Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations, 49663-49680 [2013-19791]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 78, Number 158 (Thursday, August 15, 2013)]
[Rules and Regulations]
[Pages 49663-49680]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19791]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 39

RIN 3038-AC98


Enhanced Risk Management Standards for Systemically Important 
Derivatives Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting final regulations to implement enhanced risk 
management standards for systemically important derivatives clearing 
organizations that include increased financial resources requirements 
for systemically important derivatives clearing organizations that are 
involved in activities with a more complex risk profile or that are 
systemically important in multiple jurisdictions, the prohibited use of 
assessments by systemically important derivatives clearing 
organizations in calculating their available default resources, and 
enhanced system safeguards for systemically important derivatives 
clearing organizations for business continuity and disaster recovery 
(``BC-DR''). This final rule also implements special enforcement 
authority over systemically important derivatives clearing 
organizations granted to the Commission under section 807(c) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'').

[[Page 49664]]


DATES: The rules will become effective October 15, 2013. Systemically 
important derivatives clearing organizations must comply with Sec.  
39.29 and Sec.  39.30 no later than December 31, 2013.

FOR FURTHER INFORMATION CONTACT: Ananda Radhakrishnan, Director, 202-
418-5188, aradhakrishnan@cftc.gov, Robert B. Wasserman, Chief Counsel, 
202-418-5092, rwasserman@cftc.gov, M. Laura Astrada, Associate Chief 
Counsel, 202-418-7622, lastrada@cftc.gov, or Tracey Wingate, Special 
Counsel, 202-418-5319, twingate@cftc.gov, Division of Clearing and 
Risk, Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Core Principles for DCOs
    B. Designation of Systemically Important Derivatives Clearing 
Organizations Under Title VIII of the Dodd-Frank Act
    C. Standards for SIDCOs Under Title VIII of the Dodd-Frank Act
    D. Principles for Financial Market Infrastructures
    E. Existing Prudential Requirements
    F. Risk Management Standards for SIDCOs
II. Regulation 39.29
    A. Regulation 39.29(a)
    B. Regulation 39.29(b)
III. Regulation 39.30
IV. Regulation 39.31
V. Compliance Dates
VI. Consideration of Costs and Benefits
    A. Introduction
    B. Background
    C. Benefits and Costs of the Final Rule
    D. Section 15(a) Factors
VII. Related Matters
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
VIII. Text of Final Rules

I. Background

A. Core Principles for DCOs

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\ 
Title VII of the Dodd-Frank Act, entitled the ``Wall Street 
Transparency and Accountability Act of 2010,'' \2\ amended the 
Commodity Exchange Act (``CEA'' or the ``Act'') \3\ to establish a 
comprehensive regulatory framework for over-the-counter (``OTC'') 
derivatives, including swaps. The legislation was enacted to reduce 
risk, increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing mandatory clearing and trade execution 
requirements on clearable swap contracts; (3) creating rigorous 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at https://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
    \2\ Section 701 of the Dodd-Frank Act.
    \3\ 7 U.S.C. 1 et seq.
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    Section 725(c) of the Dodd-Frank Act amended section 5b(c)(2) of 
the CEA, which sets forth core principles that a derivatives clearing 
organization (``DCO'') must comply with to register and maintain 
registration with the Commission. The core principles were originally 
added to the CEA by the Commodity Futures Modernization Act of 2000 
(``CFMA''),\4\ and in 2001, the Commission issued guidance on DCO 
compliance with these core principles.\5\ However, in furtherance of 
the goals of the Dodd-Frank Act to reduce risk, increase transparency, 
and promote market integrity, the Commission, pursuant to the 
Commission's enhanced rulemaking authority,\6\ withdrew the 2001 
guidance and adopted regulations establishing standards for compliance 
with the DCO core principles.\7\
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    \4\ See Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (2000).
    \5\ See A New Regulatory Framework for Clearing Organizations, 
66 FR 45604 (Aug. 29, 2001) (final rule) (adopting 17 CFR part 39, 
app. A).
    \6\ See section 725(c) of the Dodd-Frank Act (explicitly giving 
the Commission authority to promulgate rules regarding the core 
principles pursuant to its rulemaking authority under section 8a(5) 
of the CEA, 7 U.S.C. 12a(5)).
    \7\ See Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR 69334 (Nov. 8, 2011) (final rule).
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    As noted in the preamble to the adopting release for subparts A and 
B of part 39 of the Commission's regulations, the regulations that 
implement the DCO core principles, the Commission sought to provide 
legal certainty for market participants, strengthen the risk management 
practices of DCOs, and increase overall confidence in the financial 
system by assuring the public that DCOs are meeting minimum risk 
management standards.\8\ These risk management standards include, in 
part:
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    \8\ Id. at 69335.
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    (1) With respect to financial resources, (a) Core Principle B, 
which requires DCOs to have ``adequate financial, operational, and 
managerial resources, as determined by the Commission, to discharge 
each responsibility of the [DCO],'' \9\ and (b) Commission regulation 
39.11, which requires a DCO to maintain sufficient financial resources 
to meet its financial obligations to its clearing members 
notwithstanding a default by the clearing member creating the largest 
financial exposure for the DCO in extreme but plausible market 
conditions,\10\ and permits the inclusion of assessment powers to meet 
a limited portion of the DCO's default resources requirement; \11\ and
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    \9\ Core Principle B also expressly requires DCOs to ``possess 
financial resources that, at a minimum, exceed the total amount that 
would (I) enable the organization to meet its financial obligations 
to its members and participants notwithstanding a default by the 
member or participant creating the largest financial exposure for 
that organization in extreme but plausible market conditions; and 
(II) enable the [DCO] to cover operating costs of the [DCO] for a 
period of 1 year (as calculated on a rolling basis).'' Section 
5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B) (emphasis added).
    \10\ 17 CFR 39.11(a)(1) (implementing Core Principle B 
pertaining to financial resources).
    \11\ See 17 CFR 39.11(d)(2)(iii) (requiring a DCO to apply a 30 
percent haircut to the value of potential assessments); see also 17 
CFR 39.11(d)(2)(iv) (permitting a DCO to count the value of 
assessments, after the 30 percent haircut, to meet up to 20 percent 
of its default obligations).
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    (2) with respect to business continuity, (a) Core Principle I, 
which requires DCOs to ``establish and maintain emergency procedures, 
backup facilities, and a plan for disaster recovery that allows for (I) 
the timely recovery and resumption of operations of the [DCO], and (II) 
the fulfillment of each obligation and responsibility of the [DCO],'' 
\12\ and (b) Commission regulation 39.18, which requires a DCO to 
maintain a BC-DR plan, emergency procedures, and physical, 
technological, and personnel resources sufficient to enable the DCO to 
resume daily processing, clearing, and settlement no later than the 
next business day following the disruption of its operations.\13\
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    \12\ Core Principle I also requires DCOs to ``establish and 
maintain a program of risk analysis and oversight to identify and 
minimize sources of operational risk through the development of 
appropriate controls and procedures, and automated systems, that are 
reliable, secure, and have adequate scalable capacity,'' and 
``periodically conduct tests to verify that the backup resources of 
the [DCO] are sufficient to ensure daily processing, clearing, and 
settlement.'' Section 5b(c)(2)(I) of the CEA, 7 U.S.C. 7a-
1(c)(2)(I).
    \13\ 17 CFR 39.18(e)(3) (implementing Core Principle I 
pertaining to system safeguards).
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B. Designation of Systemically Important Derivatives Clearing 
Organizations Under Title VIII of the Dodd-Frank Act

    Title VIII of the Dodd-Frank Act, entitled ``Payment, Clearing, and 
Settlement Supervision Act of 2010,'' \14\

[[Page 49665]]

was enacted to mitigate systemic risk in the financial system and 
promote financial stability.\15\ Section 804 of the Dodd-Frank Act 
requires the Financial Stability Oversight Council (``Council'') \16\ 
to designate those financial market utilities (``FMUs'') that the 
Council determines are, or are likely to become, systemically 
important.\17\ An FMU includes ``any person that manages or operates a 
multilateral system for the purpose of transferring, clearing, or 
settling payments, securities, or other financial transactions among 
financial institutions or between financial institutions and the 
person.'' \18\ As noted by the Council,
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    \14\ Section 801 of the Dodd-Frank Act.
    \15\ Section 802(b) of the Dodd-Frank Act.
    \16\ The Council was established by section 111 of the Dodd-
Frank Act. In general, the Council is tasked with identifying 
``risks to the financial stability of the United States that could 
arise from the material financial distress or failure, or ongoing 
activities, of large, interconnected bank holding companies or 
nonbank financial companies, or that could arise outside the 
financial services marketplace,'' promoting ``market discipline, by 
eliminating expectations on the part of shareholders, creditors, and 
counterparties of such companies that the Government will shield 
them from losses in the event of failure,'' and responding ``to 
emerging threats to the stability of the United States financial 
system.'' Section 112(a)(1) of the Dodd-Frank Act.
    \17\ Section 804(a)(1) of the Dodd-Frank Act. The term 
``systemically important'' means ``a situation where the failure of 
or a disruption to the functioning of a financial market utility . . 
. could create, or increase, the risk of significant liquidity or 
credit problems spreading among financial institutions or markets 
and thereby threaten the stability of the financial system of the 
United States.'' Section 803(9) of the Dodd-Frank Act; see also 
Authority to Designate Financial Market Utilities as Systemically 
Important, 76 FR 44763, 44774 (July 27, 2011) (final rule).
    \18\ Section 803(6)(A) of the Dodd-Frank Act. In section 
803(6)(B) of the Dodd-Frank Act, the term expressly excludes 
designated contract markets, registered futures associations, swap 
data repositories, and swap execution facilities registered under 
the Commodity Exchange Act (7 U.S.C. 1 et seq.), or national 
securities exchanges, national securities associations, alternative 
trading systems, security-based swap data repositories, and swap 
execution facilities registered under the Securities Exchange Act of 
1934 (15 U.S.C. 78a et seq.), solely by reason of their providing 
facilities for comparison of data respecting the terms of settlement 
of securities or futures transactions effected on such exchange or 
by means of any electronic system operated or controlled by such 
entities, provided that the exclusions in this clause apply only 
with respect to the activities that require the entity to be so 
registered; and any broker, dealer, transfer agent, or investment 
company, or any futures commission merchant, introducing broker, 
commodity trading advisor, or commodity pool operator, solely by 
reason of functions performed by such institution as part of 
brokerage, dealing, transfer agency, or investment company 
activities, or solely by reason of acting on behalf of a financial 
market utility or a participant therein in connection with the 
furnishing by the financial market utility of services to its 
participants or the use of services of the financial market utility 
by its participants, provided that services performed by such 
institution do not constitute critical risk management or processing 
functions of the financial market utility.

    FMUs form a critical part of the nation's financial 
infrastructure. They exist in many markets to support and facilitate 
the transfer, clearing or settlement of financial transactions, and 
their smooth operation is integral to the soundness of the financial 
system and the overall economy. However, their function and 
interconnectedness also concentrate a considerable amount of risk in 
the financial system due, in large part, to the interdependencies, 
either directly through operational, contractual or affiliation 
linkages, or indirectly through payment, clearing, and settlement 
processes. In other words, problems at one FMU could trigger 
significant liquidity and credit disruptions at other FMUs or 
financial institutions.\19\
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    \19\ 76 FR at 44763.

    In determining whether an FMU is systemically important, the 
Council uses a two-stage designation process, applying certain 
statutory considerations \20\ and other metrics to assess, among other 
things, ``whether possible disruptions [to the functioning of an FMU] 
are potentially severe, not necessarily in the sense that they 
themselves might trigger damage to the U.S. economy, but because such 
disruptions might reduce the ability of financial institutions or 
markets to perform their normal intermediation functions.'' \21\ On 
July 18, 2012, the Council designated eight FMUs as systemically 
important under Title VIII.\22\ Two of these designated FMUs are CFTC-
registered DCOs \23\ for which the Commission is the Supervisory 
Agency.\24\ Such designated CFTC-registered DCOs are also known as 
systemically important derivatives clearing organizations 
(``SIDCOs'').\25\
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    \20\ Under section 804(a)(2) of the Dodd-Frank Act, in 
determining whether an FMU is or is likely to become systemically 
important, the Council must take into consideration the following: 
(A) The aggregate monetary value of transactions processed by the 
FMU; (B) the aggregate exposure of an FMU to its counterparties; (C) 
the relationship, interdependencies, or other interactions of the 
FMU with other FMUs or payment, clearing, or settlement activities; 
(D) the effect that the failure of or a disruption to the FMU would 
have on critical markets, financial institutions, or the broader 
financial system; and (E) any other factors the Council deems 
appropriate.
    \21\ 76 FR at 44766.
    \22\ See Press Release, Financial Stability Oversight Council, 
Financial Stability Oversight Council Makes First Designations in 
Effort to Protect Against Future Financial Crises (July 18, 2012), 
available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
    \23\ Chicago Mercantile Exchange, Inc. (``CME'') and ICE Clear 
Credit LLC (``ICE Clear Credit'') are the CFTC-registered DCOs that 
were designated systemically important by the Council, for which 
CFTC is the Supervisory Agency. While The Options Clearing 
Corporation (``OCC''), a CFTC-registered DCO, was designated 
systemically important by the Council, the Securities and Exchange 
Commission (``SEC'') serves as OCC's Supervisory Agency.
    \24\ See section 803(8)(A) of the Dodd-Frank Act (defining 
``Supervisory Agency'' as ``the Federal agency that has primary 
jurisdiction over a designated [FMU] under Federal banking, 
securities, or commodity futures laws'').
    \25\ Specifically, under Commission regulations, a systemically 
important derivatives clearing organization is a ``financial market 
utility that is a derivatives clearing organization registered under 
Section 5b of the Act, which has been designated by the Financial 
Stability Oversight Council to be systemically important and for 
which the Commission acts as the Supervisory Agency pursuant to 
Section 803(8) of the [Dodd-Frank Act].'' See 17 CFR 39.2.
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C. Standards for SIDCOs Under Title VIII of the Dodd-Frank Act

    Section 805 of the Dodd-Frank Act directs the Commission to 
consider relevant international standards and existing prudential 
requirements when prescribing risk management standards governing the 
operations related to payment, clearing, and settlement activities for 
FMUs that are (1) designated as systemically important by the Council, 
and (2) engaged in activities for which the Commission is the 
Supervisory Agency.\26\ Under Title VIII, the objectives and principles 
for these risk management standards are to: (1) Promote risk 
management; (2) promote safety and soundness; (3) reduce systemic 
risks; and (4) support the stability of the broader financial 
system.\27\ As outlined in section 805(c), these standards may address 
such areas as: ``(1) Risk management policies and procedures; (2) 
margin and collateral requirements; (3) participant or counterparty 
default policies and procedures; (4) the ability to complete timely 
clearing and settlement of financial transactions; (5) capital and 
financial resources requirements for designated [FMUs]; and (6) other 
areas that are necessary to achieve the objectives and principles in 
[section 805(b) of the Dodd-Frank Act].''
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    \26\ See section 805(a)(2) of the Dodd-Frank Act. The Commission 
notes that it also has the authority to prescribe risk management 
standards governing the operations related to payment, clearing, and 
settlement activities for FMUs that are designated as systemically 
important by the Council and that are engaged in activities for 
which the Commission is the appropriate financial regulator. 
Furthermore, section 805 establishes a review mechanism by which the 
Council may intervene if the Board of Governors of the Federal 
Reserve System (the ``Board'') determines that the existing risk 
management standards set by the Commission ``are insufficient to 
prevent or mitigate significant liquidity, credit, operational, or 
other risks to the financial markets or to the financial stability 
of the United States.'' Section 805(a)(2)(B) of the Dodd-Frank Act.
    \27\ Section 805(b) of the Dodd-Frank Act.
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    The Commission has reviewed the risk management standards set forth 
in part 39 of the Commission's regulations in light of recently 
promulgated relevant international standards and existing prudential 
requirements to identify

[[Page 49666]]

those areas in which additional risk management standards for SIDCOs 
would be necessary and appropriate.

D. Principles for Financial Market Infrastructures

1. Overview
    The Commission has determined that the international standards most 
relevant to the risk management of SIDCOs, for purposes of meeting the 
Commission's obligation pursuant to section 805(a)(2)(A) of the Dodd-
Frank Act, are the Principles for Financial Market Infrastructures 
(``PFMIs''), which were developed by the Bank for International 
Settlements' Committee on Payment and Settlement Systems (``CPSS'') and 
the Technical Committee of the International Organization of Securities 
Commissions (``IOSCO'') (collectively, ``CPSS-IOSCO'').\28\ The 
Commission notes that the adoption and implementation of the PFMIs by 
numerous foreign jurisdictions highlights the role these principles 
play in creating a global, unified set of international risk management 
standards for central counterparties (``CCPs'').\29\ Moreover, the 
Commission, which is a member of the Board of IOSCO, is working towards 
implementing rules and regulations that are fully consistent with the 
PFMIs by the end of 2013.\30\
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    \28\ See Bank for International Settlements' Committee on 
Payment and Settlement Systems and Technical Committee of the 
International Organization of Securities Commissions, ``Principles 
for Financial Market Infrastructures,'' (April 2012), available at 
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf; see also 
Financial Stability Board, ``OTC Derivatives Market Reforms: Third 
Progress Report on Implementation,'' (June 15, 2012), available at 
https://www.financialstabilityboard.org/publications/r_120615.pdf 
(noting publication of the PFMIs as achieving ``an important 
milestone in the global development of a sound basis for central 
clearing of all standardised OTC derivatives'').
    \29\ In Asia, Singapore has adopted the PFMIs into its financial 
regulations pertaining to FMIs. See Monetary Authority of Singapore, 
``Supervision of Financial Market Infrastructures in Singapore,'' 
(January 2013), available at https://www.mas.gov.sg/~/media/MAS/
About%20MAS/Monographs%20and%20information%20papers/MASMonograph--
Supervision--of--Financial--Market--Infrastructures--in--
Singapore%202.pdf. In addition, Australia, Canada and the European 
Union have publicly indicated their intent to adopt the PFMIs. See 
Reserve Bank of Australia, ``Consultation on New Financial Stability 
Standards,'' (August 2012), available at https://www.rba.gov.au/payments-system/clearing-settlement/consultations/201208-new-fin-stability-standards/; Canadian Securities Administrators 
Consultation Paper 91-406 ``Derivatives: OTC Central Counterparty 
Clearing,'' (June 20, 2012), available at https://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20120620_91-406_counterparty-clearing.pdf; and Regulation (EU) No 648/2012 of the 
European Parliament and of the Council on OTC Derivatives, Central 
Counterparties and Trade Repositories, preamble paragraph 90, 2012 
O.J. (L 201), available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:FULL:EN:PDF.
    In the United States, the SEC adopted a final rule that 
incorporates heightened risk management standards for CCPs that 
clear security-based swaps, based on, in part, the PFMIs' ``cover 
two'' standard for CCPs engaged in a more complex risk profile or 
that are systemically important in multiple jurisdictions. See 17 
CFR 240.17Ad-22(b)(3) (2013) (requiring, in relevant part, SEC-
registered clearing agencies (i.e., CCPs) to maintain sufficient 
financial resources to withstand, at a minimum, a default by the 
participant family to which they have the largest exposure in 
extreme but plausible conditions, provided that a security-based 
swap clearing agency, (i.e., a CCP that clears security-based swaps) 
shall maintain sufficient financial resources to withstand, at a 
minimum, a default by the two participant families to which it has 
the largest exposure in extreme but plausible market conditions).
    \30\ Part 39 of the Commission's regulations was informed by the 
consultative report for the PFMIs and incorporates the vast majority 
of the standards set forth in the PFMIs. See Financial Resources 
Requirements for Derivatives Clearing Organizations, 75 FR 63113 
(Oct. 14, 2010); Risk Management Requirements for Derivatives 
Clearing Organizations, 76 FR 3698 (Jan. 20, 2011); see also Bank 
for International Settlements' Committee on Payment and Settlement 
Systems and Technical Committee of the International Organization of 
Securities Commissions, ``Principles for Financial Market 
Infrastructures: Consultative Report,'' (March 2011), available at 
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD350.pdf (``CPSS-
IOSCO Consultative Report'').
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    The PFMIs establish international risk management standards for 
financial market infrastructures (``FMIs''), including CCPs, that 
facilitate clearing and settlement.\31\ In February 2010, CPSS-IOSCO 
launched a review of the existing sets of international standards for 
FMIs in support of a broader effort by the Financial Stability Board 
(``FSB'') \32\ to strengthen core financial infrastructures and markets 
by ensuring that gaps in international standards are identified and 
addressed.\33\ CPSS-IOSCO endeavored to incorporate in its review 
process lessons from the 2008 financial crisis and the experience of 
using the existing international standards, as well as policy and 
analytical work by other international committees including the Basel 
Committee on Banking Supervision (``BCBS'').\34\ The PFMIs replace 
CPSS-IOSCO's previous recommendations applicable to CCPs.\35\ In 
issuing the PFMIs, CPSS-IOSCO sought to strengthen and harmonize 
existing international standards and incorporate new specifications for 
CCPs clearing OTC derivatives.\36\ The stated objectives of the PFMIs 
are to enhance the safety and efficiency of FMIs and, more broadly, 
reduce systemic risk and foster transparency and financial 
stability.\37\
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    \31\ The PFMIs define a ``financial market infrastructure'' as a 
``multilateral system among participating institutions, including 
the operator of the system, used for the purposes of clearing, 
settling, or recording payments, securities, derivatives, or other 
financial transactions.'' See PFMIs, Introduction, 1.8.
    \32\ The FSB is an international organization that coordinates 
with national financial authorities and international policy 
organizations to develop and promote effective regulatory, 
supervisory, and other financial sector policies. See generally 
https://www.financialstabilityboard.org.
    \33\ PFMIs, Background, 1.6.
    \34\ Id.
    \35\ The international standards for FMIs, prior to the 
publication of the PFMIs, included the ``Recommendations for 
Securities Settlement Systems'' published by CPSS in 2001, the 
``Core Principles for Systemically Important Payment Systems'' 
published by CPSS-IOSCO in 2001, and the ``Recommendations for 
Central Counterparties'' published by CPSS-IOSCO in 2004 
(collectively the ``CPSS-IOSCO Principles and Recommendations''). 
See PFMIs, Background, 1.4 and 1.5.
    \36\ Id. at Introduction, 1.2.
    \37\ Id. at Background, 1.15.
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    The PFMIs set out 24 principles addressing various risk components 
of an FMI's operations, including, as most relevant to this final rule, 
credit and operational risk.\38\
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    \38\ Pursuant to the PFMIs, key risks faced by FMIs include 
legal, credit, liquidity, general business, custody, investment, and 
operational risks. See id. at Overview of Key Risks in Financial 
Market Infrastructures, 2.1.
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2. Principle 4: Credit Risk
    Principle 4 addresses the risk that a counterparty to the CCP will 
be unable to fully meet its financial obligations when due.\39\ 
Specifically, Principle 4 states that a ``CCP should cover its current 
and potential future exposures to each participant fully with a high 
degree of confidence using margin and other prefunded financial 
resources.'' \40\ Additionally, Principle 4 provides that a CCP 
involved in activities with a more complex risk profile \41\ or that is 
systemically important in multiple jurisdictions should maintain 
additional financial resources sufficient to cover a wide range of 
potential stress scenarios, including, but not limited to, the default 
of the two participants and their affiliates that would potentially 
cause the largest aggregate credit exposure to the CCP in extreme but 
plausible market conditions.\42\
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    \39\ The PFMIs define ``credit risk'' as the ``risk that a 
counterparty, whether a participant or other entity, will be unable 
to meet fully its financial obligations when due, or at any time in 
the future.'' Id. at Annex H: Glossary.
    \40\ Id. at Principle 4: Credit Risk, Key Consideration 4.
    \41\ Such activities ``with a more complex risk profile'' 
include clearing financial instruments that are characterized by 
discrete jump-to-default price changes or that are highly correlated 
with potential participant defaults. Id. at Principle 4: Credit 
Risk, Explanatory Note 3.4.19.
    \42\ Id. at Principle 4: Credit Risk. Financial resources 
sufficient to cover the default of the two participants and their 
affiliates creating the largest credit exposure in extreme but 
plausible circumstances are sometimes referred to as cover two. All 
other CCPs, under the PFMIs, are required to maintain financial 
resources sufficient to cover a wide range of potential stress 
scenarios, which includes, but is not limited to, the default of the 
participant and its affiliates that would potentially cause the 
largest aggregate credit exposure to the CCP in extreme but 
plausible market conditions, otherwise known as ``cover one.'' Id.

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[[Page 49667]]

    More generally, Principle 4 states that all FMIs should establish 
explicit rules and procedures to address any credit losses they may 
face as a result of an individual or combined default among its 
participants with respect to any of their obligations to the FMI.\43\ 
These rules and procedures should also address how potentially 
uncovered credit losses would be allocated, how the funds an FMI may 
borrow from liquidity providers would be repaid, and how an FMI would 
replenish the financial resources used during a stress event, such as a 
default, so that the FMI can continue to operate in a safe and sound 
manner.\44\
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    \43\ Id. at Principle 4: Credit Risk, Key Consideration 7.
    \44\ Id.
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3. Principle 17: Operational Risk
    Principle 17 addresses the risk of deficiencies in information 
systems or internal processes, human errors, management failures, or 
disruptions from external events that will result in the reduction or 
deterioration of services provided by the FMI.\45\ Principle 17 states 
that ``[b]usiness continuity management should aim for timely recovery 
of operations and fulfilment [sic] of the FMI's obligations, including 
in the event of a wide-scale or major disruption.'' \46\ Additionally, 
an FMI's business continuity plan ``should incorporate the use of a 
secondary site and should be designed to ensure that critical 
information technology (IT) systems can resume operations within two 
hours following disruptive events.'' \47\
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    \45\ Id. at Overview of Key Risks in Financial Market 
Infrastructures, 2.9.
    \46\ Id. at Principle 17: Operational Risk.
    \47\ Id. at Key Consideration 6.
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4. The Role of the PFMIs in International Banking Standards
    Where a CCP is prudentially supervised in a jurisdiction that does 
not have domestic rules and regulations that are consistent with the 
PFMIs, the implementation of certain international banking regulations 
will have significant cost implications for that CCP and its market 
participants.
    In July 2012, the BCBS,\48\ the international body that sets 
standards for the regulation of banks, published the ``Capital 
Requirements for Bank Exposures to Central Counterparties'' (``Basel 
CCP Capital Requirements''), which sets forth interim rules governing 
the capital charges arising from bank exposures to CCPs related to OTC 
derivatives, exchange-traded derivatives, and securities financing 
transactions.\49\ The Basel CCP Capital Requirements create financial 
incentives for banks \50\ to clear financial derivatives with CCPs that 
are licensed in a jurisdiction where the relevant regulator has adopted 
rules or regulations that are consistent with the PFMIs. Specifically, 
the Basel CCP Capital Requirements introduce new capital charges based 
on counterparty risk for banks conducting financial derivatives 
transactions through a CCP.\51\ These new capital charges relate to a 
bank's trade exposure and default fund exposure to a CCP.\52\
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    \48\ The BCBS is comprised of senior representatives of bank 
supervisory authorities and central banks from around the world, 
including Argentina, Australia, Belgium, Brazil, Canada, China, 
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, 
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, 
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the 
United Kingdom, and the United States. See Bank for International 
Settlements' Basel Committee on Banking Supervision, ``Basel III: A 
Global Regulatory Framework for More Resilient Banks and Banking 
Systems,'' (December 2010; revised June 2011), available at https://www.bis.org/publ/bcbs189.htm (``Basel III: A Global Regulatory 
Framework'').
    \49\ See Bank for International Settlements' Basel Committee on 
Banking Supervision, ``Capital Requirements for Bank Exposures to 
Central Counterparties,'' (July 2012), available at www.bis.org/publ/bcbs227.pdf (``Basel CCP Capital Requirements''). The Basel CCP 
Capital Requirements are one component of Basel III, a framework 
that is part of ``a comprehensive set of reform measures, developed 
by the [BCBS], to strengthen the regulation, supervision and risk 
management of the banking sector.'' See Bank for International 
Settlements' Web site for a compilation of documents that form the 
regulatory framework of Basel III, available at https://www.bis.org/bcbs/basel3.htm.
    \50\ ``Bank'' is defined in accordance with the Basel framework 
to mean bank, banking group, or other entity (i.e., bank holding 
company) whose capital is being measured. See Basel III: A Global 
Regulatory Framework, Definition of Capital, paragraph 51, at 12. 
The term ``bank,'' as used herein, also includes subsidiaries and 
affiliates of the banking group or other entity. The Commission 
notes that a bank may be a client and/or a clearing member of a 
SIDCO.
    \51\ See Basel CCP Capital Requirements, Annex 4, section II, 
6(i).
    \52\ ``Trade exposure'' is a measure of the amount of loss a 
bank is exposed to based on the size of its position, given a CCP's 
failure. Under the Basel CCP Capital Requirements, ``trade 
exposure'' is defined to include the current and potential future 
exposure of a bank acting as either a clearing member or a client to 
a CCP arising from OTC derivatives, exchange traded derivatives 
transactions, or securities financing transactions, as well as 
initial margin. See Basel CCP Capital Requirements, Annex 4, section 
I, A: General Terms. ``Current exposure'' includes variation margin 
that is owed by the CCP but not yet been received by the clearing 
member or client. Id. at n. 2. ``Default fund exposure'' is a 
measure of the loss a bank acting as a clearing member is exposed to 
arising from the use of its contributions to the CCP's mutualized 
default fund resources. See Basel CCP Capital Requirements, Annex 4, 
section I, A: General Terms. BIS defines ``potential future 
exposure'' as ``the additional exposure that a counterparty might 
potentially assume during the life of a contract or set of contracts 
beyond the current replacement cost of the contract or set of 
contracts.'' See Bank for International Settlements' Committee on 
Payment and Settlement Systems, ``A Glossary of Terms Used in 
Payment and Settlement Systems,'' (March 2003), available at https://www.bis.org/publ/cpss00b.pdf.
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    The capital charges for trade exposure are based upon a function 
that multiplies exposure by risk weight. Risk weight is a measure that 
represents the likelihood that the loss to which the bank is exposed 
will be incurred, and the extent of that loss. The risk weight assigned 
under the BCBS standards varies significantly depending on whether or 
not the counterparty is a ``qualified'' CCP (``QCCP'').\53\ A ``QCCP'' 
is defined as an entity that (1) is licensed to operate as a CCP, and 
is permitted by the appropriate regulator to operate as such, and (2) 
is prudentially supervised in a jurisdiction where the relevant 
regulator has established and publicly indicated that it applies to the 
CCP on an ongoing basis, domestic rules and regulations that are 
consistent with the PFMIs.\54\ If a bank transacts through a QCCP 
acting either as (1) a clearing member of a CCP for its own account or 
for clients,\55\ or (2) a client of a clearing member that enters into 
an OTC derivatives transaction with the clearing member acting as a 
financial intermediary, then the risk weight is 2 percent for purposes 
of calculating the counterparty risk.\56\ If

[[Page 49668]]

the CCP is non-qualifying, then the risk weight is the same as a 
bilateral OTC derivative trade and the bank applies the corresponding 
bilateral risk-weight treatment, which is at least 20 percent if the 
CCP is a bank, or as high as 100 percent if the CCP is a corporate 
financial institution.\57\
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    \53\ See id. at Annex 4, section IX., Exposures to Qualifying 
CCPs, paragraphs 110-119 (describing the methodology for calculating 
a bank's trade exposure to a qualified CCP); see also id. at 
paragraph 126 (describing the methodology for calculating a bank's 
trade exposure to a non-qualifying CCP).
    \54\ Id. at section I, A: General Terms.
    \55\ The term ``client'' as used herein refers to a customer of 
a bank.
    \56\ Id. at section IX: Central Counterparties, paragraphs 110 
and 114. Client trade exposures are risk-weighted at 2 percent if 
the following two conditions are met: (1) the offsetting 
transactions are identified by the CCP as client transactions and 
collateral to support them is held by the CCP and/or clearing 
member, as applicable, under arrangements that prevent losses to the 
client due to the default or insolvency of the clearing member, or 
the clearing member's other clients, or the joint default or 
insolvency of the clearing member and any of its other clients, and 
(2) relevant laws, regulations, contractual or administrative 
arrangements provide that the offsetting transactions with the 
defaulted or insolvent clearing member are highly likely to continue 
to be indirectly transacted through the CCP, or by the CCP, should 
the clearing member default or become insolvent. However, in certain 
circumstances, risk weight may increase. Specifically, if the first 
condition is not met (i.e., where a client is not protected from 
losses in the case that the clearing member and another client of 
the clearing member jointly default or become jointly insolvent), 
but the second condition is met, the bank's trade exposure is risk-
weighted at 4 percent. If neither condition is met, the bank must 
capitalize its exposure to the CCP as a bilateral trade. Id. at 
paragraphs 115 and 116.
    \57\ See Bank for International Settlements' Basel Committee on 
Banking Supervision, ``Consultative Document: Capitalisation of Bank 
Exposures to Central Counterparties,'' (November 2011; revised July 
2012), paragraph 28, available at https://www.bis.org/publ/bcbs206.pdf (stating that ``the applicable risk weight [for clearing 
member trades with a non-qualifying CCP] would be at least 20% (if 
the CCP is a bank) or 100% (if it is a corporate financial 
institution according to the definition included in paragraph 272 of 
the Basel framework, revised by Basel III''); see also Basel III: A 
global regulatory framework for more resilient banks and banking 
systems (June 2011), paragraph 102, available at https://www.bis.org/publ/bcbs189.pdf (revising paragraph 272 of the Basel framework).
---------------------------------------------------------------------------

    With respect to default fund exposure, whenever a clearing member 
bank is required to capitalize for exposures arising from default fund 
contributions to a QCCP, the clearing member bank may apply one of two 
methodologies for determining the capital requirement: The risk-
sensitive approach, or the 1250 percent risk-weight approach.\58\ The 
risk-sensitive approach considers various factors in determining the 
risk weight for a bank's default exposure to a QCCP, such as (1) the 
size and quality of a QCCP's financial resources, (2) the counterparty 
credit risk exposures of such CCP, and (3) the application of such 
financial resources via the CCP's loss bearing waterfall in the event 
one or more clearing members default.\59\ The 1250 percent risk-weight 
approach allows a clearing member bank to apply a 1250 percent risk 
weight to its default fund exposures to the QCCP, subject to an overall 
cap of 20 percent on the risk-weighted assets from all trade exposures 
to the QCCP.\60\ In other words, banks with exposures to QCCPs have a 
cap on their default fund exposure. In contrast, a clearing member bank 
with exposures to a non-qualified CCP must apply a risk weight of 1250 
percent with no cap for default fund exposures.\61\
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    \58\ See Basel CCP Capital Requirements, Annex 4, section IX, 
paragraphs 121-125. The Commission notes that the 1250 percent risk 
weight represents the reciprocal of the 8 percent capital ratio, 
which is the percentage of a bank's capital to its risk-weighted 
assets (i.e., 1250 percent times 8 percent equals 100 percent).
    \59\ Id. at paragraph 122.
    \60\ Id. at paragraph 125. See also Basel CCP Capital 
Requirements, Annex 4, section IX, paragraphs 125 (explaining that 
``More specifically, under [the 1250 percent risk-weight] approach, 
the Risk Weighted Assets (RWA) for both bank i's trade and default 
fund exposures to each CCP are equal to: Min {(2% * TEi + 1250% * 
DFi); (20% * TEi){time}  where TEi is bank i's trade exposure to the 
CCP, as measured by the bank according to paragraphs 110 to 112 of 
this Annex; and DFi is bank i's pre-funded contribution to the CCP's 
default fund.'').
    \61\ Id. at paragraph 127.
---------------------------------------------------------------------------

    Thus, the Basel CCP Capital Requirements provide incentives for 
banks to clear derivatives through CCPs that are QCCPs by setting lower 
capital charges for exposures arising from derivatives cleared through 
a QCCP and setting significantly higher capital charges for exposures 
arising from derivatives cleared through non-qualifying CCPs. The 
increased capital charges for transactions through non-qualifying CCPs 
may have significant business and operational implications for U.S. 
DCOs, particularly SIDCOs that operate internationally and are not 
QCCPs.\62\ Specifically, banks faced with much higher capital charges 
might transfer their OTC derivatives business away from such SIDCO to a 
QCCP in order to benefit from the preferential capital charges provided 
by the Basel CCP Capital Requirements. Alternatively, banks might 
reduce or discontinue their OTC business altogether. Banks might also 
pass on to their customers the higher costs of transacting with a non-
qualifying DCO as a result of the higher capital treatment. 
Accordingly, customers using such banks as intermediaries would have an 
incentive to transfer their business to an intermediary that clears at 
a QCCP. In short, a SIDCO's failure to be a QCCP may cause it to face a 
competitive disadvantage retaining members and customers.
---------------------------------------------------------------------------

    \62\ The Commission notes that the failure of SIDCOs to be QCCPs 
may negatively impact the broader US derivatives market as well. For 
example, higher clearing costs may result in fewer transactions, and 
less overall liquidity.
---------------------------------------------------------------------------

    As discussed further below in Section VI, the incentives noted in 
the foregoing paragraph have important implications for the cost and 
benefit considerations required by section 15(a) of the CEA.

E. Existing Prudential Requirements

    In April 2011, a year before the PFMIs were published, the Board 
proposed regulation HH, which sets forth, in part, risk management 
standards for those FMUs, for which the Board is the Supervisory 
Agency, that have been designated systemically important by the Council 
under Title VIII.\63\ The Board, in proposing regulation HH, stated 
that the risk management standards most relevant to the risk management 
of FMUs, and the most appropriate basis for setting initial risk 
management standards under Title VIII, were the then-current 
international risk management standards set by CPSS-IOSCO's Principles 
and Recommendations.\64\ The Board did note, in both its proposed and 
final rulemaking, that CPSS-IOSCO intended to update and replace the 
CPSS-IOSCO Principles and Recommendations with the PFMIs, and the Board 
anticipated at that time that it would review the PFMIs, consult with 
other appropriate agencies and the Council, and seek public comment on 
the adoption of the revised international standards.\65\


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    \63\ Notice of Proposed Rulemaking for Financial Market 
Utilities (``Regulation HH''), 76 FR 18445 (April 4, 2011) 
(Financial Market Utilities) (proposing regulation HH in accordance 
with section 805 of the Dodd-Frank Act, which directed the Board to 
establish risk management standards governing the operations related 
to the payment, clearing, and settlement activities of those FMUs 
that have been designated as systemically important by the Council 
for which the Board is the Supervisory Agency. Note, however, that 
FMUs that are registered as clearing agencies with the SEC under 
section 17A of the Securities Exchange Act of 1934, or that are 
registered as DCOs with the CFTC under section 5b of the CEA are 
expressly exempt from regulation HH.).
    \64\ Id. at 18447.
    \65\ Id. at 18448; see also Financial Market Utilities 
(``Regulation HH''), 77 FR 45907, 45908 (Aug. 2, 2012) (final rule).
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F. Risk Management Standards for SIDCOs

    As noted above, the CEA specifies certain core principles that all 
DCOs must comply with in order to register and maintain registration 
with the Commission. Core Principle B sets out minimum financial 
resources requirements for all DCOs and expressly states that a DCO 
must have ``adequate financial, operational, and managerial resources, 
as determined by the Commission, to discharge each responsibility of 
the DCO.'' \66\ Moreover, under Core Principle I, a DCO must have 
procedures, facilities, and a disaster recovery plan that allow it to, 
on an emergency basis, have a ``timely recovery and resumption'' of its 
operations, and fulfill each of its obligations and 
responsibilities.\67\ In light of the statutory language described 
above, and because the failure of or a disruption to the functioning of 
a SIDCO could ``create, or increase, the risk of significant liquidity 
or credit problems spreading among financial institutions or markets 
and thereby threaten the stability of the financial system of the 
United States,'' \68\ the Commission, in

[[Page 49669]]

accordance with section 5b(c)(2) of the Act \69\ and section 805 of the 
Dodd-Frank Act,\70\ proposed heightened requirements to increase the 
minimum financial resources requirements for SIDCOs,\71\ restrict the 
use of assessments in meeting such obligations,\72\ enhance the system 
safeguards for SIDCOs,\73\ and grant the Commission special enforcement 
authority over SIDCOs pursuant to section 807 of the Dodd-Frank 
Act.\74\
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    \66\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B) 
(emphasis added).
    \67\ Section 5b(c)(2)(I) of the CEA, 7 U.S.C. 7a-1(c)(2)(I).
    \68\ See supra discussion in n.17.
    \69\ Section 5b(c)(2) of the CEA, 7 U.S.C. 7a-1(c)(2).
    \70\ See section 805(a)(2) of the Dodd-Frank Act.
    \71\ See Financial Resources Requirements for Derivatives 
Clearing Organizations, 75 FR 63113, 63119-63120 (Oct. 14, 2010).
    \72\ Id.
    \73\ See Risk Management Requirements for Derivatives Clearing 
Organizations, 76 FR 3698, 3726-3727 (Jan. 20, 2011).
    \74\ Id. at 3727.
---------------------------------------------------------------------------

    First, the Commission proposed to increase the amount of financial 
resources a SIDCO must maintain in order to comply with Core Principle 
B and Commission regulation 39.11.\75\ Regulation 39.11, in part, (1) 
requires a DCO to maintain sufficient financial resources to meet its 
financial obligations to its clearing members notwithstanding a default 
by the clearing member creating the largest financial exposure for the 
DCO in extreme but plausible market conditions, provided that if a 
clearing member controls another clearing member or is under common 
control with another clearing member, affiliated clearing members shall 
be deemed to be a single clearing member for the purposes of this 
provision; \76\ and (2) permits a DCO to include the value of potential 
assessments, subject to a 30 percent haircut, in calculating up to 20 
percent of the default resource requirements.\77\ For SIDCOs, the 
Commission proposed a regulation that would require a SIDCO to (1) 
maintain sufficient financial resources to meet the SIDCO's financial 
obligations to its clearing members notwithstanding a default by the 
two clearing members creating the largest combined financial exposure 
for the SIDCO in extreme but plausible market conditions,\78\ and (2) 
only count the value of assessments, after a 30 percent haircut, to 
meet up to 20 percent of the resources required to meet obligations 
arising from a default by the clearing member creating the second 
largest financial exposure.\79\
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    \75\ See section 5b(c)(2)(B)(ii)(I) of the CEA, 7 U.S.C. 7a-
1(c)(2)(B)(ii)(I); see also 75 FR at 63116.
    \76\ See 17 CFR 39.11(a)(1); see also 75 FR 63114 (noting that 
for purposes of determining the largest financial exposure for DCOs 
under Core Principle B, the treatment of commonly controlled 
affiliates as a single entity is necessary because the default of 
one affiliate could have an impact on the ability of the other to 
meet its financial obligations to the DCO).
    \77\ 17 CFR 39.11(d)(2)(iii) and (iv).
    \78\ 75 FR at 63119.
    \79\ Id.
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    In addition to financial resources requirements, the Commission 
also proposed to improve system safeguards for SIDCOs by enhancing 
certain BC-DR procedures.\80\ Core Principle I requires a DCO to 
establish and maintain emergency procedures, backup facilities, and a 
plan for disaster recovery that allows for the timely recovery and 
resumption of operations.\81\ Pursuant to Commission regulation 39.18, 
the required recovery time objective would be no later than the next 
business day.\82\ However, because the systemic importance of SIDCOs 
carries with it a responsibility to be reliably available on a near-
continuous basis to fulfill their obligations, the Commission proposed 
a regulation that would require a SIDCO to have a BC-DR plan with the 
objective of enabling, and the physical, technological, and personnel 
resources sufficient to enable, the SIDCO to recover its operations and 
resume daily processing, clearing, and settlement no later than two 
hours following the disruption, including a wide-scale disruption.\83\
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    \80\ See 76 FR at 3726-3727.
    \81\ See section 5(c)(2)(I)(ii)(I) of the CEA, 7 U.S.C. 7a-
1(c)(2)(I)(ii)(I).
    \82\ See 17 CFR 39.18(e)(3).
    \83\ 76 FR at 3726. Chicago Mercantile Exchange Inc. (``CME 
Clearing'') and ICC, the two existing SIDCOs, must comply with 
regulation 39.30, including the two-hour recovery time objective 
requirement, by December 31, 2013. Thereafter, any DCO that is 
designated as systemically important by the Council for which the 
Commission is the Supervisory Agency will be required to comply with 
regulation 39.30 within one year after designation by the Council.
---------------------------------------------------------------------------

    As part of the Commission's proposed regulations for SIDCOs, the 
Commission also included special enforcement authority over SIDCOs \84\ 
pursuant to section 807(c) of the Dodd-Frank Act, which would grant the 
Commission authority under the provisions of subsections (b) through 
(n) of section 8 of the Federal Deposit Insurance Act (``FDIA'') \85\ 
in the same manner and to the same extent as if the SIDCO were an 
insured depository institution and the Commission were the appropriate 
federal banking agency for such insured depository institution.\86\
---------------------------------------------------------------------------

    \84\ Id. at 3727.
    \85\ See 12 U.S.C. 1818 (b)-(n) (granting authority for 
enforcement powers).
    \86\ 76 FR at 3727.
---------------------------------------------------------------------------

    The Commission requested comments on the proposed regulations,\87\ 
including comments on the potential competitive effects of imposing 
higher risk standards on SIDCOs as a subset of DCOs.\88\ The Commission 
received thirteen comment letters from the public regarding the 
proposed SIDCO rules. Several commenters advocated that any new 
Commission regulations correspond with applicable international 
standards.\89\
---------------------------------------------------------------------------

    \87\ The comment period for the proposed rule on Financial 
Resources Requirements for Derivatives Clearing Organizations, which 
proposed the increased financial resources requirements for SIDCOs, 
initially closed on December 13, 2010, but was extended until June 
3, 2011. The comment period for the proposed rule on Risk Management 
Requirements for Derivatives Clearing Organizations, which proposed 
a two hour recovery time and special enforcement authority, closed 
on April 25, 2011.
    \88\ See 75 FR at 63117.
    \89\ See infra n. 110 and 125.
---------------------------------------------------------------------------

    Because efforts to finalize the PFMIs were ongoing, new rules could 
have put SIDCOs at a competitive disadvantage vis-[agrave]-vis foreign 
CCPs not yet subject to comparable rules, and, at the time, no DCO had 
been designated as systemically important by the Council, the 
Commission concluded it would be premature to finalize the SIDCO 
regulations in the Derivatives Clearing Organization Core Principles 
adopting release.\90\ Instead, the Commission decided, consistent with 
section 805(a)(1) of the Dodd-Frank Act,\91\ to monitor domestic and 
international developments concerning CCPs and reconsider the proposed 
SIDCO regulations in light of such developments.\92\
---------------------------------------------------------------------------

    \90\ See 76 FR at 69352 (Derivatives Clearing Organization Core 
Principles) (final rule).
    \91\ The Commission notes again that section 805(a)(1) of the 
Dodd-Frank Act requires the Commission to consider international 
standards in promulgating risk management rules.
    \92\ Id.
---------------------------------------------------------------------------

    As discussed above, since the final adoption of subparts A and B of 
part 39 of the Commission's regulations implementing the DCO core 
principles, there have been significant domestic and international 
developments, including (1) the publication of the final PFMIs in April 
2012,\93\ (2) the designation of two registered DCOs for which the 
Commission is the Supervisory Agency, as systemically important by the 
Council,\94\ and (3) the adoption of the Basel CCP Capital Requirements 
in July 2012,\95\ which provide for significantly less favorable 
capital treatment for bank exposures to CCPs unless the relevant 
regulator of the CCP establishes regulations that are consistent with 
the PFMIs by the end of

[[Page 49670]]

2013.\96\ Given these developments and requests from market 
participants to harmonize CFTC regulations with the PFMIs,\97\ the 
Commission believes the time is ripe to finalize the previously 
proposed SIDCO regulations.
---------------------------------------------------------------------------

    \93\ See supra n. 28.
    \94\ See supra n. 23, 24.
    \95\ See supra n. 48; see also discussion in section I. D. 4.
    \96\ See Bank for International Settlements' Basel Committee on 
Banking Supervision, ``Basel III Counterparty Credit Risk and 
Exposures to Central Counterparties--Frequently Asked Questions,'' 
(November 2012; revised December 2012), available at https://www.bis.org/publ/bcbs237.pdf) (stating that if (1) a CCP regulator 
has provided a public statement on the status of a CCP (QCCP or non-
qualifying), then banks will treat exposures to this CCP 
accordingly. Otherwise, the bank will determine whether a CCP is 
qualifying based on the criteria in the definition of a QCCP in 
Annex 4, Section 1 of the Basel CCP Capital Requirements; (2) during 
2013, if a CCP regulator has not yet implemented the PFMIs, but has 
publicly stated that it is working towards implementing these 
principles, the CCPs that are regulated by the CCP regulator may be 
treated as QCCPs. However, a CCP regulator may still declare a 
specific CCP non-qualifying; and (3) after 2013, if a CCP regulator 
has yet to implement the PFMIs, then the bank will determine whether 
a CCP subject to such a CCP regulator's jurisdiction is qualifying 
on the basis of the criteria outlined in the definition of a QCCP in 
Annex 4, Section 1 of the Basel CCP Capital Requirements.).
    \97\ See, e.g., CME Group Inc., letter dated May 3, 2013 (``CME 
2013 Letter'') (stating that the PFMIs establish ``more demanding 
international risk management and related standards for payment, 
clearing and settlement systems, including central counterparties'' 
and that in recognition of ``the systemic protections and robustness 
of designated CCPs who adhere to the PFMIs,'' the Basel CCP Capital 
Requirements provide ``capital incentives for exposures to such 
QCCPs relative to non-Qualified CCPs.'' Moreover, the letter states 
that it ``is important to [Chicago Mercantile Exchange Inc.] to be 
designated a QCCP . . . in order for [its] market participants to 
obtain optimal capital treatment for their business at [Chicago 
Mercantile Exchange Inc. . . .]'').
---------------------------------------------------------------------------

II. Regulation 39.29

A. Proposed Regulation 39.29(a)

    Regulation 39.29(a), as proposed, would have required SIDCOs to 
maintain sufficient financial resources to meet financial obligations 
to its clearing members notwithstanding a default by the two clearing 
members creating the largest combined financial exposure for the SIDCO 
in extreme but plausible market conditions.\98\
---------------------------------------------------------------------------

    \98\ See 75 FR at 63119.
---------------------------------------------------------------------------

    The Commission received nine comment letters from market 
participants regarding the specific requirements set forth in proposed 
regulation 39.29(a).\99\ The majority of these commenters expressed 
concern that heightened requirements for SIDCOs could place them at a 
competitive disadvantage vis-[agrave]-vis other DCOs and foreign CCPs 
that clear and settle similar OTC derivatives.\100\
---------------------------------------------------------------------------

    \99\ Comments on proposed regulation 39.29(a) include the 
following: See The Options Clearing Corporation, December 10, 2010 
letter (``OCC December Letter''); Michael Greenberger, December 10, 
2010 letter (``Greenberger Letter''); CME Group Inc., letter dated 
December 13, 2010 (``CME December Letter''); CME 2013 Letter; 
International Swaps and Derivatives Association, Inc., letter dated 
December 10, 2010) (``ISDA Letter''); Americans for Financial 
Reform, letter dated December 13, 2010 (``AFR Letter''); Futures 
Industry Association, letter dated December 13, 2010 (``FIA 
Letter''); LCH. Clearnet Group Limited, letter dated December 10, 
2010 (``LCH December Letter''); ICE Clear Credit LLC, letter dated 
April 26, 2013 (``ICC Letter''). The comment files for each proposed 
rulemaking can be found on the Commission's Web site at 
www.cftc.gov.
    \100\ See CME December Letter at 7; FIA Letter at 2; LCH 
December Letter at 1. More broadly, Chris Barnard argued that all 
DCOs are SIDCOs ``[g]iven their aggregate nature and high levels of 
interconnectedness.'' See Chris Barnard, letter, dated May 10, 2011, 
(``Barnard Letter'') at 2.
---------------------------------------------------------------------------

    Two commenters, Mr. Michael Greenberger and LCH. Clearnet Group 
Limited (``LCH''), generally supported the proposed financial resources 
requirements for SIDCOs.\101\ ICE Clear Credit LLC (``ICC''), one of 
the two existing SIDCOs, stated that it currently is in compliance with 
the proposed cover two requirement and acknowledged ``the importance of 
clearing houses with more complex risk management requirements 
maintaining robust financial resources.'' \102\ Both the International 
Swaps and Derivatives Association (``ISDA'') and Americans for 
Financial Reform (``AFR'') suggested alternative approaches to the 
proposed cover two requirement for SIDCOs.\103\ ISDA encouraged the 
Commission to consider ``whether the appropriate size of a SIDCO's 
financial resources should be determined following an assessment by the 
Commission of the specific risks posed by the relevant SIDCO and the 
individual products it clears, rather than set to a uniform level that 
may be either insufficient or overly conservative.'' \104\ AFR stated 
that a SIDCO's minimum financial resources requirements should be based 
on risk exposure as well as the number of defaults because while in ``a 
concentrated market, a single default can have great consequence,'' and 
in ``a more diverse market, the probability of multiple defaults is 
greater and is a more meaningful scenario.'' \105\
---------------------------------------------------------------------------

    \101\ See Greenberger Letter at 6; LCH December Letter at 3.
    \102\ See ICC Letter at 2.
    \103\ See ISDA Letter at 8; AFR Letter at 3.
    \104\ See ISDA Letter at 8.
    \105\ See AFR Letter at 3.
---------------------------------------------------------------------------

    OCC, however, disagreed with the necessity to impose a cover two 
requirement on all SIDCOs.\106\ OCC argued that the Commission should 
not impose a rigid financial resources requirement on every SIDCO 
because mandating the default of the two largest clearing members for 
purposes of calculating the financial resources requirement does not 
necessarily have a beneficial result in that ``it restricts the ability 
of a DCO to measure its resources against those contingencies that it 
deems to be the most likely threats to its liquidity and solvency.'' 
\107\ OCC agreed that all clearing organizations should consider 
possible simultaneous defaults by multiple clearing members but that 
the simultaneous defaults of a clearing organization's two largest 
clearing members, at least in the context of how that might occur 
within OCC, seem extremely implausible.\108\ OCC did state that ``the 
clearing of OTC derivatives presents unique risk management concerns, 
and, depending on the particular product and applicable risk management 
framework, perhaps even heightened concerns that warrant special 
regulatory treatment.'' \109\ Additionally, OCC argued for 
international consistency on this issue, and encouraged the Commission 
to follow the PFMIs and ``avoid taking final action on the Proposed 
Rules prior to receiving greater clarity in terms of the positions and 
proposals that European and U.K. legislators and regulators and CPSS[-
]IOSCO eventually adopt.'' \110\
---------------------------------------------------------------------------

    \106\ See OCC December Letter at 2, 5, and 6.
    \107\ Id. at 2. In addition, OCC argued that the proposed 
regulation did not fully consider the costs associated with meeting 
the cover two standard nor the risk of driving clearing volume to 
clearinghouses that are not required to meet the cover two standard. 
Id.
    \108\ Id. at 6.
    \109\ Id. at 5.
    \110\ Id. at 12.
---------------------------------------------------------------------------

    The Futures Industry Association (``FIA'') and, in its initial 
comment letter, CME commented that the proposed cover two requirement 
for SIDCOs could competitively disadvantage SIDCOs in both domestic and 
international markets.\111\ FIA stated that the proposed regulation 
would create a two-tier system between those DCOs designated as 
systemically important and those DCOs that are not designated as 
such.\112\ FIA believes that the two-tier system could put SIDCOs ``at 
a competitive disadvantage to the extent that they need to increase 
margin or guaranty fund requirements to cover the additional cost of 
covering the risk of loss resulting from the default of the second 
largest clearing member.'' \113\ In this regard, FIA recommended that 
the Commission require all DCOs, not just SIDCOs, to maintain 
sufficient financial resources to withstand the default of the two 
clearing members creating the largest combined financial exposure for

[[Page 49671]]

the DCO in extreme but plausible market conditions.\114\
---------------------------------------------------------------------------

    \111\ See FIA Letter at 2, CME December Letter at 7-8.
    \112\ See FIA Letter at 2.
    \113\ Id.
    \114\ Id.
---------------------------------------------------------------------------

    CME's initial comment letter echoed FIA's approach, arguing that 
having lower financial resources requirements for DCOs that are not 
SIDCOs would allow those DCOs to offer lower guaranty fund and margin 
requirements.\115\ According to CME, this ``would likely attract 
additional volume to at least some non-systemically important DCOs and 
transform them into de facto SIDCOs.'' \116\ CME argued that until such 
time as a ``de facto SIDCO'' was designated as systemically important 
by the Council, SIDCOs would be competitively disadvantaged because the 
``de facto SIDCO'' would be operating under the lower and less costly 
general regulatory standards for DCOs.\117\ CME argued that such a 
result would disregard the objectives of Title VIII.\118\ CME suggested 
that the Commission, in lieu of adopting the proposed regulation, adopt 
a regulation that subjects SIDCOs to more frequent stress testing 
(e.g., bi-monthly rather than monthly) and reporting requirements 
(e.g., monthly rather than quarterly).\119\ Following publication of 
the PFMIs and the Basel CCP Capital Requirements, CME submitted a 
supplemental comment letter stating that its subsidiary, CME Clearing 
began offering clearing services for the interest rate swap and credit 
default swap markets.\120\ As a result, CME Clearing has three distinct 
guaranty funds: one for interest rate swap products (``IRS Guaranty 
Fund''), one for credit default swap products (``CDS Guaranty Fund''), 
and one for futures and other cleared OTC products (``Base Guaranty 
Fund'').\121\ Moreover, CME stated that the IRS Guaranty Fund and the 
CDS Guaranty Fund are already sized to the cover two standard.\122\ 
While CME stated that it is satisfied with the size of the Base 
Guaranty Fund, which is currently set to meet a cover one standard, CME 
anticipates that the Commission will promulgate a cover two standard as 
part of the Commission's implementation of the standards set forth in 
the PFMIs.\123\ As such, CME requested that the Commission ``consider 
the impact to clearing firms when specifying the timelines associated 
with compliance with the cover [two] standard and suggests as long a 
time horizon as possible for implementation,'' with ``an effective date 
of the end of 2013, or later to the extent practicable to maintain QCCP 
status in accordance with BCBS 227, which we believe would assist in 
minimizing the impact to the clearing firm community.'' \124\
---------------------------------------------------------------------------

    \115\ See CME December Letter at 7.
    \116\ Id.
    \117\ Id. at 7-8.
    \118\ Id. at 8.
    \119\ Id.
    \120\ CME 2013 Letter at 2.
    \121\ CME 2013 Letter at 2-3.
    \122\ CME 2013 Letter at 3.
    \123\ Id.
    \124\ Id.
---------------------------------------------------------------------------

    Additionally, LCH, which was supportive of the proposal, urged the 
Commission ``to minimize the divergence'' between U.S.-regulated CCPs 
and other CCPs and ensure a level playing field between SIDCOs and 
other large CCPs around the world by conforming as much as possible the 
Commission's final rules on SIDCOs to the global standards set forth by 
the PFMIs.\125\
---------------------------------------------------------------------------

    \125\ See LCH December Letter at 1-2 (citing to the Bank for 
International Settlements' Committee on Payment and Settlement 
Systems September 2010 report entitled Market Structure Developments 
in the Clearing Industry: Implications for Financial Stability for 
the opinion that ``regulatory complexity, and with it the potential 
for regulatory arbitrage, may increase, especially when competing 
CCPs are regulated by different authorities and/or are located in 
different jurisdictions.'' Id. at 4.
---------------------------------------------------------------------------

    The Commission notes that Core Principle B requires DCOs to have 
``adequate financial, operational, and managerial resources, as 
determined by the Commission, to discharge each responsibility of the 
DCO.'' \126\ Pursuant to Core Principle B, at a minimum, DCOs must be 
able to meet a cover one requirement. As discussed above, because of 
the impact that the failure of or a disruption to the operations of a 
SIDCO could have on the U.S. financial markets, the Commission proposed 
increased standards for SIDCOs. However, after consideration of the 
comments, and consistent with the directive in section 805 of the Dodd-
Frank Act to consider relevant international standards and existing 
prudential requirements, the Commission is adopting regulation 39.29(a) 
with a revision in order to harmonize U.S. regulations with 
international CCP risk management standards.\127\
---------------------------------------------------------------------------

    \126\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B).
    \127\ The Commission finds the comments arguing for 
international regulatory consistency to be persuasive and recognizes 
the importance of harmonizing U.S. regulations with international 
CCP risk management standards.
---------------------------------------------------------------------------

    Specifically, rather than apply the cover two requirement to all 
SIDCOs, the revised regulation 39.29(a) would parallel the financial 
resources standard in Principle 4 of the PFMIs and only require a SIDCO 
that is systemically important in multiple jurisdictions or that is 
involved in activities with a more complex risk profile to maintain 
financial resources sufficient to enable it to meet its financial 
obligations to its clearing members notwithstanding a default by the 
two clearing members creating the largest combined financial exposure 
for the SIDCO in extreme but plausible market conditions, provided that 
if a clearing member controls another clearing member or is under 
common control with another clearing member, affiliated clearing 
members shall be deemed to be a single clearing member for the purposes 
of this provision.\128\
---------------------------------------------------------------------------

    \128\ See supra n. 41, 42. Moreover, the same proviso regarding 
the treatment of affiliate clearing members as set out in 
39.11(a)(1), i.e., that ``if a clearing member controls another 
clearing member or is under common control with another clearing 
member, affiliated clearing members shall be deemed to be a single 
clearing member for the purposes of this provision'' is incorporated 
in regulation 39.29(a) and is repeated in the rule text for clarity. 
See also 75 FR 63116 (stating that as DCOs, SIDCOs are still subject 
to Title VII and the regulations thereunder, except to the extent 
that the Commission proposes higher standards pursuant to Title 
VIII).
---------------------------------------------------------------------------

    Thus, regulation 39.29(a) will promote consistency and efficiency 
in the financial markets by holding SIDCOs to the same cover two 
standard as similarly situated foreign CCPs. Additionally, because the 
PFMIs set forth international risk management standards for CCPs, this 
international harmonization should mitigate some of the competition 
concerns raised by the commenters. Moreover, adoption of this revised 
regulation is part of the Commission's broader efforts to adopt and 
implement regulations that are consistent with the PFMIs so that SIDCOs 
operating internationally can be considered QCCPs. Such QCCP status 
should help a SIDCO avoid competitive harm internationally by providing 
bank clearing members and clients with the opportunity to obtain the 
more favorable capital charges set forth by the Basel CCP Capital 
Requirements.\129\
---------------------------------------------------------------------------

    \129\ See supra section I.D.4. for a more detailed discussion on 
the role of the PFMIs in international banking. See also CME 2013 
Letter at 2 (stating that ``it is important to CME [Clearing] to be 
designated a QCCP . . . in order for [its] market participants to 
obtain optimal capital treatment for their business at CME 
[Clearing] . . .'').
---------------------------------------------------------------------------

    After careful review and consideration of the comments, and in 
light of international standards and prudential regulations, the 
Commission is adopting a regulation 39.29(a), as revised, to require 
the cover two standard for those SIDCOs that are systemically important 
in multiple jurisdictions or that are involved in activities with a 
more complex risk profile.

[[Page 49672]]

B. Proposed Regulation 39.29(b)

    Regulation 39.29(b), as proposed, would have precluded SIDCOs from 
counting the value of assessments in calculating the resources 
available to meet the obligations arising from a default by the 
clearing member creating the single largest financial exposure,\130\ 
but would have permitted SIDCOs to count the value of assessments, 
after a 30 percent haircut, in calculating the resources available to 
meet up to 20 percent of the obligations arising from a default of the 
clearing member creating the second largest financial exposure.\131\
---------------------------------------------------------------------------

    \130\ See 75 FR at 63117. Accordingly, SIDCOs would have to hold 
a greater percentage of financial resources in margin and guaranty 
funds. Id.
    \131\ Id.
---------------------------------------------------------------------------

    The Commission received five comment letters from market 
participants regarding the specific requirements set forth in proposed 
regulation 39.29(b).\132\ FIA agreed with the Commission's proposed 
limitation on the use of assessments by SIDCOs, stating that the 
proposed limitation was reasonable, prudent, and sufficient to ensure 
that a SIDCO does not unduly rely on its assessment power.\133\ In 
contrast, AFR argued that the use of assessments in calculating the 
resources available to meet a SIDCO's obligations under proposed 
regulation 39.29(b) should be prohibited.\134\ AFR emphasized that a 
DCO should be financially viable at all times, regardless of whether it 
might be able to call on its members to provide additional 
capital.\135\ In addition, ICC, one of the two existing SIDCOs, stated 
that it does not rely upon its right of assessment to meet the cover 
two standard \136\ and CME, the parent company of the other existing 
SIDCO, stated that ``each of [CME Clearing's] guaranty funds are pre-
funded by the respective clearing members.'' \137\ More broadly, Chris 
Barnard commented that the use of assessments by DCOs may cause pro-
cyclical problems and increase systemic risk in times of financial 
stress.\138\
---------------------------------------------------------------------------

    \132\ See AFR Letter; FIA Letter; Barnard Letter; ICC Letter; 
CME 2013 Letter.
    \133\ See FIA Letter at 3.
    \134\ See AFR Letter at 3.
    \135\ Id. AFR also argued that DCOs should be prohibited from 
including assessments in meeting their financial resources 
requirements as well.
    \136\ See ICC Letter at 2.
    \137\ See CME 2013 Letter at 3, n.7.
    \138\ See Barnard Letter at 2.
---------------------------------------------------------------------------

    The Commission recognizes the potential pro-cyclical effects of 
assessments and agrees that a SIDCO should not be permitted to use the 
value of assessments in calculating the resources available to meet its 
obligations under regulation 39.29(a). ``Pro-cyclicality,'' as defined 
in the PFMIs, refers to ``changes in risk-management practices that are 
positively correlated with market, business, or credit cycle 
fluctuations and that may cause or exacerbate financial instability.'' 
\139\ In the context of assessments, a SIDCO's call for additional 
capital from its clearing members in order to cover any losses in a 
default scenario (generally needed on an expedited basis) may trigger 
greater distress on the financial markets, which presumably have 
already been weakened. In other words, in a stressed market where 
credit is tightening and margin calls are increased, a SIDCO's 
assessment of additional claims upon its clearing members may well 
exacerbate already weakened financial markets by potentially forcing 
clearing members and/or their customers to deleverage in falling asset 
markets, which will further drive down asset prices and stifle 
liquidity, or force clearing members to default in their obligations to 
the SIDCO. This in turn could start a downward spiral which, combined 
with restricted credit, might lead to additional defaults of clearing 
members and/or their customers, and would play a significant role in 
the destabilization of the financial markets. In striking a balance 
between the need for SIDCOs to effectively and efficiently use their 
resources and the mitigation of pro-cyclical behaviors, the Commission 
believes prefunding default obligations is the appropriate mechanism 
for SIDCOs to meet their default resource obligations.
---------------------------------------------------------------------------

    \139\ See PFMIs, Definitions; see also Principle 5: Collateral, 
Explanatory Note 3.5.6; see also Bank for International Settlements' 
Committee on the Global Financial System, ``The Role of Margin 
Requirements and Haircuts in Procyclicality,'' CGFS Papers No. 36 
(March 2010), available at https://www.bis.org/publ/cgfs36.htm.
---------------------------------------------------------------------------

    As discussed above, Core Principle B requires DCOs to have 
``adequate financial, operational, and managerial resources, as 
determined by the Commission, to discharge each responsibility of the 
DCO.'' \140\ Moreover, the PFMIs require a CCP to use prefunded 
financial resources to cover current and potential future 
exposures,\141\ which may include initial margin, contributions to a 
prefunded default arrangement (e.g., a guaranty fund), and a specified 
portion of the CCP's own funds.\142\ In addition, the PFMIs encourage 
CCPs to address pro-cyclicality in their margin arrangements \143\ and 
state that ``a CCP could consider increasing the size of its prefunded 
default arrangements to limit the need and likelihood of large or 
unexpected margin calls in times of market stress.'' \144\ Prefunding 
financial resources requires market participants to pay more during 
times of relative market stability and low-market volatility through 
prefunded default arrangement contributions.\145\ However, paying more 
during a period of economic stability or even an upturn may ``result in 
additional protection and [be] potentially less costly and less 
disruptive adjustments in periods of high market volatility.'' \146\
---------------------------------------------------------------------------

    \140\ Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a-1(c)(2)(B).
    \141\ See supra n. 40 and accompanying text.
    \142\ See PFMIs, Principle 4: Credit Risk, Explanatory Note 
3.4.17 (stating that a CCP typically uses a sequence of prefunded 
financial resources, often referred to as a ``waterfall,'' to manage 
its losses caused by participant defaults. The waterfall may include 
a defaulter's initial margin, the defaulter's contribution to a 
prefunded default arrangement, a specified portion of the CCP's own 
funds, and other participants' contributions to a prefunded default 
arrangement).
    \143\ Id. at Principle 6: Margin, Explanatory Note 3.6.10.
    \144\ Id.
    \145\ Id.
    \146\ Id.
---------------------------------------------------------------------------

    The Commission believes the role of a SIDCO, in part, is to add 
stability and confidence in the financial markets, and to the extent 
that the prohibition of the inclusion of the value of assessments by 
SIDCOs in meeting their default resource requirements helps to stem 
pro-cyclicality and the potential weakening of financial markets, the 
Commission is in favor of this approach. Moreover, prohibition of the 
inclusion of the value of assessments will help ensure that a SIDCO 
has, when needed, adequate resources to discharge each of its 
responsibilities.
    Accordingly, after consideration of the comments, relevant 
international standards, and existing prudential requirements, the 
Commission is adopting regulation 39.29(b) with a revision to prohibit 
the use of assessments by SIDCOs in calculating financial resources 
available to meet the SIDCO's obligations under regulation 39.29(a).

III. Regulation 39.30

    Regulation 39.30(a), as proposed, would have required a SIDCO to 
have a BC-DR plan, that has the objective of, and the physical, 
technological, and personnel resources sufficient to, enable the SIDCO 
to recover operations and resume daily processing, clearing, and 
settlement no later than two hours following a disruption,\147\ 
including a wide-scale disruption.\148\
---------------------------------------------------------------------------

    \147\ See 76 FR at 3726.
    \148\ The following definitions pertaining to system safeguards 
were codified at 17 CFR 39.18(a):
    A ``recovery time objective'' is defined as ``the time period 
within which an entity should be able to achieve recovery and 
resumption of clearing and settlement of existing and new products, 
after those capabilities become temporarily inoperable for any 
reason up to or including a wide-scale disruption.'' A ``wide-scale 
disruption'' is defined as ``an event that causes a severe 
disruption or destruction of transportation, telecommunications, 
power, water, or other critical infrastructure components in a 
relevant area, or an event that results in an evacuation or 
unavailability of the population in a relevant area.'' ``Relevant 
area'' is defined as ``the metropolitan or other geographic area 
within which a derivatives clearing organization has physical 
infrastructure or personnel necessary for it to conduct activities 
necessary to the clearing and settlement of existing and new 
products. The term `relevant area' also includes communities 
economically integrated with, adjacent to, or within normal 
commuting distance of that metropolitan or other geographic area.''

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

[[Page 49673]]

    In order to achieve the specified recovery time objective (``RTO'') 
in proposed regulation 39.30(a), proposed regulation 39.30(b) would 
have required SIDCOs to maintain a geographic dispersal of physical, 
technological, and personnel resources.\149\ Pursuant to proposed 
regulation 39.30(b)(1), physical and technological resources would have 
to be located outside the relevant area of the infrastructure the 
entity normally relies upon to conduct activities necessary to the 
clearance and settlement of existing and new contracts, and the entity 
could not rely on the same critical transportation, telecommunications, 
power, water, or other critical infrastructure components the entity 
normally relies upon for such activities.\150\ Additionally, proposed 
regulation 39.30(b)(2) would have required SIDCOs to maintain personnel 
sufficient to meet the RTO after interruption of normal clearing by a 
wide-scale disruption affecting the relevant area, who live and work 
outside the relevant area.\151\ To avoid duplication and maximize 
flexibility, proposed regulation 39.30(b)(3) \152\ provided that SIDCOs 
could use the outsourcing provisions applicable to non-SIDCO DCOs as 
set forth in regulation 39.18(f).\153\
---------------------------------------------------------------------------

    \149\ See 76 FR at 3726-3727.
    \150\ Id.
    \151\ Id. at 3727.
    \152\ Id.
    \153\ See 17 CFR 39.18(f) (stating, in relevant part, that a DCO 
may maintain the resources required under BC-DR procedures 
enumerated in regulation 39.18(e)(1) by ``either (1) Using its own 
employees as personnel, and property that it owns, licenses, or 
leases (own property); or (2) Through written contractual 
arrangements with another derivatives clearing organization or other 
service provider (outsourcing).'')
---------------------------------------------------------------------------

    Regulation 39.30(c), as proposed, would have required that each 
SIDCO conduct regular, periodic tests of its BC-DR plans and resources, 
and of its capacity to achieve the required RTO in the event of a wide-
scale disruption.\154\ Additionally, proposed regulation 39.30(c) 
incorporated the provisions of regulation 39.18(j) concerning testing 
by DCOs, including the purpose of the testing, the conduct of the 
testing, and reporting and review of the testing.\155\
---------------------------------------------------------------------------

    \154\ See 76 FR at 3727.
    \155\ See id; see also 17 CFR 39.18(j).
---------------------------------------------------------------------------

    The Commission received five comment letters regarding the specific 
requirements set forth in proposed regulation 39.30(a).\156\ One 
commenter stated that the recovery time for its technology systems is 
currently approximately two hours based upon past disaster recovery 
tests,\157\ and three commenters opposed the two-hour RTO.\158\ ICC, 
one of the two existing SIDCOs, acknowledged ``the importance of 
maintaining market integrity during disruptive events'' and noted that 
a two-hour RTO is consistent with Principle 17 of the PFMIs.\159\ In 
addition, ICC stated that the ``two-hour benchmark is unlikely to 
require [it] to hire additional personnel or to require a different 
level of cross-training related to its wide-scale disruption plan,'' 
and that it ``is unlikely that [ICC] will incur any additional backup 
technology costs related to the CFTC's proposed RTO.\160\
---------------------------------------------------------------------------

    \156\ Comments on proposed regulation 39.30 include the 
following: See Intercontinental Exchange, Inc. letter dated March 
21, 2011 (``ICE Letter''); OCC letter dated March 21, 2011 (``OCC 
Letter''); CME Group Inc., letter dated March 21, 2011 (``CME March 
Letter''); ICC Letter; and CME 2013 Letter. The Commission received 
no comments regarding proposed regulation 39.30(b) or 39.30(c).
    \157\ See ICC Letter at 2.
    \158\ See ICE Letter at 7-8; CME March Letter at 14-15; OCC 
Letter at 19-20.
    \159\ ICC Letter at 2.
    \160\ Id.
---------------------------------------------------------------------------

    Both Intercontinental Exchange, Inc. (``ICE'') and CME, on the 
other hand, expressed concern that requiring a more stringent RTO for 
SIDCOs would impose significant costs.\161\ ICE argued that ``assigning 
an RTO to a SIDCO instead of assigning the objective the RTO is 
intended to achieve adds significant cost to a SIDCO's business 
continuity program but does not necessarily increase overall resilience 
of the financial system.'' \162\ ICE and CME also highlighted the 
approach referenced in the Interagency Paper on Sound Practices to 
Strengthen the Resilience of the U.S. Financial System (the ``Sound 
Practices Paper''),\163\ published in 2003, which argued for a same-
business-day RTO with a two-hour RTO as an aspirational goal for 
clearing and settlement organizations.\164\ CME urged the Commission to 
adopt the same approach as the Sound Practices Paper for SIDCOs, i.e., 
the same-business-day RTO with a two-hour RTO on a voluntary 
basis.\165\ In addition, CME stated that ``[m]oving to a 2-hour RTO 
would impose enormous costs on SIDCOs, and the CFTC has provided no 
cost/benefit analysis in connection with this aspect of the proposed 
Regulation.'' \166\ Nonetheless, in a supplemental comment letter, CME 
stated that ``in light of the systemic importance of CME [Clearing]'s 
clearing functions and the intended benefits, including compliance with 
the PFMI requirements for critical information technology, CME 
[Clearing] has obtained budget approval and allocated resources towards 
a two hour RTO and will be working throughout 2013 towards achieving a 
two hour RTO.'' \167\
---------------------------------------------------------------------------

    \161\ See ICE Letter at 7; CME March Letter at 14.
    \162\ ICE Letter at 8.
    \163\ See the Federal Reserve Board, the Office of the 
Comptroller of the Currency and the Securities and Exchange 
Commission, ``Interagency Paper on Sound Practices to Strengthen the 
Resilience of the U.S. Financial System'' (the ``Sound Practices 
Paper''), 68 FR 17809 (April 11, 2003).
    \164\ Id. at 17812 (stating that core clearing and settlement 
organizations should develop the capacity to recover and resume 
clearing and settlement activities within the business day on which 
the disruption occurs with the overall goal of achieving recovery 
and resumption within two hours after an event).
    \165\ CME March Letter at 15.
    \166\ CME March Letter at 14.
    \167\ CME 2013 Letter at 4 (CME also acknowledges that 
``Principle 17 of the PFMIs states that a BC-DR Plan should be 
designed to ensure that critical information technology systems can 
resume operations within two hours following disruptive events.'') 
(emphasis added).
---------------------------------------------------------------------------

    OCC commented that, though a laudable goal, a two-hour RTO was not 
consistently achievable without sacrificing core DCO functions and 
increasing the risks of error and backlogs.\168\ In addition, OCC 
argued that in its experience, it often takes three hours to fully 
recover and meet its responsibilities and avoid significant market 
disruption.\169\ OCC also argued that further efforts to reduce RTO 
would not be cost-effective and could increase rather than decrease 
reliability risk.\170\
---------------------------------------------------------------------------

    \168\ OCC Letter at 19.
    \169\ Id.
    \170\ Id.
---------------------------------------------------------------------------

    With respect to commenters' concerns that the proposed regulation 
will significantly increase costs on SIDCOs, the Commission recognizes 
these concerns but notes that a systemic importance designation under 
Title VIII means that the failure of a SIDCO to meet its obligations 
will have a greater impact on the U.S. financial system than the 
failure of a DCO not so designated. Thus, the Commission believes the 
financial system has a vested interest in enhancing risk management 
requirements for SIDCOs to increase a SIDCO's financial resiliency and 
to

[[Page 49674]]

mitigate the risk of significant liquidity or credit problems spreading 
among financial institutions or markets, threatening the stability of 
the U.S. financial system. In the event of a wide-scale disruption, the 
resiliency of the U.S. financial markets might depend on the rapid 
recovery of SIDCOs to support critical market functions and thereby 
allow other market participants (i.e., the counterparties) to process 
their transactions. In addition, in such a scenario, it is reasonable 
to assume that there will be other market participants in locations not 
affected by the disruption that will need to clear and settle pending 
transactions as well. In short, the failure of a SIDCO to complete core 
clearing and settlement functions within a rapid period could create 
systemic liquidity and credit dislocations on a global scale.
    Additionally, the Commission notes that while it may be true that a 
two-hour RTO was an aspirational goal in 2003, standards and technology 
have advanced in the last ten years. As discussed above, the current 
international standard for CCPs, as set forth by the PFMIs, is to have 
a BC-DR plan that incorporates a two-hour RTO.\171\ Specifically, the 
PFMIs state that an FMI's business continuity plan ``should incorporate 
the use of a secondary site and should be designed to ensure that 
critical information technology systems can resume operations within 
two hours following disruptive events.'' \172\ Because the two-hour RTO 
is the international standard and foreign CCPs are anticipated to 
operate under this timeframe, any competitive disadvantages to SIDCOs 
in implementing this regulation should be mitigated because all 
similarly situated CCPs will likely be operating under this standard. 
Indeed, ICC, one of the two existing SIDCOs, has stated that it is 
unlikely that it will need to hire additional personnel or incur 
additional technology costs to meet this standard.\173\ Moreover, as 
discussed above, CME Clearing, the other existing SIDCO, ``has obtained 
budget approval and allocated resources towards a two hour RTO and will 
be working throughout 2013 towards achieving a two hour RTO.'' \174\
---------------------------------------------------------------------------

    \171\ See supra n. 46, 47 (referring to the PFMIs, Principle 17: 
Operational Risk).
    \172\ Id.
    \173\ See supra n. 160 and accompanying text.
    \174\ CME 2013 Letter at 4.
---------------------------------------------------------------------------

    The Commission believes that enhancing the system safeguard 
requirements a SIDCO must maintain under Core Principle I will increase 
stability in the financial markets and is therefore consistent with 
Title VIII's objectives. Moreover, regulation 39.30(a) will promote 
regulatory consistency for SIDCOs and similarly situated CCPs because 
the two-hour RTO is the international standard, under the PFMIs, for 
CCPs operating in other jurisdictions. As discussed above, the 
Commission is fully committed to adopting and implementing regulations 
that are consistent with the PFMIs to ensure that SIDCOs are QCCPs 
under the Basel CCP Capital Requirements so that banks transacting 
through SIDCOs can receive preferential capital treatment.\175\ 
Therefore, the Commission is adopting regulation 39.30(a) as proposed.
---------------------------------------------------------------------------

    \175\ See supra section I.D.4.
---------------------------------------------------------------------------

    The Commission did not receive any comments regarding proposed 
regulations 39.30(b) or 39.30(c). Therefore, for reasons stated in the 
proposal, the Commission is adopting regulations 39.30(b) and 39.30(c) 
as proposed.\176\ However, to mitigate costs, the Commission notes that 
regulation 39.30(b) should be interpreted in a manner consistent with 
the PFMIs, which state ``[a] particular site may be primary for certain 
functions and secondary for others. It is not intended that an FMI 
would be required to have numerous separate secondary sites for each of 
its essential functions.'' \177\


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

    \176\ See 76 FR at 3726-3727.
    \177\ See PFMIs, Principle 17: Operations Risk.
---------------------------------------------------------------------------

IV. Regulation 39.31

    Regulation 39.31 proposed to codify the special enforcement 
authority granted to the Commission over SIDCOs pursuant to section 
807(c) of the Dodd-Frank Act, which states that for purposes of 
enforcing the provisions of Title VIII of the Dodd-Frank Act, a SIDCO 
is subject to, and the Commission has authority under, provisions (b) 
through (n) of section 8 of the FDIA\178\ in the same manner and to the 
same extent as if the SIDCO were an insured depository institution and 
the Commission were the appropriate Federal banking agency for such 
insured depository institution.\179\ The Commission did not receive any 
comment letters on this proposed regulation, which tracks the statutory 
text in section 807 of the Dodd-Frank Act. Therefore, for reasons 
stated in the proposal, the Commission is adopting regulation 39.31 as 
proposed.
---------------------------------------------------------------------------

    \178\ See also 12 U.S.C. 1818(b)-(n) (granting authority for 
enforcement powers).
    \179\ 76 FR at 3727. The Commission notes that Title VIII 
preserved and expanded the CFTC's examination and enforcement 
authority with respect to designated entities within its 
jurisdiction. See Cong. Rec. 156 S5924-5 (daily ed. July 14, 2010) 
(statement of Sen. Lincoln that Title VIII ``preserves and expands 
the CFTC's and SEC's examination and enforcement authorities with 
respect to designated entities within their respective 
jurisdictions,'' and that ``the authorities granted in Title VIII 
are intended to be both additive and complementary to the 
authorities granted to the CFTC and SEC in Title VII and to those 
agencies' already existing legal authorities. The authority provided 
in Title VIII to the CFTC and SEC with respect to designated 
clearing entities and financial institutions engaged in designated 
activities would not and is not intended to displace the CFTC's and 
SEC's regulatory regime that would apply to these institutions or 
activities.'').
---------------------------------------------------------------------------

V. Effective Date and Compliance Dates

    For purposes of publication in the Code of Federal Regulations, all 
of the rules adopted herein will have an effective date of 60 days 
after publication in the Federal Register. The Commission received 
three comments, however, requesting additional time to come into 
compliance with these rules. Regarding the compliance date of 
regulation 39.29, OCC requested that DCOs be afforded a reasonable 
amount of time to raise ``any material amount of additional resources'' 
and requested a delayed implementation of two years.\180\ CME stated 
that the financial resources that DCOs are required to maintain will 
increase dramatically and requested an implementation period of no less 
than 180 days.\181\ Regarding the compliance date of regulation 39.30, 
the Commission had proposed a compliance date of one year after 
publication of the final rules or July 12, 2012.\182\ OCC commented 
that this is a short and burdensome deadline that will be difficult to 
meet and encouraged the Commission to adopt a two-year compliance 
period for the requirements applicable to SIDCOs.\183\ The Commission 
received no comments regarding regulation 39.31.
---------------------------------------------------------------------------

    \180\ OCC December Letter at 11.
    \181\ CME December Letter at 8.
    \182\ See 76 FR at 3714.
    \183\ OCC March Letter at 21.
---------------------------------------------------------------------------

    Given the mandate to implement these standards, and the necessity 
of SIDCOs to fulfill their obligations on a near continuous basis, 
after careful consideration of the comments received, the Commission is 
extending the compliance date for regulations 39.29 and 39.30 to 
December 31, 2013.

VI. Consideration of Costs and Benefits

A. Introduction

    Section 15(a) requires the Commission to consider the costs and 
benefits of its actions before promulgating a regulation under the CEA 
or issuing certain orders.\184\

[[Page 49675]]

Section 15(a) further specifies that the costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission's cost and benefit 
considerations in accordance with section 15(a) are discussed below.
---------------------------------------------------------------------------

    \184\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

B. Background

    In this final rulemaking, the Commission is adopting regulations to 
implement enhanced risk management standards for SIDCOs.\185\
---------------------------------------------------------------------------

    \185\ See supra section I.A. through I.F. for a more detailed 
discussion on the risk management standards for SIDCOs, including 
the designation process for SIDCOs and standards for SIDCOs under 
Title VIII of the Dodd-Frank Act.
---------------------------------------------------------------------------

    As noted above, consistent with the DCO core principles and section 
805 of the Dodd-Frank Act, which requires the Commission to consider 
relevant international and existing prudential requirements when 
prescribing risk management standards for SIDCOs, the Commission 
proposed the following enhanced requirements for SIDCOs: \186\
---------------------------------------------------------------------------

    \186\ See supra section I.F. for discussion on the risk 
management standards for SIDCOs proposed by the Commission.
---------------------------------------------------------------------------

    (1) Regulation 39.29(a) which would require a SIDCO to maintain 
sufficient resources to meet a ``cover two'' standard in order to 
comply with Core Principle B; \187\ (2) regulation 39.29(b) which would 
strictly limit the value of assessments that could be used in meeting 
that requirement; \188\ (3) regulation 39.30 which would require a 
SIDCO to have a BC-DR plan with a two-hour RTO in order to comply with 
Core Principle I (``two-hour RTO''); \189\ and (4) regulation 39.31 
which, under section 807(c) of the Dodd-Frank Act, grants the 
Commission special enforcement authority over SIDCOs.\190\
---------------------------------------------------------------------------

    \187\ Id.
    \188\ Id.
    \189\ Id.
    \190\ Id.
---------------------------------------------------------------------------

    As also discussed above, after the Commission proposed the SIDCO 
risk management standards and received comments, the PFMIs were 
published.\191\ The PFMIs establish international risk management 
standards for FMIs, including CCPs, that facilitate clearing and 
settlement.\192\ The PFMIs also play a significant role in the Basel 
CCP Capital Requirements, which introduce new capital charges based on 
counter party risk for banks conducting financial derivatives 
transactions through a CCP.\193\ These capital charges vary 
significantly depending on whether or not the counterparty is a QCCP, 
that is, a CCP that is subject to regulations consistent with the 
PFMIs.\194\ Effectively, the Basel CCP Capital Requirements incentivize 
banks to clear derivatives through QCCPs by setting lower capital 
charges for exposures arising from derivatives cleared through a QCCP 
and setting significantly higher capital charges for exposures arising 
from derivatives cleared through non-qualifying CCPs.\195\ As discussed 
further below, these differences in capital charges are extremely 
important in considering whether to adopt requirements for SIDCOs, 
which are consistent with the PFMIs, or requirements that fall short of 
that standard.
---------------------------------------------------------------------------

    \191\ See supra section I.D.1. for a general discussion on the 
PFMIs.
    \192\ Id.
    \193\ See supra section I.D.4. for a discussion on the role of 
the PFMIs in international banking standards.
    \194\ Id.
    \195\ Id.
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    In light of the directive of section 805 of the Dodd-Frank Act to 
consider relevant international standards and existing prudential 
requirements when prescribing risk management standards for designated 
systemically important FMUs, as well as the recent publication of the 
PFMIs, and public comments on the proposed SIDCO regulations, the 
Commission has determined it is necessary and appropriate to finalize 
the proposed enhanced risk management standards for SIDCOs. However, in 
order to harmonize the proposed regulations with the existing 
international standards set forth by the PFMIs, as requested by some 
commenters,\196\ the Commission has revised proposed regulation 
39.29(a) and 39.29(b). Rather than apply the cover two requirement to 
all SIDCOs, revised regulation 39.29(a) parallels the financial 
resources standard in Principle 4 of the PFMIs and only requires a 
SIDCO that is systemically important in multiple jurisdictions or that 
is involved in activities with a more complex risk profile to maintain 
financial resources sufficient to meet the cover two requirement.\197\ 
Revised regulation 39.29(b), which is also consistent with Principle 4 
of the PFMIs, prohibits a SIDCO from the use of assessments in 
calculating its financial resources available to meet the SIDCO's 
obligations under regulation 39.29(a).\198\
---------------------------------------------------------------------------

    \196\ See OCC December Letter at 12 (OCC requesting that the 
Commission avoid taking final action on the proposed SIDCO 
regulations until the adoption of the PFMIs to ensure consistency 
with international regulations) and LCH December Letter at 1-2 (LCH 
urging the Commission to conform as much as possible the 
Commission's final rules on SIDCOs to the global standards set forth 
in the PFMIs).
    \197\ See supra section II. for a discussion on the proposed and 
revised rule text of regulation 39.29.
    \198\ Id.
---------------------------------------------------------------------------

    The Commission considered the following alternatives: (1) Not to 
adopt any of the proposed SIDCO risk management regulations, (2) to 
adopt the SIDCO risk management regulations only as proposed, or (3) to 
adopt the proposed SIDCO risk management regulations with revisions 
consistent with relevant international standards and existing 
prudential requirements. As detailed above, the Commission has 
concluded it is necessary and appropriate in this final rulemaking to 
adopt regulation 39.29, as revised, regulation 39.30, as proposed, and 
regulation 39.31, as proposed.\199\
---------------------------------------------------------------------------

    \199\ See supra discussion I.C. and I.F.
---------------------------------------------------------------------------

    In the discussion that follows, the Commission considers the costs 
and benefits of the final rulemaking in light of the comments it 
received and section 15(a) of the CEA. As the requirement in regulation 
39.31 is imposed by the Dodd-Frank Act, any associated costs and 
benefits are the result of statutory directives as determined by 
Congress, not an act of Commission discretion.
    For the remaining regulations in this rulemaking, 39.29(a) (cover 
two), 39.29(b) (prohibition of assessments) and 39.30 (two-hour RTO), 
the Commission considers the costs and benefits attributable to these 
enhanced requirements against the DCO regulatory framework established 
in part 39, which provides minimum risk standards for DCOs and sets the 
baseline for cost and benefit considerations. Specifically, regulation 
39.11 (implementing DCO Core Principle B) sets a cover one standard as 
the minimum financial resources requirement for all DCOs whereas 
regulation 39.29(a) sets a cover two financial resources requirement 
for all SIDCOs engaged activities with a more complex risk profile or 
that are systemically important in multiple jurisdictions. Regulation 
39.11 permits the inclusion of assessment powers, to a limited extent, 
in calculating whether a DCO meets its default resources requirement, 
whereas regulation 39.29(b) prohibits the use of assessments by SIDCOs 
in meeting those obligations. Regulation 39.18 requires a DCO to have 
an RTO of no later than the next business day following the disruption 
of its operations whereas regulation 39.30 (implementing DCO Core 
Principle I) requires SIDCOs to have a BC-DR plan with a two-hour

[[Page 49676]]

RTO following the disruption of its operations.
    The Commission invited public comment on all aspects of the 
proposed SIDCO rulemaking but did not receive any comments with 
quantitative data from which the Commission could calculate the costs 
and benefits of the proposed enhanced requirements. The Commission did 
receive qualitative comments on the Commission's proposed consideration 
of costs and benefits generally, as well as specifically to the 
requirements central to this final rule: Cover two, use of assessments 
and two-hour RTO. These comments are summarized below in connection 
with the Commission's consideration of the costs and benefits of the 
final rules being promulgated herein.

C. Benefits and Costs of the Final Rule

1. Benefits
    As explained in the subsections that follow, this final rule 
promotes the financial strength, operational security and reliability 
of SIDCOs, reduces systemic risk, and increases the stability of the 
broader U.S. financial system. In addition, the regulations harmonize 
U.S regulations with international standards which will, in important 
ways, place SIDCOs on a level playing field with their competitors in 
the global financial markets:
a. Regulation 39.29(a): Cover Two
    The cover two requirement increases the financial stability of 
certain SIDCOs which, in turn, increases the overall stability of the 
US financial markets. This is so because enhancing a SIDCO's financial 
resources requirements from the minimum of cover one to a more 
stringent cover two standard helps to ensure the affected SIDCO will 
have greater financial resources to meet its obligations to market 
participants, including in the case of defaults by multiple clearing 
members. These added financial resources lessen the likelihood of the 
SIDCO's failure which, given the designation of systemically important, 
could threaten the stability of the US financial system.\200\ By 
bolstering certain SIDCOs' resources, regulation 39.29(a) contributes 
to the financial integrity of the financial markets and reduces the 
likelihood of systemic risk from spreading through the financial 
markets due to one of those SIDCOs' failure or disruption.
---------------------------------------------------------------------------

    \200\ See supra section I.B.
---------------------------------------------------------------------------

    According to commenters, existing SIDCOs already fund their default 
resources using a cover two standard for products with a more complex 
risk profile.\201\ Although the benefit associated with regulation 
39.29(a) is somewhat lessened by the already established practice of 
cover two by the relevant SIDCOs, there is a long-term benefit of 
setting the cover two standard as the new regulatory minimum to ensure 
that even in periods of apparent stability and low market volatility, 
these SIDCOs will continue to have increased financial resource 
requirements and, ultimately, greater financial stability. This 
approach of obtaining resources in such low-stress periods avoids the 
need to call for additional resources from clearing members during less 
stable, more volatile times, which would have pro-cyclical effects on 
the U.S. financial markets.\202\ In addition, the cover two requirement 
will apply to SIDCOs deemed systemically important in multiple 
jurisdictions.
---------------------------------------------------------------------------

    \201\ See ICC Letter at 1. See also CME 2013 Letter at 2-3.
    \202\ See supra section II.B. for discussion on the pro-cyclical 
impact of assessments.
---------------------------------------------------------------------------

b. Regulation 39.29(b): Prohibited Use of Assessments To Meet 
Regulation 39.29(a) Obligations
    As discussed below and throughout this release, the Commission 
believes that prohibiting the use of assessments by a SIDCO in meeting 
its default resource obligations (i.e. those under regulations 
39.11(a)(1) and 39.29(a)) increases the financial stability of the 
SIDCO, which in turn, increases the overall stability of the U.S. 
financial markets.
    Assessment powers are more likely to be exercised during periods of 
financial market stress. If during such a period, a clearing member 
defaults and the loss to the SIDCO is sufficiently large to deplete (1) 
the collateral posted by the defaulting entity, (2) the defaulting 
entity's default fund contribution, and (3) the remaining pre-funded 
default fund contributions, a SIDCO's exercise of assessment powers 
over the non-defaulting clearing members may exacerbate a presumably 
already weakened financial market. The demand by a SIDCO for more 
capital from its clearing members could force one or more additional 
clearing members into default because they cannot meet the assessment. 
The inability to meet the assessment could lead clearing members and/or 
their customers to de-leverage (i.e., sell off their positions) in 
falling asset markets, which further drives down asset prices and may 
result in clearing members and/or their customers defaulting on their 
obligations to each other and/or to the SIDCO. In such extreme 
circumstances, assessments could trigger a downward spiral and lead to 
the destabilization of the financial markets. Prohibiting the use of 
assessments by a SIDCO in meeting default resources obligations is 
intended to require the SIDCO to retain more financial resources 
upfront, i.e. to prefund its financial resources requirement to cover 
its potential exposure.
    The increase in prefunding of financial resources by a SIDCO may 
increase costs to clearing members of that SIDCO (e.g. requiring 
clearing members to post additional funds with the SIDCO),\203\ but it 
also reduces the likelihood that the SIDCO will require additional 
capital infusions during a time of financial stress when raising such 
additional capital is expensive relative to market norms. By increasing 
prefunded financial resources, a SIDCO becomes less reliant on the 
ability of its clearing members to pay an assessment, more secure in 
its ability to meets its obligations, and more viable in any given 
situation, even in the case of multiple defaults of clearing members. 
Accordingly, regulation 39.29(b) increases the financial security and 
reliability of the SIDCO which will thereby further increase the 
overall the stability of the U.S. financial markets.
---------------------------------------------------------------------------

    \203\ Id.
---------------------------------------------------------------------------

c. Regulation 39.30: Two-Hour RTO
    A two-hour RTO in a SIDCO's BC-DR plan increases the soundness and 
operating resiliency of the SIDCO, which in turn, increases the overall 
stability of the U.S. financial markets.
    Given the significant role SIDCOs play within the financial market 
infrastructure and the need to preserve, to the greatest extent 
practicable, their near-continuous operation, regulation 39.30 
prescribes an enhanced RTO of two hours. The two-hour RTO ensures that 
even in the event of a wide-scale disruption, the potential negative 
effects upon U.S. financial markets be minimized because the affected 
SIDCO will recover rapidly and resume its critical market functions, 
thereby allowing other market participants to process their 
transactions, even those participants in locations not directly 
affected by the disruption. The two-hour RTO increases a SIDCO's 
operational resiliency by requiring the SIDCO to have the resources and 
technology necessary to resume operations promptly. This resiliency, in 
turn, increases the overall stability of the U.S. financial markets.

[[Page 49677]]

d. Benefits of QCCP Status
    As discussed above,\204\ the international Basel CCP Capital 
Requirements provide incentives for banks to clear derivatives through 
CCPs that are qualified CCPs or ``QCCPs'' by setting lower capital 
charges for exposures arising from derivatives cleared through a QCCP 
and setting significantly higher capital charges for exposures arising 
from derivatives cleared through non-qualifying CCPs.\205\ The enhanced 
risk management standards for SIDCOs adopted in this final rulemaking 
are consistent with the international standards set forth in the PFMIs 
and address part of the remaining divergences between part 39 of the 
Commission's regulations and the PFMIs, which will provide an 
opportunity for SIDCOs to gain QCCP status. The Commission believes 
there is a benefit for a SIDCO if it is able to offer to its clearing 
members and their customers the favorable capital treatment under the 
Basel CCP Capital Requirements.
---------------------------------------------------------------------------

    \204\ See supra section I. D. 4. for a discussion of the Basel 
CCP Capital Requirements.
    \205\ Id.
---------------------------------------------------------------------------

2. Costs
    The Commission requested but did not receive any quantitative data 
or specific cost estimates associated with the proposed regulations. 
However, in qualitative terms, the Commission recognizes that this 
final rule may impose important costs on SIDCOs depending on the 
financial resources requirements and system safeguards procedures the 
SIDCOs currently implement. In other words, the costs range from 
minimal (to the extent SIDCOs are already operating, or planning to 
operate, consistent with the final rules) to significant (for those who 
are not).\206\
---------------------------------------------------------------------------

    \206\ For example, ICC, one of the two existing SIDCOs, stated 
that it already implements the ``cover two'' requirement, that it 
does not rely upon its right of assessment in meeting that 
requirement, and that it is unlikely to incur significant costs in 
implementing the two hour RTO. See ICC Letter at 1-2. In addition, 
CME Clearing, the other existing SIDCO, implements the ``cover two'' 
requirement for two of its three guaranty funds, has each of its 
guaranty funds pre-funded by the respective clearing members, and, 
though the cost will be significant, has already ``obtained budget 
approval and allocated resources towards a two hour RTO.'' See CME 
2013 Letter at 2-4.
---------------------------------------------------------------------------

    To the extent costs increase, the Commission has considered that 
higher trading costs for market participants (i.e. increased clearing 
fees, guaranty fund contributions, and margin fees, etc.) may 
discourage market participation and result in decreased liquidity and 
reduced price discovery. However, the Commission has also considered 
the costs to market participants and the public if these regulations 
are not adopted. Significantly, without these regulations to ensure 
that SIDCOs operate under certain enhanced risk management standards, 
in a manner that is consistent with internationally accepted standards, 
the financial integrity and security of the U.S. financial markets 
would be at a greater risk relative to international markets. This, 
too, could adversely affect the attractiveness of the U.S. financial 
markets subject to the Commission's jurisdiction as compared to foreign 
competitors. In addition, without the final rule, SIDCOs would not have 
the opportunity to gain QCCP status, thereby putting them at a 
significant competitive disadvantage in the global financial markets 
which, again, would be to the detriment of their clearing members and 
their customers. The Commission notes that to the extent it addresses 
the remaining divergences between part 39 of the Commission's 
regulations and the PFMIs through future rulemakings, and these 
rulemakings, along with the regulations adopted herein, do not provide 
an opportunity for non-SIDCO DCOs to obtain QCCP status, this would 
place such non-SIDCO DCOs at a competitive disadvantage to SIDCOs. 
Moreover, the resulting cost to the DCOs would be the inability to 
offer the favorable capital treatment under the Basel CCP Capital 
Requirements to their customers and clearing members.
a. Regulation 39.29(a): Cover Two
    The cost of the cover two requirement for certain SIDCOs includes 
the opportunity cost of the additional financial resources needed to 
satisfy the guaranty fund requirements for the risk of loss resulting 
from the default of the second largest clearing member.\207\
---------------------------------------------------------------------------

    \207\ In the event that these additional resources need to be 
raised by the SIDCO, as opposed to reallocated, this cost is the 
funding cost for raising these additional resources. In addition, to 
the extent that there is uncertainty over whether cover two applies 
(for example, as in the case of whether a DCO gets deemed to be 
systemically important in multiple jurisdictions or whether a given 
product is, indeed, of a more complex risk profile), the cost of 
cover two is the opportunity cost (funding cost) of the additional 
financial resources weighted by the likelihood that cover two will 
apply.
---------------------------------------------------------------------------

    As discussed above in more detail, the Commission received comments 
from market participants addressing the costs associated with a cover 
two standard.\208\ OCC argued that if heightened risk management 
standards are imposed on a DCO in such a way as to substantially 
increase the costs for clearing members and their customers to clear 
transactions through a SIDCO rather than a non-SIDCO, there is risk of 
undermining the goals of both Titles VII and VIII of the Dodd-Frank Act 
by driving clearing volume to less-regulated clearinghouses.\209\ FIA 
commented that the cover two requirement would put SIDCOs at a 
competitive disadvantage to other DCOs to the extent that they need to 
increase margin or guaranty fund requirements to cover the default of 
the second largest clearing member.\210\ FIA recommended that the 
Commission adopt an alternative approach by extending the cover two 
requirement to all DCOs, not just SIDCOs, and allow ample time for DCOs 
to come into compliance.\211\ CME stated that a cover two requirement 
would allow some DCOs to offer lower guaranty fund and margin 
requirements, which would attract additional volume to that DCO and 
make it a de facto SIDCO. SIDCOs would then be at a competitive 
disadvantage relative to the de facto SIDCO until such time as the de 
facto SIDCO was designated as a SIDCO.\212\ ICC, one of the two 
existing SIDCOs, on the other hand, is in compliance with the cover two 
requirement and therefore, would not incur additional costs to meet the 
cover two requirement.\213\
---------------------------------------------------------------------------

    \208\ See section II. for a discussion on comments received on 
the proposed regulation 39.29(a).
    \209\ Id.
    \210\ Id.
    \211\ Id.
    \212\ Id.
    \213\ ICC Letter at 2.
---------------------------------------------------------------------------

    As noted above, and in comment letters from CME and ICC,\214\ 
SIDCOs already implement the cover two standard for products with a 
more complex risk profile, and therefore, the costs of compliance with 
cover two should be mitigated given these existing practices.\215\
---------------------------------------------------------------------------

    \214\ See supra n. 23 (designation of CME and ICC as SIDCOs).
    \215\ See ICC Letter at 1-2. See also CME 2013 Letter at 2-3.
---------------------------------------------------------------------------

    However, there are likely to be costs associated with the 
uncertainty as to whether a SIDCO is deemed systemically important in 
multiple jurisdictions and what constitutes a product with a more 
complex risk profile. These costs are associated with business 
planning, i.e. how to fund a cover two requirement. In addition, the 
possibility exists that some market participants will port their 
positions from a SIDCO that either (1) is deemed systemically important 
in multiple jurisdictions or (2) clears products of a more complex risk 
profile to another SIDCO for which neither (1) nor (2) applies or to 
another DCO that is not

[[Page 49678]]

systemically important because the value of the cover two protection to 
these market participants is less than the price at which that 
protection is being offered. These market participants will transact 
with DCOs that operate under cover one, which is a lower financial 
resources requirement, and thus, get the benefit of lower transactional 
fees and forego the enhanced protections associated with the SIDCOs. 
Such an event adversely impacts the reduction in systemic risk that the 
cover two standard affords. However, the potential cost to the SIDCO 
and to the goal of systemic risk reduction is likely mitigated because 
(a) not every product offered by the SIDCO is available at other DCOs 
and (b) a SIDCO may offer benefits not available to a DCO that is not 
designated as systemically important,\216\ thereby reducing the 
likelihood that market participants will port their positions to other 
DCOs.
---------------------------------------------------------------------------

    \216\ For example under Title VIII, a SIDCO may establish and 
maintain an account with the Federal Reserve Bank if permitted to do 
so by such Federal Reserve Bank and by the Board. See section 806(a) 
of the Dodd-Frank Act.
---------------------------------------------------------------------------

b. Regulation 39.29(b): Prohibition on the Use of Assessments in 
Calculation of Default Resources To Meet Obligations Under Regulation 
39.29(a)
    The costs associated with the prohibited use of assessments by 
SIDCOs in calculating the SIDCO's obligations under regulation 39.29(a) 
include the opportunity cost of the additional financial resources 
needed to replace the value of such assessments. This may require an 
infusion of additional capital. The cost of this regulation should be 
mitigated for SIDCOs because neither CME Clearing nor ICC, the two 
existing SIDCOs, rely on assessments to meet their default fund 
obligations for products with a more complex risk profile.\217\ 
Additionally, analogous to the case with the cover two standard, market 
participant demand may shift from a SIDCO to a DCO with a lower 
capitalization requirement.
---------------------------------------------------------------------------

    \217\ See ICC Letter at 2 (stating that ICC ``does not rely upon 
(count) [its] right of assessment to meet the [``cover two'' 
requirement]''). See also CME 2013 Letter at 3, n.7.
---------------------------------------------------------------------------

c. Regulation 39.30: Two-Hour RTO
    The Commission recognizes that a two-hour RTO may increase 
operational costs for SIDCOs by requiring additional resources, 
including personnel, technological and geographically dispersed 
resources, in order to comply with the final rule. Moreover, the 
implementation of a two-hour RTO is expected to impose one-time costs 
to set up the enhanced resources as well as recurring costs to operate 
the additional resources. However, as noted above, the Commission 
requested but did not receive quantitative data from which to estimate 
the dollar costs associated with implementing a two-hour RTO, and in 
particular the costs of moving from a next day RTO, the minimum 
standard established by the DCO core principles and regulation 39.18, 
to a two-hour RTO as required by regulation 39.30. The Commission did, 
however, receive qualitative comments regarding the costs associated 
with the two-hour RTO, which are discussed in more detail above. For 
example, CME, ICE and OCC all initially opposed the enhanced RTO, 
citing to the increase of costs associated with the proposed regulation 
39.30. However, more recently, the Commission received comments from 
CME and ICC acknowledging the importance of the two-hour RTO and their 
intent to implement a two-hour RTO.\218\
---------------------------------------------------------------------------

    \218\ See ICC Letter at 2 (noting that the two-hour RTO is 
consistent with Principle 17 of the PFMIs, and stating that it is 
unlikely to incur ``any significant additional personnel training 
cost associated with the CFTC's proposed RTO of two hours'' or ``any 
additional backup technology costs related to the CFTC's proposed 
RTO.''). See also CME 2013 Letter at 4 (noting that ``in light of 
the systemic importance of CME [Clearing]'s clearing functions and 
the intended benefits, including compliance with the PFMI 
requirements for critical information technology, CME [Clearing] has 
obtained budget approval and allocated resources towards a two hour 
RTO and will be working throughout 2013 towards achieving a two hour 
RTO.'').
---------------------------------------------------------------------------

D. Section 15(a) Factors

1. Protection of Market Participants and the Public
    The enhanced financial resources requirements and system safeguard 
requirements for SIDCOs, as set forth in this final rulemaking, will 
further the protection of market participants and the public by 
increasing the financial stability and operational security of SIDCOs, 
and more broadly, increase the stability of the U.S. financial markets. 
A designation of systemic importance under Title VIII means the failure 
of a SIDCO or the disruption of its clearing and settlement activities 
could create or increase the risk of significant liquidity or credit 
problems spreading among financial institutions or markets, thereby 
threatening the stability of the U.S. financial markets. The 
regulations contained in this final rule are designed to help ensure 
that SIDCOs continue to function even in extreme circumstances, 
including multiple defaults by clearing members and wide-scale 
disruptions. While there may be increased costs associated with the 
implementation of the final rules, these costs are mitigated by the 
countervailing benefits of the increased safety and soundness of the 
SIDCOs and the reduction of systemic risk, which protect market 
participants and the public form the adverse consequences that would 
result from a SIDCO failure or a disruption in its functioning.
2. Efficiency, Competitiveness, and Financial Integrity
    The regulations set forth in this final rulemaking will promote 
financial strength and stability of SIDCOs, as well as, more broadly, 
efficiency and greater competition in the global markets. The 
regulations promote efficiency insofar as SIDCOs that operate with 
enhanced financial resources as well as increased system safeguards are 
more secure and are less likely to fail. The regulations promote 
competition because they are consistent with the international 
standards set forth in the PFMIs and will help to ensure that SIDCOs 
are afforded the opportunity to gain QCCP status and thus avoid an 
important competitive disadvantage relative to similarly situated 
foreign CCPs that are QCCPs. Additionally, by increasing the stability 
and strength of the SIDCOs, the regulations in the final rule help to 
ensure that SIDCOs can meet their obligations in the most extreme 
circumstances and can resume operations even in the face of wide-scale 
disruption, which contributes to the financial integrity of the 
financial markets. In requiring more SIDCO financial resources to be 
pre-funded by (1) expanding the potential losses those resources are 
intended to cover and (2) restricting the means for satisfying those 
resource requirements, i.e. through prohibiting the use of assessments 
in determining guarantee fund contributions, the requirements of this 
final rule seek to lessen the incidence of pro-cyclical demands for 
additional funding resources and, in so doing, promote both financial 
integrity and market stability.\219\
---------------------------------------------------------------------------

    \219\ See supra n. 139 and accompanying text for a discussion of 
pro-cyclicality.
---------------------------------------------------------------------------

3. Price Discovery
    The regulations in the final rulemaking enhance risk management 
standards for SIDCOs which may result in increased public confidence, 
which, in turn, might lead to expanded participation in the affected 
markets, i.e. products with a more complex risk profile. The expanded 
participation in these markets (i.e. greater transactional

[[Page 49679]]

volume) may have a positive impact on price discovery. Conversely, the 
Commission notes that these enhanced risk management standards are also 
associated with additional costs and to the extent that SIDCOs pass 
along the additional costs to their clearing members and customers, 
participation in the affected markets may decrease and have a negative 
impact on price discovery. However, it is the Commission's belief that 
such higher transactional costs should be greatly offset by the lower 
capital charges granted to clearing members and customers clearing 
derivative transactions through SIDCOs that are deemed QCCPs.
4. Sound Risk Management Practices
    The regulations in the final rulemaking contribute to the sound 
risk management practices of SIDCOs because the requirements promote 
the safety and soundness of the SIDCOs by (1) enhancing the financial 
resources requirements, which provide greater certainty for market 
participants that all obligations will be honored by the SIDCOs and (2) 
enhancing system safeguards to facilitate the continuous operation and 
rapid recovery of activities, which provide certainty and security to 
market participants that potential disruptions will be reduced and, by 
extension, the risk of loss of capital and liquidity will be reduced.
5. Other Public Interest Considerations
    The Commission notes the strong public interest for jurisdictions 
to either adopt the PFMIs or establish standards consistent with the 
PFMIs in order to allow CCPs licensed in the relevant jurisdiction to 
gain QCCP status. As emphasized throughout this rulemaking, SIDCOs that 
gain QCCP status will avoid a competitive disadvantage in the financial 
markets by avoiding the much higher capital charges imposed by the 
Basel CCP Capital Requirements. Moreover, because ``enhancements to the 
regulation and supervision of systemically important financial market 
utilities . . . are necessary . . . to support the stability of the 
broader financial system,'' \220\ adopting these rules promotes the 
public interest in a more stable broader financial system.
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    \220\ See section 804(a)(4) of the Dodd-Frank Act (Congressional 
findings).
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VII. Related Matters

A. Paperwork Reduction Act

    The Commission may not conduct or sponsor, and a registered entity 
is not required to respond to, a collection of information unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number. The Commission's adoption of Sec. Sec.  39.28, 39.29, 
39.30, and 39.31 (DCO) imposes no new information collection 
requirements on registered entities within the meaning of the Paperwork 
Reduction Act.\221\ The OMB has previously assigned control numbers for 
the required collections of information under a prior related final 
rulemaking to which this rulemaking relates.\222\ The titles for the 
previous collections of information are ``Part 40, Provisions Common to 
Registered Entities'', OMB control number 3038-0093, ``Financial 
Resources Requirements for Derivatives Clearing Organizations, OMB 
control number 3038-0066,'' ``Information Management Requirements for 
Derivatives Clearing Organizations, OMB control number 3038-0069,'' 
``General Regulations and Derivatives Clearing Organizations, OMB 
control number 3038-0081,'' and ``Risk Management Requirements for 
Derivatives Clearing Organizations, OMB control number 3038-0076.'' 
This rulemaking is applicable to a subset of DCOs designated as SIDCOs, 
who must comply with existing information collection requirements for 
DCOs.
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    \221\ 44 U.S.C. 3501 et seq.
    \222\ 76 FR 69334 at 69428.
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the impact. The 
rules proposed by the Commission will affect only DCOs designated as 
SIDCOs. The Commission has previously established certain definitions 
of ``small entities'' to be used by the Commission in evaluating the 
impact of its regulations on small entities in accordance with the RFA. 
The Commission has previously determined that DCOs are not small 
entities for the purpose of the RFA.\223\ Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that the proposed rules will not have a significant economic impact on 
a substantial number of small entities.
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    \223\ See ``A New Regulatory Framework for Clearing 
Organizations,'' 66 FR 45604, 45609 (Aug. 29, 2001), ``17 CFR part 
40 Provisions Common to Registered Entities,'' 75 FR 67282 (November 
2, 2010), and ``Provisions Common to Registered Entities,'' 76 FR 
44776, 44789 (July 27, 2011).
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List of Subjects in 17 CFR Part 39

    Commodity futures, Consumer protection, Enforcement authority, 
Financial resources, Reporting and recordkeeping requirements, Risk 
management.

    For the reasons stated in the preamble, amend 17 CFR part 39 as 
follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 is revised to read as follows:

    Authority: 7 U.S.C. 2 and 7a-1 as amended by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 
Stat. 1376; Subpart C also issued under 12 U.S.C. 5464.


0
2. Add subpart C to read as follows:
Subpart C--Provisions Applicable to Systemically Important Derivatives 
Clearing Organizations
Sec.
39.28 Scope.
39.29 Financial resources requirements.
39.30 System safeguards.
39.31 Special enforcement authority.

Subpart C--Provisions Applicable to Systemically Important 
Derivatives Clearing Organizations


Sec.  39.28  Scope.

    (a) The provisions of this subpart C apply to any derivatives 
clearing organization, as defined in section 1a(15) of the Act and 
Sec.  1.3(d) of this chapter,
    (1) Which is registered or deemed to be registered with the 
Commission as a derivatives clearing organization, is required to 
register as such with the Commission pursuant to section 5b(a) of the 
Act, or which voluntarily registers as such with the Commission 
pursuant to section 5b(b) or otherwise; and
    (2) Which is a systemically important derivatives clearing 
organization as defined in Sec.  39.2.
    (b) A systemically important derivatives clearing organization is 
subject to the provisions of subparts A and B of this part 39 except to 
the extent different requirements are imposed by provisions of this 
subpart C.
    (c) A systemically important derivatives clearing organization 
shall provide notice to the Commission in advance of any proposed 
change to its rules, procedures, or operations that could materially 
affect the nature or level of risks presented by the systemically 
important derivatives clearing organization, in accordance with the 
requirements of Sec.  40.10 of this chapter.

[[Page 49680]]

Sec.  39.29  Financial resources requirements.

    (a) General rule. Notwithstanding the requirements of Sec.  
39.11(a)(1), a systemically important derivatives clearing organization 
that is systemically important in multiple jurisdictions or that is 
involved in activities with a more complex risk profile shall maintain 
financial resources sufficient to enable it to meet its financial 
obligations to its clearing members notwithstanding a default by the 
two clearing members creating the largest combined financial exposure 
for the systemically important derivatives clearing organization in 
extreme but plausible market conditions; Provided that if a clearing 
member controls another clearing member or is under common control with 
another clearing member, affiliated clearing members shall be deemed to 
be a single clearing member for the purposes of this provision.
    (b) Valuation of financial resources. Notwithstanding the 
requirements of Sec.  39.11(d)(2), assessments for additional guaranty 
fund contributions (i.e., guarantee fund contributions that are not 
pre-funded) shall not be included in calculating the financial 
resources available to meet a systemically important derivatives 
clearing organization's obligations under paragraph (a) of this 
section.


Sec.  39.30  System safeguards.

    (a) Notwithstanding Sec.  39.18(e)(3), the business continuity and 
disaster recovery plan described in Sec.  39.18(e)(1) for each 
systemically important derivatives clearing organization shall have the 
objective of enabling, and the physical, technological, and personnel 
resources described in Sec.  39.18(e)(1) shall be sufficient to enable, 
the derivatives clearing organization to recover its operations and 
resume daily processing, clearing, and settlement no later than two 
hours following the disruption, for any disruption including a wide-
scale disruption.
    (b) To ensure its ability to achieve the recovery time objective 
specified in paragraph (a) of this section in the event of a wide-scale 
disruption, each systemically important derivatives clearing 
organization must maintain a degree of geographic dispersal of 
physical, technological and personnel resources consistent with the 
following:
    (1) For each activity necessary to the clearance and settlement of 
existing and new contracts, physical and technological resources, 
sufficient to enable the entity to meet the recovery time objective 
after interruption of normal clearing by a wide-scale disruption, must 
be located outside the relevant area of the infrastructure the entity 
normally relies upon to conduct that activity, and must not rely on the 
same critical transportation, telecommunications, power, water, or 
other critical infrastructure components the entity normally relies 
upon for such activities;
    (2) Personnel, sufficient to enable the entity to meet the recovery 
time objective after interruption of normal clearing by a wide-scale 
disruption affecting the relevant area in which the personnel the 
entity normally relies upon to engage in such activities are located, 
must live and work outside that relevant area;
    (3) The provisions of Sec.  39.18(f) shall apply to these resource 
requirements.
    (c) Each systemically important derivatives clearing organization 
must conduct regular, periodic tests of its business continuity and 
disaster recovery plans and resources and its capacity to achieve the 
required recovery time objective in the event of a wide-scale 
disruption. The provisions of Sec.  39.18(j) apply to such testing.
    (d) The requirements of this section shall apply to a derivatives 
clearing organization not earlier than one year after such derivatives 
clearing organization is designated as systemically important.


Sec.  39.31  Special enforcement authority.

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

    Issued in Washington, DC, on August 9, 2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.

Appendix to Final Rule on Enhanced Risk Management Standards for 
Systemically Important Derivatives Clearing Organizations--Commission 
Voting Summary

    Note: The following appendix will not appear in the Code of 
Federal Regulations

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton, 
O'Malia, and Wetjen voted in the affirmative.

[FR Doc. 2013-19791 Filed 8-14-13; 8:45 am]
BILLING CODE 6351-01-P