each pre-Dodd-Frank Act clearing agency to draft and 
implement policies and procedures relating to using EFFS to submit 
Security-Based Swap Submissions and/or Advance Notices) + 45 hours 
(one-time paperwork burden for each newly-registered clearing agency 
to create or update their existing Web sites in order to provide the 
capability to post proposed rule changes, Security-Based Swap 
Submissions and Advance Notices online) + 136,086 hours (the total 
annual reporting burden for all SROs to prepare, review and submit 
Security-Based Swap Submissions, proposed rule changes and Advance 
Notices with the Commission) + 18,882 hours (the total annual burden 
for all SROs to post Security-Based Swap Submissions, Advance 
Notices, notices of changes to rules, procedures or operations 
referred to in Advance Notices and proposed rule changes (including 
updates to the posted SRO rules) on their Web sites + 16 hours for 
SROs to notify the Commission of the date on which it posted a 
proposed rule change on its Web site = 156,049 hours. After the 
initial year, the paperwork burden is calculated as follows: 136,086 
hours (the total annual reporting burden for all SROs to prepare, 
review and submit Security-Based Swap Submissions, proposed rule 
changes and Advance Notices with the Commission) + 18,882 hours (the 
total annual burden for all SROs to post Security-Based Swap 
Submissions, Advance Notices, notices of changes to rules, 
procedures or operations referred to in Advance Notices and proposed 
rule changes on their Web sites) + 350 hours (the total annual 
burden of training new staff members and updating the training of 
existing staff members to use EFFS) + 16 hours for SROs to notify 
the Commission of the date on which it posted a proposed rule change 
on its Web site = 155,334 hours.
---------------------------------------------------------------------------

5. New Rule 3Ca-1
    Prior to issuing the Proposing Release, Commission staff contacted 
eight clearing agencies, including four that likely would clear 
security-based swaps, and would therefore be subject to a stay of the 
clearing requirement and related review under new Rule 3Ca-1. The 
Commission used these discussions to estimate the collection of 
information for this rule in the Proposing Release. Those estimates are 
discussed below; however, the clearing agencies emphasized that the 
estimated burdens would depend in large part on the number of stays 
requested annually and the scope of the information requested by the 
Commission in the course of the related review.
    Pursuant to Exchange Act Section 3C(c)(1), the Commission on its 
own initiative or on the application of a counterparty may stay a 
clearing requirement made pursuant to Exchange Act Section 3C(a)(1) 
until it completes a review of the terms of the security-based swap and 
the clearing arrangement. The Commission is unable to estimate 
accurately the number of times it may stay a clearing requirement 
pursuant to Exchange Act Section 3C(c)(1) because it has not yet made 
any mandatory clearing determinations and it does not know what 
counterparties may object to a determination or when they would make an 
application for a stay. However, the Commission recognizes that there 
will likely be some applications for stays from clearing requirements 
made pursuant to a Commission determination and, for purposes of the 
Proposing Release, the Commission estimated there would be five 
applications for stays of a clearing requirement per clearing agency 
per year. This figure would represent one quarter of the estimated 
number of Security-Based Swap Submissions from each clearing agency per 
year, for a total of 30 applications for stays per year (5 stay 
applications x 6 respondent clearing agencies). The Commission did not 
receive any comments on this estimate in the Proposing Release and is 
using the same estimate for the rules as adopted.
    Based on the Commission staff's discussions with the clearing 
agencies, the Commission estimated in the Proposing Release that a 
clearing agency would spend approximately 18 hours to retrieve, review, 
and submit the information associated with the stay of the clearing 
requirement. The Commission also estimated that each clearing agency 
would be required to provide information requested by the Commission in 
the course of its reviews of five requests for a stay of the clearing 
requirement, resulting in a total annual reporting burden of 540 hours 
(five stay applications x 18 hours to retrieve, review, and submit the 
information x six respondent clearing agencies). Further, the 
Commission also estimated that a clearing agency would require seven 
hours of outside legal work to retrieve, review, and submit the 
information associated with the stay of the clearing requirement. These 
figures were based on the Commission staff's discussions with the 
clearing agencies prior to issuing the Proposing Release. Assuming an 
hourly cost of $354 for an outside attorney,\222\ the total estimated 
annual cost in the aggregate for the six respondent clearing agencies 
to meet these requirements was $74,340 (seven hours x $354 per hour for 
an outside attorney x five stay of clearing applications x six 
respondents). The Commission did not receive any comments on these 
estimates in the Proposing Release and is using them for the rules as 
adopted.
---------------------------------------------------------------------------

    \222\ The hourly rate for an outside attorney is from SIFMA's 
Management & Professional Earnings in the Securities Industry 2010, 
modified by the Commission's staff to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

    Finally, the Commission estimated in the Proposing Release that 100 
hours would be required by a counterparty to a security-based swap to 
prepare and submit an application requesting a stay of the clearing 
requirement. The Commission drew a comparison between the amount of 
time it would take for a clearing agency to prepare a Security-Based 
Swap Submission and the amount of time it would take a counterparty to 
prepare an application of a stay of a clearing requirement, given that 
each filing would likely address similar issues related to the clearing 
of the particular security-based swap. This 100 hours estimated for the 
application is less than the 140 hours the Commission estimates it 
would take for a clearing agency to prepare a full Security-Based Swap 
Submission because an application for a stay would take less time to 
prepare than a new submission, due to the fact that some of the 
information addressed in the application for a stay will have already 
been provided with the Security-Based Swap Submission when it was 
published for notice and comment. As discussed above, the Commission 
estimated in the Proposing Release that counterparties to security-
based swaps transactions would submit 30 applications requesting stays 
of the clearing requirement. Assuming an hourly cost of $354 for an 
outside attorney,\223\ the total annual cost in the aggregate for the 
respondent counterparties to meet these requirements would be 
$1,062,000 (100 hours x $354 per hour for an outside attorney x 30 stay 
of clearing applications). The Commission did not receive any comments 
on these estimates in the Proposing Release and is using them for the 
rules as adopted.
---------------------------------------------------------------------------

    \223\ See id.
---------------------------------------------------------------------------

E. Retention Period of Recordkeeping Requirements

    Clearing agencies will be required to retain records of the 
collection of information (the manually signed signature page of the 
Form 19b-4, a file available to interested persons for public 
inspection and copying, of all Security-Based Swap Submissions, Advance 
Notices and proposed rule changes made pursuant to Rule 19b-4) and all 
correspondence and other

[[Page 41635]]

communications reduced to writing (including comment letters) to and 
from such SROs concerning any Security-Based Swap Submissions, Advance 
Notices and proposed rule changes, for a period of not less than five 
years, the first two years in an easily accessible place, according to 
the current recordkeeping requirements set forth in Exchange Act Rule 
17a-1.\224\
---------------------------------------------------------------------------

    \224\ SROs may also destroy or otherwise dispose of such records 
at the end of five years according to Rule 17a-6 of the Act. 17 CFR 
240.17a-6.
---------------------------------------------------------------------------

    The Commission believes that maintaining the physical signature 
pages, Security-Based Swap Submissions, Advance Notices, proposed rule 
changes and all related correspondence and other communications would 
enable interested parties, including the Commission, to access a record 
of a particular Security-Based Swap Submission, Advance Notice or 
proposed rule change that was made. The Commission notes that the 
retention of the physical signature page is an existing maintenance 
requirement for SROs.\225\
---------------------------------------------------------------------------

    \225\ Rule 19b-4(j) currently requires SROs to sign Form 19b-4 
electronically in connection with filing a proposed rule change and 
to retain a copy of the signature page in accordance with Rule 17a-
1. Under the adopted rules, Rule 19b-4(j) would be modified such 
that it would apply also to Security-Based Swap Submissions and 
Advance Notices.
---------------------------------------------------------------------------

F. Collection of Information is Mandatory

    Any collection of information pursuant to Rule 19b-4 and Form 19b-4 
to require electronic submission of Security-Based Swap Submissions, 
Advance Notices and proposed rule changes with the Commission is a 
mandatory collection of information. Any collection of information 
pursuant to Rule 19b-4 to require Web site posting by clearing agencies 
of their Security-Based Swap Submissions, Advance Notices and proposed 
rule changes also is a mandatory collection of information. Any 
collection of information pursuant to new Rule 3Ca-1 in connection with 
the application for the stay of the clearing requirement is a mandatory 
collection of information. Any collection of information pursuant to 
Rule 19b-4 to require an SRO to inform the Commission of the date on 
which it posted a proposed rule change on its Web site (if such date is 
not the same day that it filed the proposal with the Commission) also 
is a mandatory collection of information.

G. Responses to Collection of Information Will Not Be Kept Confidential

    The collection of information pursuant to Rule 19b-4, Form 19b-4 
and new Rule 3Ca-1 will not be kept confidential.\226\ The posting of 
Security-Based Swap Submissions, Advance Notices and proposed rule 
changes would be publicly available on the SRO's Web site.
---------------------------------------------------------------------------

    \226\ While there is a general requirement that information be 
made publicly available, SROs may request confidential treatment of 
certain information in accordance with the provisions of the Freedom 
of Information Act. 5 U.S.C. 552.
---------------------------------------------------------------------------

IV. Economic Analysis

    The rules that the Commission is adopting today are largely 
concerned with implementing certain processes for clearing agencies and 
security-based swap counterparties to submit filings to the Commission. 
These include Security-Based Swap Submissions, Advance Notices, and 
requests for a stay of an existing mandatory clearing requirement. The 
economic analysis set forth below focuses on the economic 
considerations related to those processes. The analysis does not seek 
to address the full range of considerations that may result from the 
Commission's future actions, such as determinations based on the 
information submitted in specific filings. The Commission believes 
instead that these considerations are more appropriately addressed at 
the time such future determinations are made as each filing may raise 
unique issues that are unrelated to the submission process. The 
Commission, however, recognizes that the process rules are being 
adopted in the larger context of substantive reforms to the financial 
system pertaining to the clearing of securities. The Commission is 
mindful of the potential economic consequences of this larger 
substantive effort in considering the more limited economic 
consequences of these final procedural rules. In particular, the 
Commission is cognizant of the potential impact future determinations 
made with respect to mandatory clearing could have on clearing 
practices, given that central clearing of security-based swaps is a 
relatively recent development and much of the current security-based 
swaps market is cleared on a bilateral basis.
    In recognition of the larger context within which the final rules 
are being adopted, this analysis begins with a review of the Dodd-Frank 
Act's new clearing requirements, current clearing practices, and views 
on the new clearing requirements, including the broader economic 
considerations that those requirements, practices, and views may 
suggest. This discussion then proceeds with an analysis of each 
procedure established by the final rules--in particular, Security-Based 
Swap Submissions, stays related to the review of mandatory clearing 
determinations, and Advance Notices--and the specific economic 
considerations associated with each procedure.

A. Background

1. Dodd-Frank Act Requirements for Clearing Security-Based Swaps
    As described above, the Dodd-Frank Act was enacted to, among other 
things, mitigate systemic risk and promote the financial stability of 
the U.S. by improving accountability and transparency in the financial 
system and by providing for enhanced regulation and oversight of 
institutions designated as systemically important.\227\ Specifically, 
Title VII of the Dodd-Frank Act amended the Exchange Act to require 
that transactions in security-based swaps must be cleared through a 
clearing agency that is registered with the Commission (or exempt from 
registration) if they are of a type that the Commission determines must 
be cleared, unless an exemption from mandatory clearing applies.\228\ 
As one means of accomplishing this objective, the Dodd-Frank Act seeks 
to ensure that, wherever possible and appropriate, derivatives 
contracts formerly traded exclusively in the OTC market be centrally 
cleared.\229\ Central clearing mitigates counterparty credit risk among 
dealers and other institutions by shifting that risk from individual 
counterparties to CCPs, thereby helping protect counterparties from 
each other's potential failures. Central clearing also requires that 
mark-to-market pricing and margin requirements be applied in a 
consistent manner.\230\ CCPs generally use liquid margin collateral to 
manage the risk of a CCP member's failure, and rely on the accuracy of 
their margin calculations and their access to that liquid collateral to 
protect against sudden movements in market prices. A CCP that stands 
between counterparties

[[Page 41636]]

for OTC derivatives is generally perceived to decrease systemic 
risk.\231\
---------------------------------------------------------------------------

    \227\ See supra part I. See also Pub. L. 111-203, Preamble.
    \228\ See 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of 
the Dodd-Frank Act).
    \229\ See supra note 5 and accompanying text.
    \230\ See Christopher Culp, OTC-Cleared Derivative: Benefits, 
Costs, and Implications of the ``Dodd-Frank Wall Street Reform and 
Consumer Protection Act, (Journal of Applied Finance No. 2, 2010), 
available at: https://www.rmcsinc.com/articles/OTCCleared.pdf.
    \231\ See, e.g., Darrell Duffie and Haoxiang Zhu, Does a Central 
Clearing Counterparty Reduce Counterparty Risk?, (Stanford 
University, Working Paper, 2010), available at: https://
www.stanford.edu/~duffie/DuffieZhu.pdf; Nout Wellink, Mitigating 
system risk in OTC derivatives markets, (Banque de France, Financial 
Stability Review, No. 14--Derivatives--Financial innovation and 
stability, July 2010), available at: https://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude15_rsf_1007.pdf; and Manmohan 
Singh, Collateral, Netting and System Risk in the OTC Derivatives 
Market,'' (International Monetary Fund, Working Paper, 2009), 
available at: https://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf.
---------------------------------------------------------------------------

    Exchange Act Section 3C(b), which was added pursuant to Title VII 
of the Dodd-Frank Act, requires the Commission to adopt rules for a 
clearing agency's submission of security-based swaps (or any group, 
category, type or class of security-based swaps) that a clearing agency 
plans to accept for clearing and to determine the manner of notice the 
clearing agency must provide to its members of such Security-Based Swap 
Submission.\232\
---------------------------------------------------------------------------

    \232\ See 15 U.S.C. 78c-3(b)(2)(A) and (5) (as added by Section 
763(a) of the Dodd-Frank Act).
---------------------------------------------------------------------------

2. Current Clearing Practices in the Security-Based Swap Market
    Prior to the enactment of the Dodd-Frank Act, there was no 
provision in the Exchange Act or any other laws in the U.S. for the 
mandatory clearing of OTC derivatives. Although initiatives related to 
central clearing had been considered before 2008, certain events of 
September 2008 brought a new focus on CDS as a source of systemic risk 
and contributed to a more general recognition that CCPs could play a 
role in helping to manage bilateral counterparty credit risk in OTC 
CDS.\233\ The failure of large financial institutions highlighted the 
concern that bilateral swap agreements can be a source of systemic risk 
by, among other things, increasing the likelihood that financial 
distress in one dealer will contribute to the financial distress in 
others--a risk that can be mitigated when transactions are cleared by a 
creditworthy central counterparty that becomes the seller to every 
clearing member buyer and the buyer to every clearing member 
seller.\234\
---------------------------------------------------------------------------

    \233\ See, e.g., Testimony of Erik Sirri, Director of the 
Division of Trading and Markets, Securities and Exchange Commission, 
before the U.S. House of Representatives, Committee on Agriculture, 
(Nov. 20, 2008) (``In light of the problems involving AIG, Lehman, 
Fannie, Freddie, and others, attention has focused on the systemic 
risks posed by CDS * * * A [CCP] for CDS could be an important step 
in reducing the counterparty risks inherent in the CDS market, and 
thereby help mitigate potential systemic impacts.''), available at: 
https://www.sec.gov/news/testimony/2008/ts112008ers.htm. The 
President's Working Group on Financial Markets made the central 
clearing of OTC derivatives a top policy objective in 2008. See 
Policy Objectives for the OTC Derivatives Market (Nov. 14, 2008), 
available at: https://www.treasury.gov/resource-center/fin-mkts/Documents/policyobjectives.pdf; see also Policy Statement on 
Financial Market Developments (Mar. 13, 2008), available at: https://www.treasury.gov/resource-center/fin-mkts/Documents/pwgpolicystatemktturmoil_03122008.pdf; and Progress Update (Oct. 
2008), available at: https://www.treasury.gov/resource-center/fin-mkts/Documents/q4progress%20update.pdf.
    \234\ See supra notes 10-11 and accompanying text.
---------------------------------------------------------------------------

    In November 2008, the Commission, in consultation and coordination 
with the Board and the CFTC, took steps to help facilitate the prompt 
development of CCPs for OTC derivatives.\235\ Specifically, the 
Commission authorized the clearing of OTC security-based swaps by 
permitting certain clearing agencies to clear CDS on a temporary 
conditional basis.\236\ As the Commission and other regulatory agencies 
monitored the activities of those clearing agencies, a significant 
volume of interdealer OTC CDS transactions and a smaller volume of 
dealer to non-dealer OTC CDS transactions were centrally cleared on a 
voluntary basis.\237\ As discussed in greater detail below, the level 
of voluntary clearing in swaps and security-based swaps has steadily 
increased since that time. Although the volume of interdealer CDS 
cleared to date is quite large,\238\ many security-based swap 
transactions are still ineligible for central clearing, and many 
transactions in security-based swaps eligible for clearing at a CCP 
continue to settle bilaterally.
---------------------------------------------------------------------------

    \235\ On November 14, 2008, the Commission executed a Memorandum 
of Understanding with the Board and CFTC that established a 
framework for consultation and information sharing on issues related 
to central counterparties for the OTC derivatives market. See https://www.sec.gov/news/press/2008/2008-269.htm.
    \236\ The Commission authorized five entities to clear credit 
default swaps. See supra note 205.
    \237\ Voluntary CCP clearing grew out of a series of meetings 
beginning in September 2005 hosted by the Federal Reserve Bank of 
New York with major market participants and their domestic and 
international supervisors for the purpose of discussing problems in 
the processing of credit default swaps, and related risk management 
and control issues. See https://www.ny.frb.org/newsevents/news/markets/2005/an050915.html. In June 2008 the attendees agreed to an 
agenda for improvement in the derivatives market infrastructure that 
included ``developing a central counterparty for credit default 
swaps that, with a robust risk management regime, can help reduce 
systemic risk.'' See https://www.ny.frb.org/newsevents/news/markets/2008/ma080609.html; see also https://www.theice.com/marketdata/reports/ReportCenter.shtml.
    \238\ As of March 31, 2012, ICE Clear Credit had cleared 
approximately $15.4 trillion notional amount of CDS contracts based 
on indices of securities, approximately $1.4 trillion notional 
amount of CDS contracts based on individual reference entities or 
securities and $151 billion notional amount of CDS contracts based 
on sovereigns. As of March 31, 2012, ICE Clear Europe had cleared 
approximately [euro]7.7 trillion notional amount of CDS contracts 
based on indices of securities and approximately [euro]1.2 trillion 
notional amount of CDS contracts based on individual reference 
entities or securities.
---------------------------------------------------------------------------

    Voluntary clearing of security-based swaps in the U.S. is currently 
limited to CDS products. Central clearing of security-based swaps began 
in March 2009 for index CDS products, in December 2009 for single-name 
corporate CDS products, and in November 2011 for single-name sovereign 
CDS products. At present, there is no central clearing in the U.S. for 
security based swaps that are not CDS products, such as those based on 
equity securities. The level of clearing activity appears to have 
steadily increased as more products have become eligible to be cleared. 
One illustration of this apparent trend is Figure 1 below, which shows 
the gross notional volumes of cleared transactions reported by ICE 
Clear Credit for U.S. CDS index and U.S. single-name corporate CDS 
products \239\ compared to the total gross notional volumes of (a) all 
transactions for reference entities or indexes, as applicable, that are 
accepted for clearing in the corresponding calendar year (cleared and 
uncleared), and (b) the total market, that is, all transactions in all 
reference underlyings of the same category (single name or index), 
whether accepted for clearing or not by ICE Clear Credit, in each case 
calculated based on price-forming, gold record transactions submitted 
to the Depository Trust and Clearing Corporation's Trade Information 
Warehouse (``DTCC-TIW'').\240\
---------------------------------------------------------------------------

    \239\ These amounts are based on information reported by ICE 
Clear Credit on its public Web site and are based on ``price forming 
transactions.'' See infra note 240. This includes the clearing of 
trades entered into on the same day as the trade was executed as 
well as the clearing of trades entered into in prior periods that 
were not previously cleared. These amounts do not include trades 
that result from the compression of trades previously submitted for 
clearing. See https://www.theice.com/marketdata/reports/ReportCenter.shtml#report/26. ICE Clear Credit describes portfolio 
compression as a process that ``reduces the overall notional size 
and number of outstanding contracts in credit derivative portfolios 
without changing the overall risk profile or present value of the 
portfolios. This is achieved by terminating existing trades and 
replacing them with a smaller number of new replacement trades that 
carry the same risk profile and cashflows as the initial portfolio, 
but require a smaller amount of regulatory capital to be held 
against the positions.'' See https://www.theice.com/post_trade_processing.jhtml. The CME Group also clears CDS index products and 
has reported clearing $144 billion in gross notional volumes of 
transactions since inception, with $21 billion in open interest as 
of the end of 2011. See https://www.cmegroup.com/trading/cds/. These 
volumes are small relative to total market activity and are not 
included in Figure 1.
    \240\ ``Price-forming transactions'' include all new trades and 
assignments, increases, and terminations of previously executed 
trades. Trades terminated or entered into in connection with a 
compression exercise and expiration of a contract at maturity are 
not considered price-forming and therefore excluded. Transactions 
reported to the DTCC-TIW used for this analysis considers all global 
activity, including transactions wholly between foreign 
counterparties.

---------------------------------------------------------------------------

[[Page 41637]]

[GRAPHIC] [TIFF OMITTED] TR13JY12.002

    Figure 1 shows that U.S.-based index CDS products comprise a 
greater proportion of the CDS market than U.S. single-name corporate 
CDS products and account for the bulk of current clearing activity in 
U.S. CDS transactions. The proportion of transactions in names accepted 
for clearing that are ultimately cleared also appears to be higher in 
U.S.-based index CDS products than in U.S. corporate single-name CDS 
products. In calendar years 2010 and 2011, Figure 1 indicates that 90% 
of the total gross notional volume of transactions in index names was 
accepted for clearing as of the end of each calendar year and that 
cleared index transactions correspond to more than 50% of the total 
gross notional volume of index trades during the same period. By 
contrast, the figure suggests that the proportion of transactions in 
accepted names in U.S. single-name corporate CDS was only 33% during 
2011, with cleared transactions during the same year totaling only 25% 
of the total trades during the same period.
    Table 1, below, provides more detail of the data summarized in 
Figure 1. The Table reports the proportion of gross notional market 
activity in names accepted for clearing and the proportion of gross 
notional market activity that was cleared. Because a security-based 
swap may have been accepted for clearing only late in the calendar 
year, two measures of transactions that were ``accepted for clearing'' 
are provided, which differ by when the applicable reference underlying 
became accepted for clearing. The first measure, and the measure 
included in Figure 1, includes all transaction volume in names accepted 
for clearing at any time during the calendar year, whether or not a 
trade was accepted for clearing at the time of its execution.\241\ This 
measure represents an upper bound for the potential level of clearing--
i.e., the level that could have been achieved if all trades in products 
accepted for clearing had in fact been submitted for clearing and there 
were no additional constraints on clearing eligibility such as those 
described above (e.g., a counterparty is not a member of a CCP that 
accepts the product in question for clearing). The second measure 
includes only transaction volume in names accepted for clearing at the 
time of trade execution.\242\ This measure accounts for the fact that 
although transactions executed in names prior to the name being 
accepted for clearing can be cleared later in the same calendar year 
through ``backloading,'' names accepted for clearing towards the end of 
the year allow less time for this to occur. Comparing these two 
measures within a year and across years measures (a) the

[[Page 41638]]

increase in percentage from 2009 to 2011 in the volume of new trades in 
names that have ``accepted for clearing'' status, and (b) the increase 
in percentage in the volume of new transactions that are actually being 
cleared.
---------------------------------------------------------------------------

    \241\ This calculation was performed by staff in the Division of 
Risk, Strategy, and Financial Innovation by totaling the sum of 
price forming transactions reported to DTCC in the calendar year for 
Index and single-name corporate CDS products that match the list of 
names accepted for clearing at ICE Clear Credit during the same 
period. See https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Clearing_Eligible_Products.xls
    \242\ This calculation was performed by staff in the Division of 
Risk, Strategy, and Financial Innovation by totaling the sum of 
price forming transactions reported to DTCC in the calendar year for 
Index and single-name corporate CDS products that match the list of 
names accepted for clearing at ICE Clear Credit, including only 
those transactions executed following the accepted for clearing date 
reported by ICE Clear Credit.

        Table 1--Cleared Trades and Accepted Trades as a Percentage of Gross Notional Transaction Volume
----------------------------------------------------------------------------------------------------------------
                                                         U.S. Index CDS                U.S. Single name CDS
                                               -----------------------------------------------------------------
                                                   2009       2010       2011       2009       2010       2011
----------------------------------------------------------------------------------------------------------------
Gross notional volume ($ billions)............     10,400      8,900      9,900      4,100      3,900      2,800
Percent of gross notional in names accepted
 for clearing
    --at calendar year end....................        88%        90%        91%         1%        23%        33%
    --at time of trade execution..............        55%        87%        91%         0%        16%        29%
Cleared transactions: % of gross notional.....        32%        54%        57%         0%        16%        25%
----------------------------------------------------------------------------------------------------------------

    One important limitation of the calendar year snapshots is that the 
volumes of cleared transactions reported by ICE Clear Credit likely 
overstate the percentages of total market activity that are cleared in 
a particular calendar year because many of the trades submitted for 
clearing to ICE Clear Credit are bilateral transactions entered into in 
a prior calendar year before ICE Clear Credit began clearing the 
particular security-based swap. Such transactions were submitted for 
clearing retroactively--through a process referred to as 
``backloading''--causing the termination of the original trade and the 
creation of two new trades with ICE Clear Credit, both of which are 
reported to DTCC-TIW by ICE Clear Credit as cleared transactions, but 
only one of which is reported for the purpose of calculating the 
clearing volume reported in Figure 1. Until April 2011, all newly 
cleared security-based swaps were submitted for clearing in this manner 
because same-day clearing was not available. Since April 2011, clearing 
members have been able to submit new trades in security-based swaps for 
clearing on the same day the counterparties enter into the trade. With 
same-day clearing, the trade is first submitted to the CCP for 
clearing, and the CCP then reports it to the DTCC-TIW as a single 
transaction. However, some backloading will likely continue to occur as 
long as CCPs continue to expand the roster of security-based swaps that 
they accept for clearing, making more past trades eligible for 
backloading.
    Although the volume of cleared CDS transactions appears to have 
steadily increased over time, there is still a large proportion of 
transactions in security-based swaps that are accepted for clearing by 
a CCP but that are nevertheless not actually cleared, particularly with 
respect to U.S. Index CDS. Currently, only eligible trades where both 
parties request the CCP to clear the transaction will be cleared. 
Eligible trades include only those where both counterparties are 
members of the clearing agency and the trade has ``accepted for 
clearing'' status at that agency. Because clearing is currently done on 
a voluntary basis, if both parties do not request the CCP to clear the 
transactions, then the transaction is not cleared. There may be a 
number of reasons why one counterparty to a security-based swap 
transaction may choose not to clear that transaction. For example, some 
counterparties may so choose because they want to avoid any additional 
transaction costs or transparency associated with clearing at a CCP. 
Other counterparties may wish to clear a transaction in a name accepted 
for clearing by a CCP but may not be eligible for membership in the CCP 
or may not have a correspondent clearing arrangement in place with a 
member of the CCP. To these counterparties, clearing is not available 
for trades that are otherwise eligible to be cleared when executed by 
other counterparties. It is also possible for counterparties to 
transact in a currency other than U.S. dollars in a name that is 
accepted for clearing; use of a currency other than U.S. dollars makes 
the trade not eligible to be cleared. Finally, because prior to April 
2011 clearing was performed exclusively on a backloading basis, some 
trades have not been cleared because they may have been subject to 
portfolio compression or otherwise terminated prior to the option to 
submit the trade for clearing becoming available.
3. Views on Clearing Requirements for Security-Based Swaps
    Taken together, while the Commission is mindful of the limitations 
discussed above, these data suggest that clearing of security-based 
swaps has been increasing, but significant segments of the security-
based swap market remain uncleared, even where a CCP is available to 
clear the product in question on a voluntary basis. Due in part to this 
data, the Commission recognizes that mandatory clearing determinations 
made pursuant to Exchange Act Section 3C(a)(1) could alter current 
clearing practices at the time such determinations are made. One 
potential consequence of determinations that require mandatory clearing 
for certain security-based swaps could be a higher level of clearing 
for such security-based swaps than would take place under a voluntary 
system. Where the amount of clearing taking place under a voluntary 
system is significantly different from the level of clearing that would 
take place if trading in a product were mandatory and where such 
difference marks a shift in existing market clearing practices, the 
mandatory clearing determination could potentially have a material 
economic impact.
    New Rule 19b-4(o) and the corresponding amendments to Form 19b-4 
focus largely on the process for how a clearing agency is required to 
make Security-Based Swap Submissions. Interested parties, including a 
number of academics, have expressed their views on the potential impact 
of the underlying clearing determinations that will be made by the 
Commission in response to Security-Based Swap Submissions or pursuant 
to the Commission's own initiative. While these parties generally agree 
that a well-managed CCP would help to mitigate counterparty credit risk 
in the security-based swaps markets, their views vary on how effective 
a clearing requirement would be in controlling risk to the financial 
system. For example, some believe that central clearing is a core 
feature of the Dodd-Frank Act and is intended to mitigate systemic 
risk. According to this view, there should be as much central clearing 
of security-based swaps as possible to fulfill the purpose of the Dodd-
Frank Act.\243\

[[Page 41639]]

Others contend that concentrating the risk of numerous bilateral 
counterparties in a single CCP (or a small number of CCPs) could 
introduce risks and incentives that may not otherwise exist. For 
example, they believe that risk sharing through a central counterparty 
may encourage excessive risk taking if the costs of imprudent decisions 
by one clearing member are borne by other clearing members, and 
generally would not be more effective in mitigating systemic risk than 
bilateral clearing arrangements between individual firms.\244\ 
Moreover, at least one party believes this moral hazard problem could 
be exacerbated to the extent that CCPs are viewed as too important to 
fail and subject to bailout remedies that benefit all CCP members.\245\
---------------------------------------------------------------------------

    \243\ See, e.g., Swaps and Derivatives Market Association, 
``Lessening Systemic Risk: Removing Final Hurdles to Clearing OTC 
Derivatives'', (available at: https://media.ft.com/cms/fe51a538-78d7-11df-a312-00144feabdc0.pdf) (``[m]andating the clearing of all 
standardized OTC derivatives without exemptions would lead to broad 
adoption of CCPs, thus reducing systemic risk.'').
    \244\ See, e.g., Craig Pirrong, Mutualization of Default Risk, 
Fungibility, and Moral Hazard: The Economics of Default Risk Sharing 
in Cleared and Bilateral Markets, available at: https://business.nd.edu/uploadedFiles/Academic_Centers/Study_of_Financial_Regulation/pdf_and_documents/clearing_moral_hazard_1.pdf (University of Houston, Working Paper, 2010) (``[c]learing of 
OTC derivatives has been touted as an essential component of reforms 
designed to prevent a repeat of the financial crisis. A back-to-
basics analysis of the economics of clearing suggests that such 
claims are overstated, and that traditional OTC mechanisms may be 
more efficient for some instruments and some counterparties.''). See 
also Derivatives Clearinghouses: Opportunities and Challenges: 
Hearing Before the U.S. Senate Committee on Banking, Housing, and 
Urban Affairs, Subcommittee on Securities, Insurance, and 
Investment, 112th Cong. (2011) (statement of Chester Spatt) (``it is 
unclear whether the extent of use of clearinghouses will ultimately 
lead to a reduction in systemic risk in the event of a future 
crisis.'').
    \245\ See Pirrong, supra note 244.
---------------------------------------------------------------------------

    Some market participants, furthermore, are concerned that requiring 
central clearing of security based swaps may entail unnecessary costs. 
One commenter stated that an ``inappropriate imposition of mandatory 
clearing requirements could also adversely affect liquidity in the 
relevant security-based swap(s) and similarly deter use of otherwise 
optimal risk management products.'' \246\ In this commenter's view, 
``[w]hile sound, centralized clearing affords clear benefits, it should 
be noted that centralized clearing also entails increased operational 
and collateral costs.'' \247\ According to this commenter, these 
additional costs underscore the importance of the Commission 
``strik[ing] an appropriate balance in evaluating the relevant 
statutory standards applicable to a mandatory clearing determination, 
and weigh[ing] the relevant factors and market impacts with great 
care.'' \248\
---------------------------------------------------------------------------

    \246\ ISDA Letter at 2-3.
    \247\ See id. Although the comment was submitted in response to 
the proposed process rule, the substance of the comments focused on 
the statutory requirements of Exchange Act Section 3C, including the 
Commission's review of security-based swaps in order to determine 
whether the Commission should impose a mandatory clearing 
requirement (either pursuant to a Commission-initiated Review or a 
Security-Based Swap Submission).
    \248\ See id.
---------------------------------------------------------------------------

4. Overview of Statutory Requirements
    Exchange Act Section 3C(b) requires the Commission to adopt rules 
for a clearing agency's submission of security-based swaps (or any 
group, category, type or class of security-based swaps) that a clearing 
agency plans to accept for clearing and to determine the manner of 
notice the clearing agency must provide to its members of such 
Security-Based Swap Submission.\249\ In addition, Section 806(e)(1)(B) 
of the Clearing Supervision Act requires each Supervisory Agency to 
adopt rules, in consultation with the Board, that define and describe 
when a designated financial market utility is required to file an 
Advance Notice with its Supervisory Agency.\250\ To satisfy these 
requirements, the Commission is today adopting new Rules 19b-4(n) and 
(o) and making corresponding amendments to Form 19b-4. In addition, 
Exchange Act Section 3C(c)(4) requires the Commission to adopt rules, 
pursuant to its authority to stay a mandatory clearing requirement, for 
reviewing a clearing agency's clearing of a security-based swap (or any 
group, category, type or class of security-based swaps) that the 
clearing agency has accepted for clearing.\251\ Today the Commission is 
adopting new Rule 3Ca-1 to comply with this requirement. In addition, 
Exchange Act Section 3C(d)(1), which is the basis on which the 
Commission is adopting new Rule 3Ca-2, directs the Commission to 
prescribe rules (and interpretations of rules) the Commission 
determines to be necessary to prevent evasions of the clearing 
requirements.\252\ Finally, Section 916 of the Dodd-Frank Act amended 
Exchange Act Section 19(b) the Dodd-Frank Act to provide for new 
deadlines by which the Commission must publish and act upon a proposed 
rule change submitted by an SRO.\253\ Accordingly, the Commission is 
adopting amendments to Rule 19b-4 and Form 19b-4 to implement conform 
the rule and form to these new requirements.
---------------------------------------------------------------------------

    \249\ See 15 U.S.C. 78c-3(b)(2)(A) and (5) (as added by Section 
763(a) of the Dodd-Frank Act).
    \250\ See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII).
    \251\ See 15 U.S.C. 78c-3(c)(4) (as added by Section 763(a) of 
the Dodd-Frank Act).
    \252\ See 15 U.S.C. 78c-3(d)(1) (as added by Section 763(a) of 
the Dodd-Frank Act).
    \253\ See 15 U.S.C. 78s(b) (as amended by Section 916 of the 
Dodd-Frank Act).
---------------------------------------------------------------------------

B. Analysis of Final Procedural Rules

    The Commission is sensitive to the economic effects of all of the 
rules it is adopting today, including the costs and benefits of those 
rules. Some of these costs and benefits stem from statutory mandates, 
while others are affected by the discretion the Commission exercises in 
implementing the mandates. The Commission requested comment on all 
aspects of the costs and benefits of the proposal, including any effect 
the proposed rules may have on efficiency, competition, and capital 
formation.
    The first procedure the Commission is adopting implements the 
requirement of Exchange Act Section 3C(b) to promulgate rules for a 
clearing agency's Security-Based Swap Submissions and to determine the 
manner of notice the clearing agency must provide to its members of 
such Security-Based Swap Submission.\254\ The Commission also is 
adopting two additional process-related rules related to the mandatory 
clearing of security-based swaps that are contemplated by the Dodd-
Frank Act. Specifically, pursuant to Exchange Act Section 3C(c)(1), new 
Rule 3Ca-1 establishes a procedure for staying a mandatory clearing 
requirement and for the Commission's subsequent review of the terms of 
the security-based swap and the clearing arrangement. Separately, new 
Rule 3Ca-2, adopted pursuant to the anti-evasion authority granted to 
the Commission by Exchange Act Section 3C(d)(1), clarifies that the 
phrase ``submits such security-based swap for clearing to a clearing 
agency'' found in Exchange Act Section 3C(a)(1)--which establishes the 
mandatory clearing requirement for security-based swaps--means that the 
security-based swap subject to the clearing requirement must be 
submitted for central clearing to a clearing agency that functions as a 
CCP.
---------------------------------------------------------------------------

    \254\ See 15 U.S.C. 78c-3(b)(2)(A) and (5) (as added by Section 
763(a) of the Dodd-Frank Act).
---------------------------------------------------------------------------

    In adopting these rules, the Commission considered the procedural 
rules recently adopted by the CFTC pursuant to the mandatory clearing 
requirement in new Section 2(h) of the Commodity Exchange Act, as added 
by Section 723(a)(3) of the Dodd-Frank Act.\255\ The procedural rules 
adopted by the CFTC included, among other things, a rule for the 
submission of swaps by a DCO to the CFTC for a mandatory

[[Page 41640]]

clearing determination.\256\ Given the similarity between the clearing 
requirements for swaps and security-based swaps under the CEA and the 
Exchange Act, respectively, the Commission carefully reviewed the rules 
adopted by the CFTC in formulating the rules the Commission is adopting 
today. Specifically, the Commission considered the information required 
by the CFTC for swap submissions filed by DCOs in new Regulation 
39.5.\257\ The Commission believes that these information requirements 
are substantially similar to the information the Commission is 
requiring in its rules, or that it may request in connection with a 
Security-Based Swap Submission. Similar to the rules the Commission is 
adopting today, Regulation 39.5(b) requires that a DCO submit 
information relating to the five factors the CFTC must consider in 
making a mandatory clearing determination.\258\ Additionally, 
Regulation 39.5(b) requires that DCOs submit detailed information 
relating to the swap and the risk management practices of the DCO.\259\ 
The Commission did not add such additional information requirements in 
the text of the rules being adopted today in order to retain the 
ability to evaluate the information needed on a case-by-case basis; 
however, the Commission specifically provided for the ability to 
request such additional information in connection with each Security-
Based Swap Submission and, as previously indicated, the Commission may 
require production of such information to the extent it believes such 
information is relevant to the mandatory clearing determination.
---------------------------------------------------------------------------

    \255\ See Section 2(h) of the CEA, 7 U.S.C. 2(h) (as added by 
Section 723(a) of the Dodd-Frank Act).
    \256\ See 76 FR 44464 (Jul. 26, 2011).
    \257\ See 17 CFR 39.5(b). Regulation 39.5(b) sets out the 
process for DCOs to follow when submitting a swap, or a group, 
category, type or class of swaps to the CFTC, including what 
information a DCO must include in the submission to assist the CFTC 
in its review.
    \258\ See 17 CFR 39.5(b)(3)(ii)(A)-(E).
    \259\ See 17 CFR 39.5(b)(3)(iii)-(ix).
---------------------------------------------------------------------------

    The rules the Commission is adopting also implement certain 
process-related provisions of the Clearing Supervision Act. Among other 
things, Section 806(e) of the Clearing Supervision Act requires any 
financial market utility designated by the Council as systemically 
important to file 60 days advance notice of changes to its rules, 
procedures or operations that could materially affect the nature or 
level of risk presented by the financial market utility. Specifically, 
the Commission is adopting new Rule 19b-4(n) and corresponding 
amendments to Form 19b-4 to set forth the process by which a designated 
clearing agency (for which the Commission is the Supervisory Agency) 
must file Advance Notices with the Commission.
    Finally, the Commission is adopting technical, conforming and 
clarifying amendments to Rule 19b-4 and Form 19b-4 to conform the rule 
and form with new deadlines and approval, disapproval and temporary 
suspension standards with respect to proposed rule changes filed under 
Exchange Act Section 19(b), as modified by Section 916 of the Dodd-
Frank Act.
    The principal benefit of the final rules is that they will 
facilitate the operation of certain substantive regulations 
contemplated by the Dodd-Frank Act. Specifically, as described above, 
the Dodd-Frank Act establishes a number of reforms related to the 
substantive regulation of securities clearing including, for example, 
with respect to the mandatory clearing of security-based swaps and 
enhanced oversight of systemically important financial market 
utilities. While the final rules do not themselves implement these 
substantive reforms, they do establish certain processes that clearing 
agencies and security-based swap counterparties must follow in order 
for the broader substantive regulations to proceed.
    For example, Exchange Act Sections 3C(b)(2)(A) and (b)(5) require 
the Commission to adopt rules for a clearing agency's submission of 
security-based swaps (or any group, category, type or class of 
security-based swaps) that a clearing agency plans to accept for 
clearing and to determine the manner of notice the clearing agency must 
provide to its members of such Security-Based Swap Submission.\260\ The 
Commission is then required to make a determination, pursuant to 
Exchange Act Section 3C(b)(2)(C)(ii), whether the security-based swap 
described in the submission is required to be cleared (i.e., subject to 
mandatory clearing). New Rule 19b-4(o) and the corresponding amendments 
to Form 19b-4, while not addressing the underlying mandatory clearing 
determinations, will facilitate such determinations by providing 
registered clearing agencies with, among other things, information as 
to what must be included in a Security-Based Swap Submission and a 
mechanism for transmitting the submission to the Commission. The rules 
also specify how and when a clearing agency is required to provide 
notice of a Security-Based Swap Submission to its members and the 
public.
---------------------------------------------------------------------------

    \260\ See 15 U.S.C. 78c-3(b)(2)(A) and (5) (as added by Section 
763(a) of the Dodd-Frank Act).
---------------------------------------------------------------------------

    Similarly, Section 806(e) of the Clearing Supervision Act requires 
the Commission, in consultation with the Board, to adopt rules that 
define and describe when a designated clearing agency is required to 
file with the Commission notice of any change to its rules, procedures 
or operations that could materially affect the nature or level of risk 
presented by the clearing agency.\261\ Upon receiving an Advance 
Notice, the Commission is required, subject to certain exceptions, to 
(i) consult with the Board before taking any action on, or completing 
its review of, the change referred to in the Advance Notice \262\ and 
(ii) notify the designated clearing agency of any objection to a 
proposed change described in the notice within 60 days of receipt.\263\ 
Although new Rule 19b-4(n) and the corresponding amendments to Form 
19b-4 do not address how the Commission will ultimately determine 
whether to object to a particular change, the final rules will 
facilitate such determinations by helping designated clearing agencies 
determine when they must file Advance Notices and what information must 
be included therein. The final rules also provide a method of 
submission for Advance Notices that should already be familiar to 
clearing agencies and establish certain requirements related to how the 
clearing agency must make the Advance Notice available to the public.
---------------------------------------------------------------------------

    \261\ See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII).
    \262\ See 12 U.S.C. 5465(e)(4) (as added by Title VIII).
    \263\ See 12 U.S.C. 5465(e)(1)(E).
---------------------------------------------------------------------------

    Finally, Section 3(f) of the Exchange Act requires the Commission, 
whenever it engages in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action would promote efficiency, competition, and capital 
formation.\264\ In addition, Section 23(a)(2) of the Exchange Act \265\ 
requires the Commission, when adopting rules and regulations under the 
Exchange Act, to consider the impact such new rule would have on 
competition. Section 23(a)(2) of the Exchange Act also prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
---------------------------------------------------------------------------

    \264\ 15 U.S.C. 78c(f).
    \265\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    Because these rules focus on the process by which clearing agencies

[[Page 41641]]

make Security-Based Swap Submissions, the Commission believes that the 
rules being adopted today will have a minimal, if any, impact on 
efficiency, competition, and capital formation. Although in some cases 
process rules themselves can have a significant impact on efficiency, 
competition, and capital formation, in this context, the rules are 
intended to simply facilitate implementation of the larger statutory 
regime regarding mandatory clearing. The Commission believes the rules 
are being implemented in a cost-efficient way consistent with the 
statute (e.g., leveraging existing infrastructure and procedures 
familiar to clearing agencies), but the rules themselves should have a 
minimal impact on efficiency, competition, and capital formation. The 
Commission nevertheless recognizes that its subsequent mandatory 
clearing determinations, which will be based on the particular facts 
and circumstances of each individual Security-Based Swap Submission, 
could potentially have an impact on efficiency, competition, and 
capital formation in the security-based swap market.
1. Analysis of Final Rules Related to Security-Based Swap Submissions
    Exchange Act Section 3C requires each clearing agency that plans to 
accept a security-based swap for clearing to file a Security-Based Swap 
Submission with the Commission for a determination by the Commission of 
whether a security-based swap (or any group, category, type or class of 
security-based swaps) referenced in the submission is required to be 
cleared.\266\ Accordingly, the Commission is adopting new Rule 19b-4(o) 
and corresponding amendments to Form 19b-4 for the purpose of ensuring 
that the Commission receives the information necessary to conduct its 
review of Security-Based Swap Submissions received from clearing 
agencies. In particular, the new rule requires clearing agencies to 
provide information about the factors the Commission is required to 
consider under Exchange Act Section 3C(b)(4)(B). These factors include 
consideration of the effect on competition as well as the size of the 
market, trading liquidity, and pricing data, as well as the 
availability of a rule framework, capacity, operational expertise and 
resources, and credit support infrastructure to clear the security-
based swap (or group, category, type or class of security-based swaps) 
under consideration.\267\ In addition, the factors in Exchange Act 
Section 3C(b)(4)(B) require the Commission to consider the effect of a 
mandatory clearing determination on the mitigation of systemic risk, 
taking into account the size of the market for the security-based swap 
and the resources of the clearing agency available to clear the 
security-based swap, as well as the effect on competition and the 
effect of an insolvency event on customer and security-based swap 
counterparty positions, funds, and property.\268\ Furthermore, in 
taking into account the size of the market, competition, and the 
mitigation of systemic risk, the factors in Section 3C(b)(4)(B) require 
the Commission to consider the effect of a mandatory clearing 
determination on the market, whether market participants trading in the 
particular security-based swap could all meet a mandatory clearing 
requirement or if the costs of such a requirement would competitively 
disadvantage some participants, and whether the clearing agency has the 
operational and risk management systems in place to effectively 
mitigate systemic risk.
---------------------------------------------------------------------------

    \266\ See 15 U.S.C. 78c-3(b)(2) (as added by Section 763(a) of 
the Dodd-Frank Act).
    \267\ 15 U.S.C. 78c-3(4)(B)(i) and (ii) (as added by Section 
763(a) of the Dodd-Frank Act).
    \268\ 15 U.S.C. 78c-3(4)(B)(iii), (iv), and (v) (as added by 
Section 763(a) of the Dodd-Frank Act).
---------------------------------------------------------------------------

    The Commission will conduct each review in accordance with Exchange 
Act Section 3C(b)(4),\269\ with determinations made on a case-by-case 
basis in connection with the unique facts and circumstances of each 
submission. The Commission will consider the factors in Exchange Act 
Section 3C(b)(4)(B) at the time the Commission conducts a review, 
drawing on the information provided by the relevant clearing agency in 
accordance with new Rule 19b-4(o).
---------------------------------------------------------------------------

    \269\ See 15 U.S.C. 78c-3(b)(4) (as added by Section 763(a) of 
the Dodd-Frank Act).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission identified potential costs 
and benefits resulting from Rule 19b-4(o) and the related amendments to 
Form 19b-4, as proposed, and requested comment on all aspects of the 
cost-benefit analysis, including the identification and assessment of 
any costs and benefits that were not discussed in the analysis. 
Although the Commission did not receive any comments on the specific 
cost-benefit analysis contained in the Proposing Release, some 
commenters raised concerns about the overall scope of some of the 
proposed rules. In particular, one commenter suggested that new Rule 
19b-4(o)(3), which sets forth the information that a clearing agency 
will be required to include in a Security-Based Swap Submission, is 
broad and burdensome, not authorized by the Dodd-Frank Act, and would 
ultimately ``undermine the purposes of Dodd-Frank'' by ``eliminat[ing] 
the possibility of a simple, speedy decision on whether a swap 
transaction can be cleared by a clearing agency.'' \270\
---------------------------------------------------------------------------

    \270\ See CME Letter at 3. Similarly, The Options Clearing 
Corporation noted that Rule 19b-4(o)(3) identifies a ``a potentially 
very large amount of data'' to be provided in a Security-Based Swap 
Submission and urged Commission staff exercise judgment and 
flexibility in determining the scope of information required in 
connection with a submission. See OCC Letter at 3-4.
---------------------------------------------------------------------------

    The Commission does not agree with the assertion that the 
requirements of Rule 19b-4(o)(3) would delay the approval of a request 
by a clearing agency to list a new security-based swap for clearing. As 
previously noted, the rules related to Security-Based Swap Submissions 
apply solely to the process by which the Commission will make a 
determination, pursuant to Exchange Act Section 3C(b)(2)(C)(ii), 
whether the security-based swap described in the submission is required 
to be cleared (i.e., subject to mandatory clearing). Nothing in the 
rules the Commission is adopting today related to Security-Based Swap 
Submissions would prevent a registered clearing agency from voluntarily 
clearing a security-based swap prior to such determination so long as 
it does so in accordance with its rules. Thus, the Commission does not 
believe that Rule 19b-4(o)(3), which simply sets forth the information 
required to be contained in a Security-Based Swap Submission, would 
affect the current state of affairs with respect to a clearing agency's 
ability to clear a security-based swap transaction, nor does the 
Commission believe that this rule would undermine the goals of the 
Dodd-Frank Act as they pertain to the voluntary clearing of security-
based swaps.
    At the same time, the Commission recognizes the concern expressed 
by commenters that Rule 19b-4(o)(3) could potentially require a 
clearing agency to submit a large amount of information in connection 
with a Security-Based Swap Submission. Accordingly, the Commission has 
sought to narrowly tailor the rule to the specific requirements of the 
Exchange Act. The list of information required pursuant to new Rule 
19b-4(o)(3)(ii) incorporates the identical qualitative and quantitative 
factors that the Commission is required to consider pursuant to 
Exchange Act Section 3C(b)(4)(B) when determining whether a security-
based swap (or group, category, type or class of security-based swaps) 
will be subject

[[Page 41642]]

to the mandatory clearing requirement.\271\ In addition, the 
information required pursuant to new Rule 19b-4(o)(3)(i) (discussing 
how the Security-Based Swap Submission is consistent with Section 17A 
of the Exchange Act) and new Rules 19b-4(o)(3)(iii)-(iv) (describing 
how the clearing agency's rules for open access are applicable to the 
security-based swap described in the Security-Based Swap Submission) 
also track statutory requirements contained in Exchange Act Section 
3C.\272\ The Commission therefore believes that it has crafted new Rule 
19b-4(o)(3) to allow it to obtain the information necessary to complete 
its statutory obligation to make the required determination, without 
imposing undue additional information requirements on clearing 
agencies. As described in greater detail below, the Commission also 
believes that the available alternatives to the approach being adopted 
would have been less cost-efficient because of the concentration of 
relevant information in the clearing agencies and would not represent 
the best option for appropriately implementing the statutory mandate.
---------------------------------------------------------------------------

    \271\ See 15 U.S.C. 78c-3(b)(4)(B)(i)-(v) (as added by Section 
763(a) of the Dodd-Frank Act) (emphasis added).
    \272\ See 15 U.S.C. 78c-3(b)(4)(A) (as added by Section 763(a) 
of the Dodd-Frank Act) (regarding compliance with Section 17A of the 
Exchange Act) and 15 U.S.C. 78c-3(a)(2) (as added by Section 763(a) 
of the Dodd-Frank Act) (setting forth the standards for evaluating 
whether the rules of a clearing agency provide for open access).
---------------------------------------------------------------------------

    However, the Commission is mindful that the new procedure set forth 
by Rule 19b-4(o) will result in costs for clearing agencies, even if 
that procedure were to achieve optimal efficiency. As in the Proposing 
Release, this analysis looks first to the hourly burdens contained in 
the PRA analysis in Section IV (which hourly figures have been updated 
from the estimates provided in the Proposing Release) multiplied by the 
estimated hourly cost. With respect to the amendments to Rule 19b-4 and 
Form 19b-4 that require a clearing agency to file Security-Based Swap 
Submissions with the Commission using EFFS and existing Form 19b-4, the 
Commission believes that clearing agencies affected by the new rules 
will likely incur certain one-time and ongoing costs associated with 
making these filings, which are primarily related to preparing internal 
policies and procedures with respect to the new filing requirements and 
training personnel to prepare security-based swap submission and file 
them on EFFS. The hourly estimates are discussed in detail in the PRA 
analysis, although the Commission recognizes that certain of these 
costs may differ in amount depending on whether the clearing agency is 
already clearing security-based swaps or will be new to the market and 
regulatory structure. The Commission has used the hourly estimates in 
the PRA analysis to estimate the total recurring annual and ongoing 
costs for the six clearing agencies the Commission has determined may 
be required to meet the requirements in the rules relating to Security-
Based Swap Submissions. The Commission estimates the annual costs will 
be $8,113,090 in the aggregate and that the one-time costs will be 
$319,080 in the aggregate.\273\
---------------------------------------------------------------------------

    \273\ These figures consist of the total hourly burdens 
identified in sections III.D.2.b and d, multiplied by the costs per 
hour attributed to different specialists. Specifically, $320 is 
attributed per hour for in-house compliance attorneys, $354 per hour 
for outside attorneys, $259 per hour for a senior systems analyst, 
and $225 per hour for a Webmaster. These hourly rates were based on 
the corresponding figures set forth in SIFMA's Management & 
Professional Earnings in the Securities Industry 2010, modified by 
the Commission's staff to account for an 1800 hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead.
---------------------------------------------------------------------------

    In addition, the Commission recognizes that registered clearing 
agencies may incur some additional costs associated with filing 
Security-Based Swap Submissions that are not readily quantifiable. For 
example, in cases where a clearing agency's rules already permit it to 
clear a security-based swap that is not listed for clearing, the 
clearing agency's subsequent decision to list such security-based swap 
for clearing would result in the requirement to make a Security-Based 
Swap Submission despite the fact that the clearing agency may have 
previously filed a proposed rule change with respect to the same 
security-based swap. As a result, clearing agencies put in this 
position could incur additional costs by being required to make a 
greater number of filings than they do currently under Exchange Act 
Section 19(b). In addition, the Commission notes that Security-Based 
Swap Submissions filed before December 10, 2012, will not be filed on 
Form 19b-4 in order to allow time for the Commission to make the 
necessary system upgrades to EFFS. Accordingly, a clearing agency that 
files a Security-Based Swap Submission prior to December 10, 2012, that 
is also an Advance Notice or proposed rule change (or both) will be 
required to submit two separate filings with the Commission. However, 
the Commission believes that the requirement to file the Security-Based 
Swap Submission by email, as well as the temporary nature of the 
requirement, will impose relatively little additional burden on 
clearing agencies, which can use their existing email systems to make 
such filings.
    While the Commission recognizes the importance of considering these 
costs, and appreciates that some costs may be unavoidable in 
establishing a new procedure, the Commission believes that new Rule 
19b-4(o) is cost-efficient and appropriately implements the provisions 
identified by Congress as requiring Commission rulemaking. 
Specifically, while implementing the submission and notice requirements 
in Exchange Act Section 3C, the Commission anticipates that the rule 
will minimize unnecessary costs to filers by utilizing a format that 
clearing agencies should be familiar with and, as they become 
registered clearing agencies, will be otherwise required to use for all 
of their proposed rule changes under existing Commission rules.
    In addition, the Commission also believes that new Rule 19b-4(o) is 
cost-efficient and an implementation of the statutory mandate because, 
as previously noted, a clearing agency would ordinarily consider most, 
if not all, of the factors set forth in the Exchange Act Section 
3C(b)(4) and new Rule 19b-4(o)(3) as part of its internal decision-
making process, particularly at the time when it was determining 
whether to list the relevant security-based swaps for clearing (and 
knowing that such listing could result in the Commission determining 
that the security-based swap may be required to be cleared).\274\ 
Accordingly, although the Commission recognizes that clearing agencies 
may incur costs associated with locating, processing and preparing 
information required to be included in a Security-Based Swap 
Submission, the Commission believes that clearing agencies are the most 
appropriate source for accurate and updated information regarding a 
security-based swap that it accepts (or plans to accept) for clearing. 
The Commission is aware of no other source for the scope and nature of 
the information contemplated by Exchange Act Section 3C.
---------------------------------------------------------------------------

    \274\ See supra section II.A.1.b.
---------------------------------------------------------------------------

    In the alternative, as suggested by a commenter,\275\ if the 
Commission were limited to compiling the necessary information using 
already available material as well as information obtained by the 
Commission in connection with its supervision of clearing agencies,

[[Page 41643]]

there is risk that such material would be incomplete and/or inaccurate 
and therefore not well-suited to allowing the Commission to make a 
reasonably informed mandatory clearing determination. Under such 
circumstances, the Commission may also be required to make potentially 
costly and time-consuming ad hoc information requests to clearing 
agencies. Requiring a clearing agency to provide necessary information 
with its submission will help ensure that the information used by the 
Commission to evaluate the security-based swap for mandatory clearing 
is correct and complete in the first instance, reducing the likelihood 
that further information requests will be required and the associated 
costs for clearing agencies incurred.
---------------------------------------------------------------------------

    \275\ See supra notes 59 to 61 and accompanying text.
---------------------------------------------------------------------------

    Moreover, as described above, new Rule 19b-4(o) limits the 
information required to be provided to the Commission while, at the 
same time, allowing the Commission to meet its statutory requirements 
under specific categories established by the Dodd-Frank Act. The 
Commission, in seeking the most cost-efficient solution for the new 
procedure that also appropriately implements the statutory mandate, 
chose not to include additional information requests in the rule at 
this time because the Commission believes that the factors identified 
in the statute are capable of supporting a reasonable determination 
with respect to a Security-Based Swap Submission. Nevertheless, the 
Commission recognizes that a clearing agency may still require 
additional clarification or guidance with respect to what information 
must be included in a Security-Based Swap Submission. In that regard, 
Commission staff is in regular contact with each clearing agency and 
expects to be able to provide such clarification or guidance as 
necessary or appropriate based on the relevant facts and circumstances.
    Finally, although the Commission is still in the process of 
determining how best to aggregate security-based swaps into groups, 
categories, types or classes, requiring that Security-Based Swap 
Submissions aggregate security-based swaps in this manner, to the 
extent reasonable and practicable to do so, as provided for in new Rule 
19b-4(o)(4), could eventually lead to further cost efficiencies by 
reducing the number of filings required to be made with the Commission, 
and subsequently reducing the number of submissions that must be 
processed and reviewed by Commission staff.
    Separately, with respect to notice, the Commission believes that 
new Rule 19b-4(5) appropriately implements the statutory mandate and 
creates a cost-efficient method of providing notice to members of the 
clearing agency, as well as other interested persons, such as 
counterparties to security-based swaps, of a Security-Based Swap 
Submission by requiring posting of the submission on the clearing 
agency's Web site within two business days of filing with the 
Commission. The Commission anticipates that this notice will provide 
the clearing agency members and other interested persons with the 
opportunity to comment on the submission with the potential for 
providing new information about the suitability of the security-based 
swap for mandatory clearing.
2. Analysis of Final Rules Related to the Process for Staying a 
Clearing Requirement While the Clearing of the Security-Based Swap Is 
Reviewed
    Under Exchange Act Section 3C(c)(1), after making a determination 
that a security-based swap (or group, category, type or class of 
security-based swaps) is required to be cleared, the Commission, on 
application of a counterparty to a security-based swap or on the 
Commission's own initiative, may stay the clearing requirement until 
the Commission completes a review of the terms of the security-based 
swap and the clearing arrangement.\276\ In connection with a stay of 
the clearing requirement, the Commission is required to adopt rules for 
reviewing a clearing agency's clearing of a security-based swap (or any 
group, category, type or class of security-based swaps) that the 
clearing agency has accepted for clearing.
---------------------------------------------------------------------------

    \276\ See 15 U.S.C. 78c-3(c)(1) (as added by Section 763(a) of 
the Dodd-Frank Act).
---------------------------------------------------------------------------

    Pursuant to new Rule 3Ca-1, a counterparty to a security-based swap 
subject to the clearing requirement who applies for a stay of the 
clearing requirement will be required to submit a written statement to 
the Commission that includes: A request for a stay of the clearing 
requirement; the identity of the counterparties to the security-based 
swap and a contact at the counterparty requesting the stay; the 
identity of the clearing agency clearing the security-based swap; the 
terms of the security-based swap subject to the clearing requirement 
and a description of the clearing arrangement; and the reasons why a 
stay should be granted and why the security-based swap should not be 
subject to a clearing requirement, specifically addressing the same 
factors a clearing agency must address in its Security-Based-Swap 
Submission pursuant to Rule 19b-4(o).\277\ In the Proposing Release, 
the Commission identified potential costs and benefits resulting from 
Rule 3Ca-1 as proposed and requested comment on all aspects of the 
cost-benefit analysis, including the identification and assessment of 
any costs and benefits that were not discussed in the analysis. The 
Commission did not receive any responses to this request.
---------------------------------------------------------------------------

    \277\ Rule 3Ca-1(b).
---------------------------------------------------------------------------

    The Commission is mindful of the costs associated with the final 
procedure for the application for a stay. As in the Proposing Release, 
this analysis looks first to the hourly burdens contained in the PRA 
analysis in Section IV (which hourly figures have been updated from the 
estimates provided in the Proposing Release) multiplied by the 
estimated hourly cost. As previously noted, the Commission is unable to 
estimate accurately the number of stay applications that it will 
receive pursuant to new Rule 3Ca-1 and Section 3C(c)(1) because the 
Commission has not yet made any mandatory clearing determinations, does 
not know which counterparties may object to a determination, and has no 
information as to when counterparties would make an application for a 
stay. Accordingly, the Commission has no reasonable basis for 
estimating the number of applications. In addition, the mere fact that 
a counterparty files an request for a stay does not automatically 
create an obligation on the relevant clearing agency to respond to the 
application. Rather, new Rule 3Ca-1(d) provides that any clearing 
agency that has accepted for clearing a security-based swap that is 
subject to the stay shall provide information requested by the 
Commission necessary to assess any of the factors it determines to be 
appropriate in the course of its review. The Commission therefore 
cannot estimate with precision the quantified costs associated with the 
new rule regarding procedures for a stay, and no additional information 
was made available during the pendency of this rule that would aid such 
an estimate.
    Nonetheless, the Commission recognizes that there will likely be 
applications for stays and, for purposes of the Proposing Release, the 
Commission estimated, by way of illustrating the potential costs of 
such applications, that there would be 30 applications for stays of a 
clearing requirement from counterparties each year based on the 
estimates of section III.D.4. of the PRA analysis. Further, the 
Proposing Release relied on the

[[Page 41644]]

assumption that the Commission would request additional information 
from the relevant clearing agency after receiving a request for a stay 
from a counterparty.
    Based on the figures and assumptions described above, the 
Commission estimates, as it did in the Proposing Release, that 
counterparties would incur $1,062,000 in total aggregate costs to 
prepare and submit applications requesting a stay of a clearing 
requirement and that clearing agencies will incur $247,140 in total 
aggregate costs to compile and provide any information requested by the 
Commission.\278\
---------------------------------------------------------------------------

    \278\ This figure consists of the total hourly burden identified 
in section III.D.4, multiplied by $320 for each hour attributed to 
in-house compliance attorneys and $354 per hour for outside 
attorneys. This hourly cost is based on SIFMA's Management & 
Professional Earnings in the Securities Industry 2010, modified by 
the Commission's staff to account for an 1800 hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead.
---------------------------------------------------------------------------

    While for the reasons described above, the Commission has no basis 
to believe that this estimate is an inapt illustration of the potential 
costs associated with stays, the Commission notes that another 
indicator of the potential burden may be the ``per stay'' cost implied 
by these aggregate figures--namely, approximately $35,400 per 
counterparty per stay and approximately $8,238 per clearing agency per 
stay. These estimates of course also assume that there is an 
application (when in fact there may be none in cases where the 
Commission exercises its authority under Exchange Act Section 3C(c)(1) 
to grant a stay on its own initiative) and that it requires a clearing 
agency to respond (when in fact it may not be required to respond in 
cases where the Commission does not require the production of 
additional information pursuant to new Rule 3Ca-1(d)).
    After considering these illustrative costs, the Commission believes 
that new Rule 3Ca-1 appropriately implements the provisions identified 
by Congress as requiring Commission rulemaking and is cost-efficient 
for the parties that will most likely be affected by the rule. In 
particular, the Commission believes that the information required of 
the counterparty and, if applicable, the clearing agency, is 
information that is most likely to be in the possession of the relevant 
party, and that alternative mechanisms for obtaining that information 
would be comparatively more costly for the parties involved. For 
example, similar to the analysis conducted with respect to Security-
Based Swap Submissions, one alternative would have been to require that 
the Commission rely on information within its possession to make a 
determination with respect to the application for a stay. However, with 
respect to the counterparty, the Commission is all but certain not to 
have the full information required to understand the application--the 
counterparty alone will likely have its reasons as to why the stay 
should be granted and why the security-based swap should not be subject 
to a clearing requirement. Similarly, a clearing agency will only be 
required to submit information in connection with this process in 
response to a request by the Commission in order to facilitate the 
Commission's review of the application for a stay and, if the stay is 
granted, the applicable clearing requirement. Under these 
circumstances, it is likely that such requests will include information 
that is unique to the clearing agency and not independently available 
to the Commission.
3. Analysis of Final Rule Related to Preventing Evasion of the Clearing 
Requirement
    As described above, new Rule 3Ca-2 clarifies that the phrase 
``submits such security-based swap for clearing to a clearing agency'' 
found in Exchange Act Section 3C(a)(1) and is intended to prevent 
potential evasions of the clearing requirement by requiring market 
participants to submit security-based swaps to a clearing agency for 
central clearing as opposed to other clearing functions or services. 
The Commission does not believe that the Rule 3Ca-2 would impose any 
additional costs or burdens on clearing agencies or counterparties to 
security-based swaps because the rule simply clarifies that security-
based swaps must be cleared at a central counterparty, rather than at 
an entity that meets the technical definition of a clearing agency 
under the Exchange Act for another reason. This clarification is 
consistent with the purpose of Section 3C(a)(1), which is to require 
that security-based swaps are centrally cleared.
4. Analysis of Final Rules Related to Advance Notices
    As previously noted, the Clearing Supervision Act, which was 
enacted into law pursuant to Title VIII of the Dodd-Frank Act, provides 
for enhanced regulation of financial market utilities, such as clearing 
agencies, that manage or operate a multilateral system for the purpose 
of transferring, clearing or settling payments, securities or other 
financial transactions among financial institutions or between 
financial institutions and the financial market utility. Among other 
things, Section 806(e) of the Clearing Supervision Act requires any 
financial market utility designated by the Council as systemically 
important to provide ``60 days in advance notice to its Supervisory 
Agency of any proposed change to its rules, procedures or operations 
that could, as defined in rules of each Supervisory Agency, materially 
affect the nature or level of risks presented by the designated 
financial market utility.'' \279\ In addition, Congress mandated that 
each Supervisory Agency, including the Commission, adopt rules, in 
consultation with the Board, that define and describe when a designated 
financial market utility is required to file an Advance Notice with its 
Supervisory Agency.\280\ Accordingly, new Rule 19b-4(n) was intended to 
define and describe when Advance Notices are required to be filed by 
designated clearing agencies and to set forth the process for filing 
such notices with the Commission.
---------------------------------------------------------------------------

    \279\ See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII).
    \280\ See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission identified potential costs 
and benefits resulting from Rule 19b-4(n) and the related amendments to 
Form 19b-4 as proposed, and requested comment on all aspects of the 
cost-benefit analysis, including the identification and assessment of 
any costs and benefits that were not discussed in the analysis. 
Although the Commission did not receive any comments on the specific 
cost-benefit analysis contained in the Proposing Release, some 
commenters suggested that proposed 19b-4(n)(2), which defines the 
phrase ``materially affect the nature or level of risks presented'' for 
purposes of determining when a designated clearing agency will be 
required to submit an Advance Notice with the Commission, was overly 
broad and burdensome.\281\ Specifically, these commenters generally 
argued that the definition would result in a requirement to submit 
Advance Notices to the Commission regarding matters that were risk-
reducing, impractical, and potentially of lesser importance to the 
designated clearing agency and its regulators, which could potentially 
place an unnecessary strain on the existing resources of the clearing 
agency.\282\
---------------------------------------------------------------------------

    \281\ See supra notes 154 to 162 and accompanying text.
    \282\ See id.
---------------------------------------------------------------------------

    While the Commission recognizes that new Rule 19b-4(n)(2), which is 
being

[[Page 41645]]

adopted as proposed, will impose certain costs and burdens on 
designated clearing agencies (which costs and burdens are discussed in 
greater detail below), the Commission believes that the rule is cost-
efficient method and represents an appropriate method for implementing 
the statutory mandate. Specifically, Section 806(e) requires all 
financial market utilities to file Advance Notices with their 
Supervisory Agencies whenever the change referred to in the notice 
materially affects the nature or level of risks presented by the 
designated financial market utility.\283\ While the Commission 
recognizes that a more narrowly tailored definition of the phrase 
``materially affect the nature or level of risks presented'' could 
potentially result in designated clearing agencies being required to 
file fewer Advance Notices, new Rule 19b-4(n)(2) was drafted to follow 
closely the statutory language set forth in Section 806(e)(1)(A). As 
such, the Commission believes that the definition set forth in the new 
rule strikes an appropriate balance between the objectives of the Dodd-
Frank Act and the potential costs and burdens on financial market 
utilities in that it does not expand on the language included in the 
statute, either by including specific types of changes not contemplated 
in Section 806(e) or by excluding changes that were not expressly 
identified by Congress. Furthermore, the Commission has previously 
encouraged designated clearing agencies to discuss proposed changes 
with Commission staff to help determine whether an Advance Notice under 
Section 806(e) would need to be filed and continues to encourage 
clearing agencies to avail themselves of this approach.\284\
---------------------------------------------------------------------------

    \283\ See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII).
    \284\ See supra section II.C.1.
---------------------------------------------------------------------------

    However, the Commission is mindful that the new procedure set forth 
for Advance Notices will result in costs for financial market 
utilities, even if that procedure were to achieve optimal efficiency. 
As in the Proposing Release, this analysis looks first to the hourly 
burdens contained in the PRA analysis in Section IV (which hourly 
figures have been updated from the estimates provided in the Proposing 
Release) multiplied by the estimated hourly cost. The Commission 
estimates the total annual cost related to filing and posting Advance 
Notices to be $15,890,000 in the aggregate for ten respondent clearing 
agencies.\285\
---------------------------------------------------------------------------

    \285\ This figure consists of the total hourly burdens 
identified in sections III.D.2.e and III.3, multiplied by the costs 
per hour attributed to different specialists. Specifically, $320 is 
attributed per hour for in-house compliance attorneys, $354 per hour 
for outside attorneys and $225 per hour for a Webmaster. These 
hourly rates were based on the corresponding figures set forth in 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2010, modified by the Commission's staff to account for an 
1800 hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    In addition, the Commission recognizes that registered clearing 
agencies may incur some additional costs associated with filing Advance 
Notices that are not readily quantifiable. For example, some proposed 
changes may be required to be filed only as Advance Notices under 
Section 806(e) and not as proposed rule changes under Exchange Act 
Section 19(b). In these circumstances, clearing agencies will likely 
incur additional costs by being required to make a greater number of 
filings than they do currently under Exchange Act Section 19(b), which 
would result from the application of different standards for triggering 
a filing under the two statutory provisions. In addition, the 
Commission notes that Advance Notices filed before December 10, 2012, 
will not be filed on Form 19b-4 in order to allow time for the 
Commission to make the necessary system upgrades to EFFS. Accordingly, 
a designated clearing agency that is required to file a change as both 
an Advance Notice and a proposed rule change will be required to submit 
two separate filings with the Commission. However, the Commission 
believes that the requirement to file the Advance Notice by email, as 
well as the temporary nature of the requirement, will impose relatively 
little additional burden on clearing agencies, which can use their 
existing email systems to make such filings.
    While the Commission recognizes the importance of considering these 
costs, and appreciates that some costs may be unavoidable in 
establishing a new procedure, the Commission believes that new Rule 
19b-4(n) implements the provisions identified by Congress as requiring 
Commission rulemaking and is cost-efficient for the parties that will 
most likely be affected by the rule. Specifically, by defining the term 
``materially affect the nature or level of risks presented,'' new Rule 
19b-4(n)(2) provides designated clearing agencies with an 
understanding, as required by Congress pursuant to Section 
806(e)(1)(B), of when an Advance Notice is required. While the 
Commission could have taken a more prescriptive approach by specifying 
which types of groups of changes would or would not trigger the 
requirement, the Commission believes that interpretative issues would 
remain and questions whether such alternative would be consistent with 
the statutory language in Section 806(e)(1)(A).
    In addition, because the requirement to file notices under Section 
806(e) is similar to the filing requirement for proposed rule changes 
under Exchange Act Section 19(b), the Commission is requiring that 
Advance Notices be filed on Form 19b-4 and EFFS. In many cases, it is 
likely that a proposed change for purposes of Section 806(e) will also 
be a proposed rule change for purposes of Exchange Act Section 19(b). 
Although the Commission could have required that Advance Notices be 
filed on a separate form, the Commission believes that requiring 
submissions using existing Form 19b-4 and EFFS represents a 
particularly cost-efficient approach to implementing the statutory 
mandate to submit Security-Based Swap Submissions, particularly since 
designated clearing agencies will already be familiar with this method 
of submission. Further, in situations where a single clearing agency 
action would trigger more than one of these filing requirements, 
allowing for each filing to be made pursuant to a single Form 19b-4 
submission would improve efficiency in the filing process including, 
for example, by allowing the clearing agency to refer to and cross-
reference information in one part of the submission if the information 
is relevant to a separate filing that is part of the same submission 
(so long as the requirements of each applicable rule are individually 
satisfied and if the clearing agency clearly explains how the 
information in one filing is applicable to the specific information 
required to be provided in the other filing).
5. Analysis of Final Rules To Amend Rule 19b-4 To Conform to the 
Requirements of Section 916 of the Dodd-Frank Act
    The Commission has made a number of modifications to Rule 19b-4 and 
Form 19b-4 to conform to the requirements specified in Exchange Act 
Section 19(b), as amended by Section 916 of the Dodd Frank Act. These 
amendments were designed to incorporate changes required by Section 
916, which provided for new deadlines by which the Commission must 
publish and act upon a proposed rule change submitted by all SROs and 
new standards for the approval, disapproval, and temporary suspension 
of a proposed rule change. In the Proposing Release, the Commission 
identified potential costs and benefits resulting from these 
amendments, as proposed, and requested comment on all aspects of the

[[Page 41646]]

cost-benefit analysis, including the identification and assessment of 
any costs and benefits that were not discussed in the analysis. The 
Commission did not receive any responses to this request.
    The Commission estimates that the requirement that an SRO inform 
the Commission of the date on which it posted a proposed rule change on 
its Web site (if the posting did not occur on the same day that the SRO 
filed the proposal with the Commission) will impose only a minimal 
burden, if any, on the SRO. As discussed in Section IV.B.4., the 
Commission believes that SROs currently post their proposed rule 
changes on their Web site on the same day on which they file them with 
the Commission. It would be unlikely that an SRO would fail to post its 
proposed rule change on the same day that it files with the Commission, 
since prompt Web site posting triggers the requirement on the 
Commission to publish notice of the proposed rule change.
    The Commission also identified certain isolated or unusual 
circumstances that could result in unforeseen costs associated with the 
requirement that an SRO, if it does not post a proposed rule change on 
its Web site on the same day that it files the proposal with the 
Commission, inform the Commission of the date on which it posted such 
proposal on its Web site. In conducting an evaluation of the costs of 
this amendment, as in the Proposing Release, the Commission relies on 
the hourly burdens contained in the PRA analysis in Section IV (which 
hourly figures have been updated from the estimates provided in the 
Proposing Release) multiplied by the estimated hourly cost. In 
addition, the Commission estimates that SROs will fail to post proposed 
rule changes on their Web sites on the same day as the filing was made 
with the Commission in 1% of all cases, or 16 times each year, and that 
each SRO will spend approximately one hour preparing and submitting 
notice to the Commission of the date on which it posted the proposed 
rule change on its Web site, resulting in a total annual burden of 14 
hours. Based on these assumptions, the Commission estimates that the 
total annual cost of this amendment will be $5,120 in the aggregate for 
all SROs.\286\
---------------------------------------------------------------------------

    \286\ This figure consists of the total hourly burdens 
identified in section III.D.4, multiplied by $320 per hour for in-
house compliance attorneys. This hourly cost is based on SIFMA's 
Management & Professional Earnings in the Securities Industry 2010, 
modified by the Commission's staff to account for an 1800 hour work-
year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

V. Regulatory Flexibility Certification

    The Regulatory Flexibility Act (``RFA'') \287\ requires the 
Commission, in promulgating rules, to consider the impact of those 
rules on small entities. Section 603(a) \288\ of the Administrative 
Procedure Act,\289\ as amended by the RFA, generally requires the 
Commission to undertake a regulatory flexibility analysis of all rules 
it has proposed to determine the impact of such rulemaking on ``small 
entities.'' \290\ Section 605(b) of the RFA states that this 
requirement shall not apply to any proposed rule which, if adopted, 
would not have a significant economic impact on a substantial number of 
small entities.\291\
---------------------------------------------------------------------------

    \287\ 5 U.S.C. 601 et seq.
    \288\ 5 U.S.C. 603(a).
    \289\ 5 U.S.C. 551 et seq.
    \290\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' The Commission has 
adopted definitions for the term ``small entity'' for the purposes 
of rulemaking in accordance with the RFA. These definitions, as 
relevant to this rulemaking, are set forth in Rule 0-10, 17 CFR 
240.0-10.
    \291\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Self-Regulatory Organizations

    New Rule 19b-4(n) and the corresponding amendments to Form 19b-4 
will apply to all designated clearing agencies. New Rule 19b-4(o) and 
the corresponding amendments to Form 19b-4 will apply to all security-
based swap clearing agencies. New rules 3Ca-1 and 3Ca-2 also will apply 
to all security-based swap clearing agencies. All of the remaining 
amendments to Rule 19b-4 and Form 19b-4, including those made to Rule 
19b-4(l) to reflect the revisions to Exchange Act Section 19(b) 
pursuant to Section 916 of the Dodd-Frank Act, will apply to all SROs. 
Three entities are currently registered to provide central clearing 
services for CDS, a class of security-based swaps. The Commission 
believes, based on its understanding of the market, that likely no more 
than six security-based swap clearing agencies could be subject to the 
requirements of new Rule 19b-4(o) and new Rules 3Ca-1 and 3Ca-2. In 
addition, the Commission believes that approximately ten registered 
clearing agencies could be designated by the Council as systemically 
important (and for which the Commission will be the Supervisory Agency) 
and subject to the requirements of new Rule 19b-4(n), which includes 
the four securities clearing agencies in existence prior to the 
enactment of the Dodd-Frank Act and the six estimated clearing agencies 
that may clear security-based swaps. Finally, there are currently 32 
SROs registered with the Commission (including registered clearing 
agencies). When combined with the additional clearing agencies that 
could potentially register with the Commission in the future to clear 
security-based swaps, the Commission believes that approximately 35 
SROs will be subject to all of the other technical amendments to Rule 
19b-4, including the amendments to Rule 19-4(l).
    For the purposes of Commission rulemaking in connection with the 
RFA, a small entity includes, when used with reference to a clearing 
agency, a clearing agency that: (i) Compared, cleared and settled less 
than $500 million in securities transactions during the preceding 
fiscal year; (ii) had less than $200 million of funds and securities in 
its custody or control at all times during the preceding fiscal year 
(or at any time that it has been in business, if shorter); and (iii) is 
not affiliated with any person (other than a natural person) that is 
not a small business or small organization.\292\ With respect to SROs 
that are not clearing agencies, the RFA analysis would apply to 
national securities exchanges, national securities associations and the 
Municipal Securities Rulemaking Board. Exchange Act Rule 0-10(d) 
provides that a small entity includes, when used in reference to an 
exchange, any exchange that: (i) Has been exempted from the reporting 
requirements of Rule 601 of Regulation NMS \293\ and (ii) is not 
affiliated with any person (other than a natural person) that is not a 
small business or small organization.\294\ Under the standards adopted 
by the Small Business Administration, small entities in the finance 
industry include the following: (i) For entities engaged in investment 
banking, securities dealing and securities brokerage activities, 
entities with $6.5 million or less in annual receipts; (ii) for 
entities engaged in trust, fiduciary and custody activities, entities 
with $6.5 million or less in annual receipts; and (iii) funds, trusts 
and other financial vehicles with $6.5 million or less in annual 
receipts.\295\
---------------------------------------------------------------------------

    \292\ 17 CFR 240.0-10(d).
    \293\ 17 CFR 242.601.
    \294\ 17 CFR 240.0-10(e).
    \295\ 13 CFR 121.201, Sector 52.
---------------------------------------------------------------------------

    Based on the Commission's existing information about SROs, the 
Commission believes that such entities will not be small entities, but 
rather part of large business entities that exceed the thresholds 
defining ``small entities'' set out above. Additionally, while other 
clearing agencies may become eligible to operate as central 
counterparties for

[[Page 41647]]

security-based swaps, the Commission does not believe that any such 
entities will be ``small entities'' as defined in Exchange Act Rule 0-
10.\296\ Furthermore, the Commission believes it is unlikely that 
clearing agencies acting as central counterparties for security-based 
swaps would have annual receipts of less than $6.5 million. 
Accordingly, the Commission believes that any clearing agencies 
clearing security-based swaps by acting as central counterparties for 
such transactions will exceed the thresholds for ``small entities'' set 
forth in Exchange Act Rule 0-10.
---------------------------------------------------------------------------

    \296\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

B. Security-Based Swap Counterparties

    New Rule 3Ca-1 will apply to any counterparty to a security-based 
swap subject to the clearing requirement that applies for a stay of a 
mandatory clearing requirement. For the purposes of Commission 
rulemaking and as applicable to new Rule 3Ca-1, a small entity 
includes: (i) When used with reference to a clearing agency, a clearing 
agency that (a) compared, cleared and settled less than $500 million in 
securities transactions during the preceding fiscal year, (b) had less 
than $200 million of funds and securities in its custody or control at 
all times during the preceding fiscal year (or at any time that it has 
been in business, if shorter) and (c) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization; \297\ (ii) when used as reference to an ``issuer'' or a 
``person,'' other than an investment company, an ``issuer'' or a 
``person'' that, on the last day of its most recent fiscal year, had 
total assets of $5 million or less; \298\ or (iii) when used as 
reference to broker-dealer, a broker-dealer (a) with total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date 
in the prior fiscal year as of which its audited financial statements 
were prepared pursuant to Rule 17a-5(d) under the Exchange Act, or, if 
not required to file such statements, a broker-dealer that had total 
capital (net worth plus subordinated liabilities) of less than $500,000 
on the last business day of the preceding fiscal year (or in that time 
that it has been in business, if shorter) and (b) is not affiliated 
with any person (other than a natural person) that is not a small 
business or small organization.\299\ Under the standards adopted by the 
Small Business Administration, small entities in the finance industry 
include the following: (i) For entities engaged in investment banking, 
securities dealing and securities brokerage activities, entities with 
$6.5 million or less in annual receipts; (ii) for entities engaged in 
trust, fiduciary and custody activities, entities with $6.5 million or 
less in annual receipts; and (iii) funds, trusts and other financial 
vehicles with $6.5 million or less in annual receipts.\300\
---------------------------------------------------------------------------

    \297\ 17 CFR 240.0-10(d).
    \298\ 17 CFR 240.0-10(a).
    \299\ 17 CFR 240.0-10(c).
    \300\ 13 CFR 121.201, Sector 52.
---------------------------------------------------------------------------

    While the Commission is unable to anticipate whether any 
counterparties to security-based swap transactions that apply for a 
stay of a mandatory clearing requirement would meet the definition of a 
``small entity'' under Exchange Act Rule 0-10, the Commission believes 
that it is unlikely that the stay application process of new Rule 3Ca-1 
will have a significant economic impact upon such an entity. Given that 
the new stay application process entails the submission of a written 
statement to the Commission setting forth information about the 
security-based swap transaction for which the stay is sought, the 
Commission believes the impact of the application process on a 
counterparty would be minimal.\301\ Furthermore, even if the stay 
application process were to have a significant economic impact upon 
such non-clearing agency counterparty, the Commission believes that the 
number of entities so impacted will be no more than 30.\302\ 
Accordingly, in respect of non-clearing agency counterparties to 
security-based swap transactions, the Commission believes that new Rule 
3Ca-1 will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \301\ In the economic analysis, the Commission estimated that 
the 30 counterparties would incur $1,062,000 in total aggregate 
costs to prepare and submit applications requesting a stay of a 
clearing requirement, which breaks down to $35,400 per stay. See 
supra note 278 and accompanying text.
    \302\ As previously noted, the Commission is unable to estimate 
accurately the number of times it will receive an application for a 
stay pursuant to Section 3C(c)(1) because it has not yet made any 
mandatory clearing determinations and it does not know what 
counterparties may object to a determination or when they would make 
an application for a stay. However, the Commission recognizes that 
there will likely be applications for stays and, for purposes of 
conducting the PRA analysis, the Commission estimated there would be 
five applications for stays of a clearing requirement per clearing 
agency per year. This figure represents one quarter of the estimated 
number of Security-Based Swap Submissions from each clearing agency 
per year, for a total of 30 applications for stays per year. While 
the Commission recognizes that a counterparty may submit multiple 
stay applications, in order to use the most conservative estimate 
possible, the Commission is assuming that each of the 30 estimated 
applications will be submitted by different counterparties. See 
supra section III.D.4.
---------------------------------------------------------------------------

C. Certification

    For the reasons stated above, the Commission certifies that the 
amendments to Rule 19b-4, including new Rules 19b-4(n) and (o) and all 
corresponding amendments to Form 19b-4, and new Rules 3Ca-1 and 3Ca-2 
will not have a significant economic impact on a substantial number of 
small entities for the purposes of the RFA.

VI. Statutory Authority

    Pursuant to the Exchange Act, and particularly Sections 3C, 17A and 
19(b) thereof, 15 U.S.C. 78c-3, 78q-1 and 78s(b) and Section 806(e) of 
the Clearing Supervision Act, 12 U.S.C 5465(e), the Commission is 
amending Rule 19b-4 and Form 19b-4 and adding Rules 3Ca-1 and 3Ca-2, as 
set forth below.

List of Subjects in 17 CFR Parts 240 and 249

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of the Final Rule

    In accordance with the foregoing, Title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 is revised and a sub-
authority is added in section number order to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78d, 78e, 78f, 78g, 
78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4, 78p, 78q, 
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350, 12 U.S.C. 
5221(e)(3), and Pub. L. 111-203, Sec.  939A, 124 Stat. 1376, (2010), 
unless otherwise noted.
* * * * *
    Section 240.19b-4 is also issued under 12 U.S.C. 5465(e).
* * * * *
0
2. Add an undesignated center heading and Sec. Sec.  240.3Ca-1 and 
240.3Ca-2 following Sec.  240.3b-19 to read as follows:

Clearing of Security-Based Swaps

240.3Ca-1 Stay of clearing requirement and review by the Commission.
240.3Ca-2 Submission of security-based swaps for clearing.
* * * * *

[[Page 41648]]

Sec.  240.3Ca-1  Stay of clearing requirement and review by the 
Commission.

    (a) After making a determination pursuant to a clearing agency's 
security-based swap submission that a security-based swap, or any 
group, category, type or class of security-based swaps, is required to 
be cleared, the Commission, on application of a counterparty to a 
security-based swap or on the Commission's own initiative, may stay the 
clearing requirement until the Commission completes a review of the 
terms of the security-based swap (or group, category, type, or class of 
security-based swaps) and the clearing of the security-based swap (or 
group, category, type, or class of security-based swaps) by the 
clearing agency that has accepted it for clearing.
    (b) A counterparty to a security-based swap applying for a stay of 
the clearing requirement for a security-based swap (or group, category, 
type, or class of security-based swaps) shall submit a written 
statement to the Commission that includes:
    (1) A request for a stay of the clearing requirement;
    (2) The identity of the counterparties to the security-based swap 
and a contact at the counterparty requesting the stay;
    (3) The identity of the clearing agency clearing the security-based 
swap;
    (4) The terms of the security-based swap subject to the clearing 
requirement and a description of the clearing arrangement; and
    (5) Reasons why such stay should be granted and why the security-
based swap should not be subject to a clearing requirement, 
specifically addressing the same factors a clearing agency must address 
in its security-based-swap submission pursuant to Sec.  240.19b-
4(o)(3).
    (c) A stay of the clearing requirement may be granted with respect 
to a security-based swap, or the group, category, type, or class of 
security-based swaps, as determined by the Commission.
    (d) The Commission's review shall include a quantitative and 
qualitative assessment of the factors specified in Sec.  240.19b-
4(o)(3). Any clearing agency that has accepted for clearing a security-
based swap, or any group, category, type or class of security-based 
swaps, that is subject to the stay of the clearing requirement shall 
provide information requested by the Commission as necessary to assess 
any of the factors it determines to be appropriate in the course of its 
review.
    (e) Upon completion of its review, the Commission may:
    (1) Determine, subject to any terms and conditions that the 
Commission determines to be appropriate in the public interest, that 
the security-based swap, or group, category, type, or class of 
security-based swaps must be cleared; or
    (2) Determine that the clearing requirement will not apply to the 
security-based swap, or group, category, type, or class of security-
based swaps, but clearing may continue on a non-mandatory basis.


Sec.  240.3Ca-2  Submission of security-based swaps for clearing.

    Pursuant to section 3C(a)(1) of the Act (15 U.S.C. 78c-3(a)(1)), it 
shall be unlawful for any person to engage in a security-based swap 
unless that person submits such security-based swap for clearing to a 
clearing agency that is registered under this Act or a clearing agency 
that is exempt from registration under the Act if the security-based 
swap is required to be cleared. The phrase submits such security-based 
swap for clearing to a clearing agency in the clearing requirement of 
Section 3C(a)(1) of the Act shall mean that the security-based swap 
will be submitted for central clearing to a clearing agency that 
functions as a central counterparty.

0
3. Sec.  240.19b-4 is amended by:
0
a. Removing the phrase ``Preliminary Note:'' in the introductory text;
0
b. Removing paragraph (b);
0
c. Redesignating paragraph (a) as paragraph (b);
0
d. Adding new paragraph (a);
0
e. In paragraph (i), adding the phrase ``, notices and submissions'' 
after ``of all filings'';
0
f. In paragraph (i), adding the words ``notice or submission,'' after 
the phrase ``any such filing,'';
0
g. In paragraph (i), removing the phrase ``the filing of the proposed 
rule change.'' and adding in its place ``the filing, notice or 
submission of the proposed rule change, advance notice or security-
based swap submission, as applicable.'';
0
h. In paragraph (j), first sentence, removing the words ``with respect 
to proposed rule changes'';
0
i. Revising paragraph (l), introductory text;
0
j. Adding paragraph (n); and
0
k. Adding paragraph (o).
    The additions and revisions read as follows:


Sec.  240.19b-4  Filings, notices or submissions with respect to 
proposed rule changes, advance notices or security-based swap 
submissions by self-regulatory organizations.

* * * * *
    (a) Definitions. As used in this section:
    (1) The term advance notice means a notice required to be made by a 
designated clearing agency pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act (12 U.S.C. 5465(e));
    (2) The term designated clearing agency means a clearing agency 
that is registered with the Commission, and for which the Commission is 
the Supervisory Agency (as determined in accordance with section 803(8) 
of the Payment, Clearing and Settlement Supervision Act (12 U.S.C. 
5462(8)), that has been designated by the Financial Stability Oversight 
Council pursuant to section 804 of the Payment, Clearing and Settlement 
Supervision Act (12 U.S.C. 5463) as systemically important or likely to 
become systemically important;
    (3) The term Payment, Clearing and Settlement Supervision Act means 
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (124 Stat. 1802, 1803, 1807, 1809, 1811, 1814, 1816, 1818, 1820, 
1821; 12 U.S.C. 5461 et seq.);
    (4) The term proposed rule change has the meaning set forth in 
Section 19(b)(1) of the Act (15 U.S.C. 78s(b)(1));
    (5) The term security-based swap submission means a submission of 
identifying information required to be made by a clearing agency 
pursuant to section 3C(b)(2) of the Act (15 U.S.C. 78c-3(b)(2)) for 
each security-based swap, or any group, category, type or class of 
security-based swaps, that such clearing agency plans to accept for 
clearing;
    (6) The term stated policy, practice, or interpretation means:
    (i) Any material aspect of the operation of the facilities of the 
self-regulatory organization; or
    (ii) Any statement made generally available to the membership of, 
to all participants in, or to persons having or seeking access 
(including, in the case of national securities exchanges or registered 
securities associations, through a member) to facilities of, the self-
regulatory organization (``specified persons''), or to a group or 
category of specified persons, that establishes or changes any 
standard, limit, or guideline with respect to:
    (A) The rights, obligations, or privileges of specified persons or, 
in the case of national securities exchanges or registered securities 
associations, persons associated with specified persons; or
    (B) The meaning, administration, or enforcement of an existing 
rule.
* * * * *
    (l) The self-regulatory organization shall post each proposed rule 
change,

[[Page 41649]]

and any amendments thereto, on its Web site within two business days 
after the filing of the proposed rule change, and any amendments 
thereto, with the Commission. If a self-regulatory organization does 
not post a proposed rule change on its Web site on the same day that it 
filed the proposal with the Commission, then the self-regulatory 
organization shall inform the Commission of the date on which it posted 
such proposal on its Web site. Such proposed rule change and amendments 
shall be maintained on the self-regulatory organization's Web site 
until:
* * * * *
    (n)(1)(i) A designated clearing agency shall provide an 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 such designated clearing agency. Except as 
provided in paragraph (n)(1)(ii) of this section, such advance notice 
shall be submitted to the Commission electronically on Form 19b-4 
(referenced in 17 CFR 249.819). The Commission shall, upon the filing 
of any advance notice, provide for prompt publication thereof.
    (ii) Any designated clearing agency that files an advance notice 
with the Commission prior to December 10, 2012, shall file such advance 
notice in electronic format to a dedicated email address to be 
established by the Commission. The contents of an advance notice filed 
pursuant to this paragraph (n)(1)(ii) shall contain the information 
required to be included for advance notices in the General Instructions 
for Form 19b-4 (referenced in 17 CFR 249.819).
    (2)(i) For purposes of this paragraph (n), the phrase materially 
affect the nature or level of risks presented, when used to qualify 
determinations on a change to rules, procedures, or operations at the 
designated clearing agency, means matters as to which there is a 
reasonable possibility that the change could affect the performance of 
essential clearing and settlement functions or the overall nature or 
level of risk presented by the designated clearing agency.
    (ii) Changes to rules, procedures, or operations that could 
materially affect the nature or level of risks presented by a 
designated clearing agency may include, but are not limited to, changes 
that materially affect participant and product eligibility, risk 
management, daily or intraday settlement procedures, default 
procedures, system safeguards, governance or financial resources of the 
designated clearing agency.
    (iii) Changes to rules, procedures, or operations that may not 
materially affect the nature or level of risks presented by a 
designated clearing agency include, but are not limited to:
    (A) Changes to an existing procedure, control, or service that do 
not modify the rights or obligations of the designated clearing agency 
or persons using its payment, clearing, or settlement services and that 
do not adversely affect the safeguarding of securities, collateral, or 
funds in the custody or control of the designated clearing agency or 
for which it is responsible; or
    (B) Changes concerned solely with the administration of the 
designated clearing agency or related to the routine, daily 
administration, direction, and control of employees;
    (3) The designated clearing agency shall post the advance notice, 
and any amendments thereto, on its Web site within two business days 
after the filing of the advance notice, and any amendments thereto, 
with the Commission. Such advance notice and amendments shall be 
maintained on the designated clearing agency's Web site until the 
earlier of:
    (i) The date the designated clearing agency withdraws the advance 
notice or is notified that the advance notice is not properly filed; or
    (ii) The date the designated clearing agency posts a notice of 
effectiveness as required by paragraph (n)(4)(ii) of this section.
    (4)(i) The designated clearing agency shall post a notice on its 
Web site within two business days of the date that any change to its 
rules, procedures, or operations referred to in an advance notice has 
been permitted to take effect as such date is determined in accordance 
with Section 806(e) of the Payment, Clearing and Settlement Supervision 
Act (12 U.S.C. 5465).
    (ii) The designated clearing agency shall post a notice on its Web 
site within two business days of the effectiveness of any change to its 
rules, procedures, or operations referred to in an advance notice.
    (5) A designated clearing agency shall provide copies of all 
materials submitted to the Commission relating to an advance notice 
with the Board of Governors of the Federal Reserve System 
contemporaneously with such submission to the Commission.
    (6) The publication and Web site posting requirements contained in 
paragraphs (n)(1), (n)(3), and (n)(4) of this section do not apply to 
any information contained in an advance notice for which a designated 
clearing agency has requested confidential treatment following the 
procedures set forth in Sec.  240.24b-2.
    (o)(1) Every clearing agency that is registered with the Commission 
that plans to accept a security-based swap, or any group, category, 
type, or class of security-based swaps for clearing shall submit to the 
Commission a security-based swap submission and provide notice to its 
members of such security-based swap submission.
    (2)(i) Except as provided in paragraph (o)(2)(ii) of this section, 
a clearing agency shall submit each security-based swap submission to 
the Commission electronically on Form 19b-4 (referenced in 17 CFR 
249.819) with the information required to be submitted for a security-
based swap submission, as provided in Sec.  240.19b-4 and Form 19b-4. 
Any information submitted to the Commission electronically on Form 19b-
4 that is not complete or otherwise in compliance with this section and 
Form 19b-4 shall not be considered a security-based swap submission and 
the Commission shall so inform the clearing agency within twenty-one 
business days of the submission on Form 19b-4 (referenced in 17 CFR 
249.819).
    (ii) Any clearing agency that files a security-based swap 
submission with the Commission prior to December 10, 2012, shall file 
such security-based swap submission in electronic format to a dedicated 
email address to be established by the Commission. The contents of a 
security-based swap submission filed pursuant to this paragraph 
(o)(2)(ii) shall contain the information required to be included for 
security-based swap submissions in the General Instructions for Form 
19b-4.
    (3) A security-based swap submission submitted by a clearing agency 
to the Commission shall include a statement that includes, but is not 
limited to:
    (i) How the security-based swap submission is consistent with 
Section 17A of the Act (15 U.S.C. 78q-1);
    (ii) Information that will assist the Commission in the 
quantitative and qualitative assessment of the factors specified in 
Section 3C of the Act (15 U.S.C. 78c-3), including, but not limited to:
    (A) The existence of significant outstanding notional exposures, 
trading liquidity, and adequate pricing data;
    (B) The availability of a rule framework, capacity, operational 
expertise and resources, and credit support infrastructure to clear the 
contract on terms that are consistent with the material terms and 
trading conventions on which the contract is then traded;

[[Page 41650]]

    (C) The effect on the mitigation of systemic risk, taking into 
account the size of the market for such contract and the resources of 
the clearing agency available to clear the contract;
    (D) The effect on competition, including appropriate fees and 
charges applied to clearing; and
    (E) The existence of reasonable legal certainty in the event of the 
insolvency of the relevant clearing agency or one or more of its 
clearing members with regard to the treatment of customer and security-
based swap counterparty positions, funds, and property;
    (iii) A description of how the rules of the clearing agency 
prescribe that all security-based swaps submitted to the clearing 
agency with the same terms and conditions are economically equivalent 
within the clearing agency and may be offset with each other within the 
clearing agency, as applicable to the security-based swaps described in 
the security-based swap submission; and
    (iv) A description of how the rules of the clearing agency provide 
for non-discriminatory clearing of a security-based swap executed 
bilaterally or on or through the rules of an unaffiliated national 
securities exchange or security-based swap execution facility, as 
applicable to the security-based swaps described in the security-based 
swap submission.
    (4) A clearing agency shall submit security-based swaps to the 
Commission for review by group, category, type or class of security-
based swaps, to the extent reasonable and practicable to do so.
    (5) A clearing agency shall post each security-based swap 
submission, and any amendments thereto, on its Web site within two 
business days after the submission of the security-based swap 
submission, and any amendments thereto, with the Commission. Such 
security-based swap submission and amendments shall be maintained on 
the clearing agency's Web site until the Commission makes a 
determination regarding the security-based swap submission or the 
clearing agency withdraws the security-based swap submission, or is 
notified that the security-based swap submission is not properly filed.
    (6) In connection with any security-based swap submission that is 
submitted by a clearing agency to the Commission, the clearing agency 
shall provide any additional information requested by the Commission as 
necessary to assess any of the factors it determines to be appropriate 
in order to make the determination of whether the clearing requirement 
applies.
    (7) Notices of orders issued pursuant to Section 3C of the Act (15 
U.S.C. 78c-3), regarding security-based swap submissions will be given 
by prompt publication thereof, together with a statement of written 
reasons therefor.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
4. The general authority citation for part 249 is revised and a sub-
authority is added in section number order to read as follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
    Section 249.819 is also issued under 12 U.S.C. 5465(e).
* * * * *

0
5. Revise Sec.  249.819 to read as follows:


Sec.  249.819  Form 19b-4, for electronic filings with respect to 
proposed rule changes, advance notices and security-based swap 
submissions by all self-regulatory organizations.

    This form shall be used by all self-regulatory organizations, as 
defined in Section 3(a)(26) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(26)), to file electronically proposed rule changes with 
the Commission pursuant to Section 19(b) of the Act (15 U.S.C. 78s(b)) 
and Sec.  240.19b-4 of this chapter, advance notices with the 
Commission pursuant to Section 806(e) of the Payment, Clearing and 
Settlement Supervision Act (12 U.S.C. 5465(e)) and Sec.  240.19b-4 of 
this chapter and security-based swap submissions with the Commission 
pursuant to Section 3C(b)(2) of the Act (15 U.S.C. 78c-3(b)(2)) and 
Sec.  240.19b-4 of this chapter.

0
6. Form 19b-4 (referenced in Sec.  249.819) is revised to read as 
follows:

    Note:  The text of Form 19b-4 does not and the amendments will 
not appear in the Code of Federal Regulations.

BILLING CODE 8011-01-P

[[Page 41651]]

[GRAPHIC] [TIFF OMITTED] TR13JY12.003


[[Page 41652]]


[GRAPHIC] [TIFF OMITTED] TR13JY12.004

BILLING CODE 8011-01-C

General Instructions for Form 19b-4

A. Use of the Form

    All self-regulatory organization proposed rule changes (except 
filings with respect to proposed rule changes by self-regulatory 
organizations submitted pursuant to Section 19(b)(7) \1\

[[Page 41653]]

of the Securities Exchange Act of 1934 (``Act'')), security-based swap 
submissions, and advance notices shall be filed in an electronic format 
through the Electronic Form 19b-4 Filing System (``EFFS''), a secure 
Web site operated by the Commission. This form shall be used for 
filings of proposed rule changes by all self-regulatory organizations 
pursuant to Section 19(b) of the Act, except filings with respect to 
proposed rule changes by self-regulatory organizations submitted 
pursuant to Section 19(b)(7) of the Act. National securities exchanges, 
registered securities associations, registered clearing agencies, and 
the Municipal Securities Rulemaking Board are self-regulatory 
organizations for purposes of this form. This form shall be used for 
all security-based swap submissions and advance notices filed by 
registered clearing agencies. A proposed change that is required to be 
filed with the Commission under more than one of these three processes 
(a proposed rule change, security-based swap submission, or advance 
notice) shall be submitted on the same Form 19b-4.
---------------------------------------------------------------------------

    \1\ Because Section 19(b)(7)(C) of the Act states that filings 
abrogated pursuant to this Section should be re-filed pursuant to 
paragraph (b)(1) of Section 19 of the Act, SROs are required to file 
electronically such proposed rule changes in accordance with this 
form.
---------------------------------------------------------------------------

B. Need for Careful Preparation of the Completed Form, Including 
Exhibits

    This form, including the exhibits, is intended to elicit 
information necessary for the public to provide meaningful comment on 
the proposed rule change, security-based swap submission, or advance 
notice and for the Commission to determine whether the proposed rule 
change, security-based swap submission, or advance notice is consistent 
with the requirements of the Act and the rules and regulations 
thereunder or the Payment, Clearing and Settlement Supervision Act and 
the rules and regulations thereunder, in each case as applicable to the 
self-regulatory organization and in accordance with the requirements 
for each type of filing. The self-regulatory organization must provide 
all the information called for by the form, including the exhibits, and 
must present the information in a clear and comprehensible manner.
    The proposed rule change, security-based swap submission, or 
advance notice shall be considered filed on the date on which the 
Commission receives the proposed rule change, security-based swap 
submission, or advance notice if the filing complies with all 
requirements of this form. Any filing that does not comply with the 
requirements of this form may be returned to the self-regulatory 
organization. Any filing so returned shall for all purposes be deemed 
not to have been filed with the Commission. See also Rule 0-3 under the 
Act (17 CFR 240.0-3).

C. Documents Comprising the Completed Form

    The completed form filed with the Commission shall consist of the 
Form 19b-4 Page 1, numbers and captions for all items, responses to all 
items, and exhibits required in Item 11. In responding to an item, the 
completed form may omit the text of the item as contained herein if the 
response is prepared to indicate to the reader the coverage of the item 
without the reader having to refer to the text of the item or its 
instructions. Each filing shall be marked on the Form 19b-4 with the 
initials of the self-regulatory organization, the four-digit year, and 
the number of the filing for the year (e.g., SRO-YYYY-XX). If the SRO 
is filing Exhibits 2 or 3 via paper, the exhibits must be filed within 
5 calendar days of the electronic submission of all other required 
documents.

D. Amendments

    If information on this form is or becomes inaccurate before the 
Commission takes action on the proposed rule change or the security-
based swap submission, or prior to the expiration of the statutory 
review period with respect to advance notices (as determined in 
accordance with Section 806(e) of the Payment, Clearing and Settlement 
Supervision Act), the self-regulatory organization shall correct any 
such inaccuracy. Amendments shall be filed as specified in Instruction 
F.
    Amendments to a filing shall include the Form 19b-4 Page 1 marked 
to number consecutively the amendments, numbers and captions for each 
amended item, amended response to the item, and required exhibits. The 
amended response to Item 3 shall explain the purpose of the amendment 
and, if the amendment changes the purpose of or basis for the proposed 
rule change, security-based swap submission, or advance notice, the 
amended response shall also provide a revised purpose and basis 
statement. Exhibit 1 or Exhibit 1A, as applicable, shall be re-filed if 
there is a material change from the immediately preceding filing in the 
language of the proposed rule change or in the information provided 
relating to the proposed rule change, security-based swap submission, 
or advance notice.
    If the amendment alters the text of an existing rule, the amendment 
shall include the text of the existing rule, marked in the manner 
described in Item 1(a) using brackets to indicate words to be deleted 
from the existing rule and underscoring to indicate words to be added. 
The purpose of this marking requirement is to maintain a current copy 
of how the text of the existing rule is being changed.
    If the amendment alters the text of the proposed rule change as it 
appeared in the immediately preceding filing (even if the proposed rule 
change does not alter the text of an existing rule), the amendment 
shall include, as Exhibit 4, the entire text of the rule as altered. 
This full text shall be marked, in any convenient manner, to indicate 
additions to and deletions from the immediately preceding filing. The 
purpose of Exhibit 4 is to permit the staff to identify immediately the 
changes made from the text of the rule with which it has been working.
    If the self-regulatory organization is amending only part of the 
text of a lengthy proposed rule change, it may, with the Commission's 
permission, file only those portions of the text of the proposed rule 
change in which changes are being made if the filing (i.e., partial 
amendment) is clearly understandable on its face. Such partial 
amendment shall be clearly identified and marked to show deletions and 
additions.
    If, after the Form 19b-4 is filed but before the Commission takes 
final action on it, the self-regulatory organization receives or 
prepares any correspondence or other communications reduced to writing 
(including comment letters) to and from such self-regulatory 
organization concerning the proposed rule change, security-based swap 
submission, or advance notice, the communications shall be filed as 
Exhibit 2. If information in the communication makes the filing 
inaccurate, the filing shall be amended to correct the inaccuracy. If 
such communications cannot be filed electronically in accordance with 
Instruction F, the communications shall be filed in accordance with 
Instruction G.

E. Completion of Action by the Self-Regulatory Organization on the 
Proposed Rule Change

    The Commission will not approve a proposed rule change or make a 
determination regarding a security-based swap submission or raise no 
objection to an advance notice before the self-regulatory organization 
has completed all action required to be taken under its constitution, 
articles of incorporation, bylaws, rules, or instruments corresponding 
thereto (excluding action specified in any such

[[Page 41654]]

instrument with respect to (i) compliance with the procedures of the 
Act or (ii) the formal filing of amendments pursuant to state law).

F. Signature and Filing of the Completed Form

    All proposed rule changes, security-based swap submissions, advance 
notices, amendments, extensions, and withdrawals of proposed rule 
changes, security-based swap submissions, and advance notices shall be 
filed through the EFFS. In order to file Form 19b-4 through EFFS, self-
regulatory organizations must request access to the SEC's External 
Application Server by completing a request for an external account user 
ID and password. Initial requests will be received by contacting the 
Trading and Markets Administrator located on our Web site (https://www.sec.gov). An email will be sent to the requestor that will provide 
a link to a secure Web site where basic profile information will be 
requested.
    A duly authorized officer of the self-regulatory organization shall 
electronically sign the completed Form 19b-4 as indicated on Page 1 of 
the Form. In addition, a duly authorized officer of the self-regulatory 
organization shall manually sign one copy of the completed Form 19b-4, 
and the manually signed signature page shall be maintained pursuant to 
Section 17 of the Act. A registered clearing agency for which the 
Commission is not the appropriate regulatory agency also shall file 
with its appropriate regulatory agency three copies of the form, one of 
which shall be manually signed, including exhibits. A clearing agency 
that also is a designated clearing agency shall file with the Board of 
Governors of the Federal Reserve System (``Federal Reserve'') three 
copies of any form containing an advance notice, one of which shall be 
manually signed, including exhibits; provided, however, that this 
requirement may be satisfied instead by providing the copies to the 
Federal Reserve in an electronic format as permitted by the Federal 
Reserve. The Municipal Securities Rulemaking Board also shall file 
copies of the form, including exhibits, with the Federal Reserve, the 
Comptroller of the Currency, and the Federal Deposit Insurance 
Corporation.

G. Procedures for Submission of Paper Documents for Exhibits 2 and 3

    To the extent that Exhibits 2 and 3 cannot be filed electronically 
in accordance with Instruction F, four copies of Exhibits 2 and 3 shall 
be filed with the Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549. Page 1 of 
the electronic Form 19b-4 shall accompany paper submissions of Exhibits 
2 and 3. If the SRO is filing Exhibits 2 and 3 via paper, they must be 
filed within five calendar days of the electronic filing of all other 
required documents.

H. Withdrawals of Proposed Rule Changes, Security-Based Swap 
Submissions or Advance Notices

    If a self-regulatory organization determines to withdraw a proposed 
rule change, security-based swap submission, or advance notice, it must 
complete Page 1 of the Form 19b-4 and indicate by selecting the 
appropriate check box to withdraw the filing.

I. Procedures for Granting an Extension of Time for Commission Final 
Action

    After the Commission publishes notice of a proposed rule change or 
security-based swap submission, if a self-regulatory organization 
wishes to grant the Commission an extension of the time to take final 
action as specified in Section 19(b)(2) or Section 3C, the self-
regulatory organization shall indicate on the Form 19b-4 Page 1 the 
granting of said extension as well as the date the extension expires.
Information To Be Included in the Completed Form (``Form 19b-4 
Information'')
1. Text of the Proposed Rule Change
    (a) Include the text of the proposed rule change, security-based 
swap submission, or advance notice. Text of the proposed rule change 
should be included either in Exhibit 5 or Exhibit 1 (or Exhibit 1A in 
the filing of a clearing agency). Changes in, additions to, or 
deletions from, any existing rule shall be set forth with brackets used 
to indicate words to be deleted and underscoring used to indicate words 
to be added.
    If any form, report, or questionnaire is:
    (i) proposed to be used in connection with the implementation or 
operation of the proposed rule change, security-based swap submission, 
or advance notice, or
    (ii) prescribed or referred to in the proposed rule change, 
security-based swap submission, or advance notice, then the form, 
report, or questionnaire must be attached to and shall be considered as 
part of the proposed rule change, security-based swap submission, or 
advance notice. If completion of the form, report, or questionnaire is 
voluntary or is required pursuant to an existing rule of the self-
regulatory organization, then the form, report, or questionnaire, 
together with a statement identifying any existing rule that requires 
completion of the form, report, or questionnaire, shall be attached as 
Exhibit 3. If the form, report, or questionnaire cannot be filed 
electronically in accordance with Instruction F, the documents shall be 
filed in accordance with Instruction G.
    (b) If the self-regulatory organization reasonably expects that the 
proposed rule change, security-based swap submission, or advance notice 
will have any direct effect, or significant indirect effect, on the 
application of any other rule of the self-regulatory organization, set 
forth the designation or title of any such rule and describe the 
anticipated effect of the proposed rule change, security-based swap 
submission, or advance notice on the application of such other rule.
    (c) Include the file numbers for prior filings with respect to any 
existing rule specified in response to Item 1(b).
2. Procedures of the Self-Regulatory Organization
    Describe action on the proposed rule change, security-based swap 
submission, or advance notice taken by the members or board of 
directors or other governing body of the self-regulatory organization. 
See Instruction E.
3. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change
    Provide a statement of the purpose of the proposed rule change and 
its basis under the Act and the rules and regulations thereunder 
applicable to the self-regulatory organization. With respect to 
proposed rule changes filed pursuant to Section 19(b)(1) of the Act, 
except for proposed rule changes that have been abrogated pursuant to 
Section 19(b)(7)(C) of the Act, the statement should be sufficiently 
detailed and specific to support a finding that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the self-regulatory organization. 
With respect to proposed rule changes filed pursuant to Section 
19(b)(1) of the Act that have been abrogated pursuant to Section 
19(b)(7)(C) of the Act, the statement should be sufficiently detailed 
and specific to support a finding under Section 19(b)(7)(D) of the Act 
that the proposed rule change does not unduly burden competition or 
efficiency, does not conflict with the securities laws, and is not 
inconsistent with the public

[[Page 41655]]

interest or the protection of investors. At a minimum, the statement 
should:
    (a) Describe the reasons for adopting the proposed rule change, any 
problems the proposed rule change is intended to address, the manner in 
which the proposed rule change will operate to resolve those problems, 
the manner in which the proposed rule change will affect various 
persons (e.g., brokers, dealers, issuers, and investors), and any 
significant problems known to the self-regulatory organization that 
persons affected are likely to have in complying with the proposed rule 
change; and
    (b) Explain why the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the self-regulatory organization. A mere assertion that 
the proposed rule change is consistent with those requirements is not 
sufficient. With respect to a proposed rule change filed pursuant to 
Section 19(b)(1) of the Act that has been abrogated pursuant to Section 
19(b)(7)(C) of the Act, explain why the proposed rule change does not 
unduly burden competition or efficiency, does not conflict with the 
securities laws, and is not inconsistent with the public interest and 
the protection of investors, in accordance with Section 19(b)(7)(D) of 
the Act. A mere assertion that the proposed rule change satisfies these 
requirements is not sufficient. In the case of a registered clearing 
agency, also explain how the proposed rule change will be implemented 
consistently with the safeguarding of securities and funds in its 
custody or control or for which it is responsible. Certain limitations 
that the Act imposes on self-regulatory organizations are summarized in 
the notes that follow.
    Failure to describe and justify the proposed rule change in the 
manner described above may result in the Commission not having 
sufficient information to make an affirmative finding that the proposed 
rule change is consistent with the Act and the rules and regulations 
issued thereunder that are applicable to the self-regulatory 
organization.

    Note 1. National Securities Exchanges and Registered Securities 
Associations. Under Sections 6 and 15A of the Act, rules of a 
national securities exchange or registered securities association 
may not permit unfair discrimination between customers, issuers, 
brokers, or dealers, and may not regulate, by virtue of any 
authority conferred by the Act, matters not related to the purposes 
of the Act or the administration of the self-regulatory 
organization. Rules of a registered securities association may not 
fix minimum profits or impose any schedule of or fix rates of 
commissions, allowances, discounts, or other fees to be charged by 
its members.
    Under Section 11A(c)(5) of the Act, a national securities 
exchange or registered securities association may not limit or 
condition the participation of any member in any registered clearing 
agency.


    Note 2. Registered Clearing Agencies. Under Section 17A of the 
Act, rules of a registered clearing agency may not permit unfair 
discrimination in the admission of participants or among 
participants in the use of the clearing agency, may not regulate, by 
virtue of any authority conferred by the Act, matters not related to 
the purposes of Section 17A of the Act or the administration of the 
clearing agency, and may not impose any schedule of prices, or fix 
rates or other fees, for services rendered by its participants.


    Note 3. Municipal Securities Rulemaking Board. Under Section 15B 
of the Act, rules of the Municipal Securities Rulemaking Board may 
not permit unfair discrimination between customers, issuers, 
municipal securities brokers, or municipal securities dealers, may 
not fix minimum profits, or impose any schedule or fix rates of 
commissions, allowances, discounts, or other fees to be charged by 
municipal securities brokers or municipal securities dealers, and 
may not regulate, by virtue of any authority conferred by the Act, 
matters not related to the purposes of the Act with respect to 
municipal securities or the administration of the Municipal 
Securities Rulemaking Board.

4. Self-Regulatory Organization's Statement on Burden on Competition
    State whether the proposed rule change will have an impact on 
competition and, if so, (i) state whether the proposed rule change will 
impose any burden on competition or whether it will relieve any burden 
on, or otherwise promote, competition and (ii) specify the particular 
categories of persons and kinds of businesses on which any burden will 
be imposed and the ways in which the proposed rule change will affect 
them. If the proposed rule change amends an existing rule, state 
whether that existing rule, as amended by the proposed rule change, 
will impose any burden on competition. If any impact on competition is 
not believed to be a significant burden on competition, explain why. 
Explain why any burden on competition is necessary or appropriate in 
furtherance of the purposes of the Act. In providing those 
explanations, set forth and respond in detail to written comments as to 
any significant impact or burden on competition perceived by any person 
who has made comments on the proposed rule change to the self-
regulatory organization. A mere assertion that the proposed rule change 
satisfies these requirements is not sufficient. The statement 
concerning burdens on competition should be sufficiently detailed and 
specific to support a Commission finding that the proposed rule change 
does not impose any unnecessary or inappropriate burden on competition. 
Failure to describe and justify the proposed rule change in the manner 
described above may result in the Commission not having sufficient 
information to make an affirmative finding that the proposed rule 
change is consistent with the Act and the rules and regulations issued 
thereunder that are applicable to the self-regulatory organization.
5. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others
    If written comments were received (whether or not comments were 
solicited) from members of or participants in the self-regulatory 
organization or others, summarize the substance of all such comments 
received and respond in detail to any significant issues that those 
comments raised about the proposed rule change. If an issue is 
summarized and responded to in detail under Item 3 or Item 4, that 
response need not be duplicated if appropriate cross-reference is made 
to the place where the response can be found. If comments were not or 
are not to be solicited, so state.
6. Extension of Time Period for Commission Action
    If the proposed rule change is subject to Commission approval, 
state whether the self-regulatory organization consents to an extension 
of the time period specified in Section 19(b)(2) or Section 19(b)(7)(D) 
of the Act and the duration of the extension, if any, to which the 
self-regulatory organization consents.
7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for 
Accelerated Effectiveness Pursuant to Section 19(b)(2) or Section 
19(b)(7)(D)
    (a) If the proposed rule change is to take, or to be put into, 
effect, pursuant to Section 19(b)(3), state whether the filing is made 
pursuant to paragraph (A) or (B) thereof.
    (b) In the case of paragraph (A) of Section 19(b)(3), designate 
that the proposed rule change:
    (i) Is a stated policy, practice, or interpretation with respect to 
the meaning, administration, or enforcement of an existing rule,
    (ii) Establishes or changes a due, fee, or other charge,
    (iii) Is concerned solely with the administration of the self-
regulatory organization,
    (iv) Effects a change in an existing service of a registered 
clearing agency

[[Page 41656]]

that either (A)(1) does not adversely affect the safeguarding of 
securities or funds in the custody or control of the clearing agency or 
for which it is responsible and (2) does not significantly affect the 
respective rights or obligations of the clearing agency or persons 
using the service or (B)(1) primarily affects the futures clearing 
operations of the clearing agency with respect to futures that are not 
security futures and (2) does not significantly affect any securities 
clearing operations of the clearing agency or any related rights or 
obligations of the clearing agency or persons using such service, and 
set forth the basis on which such designation is made,
    (v) Effects a change in an existing order-entry or trading system 
of a self-regulatory organization that (A) does not significantly 
affect the protection of investors or the public interest; (B) does not 
impose any significant burden on competition; and (C) does not have the 
effect of limiting the access to or availability of the system, or
    (vi) Effects a change that (A) does not significantly affect the 
protection of investors or the public interest; (B) does not impose any 
significant burden on competition; and (C) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest; provided that the 
self-regulatory organization has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission. If it is 
requested that the proposed rule change become operative in less than 
30 days, provide a statement explaining why the Commission should 
shorten this time period.
    (c) In the case of paragraph (B) of Section 19(b)(3), set forth the 
basis upon which the Commission should, in the view of the self-
regulatory organization, determine that the protection of investors, 
the maintenance of fair and orderly markets, or the safeguarding of 
securities and funds requires that the proposed rule change should be 
put into effect summarily by the Commission.

    Note. The Commission has the power under Section 19(b)(3)(C) of 
the Act to summarily temporarily suspend within sixty days of its 
filing any proposed rule change which has taken effect upon filing 
pursuant to Section 19(b)(3)(A) of the Act or was put into effect 
summarily by the Commission pursuant to Section 19(b)(3)(B) of the 
Act. In exercising its summary power under Section 19(b)(3)(B), the 
Commission is required to make one of the findings described above 
but may not have a full opportunity to make a determination that the 
proposed rule change otherwise is consistent with the requirements 
of the Act and the rules and regulations thereunder. The Commission 
will generally exercise its summary power under Section 19(b)(3)(B) 
on condition that the proposed rule change to be declared effective 
summarily shall also be subject to the procedures of Section 
19(b)(2) of the Act. Accordingly, in most cases, a summary order 
under Section 19(b)(3)(B) shall be effective only until such time as 
the Commission shall enter an order, pursuant to Section 19(b)(2)(A) 
of the Act, to approve such proposed rule change or, depending on 
the circumstances, until such time as the Commission shall institute 
proceedings to determine whether to disapprove such proposed rule 
change or, alternatively, such time as the Commission shall, at the 
conclusion of such proceedings, enter an order, pursuant to Section 
19(b)(2)(B), approving or disapproving such proposed rule change.

    (d) If accelerated effectiveness pursuant to Section 19(b)(2) or 
Section 19(b)(7)(D) of the Act is requested, provide a statement 
explaining why there is good cause for the Commission to accelerate 
effectiveness.
8. Proposed Rule Change Based on Rules of Another Self-Regulatory 
Organization or of the Commission
    State whether the proposed rule change is based on a rule either of 
another self-regulatory organization or of the Commission, and, if so, 
identify the rule and explain any differences between the proposed rule 
change and that rule, as the filing self-regulatory organization 
understands it. In explaining any such differences, give particular 
attention to differences between the conduct required to comply with 
the proposed rule change and that required to comply with the other 
rule.
9. Security-Based Swap Submissions Filed Pursuant to Section 3C of the 
Act
    (a) A clearing agency shall submit to the Commission on this Form 
19b-4, a security-based swap submission for any security-based swap, or 
any group, category, type or class of security-based swaps that the 
clearing agency plans to accept for clearing.
    (b) The clearing agency shall include in the security-based swap 
submission a statement that includes, but is not limited to:
    (i) How the security-based swap submission is consistent with 
Section 17A of the Act (15 U.S.C. 78q-1);
    (ii) Information that will assist the Commission in the 
quantitative and qualitative assessment of the factors specified in 
Section 3C of the Act (15 U.S.C. 78c-3), including, but not limited to:
    (A) The existence of significant outstanding notional exposures, 
trading liquidity and adequate pricing data;
    (B) The availability of a rule framework, capacity, operational 
expertise and resources, and credit support infrastructure to clear the 
contract on terms that are consistent with the material terms and 
trading conventions on which the contract is then traded;
    (C) The effect on the mitigation of systemic risk, taking into 
account the size of the market for such contract and the resources of 
the clearing agency available to clear the contract;
    (D) The effect on competition, including appropriate fees and 
charges applied to clearing; and
    (E) The existence of reasonable legal certainty in the event of the 
insolvency of the relevant clearing agency or one or more of its 
clearing members with regard to the treatment of customer and security-
based swap counterparty positions, funds, and property;
    (iii) A description of how the rules of the clearing agency 
prescribe that all security-based swaps submitted to the clearing 
agency with the same terms and conditions are economically equivalent 
within the clearing agency and may be offset with each other within the 
clearing agency, as applicable to the security-based swaps described in 
the security-based swap submission; and
    (iv) A description of how the rules of the clearing agency provide 
for non-discriminatory clearing of a security-based swap executed 
bilaterally or on or through the rules of an unaffiliated national 
securities exchange or security-based swap execution facility, as 
applicable to the security-based swaps described in the security-based 
swap submission.

    Note. In connection with the factor specified in Item 
9(b)(ii)(A) above, the statement describing the existence of 
outstanding notional exposures, trading liquidity and adequate 
pricing data could address pricing sources, models and procedures 
demonstrating an ability to obtain price data to measure credit 
exposures in a timely and accurate manner, as well as measures of 
historical market liquidity and trading activity, and expected 
market liquidity and trading activity if the security-based swap is 
required to be cleared (including information on the sources of such 
measures). With respect to the factor specified in Item 9(b)(ii)(B) 
above, the statement describing the availability of a rule framework 
could include a discussion of the rules, policies or procedures 
applicable to the clearing of the relevant security-based swap. 
Additionally, the discussion of credit support

[[Page 41657]]

infrastructure specified in Item 9(b)(ii)(B) above could include the 
methods to address and communicate requests for, and posting of, 
collateral. With respect to the factor specified in Item 9(b)(ii)(C) 
above, the discussion of systemic risk could include a statement on 
the clearing agency's risk management procedures including, among 
other things, the measurement and monitoring of credit exposures, 
initial and variation margin methodology, methodologies for stress 
testing and back testing, settlement procedures and default 
management procedures. With respect to the factor specified in Item 
9(b)(ii)(D) above, the discussion of fees and charges could address 
any volume incentive programs that may apply or impact the fees and 
charges. With respect to the factor specified in Item 9(b)(ii)(E) 
above, the discussion of legal certainty in the event of an 
insolvency could address segregation of accounts and all other 
customer protection measures under insolvency.
    In describing the security-based swap (or group, category, type 
or class of security-based swaps) referenced in the security-based 
swap submission, the clearing agency could discuss the relevant 
product specifications, including copies of any standardized legal 
documentation, generally accepted contract terms, standard practices 
for managing and communicating any life cycle events associated with 
the security-based swap and related adjustments, and the manner in 
which the information contained in the confirmation of the security-
based swap trade is transmitted. The clearing agency also could 
discuss its financial and operational capacity to provide clearing 
services to all customers potentially subject to the clearing 
requirements as applicable to the particular security-based swap. 
Finally, the clearing agency could include an analysis of the effect 
of a clearing requirement on the market for the group, category, 
type, or class of security-based swaps, both domestically and 
globally, including the potential effect on market liquidity, 
trading activity, use of security-based swaps by direct and indirect 
market participants and any potential market disruption or benefits. 
This analysis could include whether the members of the clearing 
agency are operationally and financially capable of absorbing 
clearing business (including indirect access market participants) 
that may result from a determination that the security-based swap 
(or group, category, type or class of security-based swaps) is 
required to be cleared.

    (c) A clearing agency shall submit security-based swaps to the 
Commission for review by group, category, type or class of security-
based swaps, to the extent reasonable and practicable to do so.
    (d) A clearing agency shall file as an amendment to this Form 19b-4 
any additional information necessary to assess any of the factors the 
Commission determines to be appropriate in order to make a 
determination regarding the clearing requirement.
    (e) A security-based swap submission pursuant to Section 3C that 
also is required to be filed as a proposed rule change under Section 
19(b) or an advance notice under Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act shall not take effect until 
determinations are obtained under each of the other applicable 
statutory provisions.
10. Advance Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act
    (a) A designated clearing agency shall provide notice on this Form 
19b-4 sixty (60) days in advance of any proposed change to its rules, 
procedures, or operations that could, as defined in Rule 19b-4, 
materially affect the nature or level of risks presented by the 
designated clearing agency.
    (b) A designated clearing agency shall include in the advance 
notice a description of:
    (i) The nature of the change and expected effects on risks to the 
designated clearing agency, its participants, or the market; and
    (ii) how the designated clearing agency plans to manage any 
identified risks.
    (c) A designated clearing agency shall file as amendment to this 
Form 19b-4 any additional information that is required to be filed by 
the Commission as necessary to assess the effect the proposed change 
would have on the nature or level of risks associated with the 
designated clearing agency's payment, clearing, or settlement 
activities and the sufficiency of any proposed risk management 
techniques.
    (d) A designated clearing agency that implements a proposed change 
on an emergency basis must file notice with the Commission on Form 19b-
4 within 24 hours of implementing the change. In addition to the 
information required for advance notices, the notice of an emergency 
change shall include a description of the nature of the emergency and 
the reason the change was necessary for the designated clearing agency 
to continue to operate in a safe and sound manner. Any change 
implemented by a designated clearing agency on an emergency basis also 
must comply with Section 19(b) and Section 3C of the Act to the extent 
those sections are applicable.
    (e) A proposed change filed pursuant to Section 806(e) that is also 
required to be filed as a proposed rule change under Section 19(b) or a 
security-based swap submission under Section 3C shall not take effect 
until determinations are obtained under each of the other applicable 
statutory provisions.
11. Exhibits
    List of exhibits to be filed, as specified in Instructions C and D:
    Exhibit 1. Completed Notice of Proposed Rule Change for publication 
in the Federal Register. Amendments to Exhibit 1 should be filed in 
accordance with Instructions D and F.
    Exhibit 1A. Completed Notice of Proposed Rule Change, Security-
Based Swap Submission, or Advance Notice filed by Clearing Agencies for 
publication in the Federal Register. Amendments to Exhibit 1A should be 
filed in accordance with Instructions D and F.
    Exhibit 2 (a) Copies of notices issued by the self-regulatory 
organization soliciting comment on the proposed rule change, security-
based swap submission, or advance notice and copies of all written 
comments on the proposed rule change, security-based swap submission, 
or advance notice received by the self-regulatory organization (whether 
or not comments were solicited), presented in alphabetical order, 
together with an alphabetical listing of such comments. If such notices 
and comments cannot be filed electronically in accordance with 
Instruction F, the notices and comments shall be filed in accordance 
with Instruction G.
    (b) Copies of any transcript of comments on the proposed rule 
change, security-based swap submission, or advance notice made at any 
public meeting or, if a transcript is not available, a copy of the 
summary of comments on the proposed rule change, security-based swap 
submission, or advance notice made at such meeting. If such transcript 
of comments or summary of comments cannot be filed electronically in 
accordance with Instruction F, the transcript of comments or summary of 
comments shall be filed in accordance with Instruction G.
    (c) If after the proposed rule change, security-based swap 
submission, or advance notice is filed but before the Commission takes 
final action on it, the self-regulatory organization prepares or 
receives any correspondence or other communications reduced to writing 
(including comment letters) to and from such self-regulatory 
organization concerning the proposed rule change, security-based swap 
submission, or advance notice, the communications shall be filed in 
accordance with Instruction F. If such communications cannot be filed 
electronically in accordance with Instruction F, the communications 
shall be filed in accordance with Instruction G.

[[Page 41658]]

    Exhibit 3. Copies of any form, report, or questionnaire covered by 
Item 1(a). If such form, report, or questionnaire cannot be filed 
electronically in accordance with Instruction F, the form, report, or 
questionnaire shall be filed in accordance with Instruction G.
    Exhibit 4. For amendments to a filing, marked copies, if required 
by Instruction D, of the text of the proposed rule change as amended.
    Exhibit 5. The SRO may choose to attach as Exhibit 5 proposed 
changes to rule text in place of providing it in Item I and which may 
otherwise be more easily readable if provided separately from Form 19b-
4. Exhibit 5 shall be considered part of the proposed rule change.
SPECIFIC INSTRUCTIONS FOR EXHIBIT 1--NOTICE OF PROPOSED RULE CHANGE
EXHIBIT 1

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34- ; File No. SR ]
[Date]
    Self-Regulatory Organizations; [Name of Self-Regulatory 
Organization]; Notice of Filing [and Immediate Effectiveness] of a 
Proposed Rule Change Relating to [brief description of subject matter 
of proposed rule change]

General Instructions

A. Format Requirements

    The notice must comply with the guidelines for publication in the 
Federal Register, as well as any requirements for electronic filing as 
published by the Commission (if applicable). For example, all 
references to the federal securities laws must include the 
corresponding cite to the United States Code in a footnote. All 
references to SEC rules must include the corresponding cite to the Code 
of Federal Regulations in a footnote. All references to Securities 
Exchange Act Releases must include the release number, release date, 
Federal Register cite, Federal Register date, and corresponding file 
number (e.g., SR-[SRO]-XX-XX). A material failure to comply with these 
guidelines will result in the proposed rule change being deemed not 
properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3). Leave 
a 1-inch margin at the top, bottom, and right hand side, and a 1\1/2\ 
inch margin at the left hand side. Number all pages consecutively, 
consistent with Rule 0-3 under the Act (17 CFR 240.0-3). Double space 
all primary text and single space lists of items, quoted material when 
set apart from primary text, footnotes, and notes to tables.

B. Need for Careful Preparation of the Notice

    The self-regulatory organization must provide all information 
required in the notice and present it in a clear and comprehensible 
manner. It is the responsibility of the self-regulatory organization to 
prepare Items I, II and III of the notice. The Commission cautions 
self-regulatory organizations to pay particular attention to assure 
that the notice accurately reflects the information provided in the 
Form 19b-4 it accompanies. Any filing that does not comply with the 
requirements of Form 19b-4, including the requirements applicable to 
the notice, may be returned to the self-regulatory organization. Any 
document so returned shall for all purposes be deemed not to have been 
filed with the Commission. See Instruction B to Form 19b-4.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on (date) \*\, 
the (name of self-regulatory organization) filed with the Securities 
and Exchange Commission the proposed rule change as described in Items 
I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \*\ To be completed by the Commission. This date will be the 
date on which the Commission receives the proposed rule change if 
the filing complies with all requirements of this form. See 
Instruction B to Form 19b-4.
---------------------------------------------------------------------------

Information to Be Included in the Completed Notice

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    (Supply a brief statement of the terms of substance of the proposed 
rule change. If the proposed rule change is relatively brief, a 
separate statement need not be prepared, and the text of the proposed 
rule change may be inserted in lieu of the statement of the terms of 
substance. If the proposed rule change amends an existing rule, 
indicate changes in the rule by brackets for words to be deleted and 
underlined for words to be added.)

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections A, B, and C below, of the 
most significant aspects of such statements. (Reproduce the headings, 
and summarize briefly the most significant aspects of the responses, to 
Items 3, 4, and 5 of Form 19b-4, redesignating them as A, B, and C, 
respectively.)

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    (If the proposed rule change is to be considered by the Commission 
pursuant to Section 19(b)(2) of the Act, the following paragraph should 
be used.)
    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    (If the proposed rule change is to take, or to be put into, effect 
pursuant to Section 19(b)(3)(A) of the Act and paragraph (f)(6) of Rule 
19b-4 thereunder, the following paragraph should be used.)
    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder.
    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
    (If the proposed rule change is to take, or to be put into, effect 
pursuant to Section 19(b)(3)(A) of the Act and subparagraphs (1)-(5) of 
paragraph (f) of Rule 19b-4 thereunder, the following paragraph should 
be used.)

[[Page 41659]]

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. At 
any time within 60 days of the filing of the proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
    (If the proposed rule change is to be considered by the Commission 
pursuant to Section 19(b)(7)(D) of the Act, the following paragraph 
should be used.)
    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) after consultation with the Commodity Futures Trading 
Commission, institute proceedings to determine whether the proposed 
rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number XX on the subject line.

Paper Comments

     Send paper comments in triplicate to [Name of Secretary], 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.

All submissions should refer to File Number XX. This file number should 
be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the [self-regulatory 
organization]. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number XX and 
should be submitted on or before [insert date 21 days from publication 
in the Federal Register].
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\1\
---------------------------------------------------------------------------

    \1\ 17 CFR 200.30-3(a)(12).

Secretary
SPECIFIC INSTRUCTIONS FOR EXHIBIT 1A--NOTICE OF PROPOSED RULE CHANGE, 
SECURITY-BASED SWAP SUBMISSION, OR ADVANCE NOTICE FILED BY CLEARING 
AGENCIES
EXHIBIT 1A

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34- ; File No. SR ]
[Date]
Self-Regulatory Organizations; [Name of Clearing Agency]; Proposed Rule 
Change, Security-Based Swap Submission, or Advance Notice Relating to 
[brief description of subject matter of proposed rule change, security-
based swap submission, or advance notice]

General Instructions

A. Format Requirements

    The notice must comply with the guidelines for publication in the 
Federal Register, as well as any requirements for electronic filing as 
published by the Commission (if applicable). For example, all 
references to the federal securities laws must include the 
corresponding cite to the United States Code in a footnote. All 
references to SEC rules must include the corresponding cite to the Code 
of Federal Regulations in a footnote. All references to Securities 
Exchange Act Releases must include the release number, release date, 
Federal Register cite, Federal Register date, and corresponding file 
number (e.g., SR-[SRO]-XX-XX). A material failure to comply with these 
guidelines will result in the proposed rule change, security-based swap 
submission, or advance notice being deemed not properly filed. See also 
Rule 0-3 under the Act (17 CFR 240.0-3). Leave a 1-inch margin at the 
top, bottom, and right hand side, and a 1\1/2\ inch margin at the left 
hand side. Number all pages consecutively, consistent with Rule 0-3 
under the Act (17 CFR 240.0-3). Double space all primary text and 
single space lists of items, quoted material when set apart from 
primary text, footnotes, and notes to tables.

B. Need for Careful Preparation of the Notice

    The clearing agency must provide all information required in the 
notice and present it in a clear and comprehensible manner. It is the 
responsibility of the clearing agency to prepare Items I, II and III of 
the notice. The Commission cautions clearing agencies to pay particular 
attention to assure that the notice accurately reflects the information 
provided in the Form 19b-4 it accompanies. Any filing that does not 
comply with the requirements of Form 19b-4, including the requirements 
applicable to the notice, may be returned to the clearing agency. Any 
document so returned shall for all purposes be deemed not to have been 
filed with the Commission. See Instruction B to Form 19b-4
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1) and Rule 19b-4, 17 CFR 240.19b-4, notice is 
hereby given that on (date)\*\, the (name of clearing agency) filed 
with the Securities and Exchange Commission the proposed rule change, 
security-based swap submission, or advance notice as described in Items 
I, II and III below, which Items have been prepared by the clearing 
agency. The Commission is publishing this notice to solicit comments on 
the proposed rule change, security-based swap submission, or advance 
notice from interested persons.
---------------------------------------------------------------------------

    \*\ To be completed by the Commission. This date will be the 
date on which the Commission receives the proposed rule change, 
security-based swap submission, or advance notice filing if the 
filing complies with all requirements of this form. See Instruction 
B to Form 19b-4.

---------------------------------------------------------------------------

[[Page 41660]]

Information to Be Included in the Completed Notice

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice

    (Supply a brief statement of the terms of substance of the proposed 
rule change, security-based swap submission, or advance notice. If the 
proposed rule change is relatively brief, a separate statement need not 
be prepared, and the text of the proposed rule change may be inserted 
in lieu of the statement of the terms of substance. If the proposed 
rule change amends an existing rule, indicate changes in the rule by 
brackets for words to be deleted and underlined for words to be added.)

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change, security-based swap submission, or advance notice and discussed 
any comments it received on the proposed rule change, security-based 
swap submission, or advance notice. The text of these statements may be 
examined at the places specified in Item IV below. The clearing agency 
has prepared summaries, set forth in sections A, B, and C below, of the 
most significant aspects of such statements. (Reproduce the headings, 
and summarize briefly the most significant aspects of the responses, to 
Items 3, 4, 5, 9 or 10 of Form 19b-4, as applicable, redesignating them 
as A, B, C, D or E, as applicable, respectively.)

III. Date of Effectiveness of the Proposed Rule Change, Security-Based 
Swap Submission, and Advance Notice and Timing for Commission Action

    (If the proposed rule change is to be considered by the Commission 
pursuant to Section 19(b)(2) of the Act, the following paragraph should 
be used.)
    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    (If the proposed rule change is to take, or to be put into, effect 
pursuant to Section 19(b)(3)(A) of the Act and paragraph (f)(6) of Rule 
19b-4 thereunder, the following paragraph should be used.)
    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder.
    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
    (If the proposed rule change is to take, or to be put into, effect 
pursuant to Section 19(b)(3)(A) of the Act and subparagraphs (1)-(5) of 
paragraph (f) of Rule 19b-4 thereunder, the following paragraph should 
be used.)
    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. At 
any time within 60 days of the filing of the proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
    (If the proposed rule change is to be considered by the Commission 
pursuant to Section 19(b)(7)(D) of the Act, the following paragraph 
should be used.)
    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) after consultation with the Commodity Futures Trading 
Commission institute proceedings to determine whether the proposed rule 
change should be disapproved.
    (If the proposed change is filed as a security-based swap 
submission pursuant to Section 3C of the Act, the following paragraph 
should be used.)
    Within 90 days after receiving a security-based swap submission, 
unless the submitting clearing agency agrees to an extension of time 
limitation, the Commission shall by order make its determination 
whether the security-based swap, or group, category, type or class of 
security-based swaps, described in the security-based swap submission 
is required to be cleared. In making its determination that the 
clearing requirement shall apply, the Commission may include such terms 
and conditions to the requirement as the Commission determines to be 
appropriate in the public interest.
    The clearing agency shall post notice on its Web site of any 
clearing requirement that is implemented.
    (If the proposed change is filed as an advance notice pursuant to 
the Payment, Clearing and Settlement Supervision Act, the following 
paragraph should be used.)
    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission or the Board of Governors of the Federal Reserve System 
providing the clearing agency with prompt written notice of the 
extension. A proposed change may be implemented in less than 60 days 
from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its Web site of proposed 
changes that are implemented.
    (If the proposed change is filed following the implementation of a 
change on an emergency basis pursuant to the Payment, Clearing and

[[Page 41661]]

Settlement Supervision Act, the following paragraph should be used.)
    The clearing agency implemented a proposed change that otherwise 
would be required to be filed as an advance notice because the clearing 
agency determined that (i) an emergency existed and (ii) immediate 
implementation was necessary for the clearing agency to continue to 
provide its services in a safe and sound manner. The Commission may 
require modification or recision of the proposed change if it finds it 
is not consistent with the purposes of the Payment, Clearing and 
Settlement Supervision Act or any applicable rules, orders, or 
standards prescribed under Section 805(a).
    (If the proposal is submitted pursuant to more than one filing 
requirement, the clearing agency shall add the following language in 
addition to the language above.)
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap submission, or advance notice is consistent 
with the Act. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number XX on the subject line.

Paper Comments

     Send paper comments in triplicate to [Name of Secretary], 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.
All submissions should refer to File Number XX. This file number should 
be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change, security-based 
swap submission, or advance notice that are filed with the Commission, 
and all written communications relating to the proposed rule change, 
security-based swap submission, or advance notice between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549 on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of the [clearing agency]. All comments received will 
be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number XX and should be submitted on or before 
[insert date 21 days from publication in the Federal Register].
---------------------------------------------------------------------------

    \1\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
---------------------------------------------------------------------------
pursuant to delegated authority.\1\

    Secretary

    By the Commission.

    Dated: June 28, 2012.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-16233 Filed 7-12-12; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.