Covered Clearing Agency Resilience and Recovery and Wind-Down Plans, 34708-34743 [2023-10889]
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Federal Register / Vol. 88, No. 103 / Tuesday, May 30, 2023 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–97516; File No. S7–10–23]
RIN 3235–AN19
Covered Clearing Agency Resilience
and Recovery and Wind-Down Plans
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
proposing to amend certain portions of
the Covered Clearing Agency Standards
under the Securities Exchange Act of
1934 (‘‘Exchange Act’’) to strengthen the
existing rules regarding margin with
respect to intraday margin and the use
of substantive inputs to a covered
clearing agency’s risk-based margin
system. The Commission is also
proposing a new rule to establish
requirements for the contents of a
covered clearing agency’s recovery and
wind-down plan.
DATES: Comments should be received on
or before July 17, 2023.
ADDRESSES: Comments may be
submitted by any of the following
methods:
SUMMARY:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/submitcomments.htm); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
10–23 on the subject line.
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Paper Comments
• Send paper comments to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number S7–10–23. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
website (https://www.sec.gov/rules/
proposed.shtml). Comments are also
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Operating conditions
may limit access to the Commission’s
Public Reference Room. Do not include
personal identifiable information in
submissions; you should submit only
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information that you wish to make
available publicly. We may redact in
part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on our website. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT:
Elizabeth L. Fitzgerald, Assistant
Director, Jesse Capelle, Special Counsel,
Office of Clearance and Settlement at
(202) 551–5710, Division of Trading and
Markets, U.S. Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–7010.
Table of Contents
I. Introduction
II. Regulatory Framework
A. The Covered Clearing Agency Standards
B. Statutory Requirements for Covered
Clearing Agencies as Self-Regulatory
Organizations
C. Title II of the Dodd-Frank Act
III. Proposal
A. Amendments Regarding Risk
Management
1. Proposed Changes to Rule 17Ad–22(e)(6)
2. Discussion
3. Request for Comment
D. Contents of Recovery and Wind-Down
Plans
1. Proposed Rule 17Ad–26
2. Discussion
4. Request for Comment
IV. Economic Analysis
A. Introduction
B. Economic Baseline
1. Description of Market
2. Overview of the Existing Regulatory
Framework
3. Current Recovery and Wind-Down Plans
4. Current Risk-Based Margin
E. Consideration of Benefits and Costs as
well as the Effects on Efficiency,
Competition, and Capital Formation
1. Proposed Rule 17Ad–26
2. Amendments to Rule 17Ad–22(e)(6)
3. Efficiency, Competition, and Capital
Formation
F. Reasonable Alternatives to the Proposed
Rule and Amendments
1. Establish Precise Triggers for
Implementation of RWPs Across Covered
Clearing Agencies
2. Establish Specific Scenarios and
Analyses
3. Establish Specific Rules, Policies,
Procedures, Tools, and Resources
4. Require the Identification of
Interconnections and Interdependencies
5. Establish a Specific Monitoring
Frequency for Intraday Margin Calls
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6. Adopt Only Certain Elements of
Proposed Rule 17Ad–26
7. Focus Intraday Margin Requirements on
a Subset of Covered Clearing Agencies
G. Request for Comment
V. Paperwork Reduction Act
A. Proposed Amendment to Rule 17Ad–
22(e)(6)
B. Proposed Rule 17Ad–26
H. Request for Comment
VI. Small Business Regulatory Enforcement
Fairness Act
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority
I. Introduction
Section 17A of the Exchange Act
directs the Commission to facilitate the
establishment of a national system for
the prompt and accurate clearance and
settlement of securities transactions and
provides the Commission with the
authority to regulate those entities
critical to the clearance and settlement
process.1 The enactment of the
Payment, Clearing, and Settlement
Supervision Act (‘‘Clearing Supervision
Act’’) in Title VIII of the Wall Street
Reform and Consumer Protection Act of
2010 (‘‘Dodd-Frank Act’’) reaffirmed the
importance of the national system for
clearance and settlement.2 Specifically,
Congress found that the ‘‘proper
functioning of the financial markets is
dependent upon safe and efficient
arrangements for the clearing and
settlement of payments, securities, and
other financial transactions.’’ 3
In recognition of the importance of
clearance and settlement to the
securities markets, the Commission
adopted 17 CFR 240.17Ad–22(e) (‘‘Rule
17Ad–22(e)’’), which sets forth
standards for covered clearing agencies
registered with the Commission.4 These
standards address all aspects of a
covered clearing agency’s operations,
including financial risk management,
operational risk, default management,
governance, and participation
requirements.5 In this release, the
Commission is proposing changes to
augment and strengthen the
requirements of these rules, referred to
as the Covered Clearing Agency
Standards, in three ways.6
1 See
15 U.S.C. 78q–1(a)(2)(A).
12 U.S.C. 5461–5472.
3 See 12 U.S.C. 5461(a)(1).
4 A covered clearing agency is a registered
clearing agency that provides the services of a
central counterparty or a central securities
depository. 17 CFR 240.17Ad–22(a)(5).
5 See section II.A infra (providing more
information on the Covered Clearing Agency
Standards).
6 In addition, the Commission is proposing to
amend the CFR section designation for 17 CFR
240.17Ad–22 to replace the uppercase letter with
the corresponding lowercase letter. Accordingly, 17
CFR 240.17Ad–22 is proposed to be redesignated as
17 CFR 240.17ad–22.
2 See
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Federal Register / Vol. 88, No. 103 / Tuesday, May 30, 2023 / Proposed Rules
First, the Commission is proposing
changes with respect to the Covered
Clearing Agency Standards regarding
the intraday collection of margin set
forth in 17 CFR 240.17Ad–22(e)(6)(ii)
(‘‘Rule 17Ad–22(e)(6)(ii)’’). This
proposal would build upon and
strengthen the existing requirement that
a covered clearing agency have policies
and procedures reasonably designed to
cover its credit exposures to its
participants by establishing a risk-based
margin system that, among other things,
includes the authority and operational
capacity to make intraday margin calls
in defined circumstances. Specifically,
the proposed amendments to this rule
would require that the covered clearing
agency have policies and procedures to
establish a risk-based margin system
that includes the authority and
operational capacity to monitor intraday
exposure on an ongoing basis and to
make intraday margin calls as frequently
as circumstances warrant, including
when risk thresholds specified by the
covered clearing agency are breached or
when the products cleared or markets
served display elevated volatility.
Second, the proposal would amend
and expand the requirements of 17 CFR
240.17Ad–22(e)(6)(iv) (‘‘Rule 17Ad–
22(e)(6)(iv)’’) to provide that a covered
clearing agency have policies and
procedures that would apply in the
event that the covered clearing agency
relies on substantive inputs from third
parties to calculate margin using a riskbased margin system and, specifically,
when such inputs are not readily
available or reliable. This proposal
would require that the procedures used
in such circumstances must include
substantive inputs from an alternate
source or, if it does not use an alternate
source, the use of an alternate risk-based
margin system that does not similarly
rely on the unavailable or unreliable
substantive inputs.
Finally, the Commission is proposing
to prescribe requirements for the
contents of a covered clearing agency’s
recovery and orderly wind-down plan
(‘‘RWP’’). At the time that it adopted the
Covered Clearing Agency Standards in
2016, the Commission required in 17
CFR 240.17Ad–22(e)(3)(ii) (‘‘Rule 17Ad–
27(e)(3)(ii)’’) that a covered clearing
agency’s policies and procedures
include an RWP, but the Commission
declined to include requirements for the
content of the RWP, stating that, given
the nature of recovery and resolution
planning, such plans are likely to
closely reflect the specific
characteristics of the covered clearing
agency, including its ownership,
organizational, and operational
structures, as well as the size, systemic
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importance, global reach, and/or the
risks inherent in the products it clears.7
The Commission continues to believe
that an RWP should closely reflect the
specific characteristics of the covered
clearing agency. However, at this time,
based on its supervisory experience
considering the RWPs of the covered
clearing agencies, the Commission
believes that there are certain elements
that must be included in each covered
clearing agency’s plan, to ensure that
the plan is fit for purpose and provides
sufficient identification of how a
covered clearing agency would operate
in a recovery and how it would achieve
an orderly wind-down. Accordingly, the
Commission is proposing a new rule at
17 CFR 240.17ad–26 (‘‘Rule 17ad–26’’),
which would identify certain elements
that a covered clearing agency would be
required to include in an RWP and
would also include definitions of
recovery and orderly wind-down, which
would identify the objective that these
plans are designed to meet. As
discussed further in sections III.B and
IV.B infra, many of these elements are
already contained in existing covered
clearing agencies’ RWPs, while other
elements would be new to all or most
of the existing RWPs. The Commission
believes that the elements identified in
new Rule 17ad–26 would accomplish
three objectives. First, the rule would
bolster existing plans by requiring
certain new elements be included.
Second, for the elements that are
already contained in existing RWPs, the
rule would codify these elements and
ensure that the plans are required to
continue to include these elements in
their RWPs. Finally, the rule would
ensure that the RWPs of any new
covered clearing agencies would contain
all of these elements.
However, with respect to changes to
RWPs and to risk management rules
more generally, the Commission would
need to approve any proposed rule
changes and, in filings for which an
advance notice is required, not object to
any such notice, as discussed further in
section II.B infra. The Commission
believes that this process should ensure
that it is able to consider such changes
and their consistency with the Exchange
Act and the rules and regulations
thereunder.
7 Standards for Covered Clearing Agencies
Adopting Release, Exchange Act Release No. 78961
(Sept. 28, 2016), 81 FR 70786, 70808–09 (Oct. 13,
2016) (‘‘CCA Standards Adopting Release’’).
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II. Regulatory Framework
A. The Covered Clearing Agency
Standards
In 1975, Congress added section 17A
to the Exchange Act as part of the
Securities Acts Amendments of 1975,
which, as noted in section I supra,
directed the Commission to facilitate the
establishment of: (i) a national system
for the prompt and accurate clearance
and settlement of securities transactions
(other than exempt securities which
typically includes U.S. Treasury
securities, except as discussed further
below), and (ii) linked or coordinated
facilities for clearance and settlement of
securities transactions.8 In so doing,
Congress made several findings related
to the importance of the clearance and
settlement of securities transactions and
the relationship of clearance and
settlement of securities transactions to
the protection of investors. Specifically,
Congress found that the prompt and
accurate clearance and settlement of
securities transactions are necessary for
the protection of investors and persons
facilitating transactions by and acting on
behalf of investors.9 In facilitating the
establishment of the national clearance
and settlement system, the Commission
must have due regard for the public
interest, the protection of investors, the
safeguarding of securities and funds,
and maintenance of fair competition
among brokers and dealers, clearing
agencies, and transfer agents.10
The Commission’s ability to achieve
these goals is based upon the regulation
of clearing agencies registered with the
Commission.11 Specifically, section 17A
of the Exchange Act provides the
Commission with authority to adopt
rules as necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Exchange Act
(including for the prompt and accurate
clearance and settlement of securities
transactions) and prohibits a clearing
agency from engaging in any activity in
8 See 15 U.S.C. 78q–1; Report of the Senate
Committee on Banking, Housing & Urban Affairs, S.
Rep. No. 94–75, at 4 (1975) (stating the Committee’s
belief that ‘‘the banking and security industries
must move quickly toward the establishment of a
fully integrated national system for the prompt and
accurate processing and settlement of securities
transactions’’).
9 See 15 U.S.C. 78q–1(a)(1)(A); see also 15 U.S.C.
78q–1(B), (C), and (D) (setting forth additional
findings related to the national system of clearance
and settlement).
10 See 15 U.S.C. 78q–1(a)(2)(A).
11 Under the Exchange Act and the regulations
thereunder, any entity performing the functions of
a clearing agency must register with the
Commission or seek an exemption from registration.
15 U.S.C. 78q–1(b)(1); see also 17 CFR 240.17Ad–
22(a)(5) (defining covered clearing agency).
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contravention of such rules and
regulations.12
The Commission has exercised its
broad authority to prescribe
requirements for the prompt and
accurate clearance and settlement of
securities transactions and the
safeguarding of securities and funds.
Most recently, the Commission
promulgated the Covered Clearing
Agency Standards.13 These standards
require covered clearing agencies to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to, as applicable,
meet certain minimum standards
regarding, among other things,
operations, governance, and risk
management.14
One of the Covered Clearing Agency
Standards concerns the maintaining of a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency.15 As part of
maintaining a sound risk management
framework, a covered clearing agency is
required to include plans for the
recovery and orderly wind-down of the
covered clearing agency necessitated by
credit losses, liquidity shortfalls, losses
from general business risk, or any other
losses.16 At that time, the Commission
stated that it understands that when a
financial company becomes non-viable
as a going concern or insolvent,
recovery refers to actions taken that
allow the financial company to sustain
its critical operations and services; by
contrast, resolution, or wind-down,
refers to the transferring of a financial
company’s critical operations and
services to an alternate entity.17
At the time of adoption of the Covered
Clearing Agency Standards, the
Commission declined to articulate
requirements for all RWPs.18 Rather, the
Commission stated that, given the
nature of recovery and resolution
12 See 15 U.S.C. 78q–1(d)(1); see also 15 U.S.C.
78q–1(b)(2) (referring to the Commission’s ability to
adopt rules with respect to the application of
section 17A).
13 CCA Standards Adopting Release, supra note 7,
81 FR at 70839.
14 See generally 17 CFR 240.17Ad–22(e). A
covered clearing agency is a registered clearing
agency that provides the services of a central
counterparty or a central securities depository. 17
CFR 240.17Ad–22(a)(5).
15 See 17 CFR 240.17Ad–22(e)(3).
16 See 17 CFR 240.17Ad–22(e)(3)(ii).
17 CCA Standards Adopting Release, supra note 7,
81 FR at 70808 n.251. In this release, the
Commission is proposing definitions of ‘‘recovery’’
and ‘‘orderly wind-down’’ that would apply to the
RWPs addressed by this release. See infra section
III.B.2.a.
18 Id. at 70808.
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planning, such plans are likely to
closely reflect the specific
characteristics of the covered clearing
agency, including its ownership,
organizational, and operational
structures, as well as the size, systemic
importance, global reach, and/or the
risks inherent in the products it clears.
While the Commission declined to
articulate requirements, it did provide
guidance for covered clearing agencies
in developing RWPs. In the Covered
Clearing Agency Standards Adopting
Release, the Commission stated that a
covered clearing agency generally
should consider whether: (i) it can
identify scenarios that may potentially
prevent it from being able to provide its
critical services as a going concern and
assess the effectiveness of a full range of
options for recovery or orderly winddown; (ii) it has prepared appropriate
plans for its recovery or orderly winddown based on the results of that
assessment; and (iii) it has provided
relevant authorities with the
information needed for purposes of
recovery and resolution planning.19 The
Commission also stated in the CCA
Standards Adopting Release that, with
respect to recovery tools, a covered
clearing agency generally should
consider the following when developing
its recovery tools: (i) whether the set of
recovery tools comprehensively
addresses how the covered clearing
agency would continue to provide
critical services in all relevant scenarios;
(ii) the extent to which each tool is
reliable, timely, and has a strong legal
basis; (iii) whether the tools are
transparent and designed to allow those
who would bear losses and liquidity
shortfalls to measure, manage, and
control their potential losses and
liquidity shortfalls; (iv) whether the
tools create appropriate incentives for
the covered clearing agency’s owners,
direct and indirect participants, and
other relevant stakeholders; and (v)
whether the tools are designed to
minimize the negative impact on direct
and indirect participants and the
financial system more broadly.20
19 Id. at 70810. As discussed in section III.B infra,
the Commission is proposing to codify elements in
proposed Rule 17ad–26 that are consistent with this
guidance, with the exception of the guidance
related to ‘‘resolution planning.’’ With respect to
the guidance related to providing relevant
authorities with the information needed for
purposes of recovery and resolution planning, the
Commission continues to support and reiterates this
prior guidance. See infra section III.B.2.
20 Id. The Commission is also proposing to codify
the first section of this guidance in proposed Rule
17ad–26(a)(5). See section III.B.2.c infra. With
respect to the remaining items of this guidance, the
Commission continues to support and reiterates this
prior guidance in section III.B.2.d infra.
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Relatedly, the Covered Clearing
Agency Standards also address the
financial resources necessary for a
covered clearing agency’s recovery or
orderly wind-down. Specifically, 17
CFR 240.17Ad–22(e)(15) requires
written policies and procedures
reasonably designed to, among other
things, hold sufficient liquid net assets
funded by equity to cover potential
general business losses so that the
covered clearing agency can continue
operations and services as a going
concern if those losses materialize.21
This requirement encompasses: (i)
determining the amount of liquid net
assets funded by equity based upon the
covered clearing agency’s general
business risk profile and the length of
time required to achieve a recovery or
orderly wind-down, as appropriate, of
its critical operations and services if
such action is taken; (ii) holding liquid
net assets funded by equity equal to the
greater of either (x) six months of the
covered clearing agency’s current
operating expenses, or (y) the amount
determined by the board of directors to
be sufficient to ensure a recovery or
orderly wind-down of critical
operations and services of the covered
clearing agency, as contemplated by the
RWPs established under current Rule
17Ad–22(e)(3)(ii),22 and (iii)
maintaining a viable plan, approved by
the board of directors and updated at
least annually, for raising additional
equity should its equity fall close to or
below the amount required under
paragraph (ii).23 With respect to the
policies and procedures related to
maintaining a viable plan for raising
additional equity, the Commission
stated that a viable plan generally
should enable the covered clearing
agency to hold sufficient liquid net
assets to achieve recovery or orderly
wind-down.24
Another of the Covered Clearing
Agency Standards sets forth
requirements for written policies and
procedures reasonably designed to,
among other things, establish a riskbased margin system to cover the
covered clearing agency’s credit
21 17
CFR 240.17Ad–22(e)(15).
amount shall be in addition to resources
held to cover participant defaults or other risks
covered under the credit risk standard in 17 CFR
240.17Ad–22(b)(3) or 17Ad–22(e)(4)(i) through (iii),
as applicable, and the liquidity risk standard in 17
CFR 240.17Ad–22(e)(7)(i) and (ii), and it shall be of
high quality and sufficiently liquid to allow the
covered clearing agency to meet its current and
projected operating expenses under a range of
scenarios, including in adverse market conditions.
17 CFR 240.17Ad–22(e)(15)(ii)(A) and (B).
23 17 CFR 240.17Ad–22(e)(15)(i), (ii), and (iii).
24 CCA Standards Adopting Release, supra note 7,
81 FR at 70836.
22 This
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exposures to its participants if the
covered clearing agency provides
central counterparty services.25 At a
minimum, such a system, among other
things, must mark participant positions
to market and collect margin, including
variation margin or equivalent charges if
relevant, at least daily and include the
authority and operational capacity to
make intraday margin calls in defined
circumstances.26 The Commission
stated that defined circumstances would
generally include margin calls on both
a scheduled and unscheduled basis.27
In addition, a covered clearing
agency’s risk-based margin system has
to use reliable sources of timely price
data and use procedures and sound
valuation models for addressing
circumstances in which pricing data are
not readily available or reliable.28 The
Commission stated that in selecting
price data sources, a covered clearing
agency generally should consider the
ability of the provider to provide data in
a variety of market conditions,
including periods of market stress, and
not select data sources based on their
cost alone to ensure that such price data
sources are reliable.29
B. Statutory Requirements for Covered
Clearing Agencies as Self-Regulatory
Organizations
A covered clearing agency is, by
definition, a registered clearing agency,
meaning that it is a self-regulatory
organization (‘‘SRO’’) for purposes of
the Exchange Act.30 Therefore, as a
SRO, a covered clearing agency is
required to file with the Commission
any proposed rule or proposed change
in its rules, including additions or
deletions from its rules.31 The
Commission has specified the format
and process for filing such proposed
rule changes in Form 19b–4, which is
intended to elicit information necessary
for the public to provide meaningful
comment on the proposed rule change
and for the Commission to determine
whether the proposed rule change is
consistent with the requirements of the
25 See
17 CFR 240.17Ad–22(e)(6).
17 CFR 240.17Ad–22(e)(6)(ii).
27 CCA Standards Adopting Release, supra note 7,
81 FR at 70818.
28 See 17 CFR 240.17Ad–22(e)(6)(iv).
29 CCA Standards Adopting Release, supra note 7,
81 FR at 70819.
30 17 CFR 240.17Ad–22(a)(5) (defining a covered
clearing agency); 15 U.S.C. 78c(a)(26) (defining an
SRO to include a registered clearing agency).
31 An SRO must submit proposed rule changes to
the Commission for review and approval pursuant
to Rule 19b–4 under the Exchange Act. A stated
policy, practice, or interpretation of an SRO, such
as its written policies and procedures, would
generally be deemed to be a proposed rule change.
See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4.
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26 See
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Exchange Act and the rules and
regulations thereunder.32
The Commission publishes all
proposed rule changes for comment.33
Proposed rule changes are generally
required to be approved by the
Commission prior to going into effect;
however, certain types of proposed rule
changes take effect upon filing with the
Commission.34 When considering
whether to approve or disapprove a
proposed rule change, the Commission
shall approve the proposed rule change
if it finds that such proposed rule
change is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
applicable to the particular type of
SRO.35 The rule filing process provides
transparency to market participants and
the public about new initiatives and
changes to governance, operations, and
risk management at the clearing agency.
In addition, clearing agencies
registered with the Commission are
financial market utilities, as defined in
section 803(6) of the Dodd-Frank Act.36
A clearing agency that has been
designated by the Financial Stability
Oversight Council as systemically
important or likely to become
systemically important, and for which
the Commission is the Supervisory
Authority (‘‘designated clearing
agency’’), is required to file 60-days
advance notice with the Commission of
changes to rules, procedures, and
operations that could materially affect
32 See Form 19b–4, General Instruction B. The
Form 19b–4 specifies the contents that must be
included in a proposed rule change filing,
including, among other items, a statement of
purpose for the proposed rule change, which
describes the reasons for adopting the proposed rule
change, any problems the proposed rule change is
intended to address, the manner in which the
proposed rule change will operate to resolve those
problems, the manner in which the proposed rule
change will affect various persons (e.g., brokers,
dealers, issuers, and investors), and any significant
problems known to the SRO that persons affected
are likely to have in complying with the proposed
rule change. Id. at Form 19b–4 Information section
3. The SRO must also include in its proposed rule
change the complete text of the proposed rule. Id.
at Form 19b–4 Information section 1. The SRO may
request confidential treatment of any portion of its
filing, see 17 CFR 240.24b–2, but it would still have
to comply with the requirements of Form 19b–4
with respect to describing the contents of the
proposed rule change for public comment.
33 See 15 U.S.C. 78s(b)(1).
34 See 15 U.S.C. 78s(b)(3)(A) (setting forth the
types of proposed rule changes that take effect upon
filing with the Commission). The Commission may
temporarily suspend those rule changes within 60
days of filing and institute proceedings to
determine whether to approve or disapprove the
rule changes. 15 U.S.C. 78s(b)(3)(C).
35 15 U.S.C. 78s(b)(1)(C)(i). On the other hand, the
Commission shall disapprove a proposed rule
change if it cannot make such a finding. 15 U.S.C.
78s(b)(1)(C)(ii).
36 See 12 U.S.C. 5462(6).
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the nature or level of risk presented by
the designated clearing agency
(‘‘advance notice’’).37 Such an advance
notice also requires consultation with
the Board of Governors of the Federal
Reserve System (‘‘Board of
Governors’’).38 The Clearing
Supervision Act authorizes the
Commission to object to changes
proposed in such an advance notice,
which would prevent the clearing
agency from implementing its proposed
change(s).39
The covered clearing agencies’
obligations as SROs and, as applicable,
designated clearing agencies, are
important when considering the types of
changes that the Commission is
proposing. If the covered clearing
agency has to make changes to its rules
to align with any of the proposed rules,
if adopted, the covered clearing agency
would be obligated to consider whether
any proposed rule change and/or
advance notice is necessary. For
example, the Commission previously
has stated that recovery and wind-down
plans, and material changes thereto,
would constitute a proposed rule
change under section 19(b) of the
Exchange Act and, for designated
clearing agencies, an advance notice
under the Clearing Supervision Act
because such plans and material
changes thereto would constitute
changes to a stated policy, practice, or
interpretation of the covered clearing
agency and, for designated clearing
agencies, a proposed change to its
operations that could materially affect
the nature or level of risk presented by
the designated clearing agency.40
Indeed, covered clearing agencies
have submitted RWPs, and material
changes thereto, for public comment
and Commission review pursuant to the
proposed rule change and advance
37 The Dodd-Frank Act defines a ‘‘designated
clearing entity’’ as a designated financial market
utility that is either a derivatives clearing
organization registered under section 5b of the
Commodity Exchange Act (7 U.S.C. 7a–1) or a
clearing agency registered with the Securities and
Exchange Commission under section 17A of the
Securities Exchange Act of 1934 (15 U.S.C. 78q–1).
See 12 U.S.C. 5462(3). The Commission is the
Supervisory Agency, as defined in 12 U.S.C.
5462(8), for four designated clearing agencies (the
Depository Trust Company, the National Securities
Clearing Corporation, the Fixed Income Clearing
Corporation, and the Options Clearing Corporation).
See 12 U.S.C. 5465(e)(1)(A). The Commission
published a final rule concerning the filing of
advance notices for designated clearing agencies in
2012. See 17 CFR 240.19b–4(n); Exchange Act
Release No. 34–67286 (June 28, 2012), 77 FR 41602
(July 13, 2012).
38 See 12 U.S.C. 5465(e)(1)(B).
39 See 12 U.S.C. 5465(e)(1)(E) and (F).
40 CCA Standards Adopting Release, supra note 7,
81 FR at 70809.
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notice processes, as appropriate.41 The
Commission continues to believe that
such RWPs, and material changes
thereto, would constitute a proposed
rule change under section 19(b) of the
Exchange Act and, for designated
clearing agencies, an advance notice
under the Clearing Supervision Act
because such plans and material
changes thereto would constitute
changes to a stated policy, practice, or
interpretation of the covered clearing
agency and, for designated clearing
agencies, a proposed change to its
operations that could materially affect
the nature or level of risk presented by
the designated clearing agency.
ddrumheller on DSK120RN23PROD with PROPOSALS3
C. Title II of the Dodd-Frank Act
Title II of the Dodd-Frank Act
establishes a process for the
appointment of the Federal Deposit
Insurance Corporation (‘‘FDIC’’) as
receiver of a failing financial company
if, among other things, its failure would
otherwise have serious adverse effects
on financial stability in the United
States.42 This Title II authority would
relate to covered clearing agencies, to
the extent that they are determined,
pursuant to the process described in this
section, to be covered financial
companies for purposes of the statute,
meaning that the FDIC could be
appointed as a receiver for a covered
clearing agency.
Under this process, certain specified
Federal regulatory authorities must
41 See, e.g., Securities Exchange Act Release Nos.
91429 (Mar. 29, 2021), 86 FR 17421 (Apr. 2, 2021)
(SR–DTC–2021–004); 83972 (Aug. 28, 2018), 83 FR
44964 (Sept. 4, 2018) (SR–DTC–2017–021); 83953
(Aug. 27, 2018), 83 FR 44381 (Aug. 30, 2018) (SR–
DTC–2017–803); 91430 (Mar. 29, 2021), 86 FR
17432 (Apr. 2, 2021) (SR–FICC–2021–002); 83973
(Aug. 28, 2018), 83 FR 44942 (Sept. 4, 2018) (SR–
FICC–2017–021); 83954 (Aug. 27, 2018), 83 FR
44361 (Aug. 30, 2018) (SR–FICC–2017–805); 94983
(May 25, 2022), 87 FR 33223 (June 1, 2022) (SR–
ICC–2022–004); 91806 (May 10, 2021), 86 FR 26561
(May 14, 2021) (SR–ICC–2021–005) (‘‘ICC 2021
Order’’); 79750 (Jan. 6, 2017), 82 FR 3831 (Jan. 12,
2017) (SR–ICC–2016–013) (‘‘ICC 2017 Notice and
Order’’); 86364 (July 12, 2019), 84 FR 34455 (July
18, 2019) (SR–ICEEU–2019–013) (‘‘ICEEU 2019
Order’’; 84498 (Oct. 29, 2018), 83 FR 55219 (Nov.
2, 2018) (SR–ICEEU–2018–014); 83651 (July 17,
2018), 83 FR 34891 (July 23, 2018) (SR–ICEEU–
2017–016 and SR–ICEEU–2017–017); 88578 (Apr. 7,
2020), 85 FR 20561 (Apr. 13, 2020) (SR–LCH SA–
2020–001); 87720 (Dec. 11, 2019), 84 FR 68989
(Dec. 11, 2019) (SR–LCH SA–2019–008); 83451
(June 15, 2018), 83 FR 28886 (June 21, 2018) (SR–
LCH SA–2017–012 and SR–LCH SA–2017–013);
91428 (Mar. 29, 2021), 86 FR 17440 (Apr. 2, 2021)
(SR–NSCC–2021–004); 83974 (Aug. 28, 2018), 83
FR 44988 (Sept. 4, 2018), (SR–NSCC–2017–017);
83955 (Aug. 27, 2018), 83 FR 44340 (Aug. 30, 2018)
(SR–NSCC–2017–805); 90712 (Dec. 17, 2020), 85 FR
84050 (Dec. 23, 2020) (SR–OCC–2020–013); 90701
(Dec. 17, 2020), 85 FR 83662 (Dec. 22, 2020) (SR–
OCC–2020–806); 83918 (Aug. 23, 2018), 83 FR
44091 (Aug. 29, 2018) (SR–OCC–2017–021); 83928
(Aug. 23, 2018), 83 FR 44109 (Aug. 29, 2018) (SR–
OCC–2017–810).
42 See 12 U.S.C. 5383.
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recommend to the Secretary of the
Treasury (the ‘‘Secretary’’) that the
Secretary appoint the FDIC as receiver
of the company. For most entities,
including covered clearing agencies, the
recommending agencies would be the
Board of Governors and the FDIC.43
Upon receipt of such recommendations,
the Secretary must make certain
determinations to implement Title II’s
orderly liquidation authority.
Specifically, the Secretary shall take
action to appoint the FDIC as receiver,
if the Secretary (in consultation with the
President) determines generally that,
inter alia, the company is a financial
company in default or in danger of
default; the failure of the company and
its resolution under otherwise
applicable Federal or State law would
have serious adverse effects on financial
stability in the United States; and no
viable private sector alternative is
available to prevent the default.44
Notably for this proposal, a covered
clearing agency would be subject to this
sort of orderly liquidation if two
conditions are met. First, it must be
considered to be a financial company,
which includes any company that is
incorporated or organized under any
provision of Federal law or the laws of
any State and is predominately engaged
in activities that the Board of Governors
has determined are financial in nature
or incidental thereto.45 Second,
pursuant to the process described above,
the Secretary would have to determine
to implement an orderly liquidation
authority.46 If both those conditions
occur, then the covered clearing agency
would be considered a ‘‘covered
financial company.’’ 47 In that case, the
FDIC would serve as the receiver for the
covered clearing agency.48
43 See 12 U.S.C. 5383(a)(1)(A). By contrast, if the
entity is a broker or dealer, the recommending
agencies would be the Board of Governors and the
Commission. See 12 U.S.C. 5383(a)(1)(B).
44 See 12 U.S.C. 5383(b).
45 See 12 U.S.C. 5381(11)(A) and (B)(iii).
Activities that are financial in nature include, but
are not limited to, lending, exchanging, transferring,
investing for others, or safeguarding money or
securities. 12 U.S.C. 1843(k)(4).
46 See 12 U.S.C. 5383(b).
47 See 12 U.S.C. 5381(a)(8).
48 Title II refers to the FDIC as the receiver in an
orderly liquidation. More generally, the orderly
liquidation process is often referred to as resolution.
See Resolution of Systemically Important Financial
Institutions: The Single Point of Entry Strategy, 78
FR 76614, 76615 (Dec. 18, 2013) (referring generally
to the orderly liquidation process as resolution).
Existing guidance by standard-setting bodies
generally refers to the governmental entity
conducting a resolution as the resolution authority.
See, e.g., Financial Stability Board, Key Attributes
of Effective Resolution Regimes, section 2.1 (2014).
For purposes of this release, the Commission uses
the more general term ‘‘resolution authority’’ to
encompass the role of the FDIC as a receiver in an
orderly liquidation.
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Once appointed as the resolution
authority, the FDIC essentially ‘‘steps
into the shoes’’ of the financial company
and is able to use any powers and
resources available to the financial
company.49 The FDIC as the resolution
authority is responsible for the
operations of the financial company,
including, among other things, taking
over the assets of and operating the
financial company, collecting all
obligations and money owed to the
financial company, and performing all
functions of the financial company in
the financial company’s name.50 In
addition, the FDIC shall liquidate and
wind-up the financial company’s affairs,
including taking steps to realize upon
the company’s assets, as appropriate
(e.g., through the sale of assets or the
transfer of assets to a bridge company).51
A covered clearing agency’s RWP would
be helpful to the FDIC if it were to serve
as the resolution authority for a covered
clearing agency. Such a plan could
provide insights, allowing the resolution
authority (i.e., the FDIC) to obtain an
understanding of the covered clearing
agency’s critical services, how it
provides such services, and how it
would be able to continue providing
such services in the event of a recovery
or an orderly wind-down.
III. Proposal
The Commission is proposing
amendments to existing rules and an
additional rule under section 17A of the
Exchange Act. Specifically, the
Commission is proposing to amend Rule
17Ad–22(e)(6)(ii) with respect to
intraday margin, to require that a
covered clearing agency’s risk-based
margin system monitors intraday
exposures on an ongoing basis and
includes the authority and operational
capacity to make intraday margin calls
as frequently as circumstances warrant,
including when risk thresholds
specified by the covered clearing agency
are breached or when the products
cleared or markets served display
elevated volatility. Second, the
Commission is proposing to amend Rule
17Ad–22(e)(6)(iv) with respect to the
use of sources of information in a
covered clearing agency’s risk-based
margin system, to require policies and
procedures reasonably designed to have
49 Specifically, the FDIC as receiver serves as the
successor to the financial company, holding all
rights, titles, powers, and privileges of the financial
company and its assets, and of any stockholder,
member, officer, or director of such company, and
it takes title to the books, records, and assets of any
previous receiver or other legal custodian of such
covered financial company. See 12 U.S.C.
5390(a)(1)(A).
50 12 U.S.C. 5390(a)(1)(B).
51 12 U.S.C. 5390(a)(1)(D).
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a covered clearing agency use reliable
sources for both price data, as the
current rule requires, and other
substantive inputs to its risk-based
margin system and to require that the
covered clearing agency use procedures
for when such inputs and price data are
not available or reliable. Finally, the
Commission is proposing new Rule
17ad–26 that would require a covered
clearing agency to include nine specific
elements in its RWP. Each of these
proposed rules is discussed further
below.
ddrumheller on DSK120RN23PROD with PROPOSALS3
A. Amendments Regarding Risk
Management
1. Proposed Changes to Rule 17Ad–
22(e)(6)
The Commission is proposing to
amend Rule 17Ad–22(e)(6)(ii) to
strengthen its requirements: first, by
further requiring that a covered clearing
agency have policies and procedures
reasonably designed to monitor intraday
exposures on an ongoing basis; and
second, by providing additional
specificity to the circumstances in
which a covered clearing agency should
have policies and procedures to collect
intraday margin. Specifically, as
proposed, Rule 17ad–22(e)(6)(ii) would
require a covered clearing agency that
provides central counterparty services
to establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, marks participant
positions to market and collects margin,
including variation margin or equivalent
charges if relevant, at least daily,
monitors intraday exposures on an
ongoing basis, and includes the
authority and operational capacity to
make intraday margin calls as frequently
as circumstances warrant, including
when risk thresholds specified by the
covered clearing agency are breached or
when the products cleared or markets
served display elevated volatility.
The Commission is also proposing to
amend Rule 17Ad–22(e)(6)(iv) to
strengthen its requirements: first, by
expanding the scope of the rule to apply
to both price data and other substantive
inputs to a covered clearing agency’s
risk-based margin system; second, by
further specifying the level to which the
covered clearing agency’s procedures
must perform when price data or other
substantive inputs are not available or
reliable; and third, by providing that the
procedures used when price data or
other inputs are not available or reliable
should include alternate sources or an
alternate risk-based margin system.
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2. Discussion
a. Amendments to Rule 17Ad–
22(e)(6)(ii)
As discussed above, when
considering the adoption of Rule 17Ad–
22(e)(6)(ii) in 2014, the Commission
stated that requiring covered clearing
agencies to have the authority and
operational capacity to make intraday
margin calls in defined circumstances
would ‘‘benefit covered clearing
agencies by covering settlement risk
created by intraday price
movements.’’ 52 Thus, the current rule
requires that covered clearing agencies
have the authority and operational
capacity to make intraday margin calls.
Importantly, the Commission
understands that the ‘‘operational
capacity’’ to make intraday margin calls
includes the ability to monitor intraday
exposure; otherwise, it would be
impossible for a covered clearing agency
to make appropriate intraday margin
calls if it were not monitoring its
intraday exposure. Therefore, under the
current rule, covered clearing agencies
have some ability to monitor for
intraday exposure and make intraday
margin calls,53 but there currently are
no requirements to monitor for intraday
exposure or regarding what frequency at
which to monitor intraday exposures.
The Commission is now proposing to
amend Rule 17Ad–22(e)(6)(ii) to
incorporate a requirement of intraday
monitoring and to require that such
monitoring is done on an ongoing basis.
The Commission continues to believe
that it is essential that a covered
clearing agency monitor its intraday
exposure because the covered clearing
agency faces a risk that its exposure to
its participants can change rapidly as a
result of intraday changes in prices,
positions, or both. Moreover, the
Commission believes that requiring that
such monitoring occur on an ongoing
basis will contribute to ensuring that the
covered clearing agency is sufficiently
informed and situated to take
appropriate actions to manage any
intraday exposure that arises.54
52 Standards for Covered Clearing Agencies
Standards Proposing Release, Exchange Act Release
No. 71699 (Mar. 12, 2014), 79 FR 29507, 29529
(May 22, 2014) (‘‘CCA Standards Proposing
Release’’). The Commission adopted Rule 17Ad–
22(e)(6)(ii) in substantially the form it was
proposed. See CCA Standards Adopting Release,
supra note 7, 81 FR at 70786.
53 See section IV.B.4.a infra.
54 See CPMI–IOSCO, Resilience of central
counterparties (CCPs): Further guidance on the
PFMI, paragraph 5.2.2 (July 2017), available at
(discussing how a CCP addresses intraday exposure
in its margin system and stating that ‘‘a CCP faces
the risk that its exposure to its participants can
change rapidly as a result of intraday changes in
prices, positions, or both; ie adverse price
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Therefore, the Commission is proposing
to amend Rule 17Ad–22(e)(6)(ii) to
require that a covered clearing agency’s
written policies and procedures be
reasonably designed to ensure that such
monitoring occurs on an ongoing basis.
The Commission is not prescribing a
particular time period or frequency that
would constitute an ongoing basis
because the Commission believes that
the covered clearing agency should be
able to tailor its monitoring to the
particular products cleared and markets
served. The Commission believes that
this requirement to monitor intraday
exposure on an ongoing basis should
allow flexibility to determine what
monitoring frequency is appropriate to
the particular market. For example,
more frequent monitoring may be
necessary for a covered clearing agency
that operates in markets where intraday
trading may be more prevalent or where
intraday exposures may tend to be larger
because of specific features, such as the
settlement process. Being able to
monitor, on an ongoing basis, any
decrease in the margin coverage as
compared to the changes in intraday
credit exposures in its participants’
portfolios should help the covered
clearing agency ensure that it is able to
collect margin sufficient to cover its
participants’ exposures. A covered
clearing agency generally should
consider whether its intraday
monitoring considers how participants’
exposures would affect all risks faced by
the covered clearing agency, including
those that may already be contemplated
by variation margin, initial margin, or
add-on charges.
Currently, Rule 17ad–22(e)(6)(ii)
refers only to the covered clearing
agency’s ability to collect intraday
margin ‘‘in defined circumstances.’’ The
proposed amendment to Rule 17Ad–
22(e)(6)(ii) would amend this to require
covered clearing agencies to have
policies and procedures to establish a
risk-based margin system with the
ability to make intraday margin calls as
frequently as circumstances warrant,
including when risk thresholds
specified by the covered clearing agency
are breached or when the products
cleared or markets served display
elevated volatility. The Commission
believes that this proposed requirement
would build upon and expand the
current rule’s requirement that provides
movements, as well as participants building larger
positions through new trading (and settlement of
maturing trades). For the purposes of addressing
these and other forms of risk that may arise
intraday, a CCP should address and monitor on an
ongoing basis how such risks affect all components
of its margin system, including initial margin,
variation margin and add-on charges.’’).
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for the authority and operational
capacity to make intraday margin calls
in defined circumstances 55 by
identifying particular instances in
which a covered clearing agency needs
to have policies and procedures to
collect margin, such as the breach of
specific risk thresholds or in times of
elevated volatility, while continuing to
provide flexibility to covered clearing
agencies to make intraday margin calls
as frequently as circumstances warrant.
Moreover, as the Commission stated
when adopting the Covered Clearing
Agency Standards, this proposed
amendment would continue to reflect
that intraday margin calls should be
able to be made on both a scheduled
and unscheduled basis,56 but would
also provide more specificity as to what
constitutes the appropriate scheduled
and unscheduled bases.
The Commission believes that the
proposed requirement for a covered
clearing agency to have the authority
and operational capacity to make
intraday margin calls when the markets
served display elevated volatility should
ensure that the covered clearing agency
develops policies and procedures to
determine when it considers volatility
to be elevated above typical levels, and
potentially necessitating the collection
of additional margin, in a manner
specific to the products cleared and
markets served. The Commission also
believes that the proposed requirement
for a covered clearing agency to have the
authority and operational capacity to
make intraday margin calls when
specific risk thresholds are breached
should ensure that the covered clearing
agency considers ex ante the degree of
exposure that necessitates additional
margin to take into account new cleared
positions and current market prices, in
a manner specific to the products
cleared and market served. Further, the
Commission also believes that the
requirement to specify thresholds that
would trigger intraday margin calls, if
breached, could improve participants’
ability to understand when they may be
subject to additional margin calls and,
therefore, to be able to prepare
accordingly to provide additional
financial resources in anticipation of
additional margin calls. In addition,
specifying that a covered clearing
agency should have the authority and
operational capacity to make intraday
margin calls in times of elevated
volatility also makes clear to
participants when they may be subject
55 Currently, Rule 17Ad–22(e)(6)(ii) does not
define what constitutes ‘‘defined circumstances.’’
56 CCA Standards Adopting Release, supra note 7,
81 FR at 70818.
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to additional margin calls and
recognizes that intraday exposures may
occur more frequently in volatile
markets.
b. Amendments to Rule 17Ad–
22(e)(6)(iv)
Currently, Rule 17Ad–22(e)(6)(iv)
requires the establishment of a riskbased margin system that uses reliable
sources of timely price data and uses
procedures and sound valuation models
for addressing circumstances in which
pricing data are not readily available or
reliable. When it proposed Rule 17Ad–
22(e)(6)(iv), the Commission stated that
a covered clearing agency should use
reliable sources of timely price data
because its margin system needs such
data to operate with a high degree of
accuracy and reliability, given the risks
that the covered clearing agency’s size,
operation, and importance pose to the
U.S. securities markets.57 The
Commission also recognized that, in
some situations, price data may not be
available or reliable, such as in
instances where third party data
providers experience lapses in service
or where limited liquidity otherwise
makes price discovery difficult, and that
establishing appropriate procedures and
sound valuation models is a useful step
a covered clearing agency can take to
help protect itself in such situations.58
Based on its experience with the
Covered Clearing Agency Standards
since their adoption in 2016, including
its review and understanding of the
covered clearing agencies’ margin
methodologies and, specifically,
whether the methodologies rely on
substantive inputs other than price data,
the Commission believes that it is
appropriate to expand the scope of this
rule beyond price data to encompass
other substantive inputs to a covered
clearing agency’s risk-based margin
system.59 As discussed in more detail in
section IV.B.4.b infra, covered clearing
agencies generally use risk-based margin
systems to calculate margin. Covered
clearing agencies’ use of other
substantive inputs, beyond price data
57 CCA Standards Proposing Release, supra note
52, 79 FR at 29529.
58 Id.
59 Despite some organizational changes to the rule
to accommodate the proposal, Rule 17Ad–
22(e)(6)(iv), as it relates to pricing data, is not being
amended in this proposal, except with respect to
the proposed new requirement to ensure that any
procedures used when pricing data is not readily
available or reliable must ensure that the covered
clearing agency continues to meet its requirements
under Rule 17Ad–22(e)(6). However, the
Commission is proposing to standardize references
to such data in the rule, which currently refers to
both price and pricing data, to refer only to price
data. The Commission previously used the two
words interchangeably in Rule 17Ad–22(e)(6)(ii).
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(which is already addressed in current
Rule 17Ad–22(e)(6)(iv)), from other
entities as part of the risk-based margin
system varies, and some do not rely on
such substantive inputs. These types of
inputs could include, for example,
portfolio size, volatility, and sensitivity
to various risk factors that are likely to
influence security prices; 60 other
examples of substantive inputs include
duration and convexity, as well as the
results of margin models run by third
parties. Similarly, the procedures used
when such substantive inputs are not
available vary. The Commission
believes that certain covered clearing
agencies would need to develop
additional procedures, or refine existing
procedures, that would apply when the
specific substantive inputs used by a
covered clearing agency are not readily
available or reliable, in order to ensure
that the covered clearing agency can
continue to meet its requirements under
Rule 17Ad–22(e)(6).
In some instances, a covered clearing
agency relies on third parties for these
inputs. For similar reasons as the
Commission discussed when proposing
Rule 17Ad–22(e)(6)(iv), there is a need
to use reliable sources for such inputs.
The unavailability or unreliability of an
input to a margin system, for example,
if a third party provider does not
perform, could potentially affect the
covered clearing agency’s ability to
calculate margin. Currently, the
Commission’s rules do not address how
a covered clearing agency plans for
circumstances in which a substantive
input to its risk-based margin system is
not readily available or reliable. This
proposed amendment to Rule 17ad–
22(e)(6)(iv) would require that the
covered clearing agency addresses such
circumstances and develops appropriate
procedures, for those covered clearing
agencies that use such substantive
inputs. Establishing procedures for
when such substantive inputs from
third parties are not available or reliable
should, in turn, help ensure that the
covered clearing agency can continue to
calculate and collect margin
commensurate with, the risks and
particular attributes of each relevant
product, portfolio, and market, as
required under Rule 17Ad–22(e)(6)(i), in
such circumstances.
The Commission is therefore
proposing to amend Rule 17Ad–
22(e)(6)(iv) to expand its scope beyond
60 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70855. Other portions of the
Covered Clearing Agency Standards reference a
model’s inputs, along with parameters and
assumptions, as part of a covered clearing agency’s
sensitivity analysis, which is required by current
Rule 17Ad–22(e)(6)(vi).
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price data to encompass other
substantive inputs to its risk-based
margin system and to impose
requirements on a covered clearing
agency to have procedures when such
substantive inputs are not readily
available or reliable. For purposes of
this rule, the Commission believes that
‘‘substantive’’ refers to any inputs used
by the covered clearing agency that are
necessary for the risk-based margin
system to calculate margin, and it is
meant to distinguish from other
potential inputs that may not be
consequential to the calculation of
margin, which would not be
encompassed by this proposed rule. The
Commission is not requiring that
covered clearing agencies use such
substantive inputs, but establishing
requirements in the event that they do
use such substantive inputs.
Further, the Commission is proposing
to impose a new requirement that would
further elaborate on the procedures
necessary when price data is not
available and that would also apply to
substantive inputs to a covered clearing
agency’s risk-based margin system.
Currently, the rule requires that the
covered clearing agency use procedures
and sound valuation models only when
price data is not readily available or
reliable. The proposed amendment
would, with respect to both price data
and other substantive inputs, require
that such procedures should address
circumstances in which price data or
substantive inputs are not readily
available or reliable, in order to ensure
that the covered clearing agency be able
to meet its requirements under Rule
17Ad–22(e)(6) and cover its credit
exposures to its participants. The
Commission believes that specifying the
level to which these backup procedures
should perform, that is, that the
procedures should ensure that the
covered clearing agency can continue to
meet its requirements under Rule 17Ad–
22(e)(6), should help ensure that
covered clearing agencies adopt
sufficiently robust procedures.
The Commission also proposes to
further specify that the procedures for
when the price data or substantive
inputs are not readily available or
reliable shall include the use of price
data or substantive inputs from an
alternate source or the use of an
alternate risk-based margin system that
does not similarly rely on the same
unavailable or unreliable substantive
input. With respect to the use of an
alternate source, such an alternate
source generally should meet the same
level of reliability of the primary source,
whether that alternate is sourced from
an external provider or created
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internally. With respect to policies and
procedures for the use of an alternate
risk-based margin system if the covered
clearing agency does not use an
alternate source, this potential alternate
risk-based margin system needs to be an
alternate margin model that does not
rely on the same data source that is
unavailable or unreliable, to ensure that
the covered clearing agency can
continue to meet its requirements under
Rule 17Ad–22(e)(6). Any alternative
risk-based margin system would be
subject to the requirements of 17 CFR
240.17Ad–22(e)(6)(vi) and (vii), with
respect to monitoring, review, testing,
and verification, and model validation.
With respect to both, a covered
clearing agency generally should
consider its reliance on any third party
sources for purposes of its risk-based
margin system and consider whether an
alternate system or source of data or
other inputs that is internal to the
covered clearing agency, and does not
rely upon any third party provider,
would be appropriate, given the
importance of calculating margin for a
covered clearing agency to cover its
exposure to its participants.61
3. Request for Comment
The Commission is requesting
comment on all aspects of the proposed
amendments to Rule 17Ad–22(e)(6). The
Commission also solicits comment on
the particular questions set forth below,
and encourages commenters to submit
any relevant data or analysis in
connection with their answers.
1. Should Rule 17Ad–22(e)(6) be
amended to require that covered
clearing agencies have policies and
procedures reasonably designed to
monitor intraday exposures and to
require that monitoring to occur on an
ongoing basis? Do commenters have
views on what constitutes an ongoing
basis, and does it differ for products
cleared or markets served by a covered
clearing agency? For example, would an
ongoing basis in the equity market be
different than in the security-based
swaps market?
2. Should Rule 17Ad–22(e)(6) be
amended to require that covered
clearing agencies have policies and
procedures reasonably designed to make
intraday margin calls as frequently as
circumstances warrant, including when
risk thresholds specified by the covered
clearing agency are breached or when
the products cleared or markets served
display elevated volatility?
3. Should the Commission prescribe
particular risk thresholds for intraday
margin calls? If so, what should those
61 17
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thresholds be and what is the basis for
those thresholds, and should the
threshold applicable to particular asset
classes (e.g., equities, fixed income,
options, etc.) be determined jointly or
separately?
4. Should the Commission identify
additional circumstances that may
warrant intraday margin calls beyond
when the products cleared or markets
served display elevated volatility? If so,
what should those circumstances be?
5. Do commenters believe that certain
participants of covered clearing
agencies, including, for example,
participants with less capital or using
smaller settlement banks, could face
operational challenges or pricing
disadvantages, if proposed Rule 17Ad–
22(e)(6)(ii) were to result in more
frequent margin calls?
6. Should Rule 17Ad–22(e)(6)(iv) be
amended to expand its scope to
encompass other substantive inputs to a
covered clearing agency’s risk-based
margin system? Should the Commission
identify any particular types of
substantive inputs or further specify
what types of inputs should be included
within the scope of the rule?
7. Should Rule 17Ad–22(e)(6)(iv) be
amended to state that the procedures
used when price data or other
substantive inputs are not readily
available or reliable should ensure that
the covered clearing agency can
continue to meet its obligations under
Rule 17Ad–22(e)(6)?
8. Should Rule 17Ad–22(e)(6)(iv) be
amended to further describe that the
procedures used by a covered clearing
agency when price data or other
substantive inputs are not readily
available or reliable shall include the
use of price data or substantive inputs
from an alternate source or the use of an
alternate risk-based margin system?
9. Do commenters have views on
whether the Commission should require
that any alternate source should be
independent of third party providers,
that is, within the sole control of the
covered clearing agency?
B. Contents of Recovery and Wind-Down
Plans
1. Proposed Rule 17ad–26
Proposed Rule 17ad–26(a) would
require that a covered clearing agency’s
recovery and wind-down plan, the
existence of which is required in current
Rule 17Ad–22(e)(3)(ii), shall: (1)
identify and describe the covered
clearing agency’s critical payment,
clearing, and settlement services and
address how the covered clearing
agency would continue to provide such
critical services in the event of recovery
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and during an orderly wind-down,
including the identification of the
staffing necessary to support such
critical services and analysis of how
such staffing would continue in the
event of a recovery and during an
orderly wind-down; (2) identify and
describe any service providers upon
which the covered clearing agency relies
to provide its critical payment, clearing,
and settlement services identified in
paragraph (1), specify to what critical
services such service providers are
relevant, and address how the covered
clearing agency would ensure that
service providers would continue to
provide such critical services in the
event of a recovery and during an
orderly wind-down, including
consideration of contractual obligations
with such service providers and
whether those obligations are subject to
alteration or termination as a result of
initiation of the recovery and orderly
wind-down plan; (3) identify and
describe scenarios that may potentially
prevent the covered clearing agency
from being able to provide its critical
payment, clearing, and settlement
services as a going concern, including
scenarios arising from uncovered credit
losses, uncovered liquidity shortfalls, or
general business losses; (4) identify and
describe criteria that could trigger the
implementation of the recovery and
orderly wind-down plan and the
process that the covered clearing agency
uses to monitor and determine whether
the criteria have been met, including the
governance arrangements applicable to
such process; (5) identify and describe
the rules, policies, procedures, and any
other tools the covered clearing agency
would use in a recovery or orderly
wind-down; (6) address how the rules,
policies, procedures, and any other tools
or resources identified in paragraph (5)
would ensure timely implementation of
the recovery and orderly wind-down
plans; (7) include procedures for
informing the Commission as soon as
practicable when the covered clearing
agency is considering initiating a
recovery or orderly wind-down; (8)
include procedures for testing the
covered clearing agency’s ability to
implement the recovery and wind-down
plans at least every twelve months,
including by requiring the covered
clearing agency’s participants and,
when practicable, other stakeholders to
participate in the testing of its plans,
providing for reporting the results of the
testing to the covered clearing agency’s
board of directors and senior
management, and specifying the
procedures for, as appropriate,
amending the plans to address the
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results of the testing; and (9) include
procedures for review of the plans by
the board of directors at least every
twelve months or following material
changes to the system or environment in
which the covered clearing agency
operates that would significantly affect
the viability or execution of the plans,
with such review informed, as
appropriate by the covered clearing
agency’s testing of the plans as required
in the prior section of the proposed rule.
Proposed Rule 17ad–26(b) would
provide definitions of ‘‘affiliate,’’
‘‘recovery,’’ ‘‘orderly wind-down,’’ and
‘‘service provider’’ for purposes of this
rule.
2. Discussion
As discussed in section II.A supra,
when the Commission adopted Rule
17Ad–22(e)(3)(ii), it did not establish
requirements for specific elements to
include in such RWPs. Since that time,
however, the Commission has reviewed
and approved RWPs for each of the
seven covered clearing agencies, as well
as periodic updates to those plans.62 In
so doing, the Commission has continued
to develop its understanding of what are
the essential elements of RWPs.63
In addition, the Commission has
continued to participate in the
development of guidance by
international standard setting bodies in
the areas of recovery and resolution of
financial market infrastructures, which
would include covered clearing
agencies. The Committee on Payments
and Market Infrastructure and the
International Organization of Securities
Commissions (together, ‘‘CPMI–
IOSCO’’) published a report entitled
Recovery of financial market
infrastructures, which sets forth a policy
statement on both the recovery planning
process and the content of recovery
plans.64 With respect to resolution
62 See
infra note 41.
Standards Adopting Release, supra note 7,
81 FR at 70809.
64 See CPMI–IOSCO, Recovery of financial market
infrastructures (July 2017), https://www.bis.org/
cpmi/publ/d162.pdf (‘‘CPMI–IOSCO Recovery
Guidance’’). The guidance covers a number of
topics: first, recovery planning, including the
importance of recovery planning, the relationship
between risk management, recovery, and resolution,
the process of recovery planning, the content of
recovery plans, and the role of the authorities in
recovery; second, general considerations with
respect to recovery tools, including risk categories
and failure scenarios that may require the use of
recovery tools, characteristics of recovery tools, and
considerations for allocating losses and liquidity
shortfalls; and third, specific recovery tools,
including tools to allocate uncovered losses caused
by participant default, tools to address uncovered
liquidity shortfalls, tools to replenish financial
resources, tools to re-establish a matched book
following participant default, and tools to address
losses not caused by participant default.
63 CCA
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planning, the Financial Stability Board
(‘‘FSB’’) published a policy statement
regarding resolution and resolution
planning for central counterparties.65 To
accommodate the development of
effective RWPs while this guidance was
being developed, and in recognition of
the need to further develop an
understanding of effective recovery and
resolution strategies for different types
of market infrastructure, the
Commission extended the compliance
date for Rule 17Ad–22(e)(3)(ii) to allow
the affected clearing agencies to
consider this emerging guidance before
submitting their RWPs for review and
approval.66 Additional guidance has
since followed, and work on the
recovery and resolution of clearing
agencies continues.67
Other U.S. authorities have
established and had the opportunity to
administer requirements for certain
specific elements to be included in the
RWPs of the financial market utilities
they supervise. For example, Regulation
HH, issued by the Board of Governors,
was amended in 2014 to identify seven
elements that must be addressed or be
included in recovery and wind-down
plans.68 These elements are
substantially similar to those proposed
in Rule 17ad–26. Similarly, the CFTC’s
regulatory framework includes specific
requirements for RWPs as applied to
clearing entities within its authority.69
65 See Guidance on CCP Resolution and
Resolution Planning (July 5, 2017), https://
www.fsb.org/wp-content/uploads/P050717-1.pdf;
Guidance on Central Counterparty Resolution and
Resolution Planning: Consultative Document (Feb.
1, 2017), https://www.fsb.org/wp-content/uploads/
Guidance-on-Central-Counterparty-Resolution-andResolution-Planning.pdf.
66 See Securities Exchange Act Release No. 80978
(Apr. 5, 2017), 82 FR 17300 (Apr. 10, 2017)
(granting a temporary exemption to covered
clearing agencies from compliance with Rule 17Ad–
22(e)(3)(ii) among other requirements); see also
Letter from Michael C. Bodson, President and Chief
Executive Officer, DTCC (Feb. 15, 2017), https://
www.sec.gov/comments/s7-03-14/s70314-1594398132354.pdf.
67 See, e.g., FSB, CPMI–IOSCO, Central
Counterparty Financial Resources for Recovery and
Resolution (Mar. 10, 2022), https://www.fsb.org/wpcontent/uploads/P090322.pdf.
68 12 CFR 234.3(a)(3)(iii); see also Final Rule,
Financial Market Utilities, Docket No. R–1477 (Oct.
28, 2014), 79 FR 65543 (Nov. 5, 2014).
69 See Derivatives Clearing Organizations and
International Standards, 78 FR 72476 (Dec. 2, 2013)
(adopting 17 CFR 39.39(b) and (c)). For example, 17
CFR 39.39(c)(1) states that the plans shall identify
scenarios that may potentially prevent a derivatives
clearing organization from being able to meet its
obligations, provide its critical operations and
services as a going concern, and assess the
effectiveness of a full range of options for recovery
or orderly wind-down. CFTC staff also released a
memorandum with additional guidance for affected
entities on the subjects and analysis that should be
included in a viable RWP, as well as questions that
affected entities should consider in evaluation tools
for inclusion and designing proposed rule changes
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Based on this supervisory experience,
including its review and approval of the
RWPs for the covered clearing agencies,
the Commission believes it is now
appropriate to specify elements for
inclusion in a covered clearing agency’s
RWP by proposing Rule 17ad–26. The
Commission has observed that the
covered clearing agencies have, to a
great degree, converged in terms of the
types of elements that are included in
each plan. As discussed in more detail
in section IV.B.3 infra and in the
discussion of each particular element
below, the current RWPs contain or
address many of the elements being
proposed for inclusion, but the current
plans do not contain all the elements
that would be required under the
proposed rule. Therefore, the
Commission believes that codifying
these nine elements, and the related
definitions, will help ensure that RWPs
continue to be effective at planning for
and managing a range of recovery and
orderly wind-down scenarios that could
risk transmitting systemic risk through
the U.S. securities markets and the
broader financial system, by
accomplishing three objectives. First,
the rule would bolster existing plans by
requiring certain new elements be
included. Second, for the elements that
are already contained in existing RWPs,
the rule would codify these elements
and ensure that the plans are required
to continue to include these elements in
their RWPs, and any future changes to
the RWPs would be subject to
Commission review for consistency
with these requirements, as discussed in
section II.B supra. Finally, the rule
would ensure that the RWPs of any new
covered clearing agencies would contain
all of these elements.
When adopting the Covered Clearing
Agency Standards, the Commission
stated that a covered clearing agency
generally should have policies and
procedures to provide the relevant
resolution authorities with information
needed for the purposes of resolution
planning, including its recovery and
wind-down plan.70 The Commission
also explained that it works with the
FDIC and other resolution authorities, as
appropriate, to help ensure the
development of effective resolution
strategies for covered clearing agencies,
and that providing the Commission and
the FDIC information for resolution
to support the inclusion of particular tools in such
plans. See Memorandum from Jeffrey M. Bandman,
Acting Director, Division of Clearing and Risk,
CFTC Letter No. 16–61 (July 21, 2016), https://
www.cftc.gov/sites/default/files/idc/groups/public/
@lrlettergeneral/documents/letter/16-61.pdf.
70 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70810.
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planning would promote the ongoing
development of these resolution
strategies.71 The Commission continues
to believe that this is the case, and that
the ongoing development of these
strategies will be further promoted by
specifically requiring that RWPs contain
certain elements and ensuring that
RWPs address these specified elements.
The Commission believes that
codifying these items as part of recovery
and wind-down plans would help assist
relevant resolution authorities develop
and improve resolution plans for
covered clearing agencies in resolution.
For example, by ensuring that these
items are included in RWPs, a
resolution authority will have a more
comprehensive understanding of what
the covered clearing agencies’ critical
payment, clearing, and settlement
services are, as well as what providers
support such services, thereby allowing
a resolution authority to connect, or
‘‘map,’’ the various providers to the
critical services to ensure continuity of
clearance and settlement by a covered
clearing agency in resolution.
a. Proposed Definitions
The Commission believes that
definitions of the terms ‘‘recovery’’ and
‘‘orderly wind-down’’ would provide
covered clearing agencies, as well as
market participants, a precise
description of the meaning of these
terms, which are not currently defined
in the Commission’s rules and are often
used together, and somewhat
interchangeably, by market participants.
Further, these definitions would help
covered clearing agencies understand
the precise goal for which their RWPs
should be reasonably designed to meet.
The Commission believes that the RWPs
generally should set forth the covered
clearing agency’s viable strategy for
ensuring that they address how a
covered clearing agency would achieve
a recovery or orderly wind-down, using
the tools and resources available under
its rules and procedures.
Current Rule 17Ad–22(e)(3)(ii) and
proposed Rule 17ad–26 both refer to
plans for recovery and orderly winddown, and, therefore, a covered clearing
agency should prepare plans for both
recovery and orderly wind-down.
Providing separate definitions specifies
that these are two distinct events, both
of which a covered clearing agency
should include in its recovery and
wind-down planning. Simply including
a plan for what a covered clearing
agency would do in recovery is not
sufficient, and a plan for one event does
not serve as a substitute for the other.
71 Id.
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34717
For example, there may be
circumstances in which a covered
clearing agency attempts to recover but
the recovery effort eventually fails. As
part of its planning, a covered clearing
agency generally should identify and
maintain the relevant supporting
information necessary to support its
RWP.
Moreover, because these definitions
refer to actions of a covered clearing
agency only, as opposed to any other
entity, neither a recovery plan nor an
orderly wind-down plan should be
based on assumptions of government
intervention or support.
Proposed Rule 17ad–26(b) would
define ‘‘recovery’’ to mean the actions of
a covered clearing agency, consistent
with its rules, procedures, and other ex
ante contractual arrangements, to
address any uncovered loss, liquidity
shortfall, or capital inadequacy, whether
arising from participant default or other
causes (such as business, operational, or
other structural weaknesses), including
actions to replenish any depleted
prefunded financial resources and
liquidity arrangements, as necessary to
maintain the covered clearing agency’s
viability as a going concern and to
continue its provision of critical
services. The Commission believes that
this proposed definition is generally
consistent with its previous
understanding of recovery, as set forth
in the CCA Standards Adopting Release,
in that this proposed definition also
focuses on the actions of the covered
clearing agency that are beyond its
typical business operations and refers to
situations in which the covered clearing
agency’s ability to serve as a going
concern is in question, that is, it goes
beyond the covered clearing agency’s
‘‘business as usual’’ operations.72
Proposed Rule 17ad–26(b) would
define ‘‘orderly wind-down’’ to mean
the actions of a covered clearing agency
to effect the permanent cessation, sale,
or transfer of one or more of its critical
services in a manner that would not
increase the risk of significant liquidity,
credit, or operational problems
spreading among financial institutions
or markets and thereby threaten the
stability of the U.S. financial system.
The Commission believes that this
72 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70808, n. 251 (when addressing
comments regarding recovery and wind-down
plans, stating the Commission’s general
understanding that: (i) when a financial company
becomes non-viable as a going concern or insolvent,
recovery refers to actions taken that allow the
financial company to sustain its critical operations
and services; (ii) resolution (or wind-down), by
contrast, refers to the transferring of the financial
company’s critical operations and services to an
alternate entity.).
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definition would clarify that an orderly
wind-down is distinct from a resolution
in that orderly wind-down continues to
rest within the control of the covered
clearing agency while resolution would
involve a governmental entity as the
resolution authority, such as the FDIC as
a receiver. The Commission further
believes that this proposed definition
would identify the specific goals of an
orderly wind-down, in that the actions
of a covered clearing agency should not
increase the risk of significant liquidity,
credit, or operational problems
spreading among financial institutions
or markets and thereby threaten the
stability of the U.S. financial system,
and that it would serve as a final and
binding solution to whatever
circumstance necessitated the winddown, that is, not a temporary stopgap
measure. This distinguishes an orderly
wind-down from winding down the
covered clearing agency as quickly as
possible.
To be orderly, a wind-down generally
should include a covered clearing
agency providing notice to allow
participants to transition to alternative
arrangements in an orderly manner, as
well as maintaining the operation of
critical services. Moreover, for a winddown involving the sale or transfer of all
or a portion of the covered clearing
agency to be orderly, the covered
clearing agency generally should
consider the separability of the parts of
the covered clearing agency and
whether there are certain portions of the
covered clearing agency’s business that
could be sold or transferred as separate
businesses.
b. Critical Services
Proposed Rule 17ad–26(a)(1) would
require each covered clearing agency’s
RWP to identify and describe the
covered clearing agency’s critical
payment, clearing, and settlement
services and address how the covered
clearing agency would continue to
provide such critical services in the
event of recovery and during an orderly
wind-down, including the identification
of the staffing necessary to support such
critical services and analysis of how
such staffing would continue in the
event of a recovery and during an
orderly wind-down.
The Commission believes that,
regardless of the products cleared or
markets served, the necessary first step
in effective recovery and wind-down
planning must be identifying and
describing the critical services that are
provided to market participants, as
required under this proposed rule. As
stated above, market participants rely on
the services of covered clearing agencies
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to facilitate payment, clearing, and
settlement for the U.S. securities
markets. The Commission believes that
identifying and describing the critical
services in an RWP should ensure that
the covered clearing agency focuses its
recovery and wind-down plans on its
ability to continue to provide those
services on an ongoing basis, even
under stress. Covered clearing agencies
already identify and describe their
critical services in the existing RWPs, as
well as the criteria used to determine
what services are critical. However,
covered clearing agencies generally do
not provide specific information as to
the staffing necessary to support a
recovery or orderly wind-down.
When identifying what is a critical
payment, clearing, or settlement service,
the Commission believes that the
covered clearing agency generally
should consider the impact that any
interruption to particular services
would have on the covered clearing
agency’s participants and the smooth
functioning of the markets that it serves,
as well as whether the service is
available from any substitute provider.
In this proposed rule, the Commission
believes that ‘‘critical’’ would refer to
the importance of the service to the
covered clearing agency’s participants,
and to the proper functioning of the
markets that the covered clearing agency
services. The inability of a covered
clearing agency to provide these
services would have implications with
respect to financial stability. The failure
to provide these critical services would
likely have a material negative impact
on participants or third parties, give rise
to contagion, and undermine general
confidence in the markets served.
The Commission believes that, after
identifying the critical services, the next
step of effective recovery and winddown planning is to address how the
covered clearing agency would continue
to provide such critical services in the
event of recovery and during an orderly
wind-down, as required under proposed
Rule 17ad–26(a)(1). This requirement
should continue to ensure that a
covered clearing agency has developed
policies and procedures to continue
providing its critical services in the
event of a recovery or orderly winddown. Further, by addressing how to
continue providing such services, the
recovery plan should also allow the
covered clearing agency to evaluate how
to ensure the orderly transfer of those
services to a new or an existing entity
as part of a wind-down, in the event that
recovery is unsuccessful.
In addition, the Commission believes
that the consideration of how the
covered clearing agency would continue
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to provide its identified critical services
must include the identification of the
staffing necessary to support such
critical services and analysis of how
such staffing would continue in the
event of a recovery and during an
orderly wind-down, in order to ensure
that the necessary personnel are
available to continue operating the
covered clearing agency. The
Commission believes that this aspect of
the proposal generally should include
identification of key business units and/
or employees who may be necessary to
implement and execute the critical
services identified in the RWP. As part
of this process, the covered clearing
agency generally should consider how it
would retain the services of any
personnel who are essential to the
execution of the plans, including
whether they are or should be subject to
employment agreements and an analysis
of the terms of employment agreements
(e.g., whether such agreements would
allow the employee to continue working
in the event that ownership of the
covered clearing agency were to transfer
in the event of a recovery or orderly
wind-down). In addition, the covered
clearing agency generally may consider,
as part of this process, any ‘‘key person
risk’’ that exists within its organization
and how it would address such risk in
its RWP.
Finally, the Commission believes that
this proposed requirement regarding the
identification and description of critical
services should also assist a resolution
authority, as discussed in section II.C
supra, with resolution planning. A key
obligation of a resolution authority is to
ensure the continued provision of an
entity’s critical services, to avoid harm
to the broader market.73 Understanding
what those critical services are, and the
covered clearing agency’s strategy for
ensuring that such critical services
73 See, e.g., Resolution of Systemically Important
Financial Institutions: The Single Point of Entry
Strategy, 78 FR 76614, 76615 (Dec. 18, 2013) (‘‘In
resolving a failed or failing SIFI . . . the FDIC seeks
to preserve financial stability by maintaining the
critical services, operations and funding
mechanisms conducted throughout the company’s
operating subsidiaries.’’); 12 U.S.C. 5384(a) (stating
that the purpose of the FDIC’s orderly liquidation
authority is to provide the necessary authority to
liquidate failing financial companies that pose a
significant risk to the financial stability of the
United States in a manner that mitigates such risk
and minimizes moral hazard). See also Financial
Stability Board, Key Attributes of Effective
Resolution Regimes, Annex 1.1 (2014) (identifying
as the objective of CCP resolution the pursuit of
financial stability and ensuring the continuity of
critical CCP functions in all jurisdictions where
those functions are critical); Financial Stability
Board, Guidance on Central Counterparty
Resolution and Resolution Planning, section 1.2
(July 2017).
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continue to be provided, therefore is
essential for resolution planning.
i. Interaction With Other Commission
Rules
The Commission acknowledges that
there likely will be some connection
between what a covered clearing agency
identifies as its critical services for
purposes of inclusion in its recovery
and wind-down plan and what it
identifies as Critical SCI systems for
purposes of Regulation Systems
Compliance Integrity (‘‘Regulation
SCI’’). Regulation SCI is designed to
strengthen the infrastructure of the U.S.
securities markets, reduce the
occurrence of systems issues in those
markets, improve their resiliency when
technological issues arise, and
implement an updated and formalized
regulatory framework, thereby helping
to ensure more effective Commission
oversight of such systems.74 However,
inclusion in a covered clearing agency’s
recovery plan as a critical service would
have no impact on a covered clearing
agency’s obligations under Regulation
SCI. This proposed rule is designed to
improve and strengthen a covered
clearing agency’s recovery and winddown plan, whereas Regulation SCI is
focused on, among other things,
strengthening the infrastructure of the
U.S. securities markets and improving
its resilience when technological issues
arise.
The key market participants that are
currently subject to Regulation SCI are
called ‘‘SCI entities’’ and encompass
certain SROs, including registered
clearing agencies.75 Regulation SCI is
designed to apply to the automated
systems important to the functioning of
the U.S. securities markets and requires
SCI entities to, among other things,
establish, maintain, and enforce written
policies and procedures reasonably
designed to ensure that their key
automated systems have levels of
capacity, integrity, resiliency,
availability, and security adequate to
maintain their operational capability
and promote the maintenance of fair
and orderly markets, and that such
systems operate in accordance with the
Exchange Act and the rules and
regulations thereunder and the entities’
rules and governing documents, as
applicable.76
Regulation SCI applies to the systems
of, or operated by or on behalf of, SCI
entities, that directly support any one of
six core securities market functions—
trading, clearance and settlement, order
routing, market data, market regulation,
and market surveillance (‘‘SCI
systems’’).77 Regulation SCI also
identifies a subset of SCI systems
defined as ‘‘Critical SCI systems,’’
which are those systems whose
functions are critical to the operation of
the markets, including those that
represent single points of failure, and
are therefore subject to certain
heightened requirements.78 Specifically,
Critical SCI systems means, any SCI
systems of, or operated by or on behalf
of, an SCI entity that directly support
functionality relating to, among other
things, clearance and settlement systems
of clearing agencies.79
When discussing the inclusion of
clearance and settlement systems of
clearing agencies as a Critical SCI
system, the Commission stated that the
clearance and settlement of securities is
fundamental to securities market
activity.80 The Commission identified a
variety of services that clearing agencies
perform to help ensure that trades settle
on time and at the agreed upon terms,
including comparing transaction
information (or reporting to members
the results of exchange comparison
operations), calculating settlement
obligations (including net settlement),
collecting margin (such as initial and
variation margin), and serving as a
depository to hold securities as
certificates or in dematerialized form to
facilitate automated settlement.81
As stated above in section III.B.2.b, a
covered clearing agency’s critical
services, for purposes of inclusion in an
RWP, would encompass its critical
payment, clearing, and settlement
services. Thus, those services could be
supported by the covered clearing
agency’s Critical SCI systems, as defined
in Regulation SCI.
c. Identification of Service Providers
Proposed Rule 17ad–26(a)(2) would
require each covered clearing agency’s
RWP to identify and describe any
service providers upon which the
covered clearing agency relies to
provide its critical payment, clearing,
77 See
74 Securities
Exchange Act Release No. 73639
(Nov. 19, 2014), 79 FR 72252, 72253, 72256 (Dec.
5, 2014) (‘‘Regulation SCI Adopting Release’’).
75 As stated above, see note 30, a covered clearing
agency is a registered clearing agency and therefore
is subject to Regulation SCI. See 17 CFR 242.1000
(defining SCI entity and SCI self-regulatory
organization).
76 See 17 CFR 242.1001.
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17 CFR.242.1000 (defining SCI systems).
17 CFR 242.1000 (defining Critical SCI
systems) and 1001(a)(2)(iv) (imposing heightened
requirements); see also Regulation SCI Adopting
Release, supra note 74, at 72277.
79 17 CFR 242.1000(a) (defining Critical SCI
systems).
80 Regulation SCI Adopting Release, supra note
74, at 72278.
81 Id.
78 See
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and settlement services, identifying to
what critical services such third parties
are relevant, and address how the
covered clearing agency would ensure
that such service providers would
continue to provide such critical
services in the event of recovery and
during an orderly wind-down. In
addition, the Commission is proposing
to define in proposed Rule 17ad–26(b)
the term ‘‘service provider’’ as any
person, including an affiliate or a third
party, that is contractually obligated to
the covered clearing agency in any way
related to the provision of critical
services, as identified by the covered
clearing agency in proposed Rule 17ad–
26(a)(1), discussed in section III.B.2.b
infra. This definition includes both
‘‘external’’ third-party service providers,
such as technology or data providers,
and those ‘‘internal’’ service providers
that may be affiliated with the covered
clearing agency, such as when a covered
clearing agency is part of a holding
company and receives certain services
pursuant to agreements with that
holding company. The Commission also
proposes to define ‘‘affiliate’’ in
proposed Rule 17ad–26(b) to mean a
person that directly or indirectly
controls, is controlled by, or is under
common control with the covered
clearing agency. It would include a
holding company that owns the covered
clearing agency.
Based on its supervisory experience,
the Commission has observed that
covered clearing agencies have used
services provided by service providers
to help ensure the prompt and accurate
clearance and settlement of securities
transactions. Service providers may be
affiliates or third party entities and can
perform a wide variety of functions,
such as providers of technology, data, or
other services. For service providers that
are necessary for the covered clearing
agency to provide its core payment,
clearing, and settlement services, the
failure of the service provider to
perform its obligations could pose
significant operational risks and have
substantial effects on the ability of the
covered clearing agency to perform its
risk management function and facilitate
prompt and accurate clearance and
settlement. In a recovery or orderly
wind-down, the continued performance
of a service provider of its function
would remain essential.
The Commission is therefore
proposing to require that an RWP
specifically identify and describe such
service providers, to ensure that the
RWP considers what providers are
necessary for the covered clearing
agency to continue providing its critical
services. This requirement would
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ensure that the covered clearing agency
has identified which service providers
relate to which critical services. This
identification must include both
affiliated service providers and nonaffiliated service providers. The covered
clearing agency also generally should
consider whether there are any
interdependencies or interconnections
amongst its service providers, that is,
whether a service provider supporting
critical services also provides other,
unrelated services to the covered
clearing agency. Regardless of the nature
of the service provider, it is essential
that an RWP identify such providers to
ensure that the covered clearing agency
understands the relationships that it
should maintain to continue providing
its critical services.82
82 The Commission proposed Rule 17Ad–25(i),
which would establish policy and procedure
requirements for clearing agency boards of directors
to oversee relationships with service providers for
critical services to, among other things, confirm and
document that risks related to relationships with
service providers for critical services are managed
in a manner consistent with its risk management
framework, review senior management’s monitoring
of relationships with service providers for critical
services, and review and approve plans for entering
into third-party relationships where the engagement
entails being a service provider for critical services
to the registered clearing agency. See Clearing
Agency Governance and Conflicts of Interest
Proposing Release, Exchange Act Release No. 34–
95431 (Aug. 8, 2022), 87 FR 51812, 51836 (Aug. 23,
2022). In addition, the Commission proposed a new
subparagraph (ix) under Rule 1001(a)(2) of
Regulation SCI regarding third party provider
management, which would require that SCI entities
have a third party provider management program
that includes: initial and periodic review of
contracts with such third party providers for
consistency with the SCI entity’s obligations under
Regulation SCI; and a risk-based assessment of each
third party provider’s criticality to the SCI entity,
including analyses of third party provider
concentration, of key dependencies if the third
party provider’s functionality, support, or service
were to become unavailable or materially impaired,
and of any potential security, including
cybersecurity, risks posed. Proposing Release,
Regulation Systems Compliance and Integrity,
Exchange Act Release No. 97143 (Mar. 15, 2023), 88
FR 23146 (Apr. 14, 2023). Although this aspect of
proposed rule 17ad–26 also relates to third party
providers and/or service providers, the Commission
does not believe that these proposed rules have any
substantive overlap. This proposed rule would
require that a covered clearing agency identify
certain service providers for purposes of its
recovery and wind-down plan. The Commission
encourages commenters to review the proposals
with respect to clearing agency governance and
Regulation SCI to determine whether they might
affect their comments on this proposing release.
Further, the Commission recognizes that the CA
Governance Proposal includes a proposed defined
term for ‘‘service providers for critical services,’’
which would mean any person that is contractually
obligated to the registered clearing agency for the
purpose of supporting clearance and settlement
functionality or any other purposes material to the
business of the registered clearing agency. In this
release, the Commission is proposing to define
‘‘service provider’’ as any person that is
contractually obligated to the covered clearing
agency in any way related to the provision of
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In addition, the Commission is
proposing to require that an RWP
address how the covered clearing
agency would ensure that service
providers could continue to perform in
the event of a recovery or during an
orderly wind-down, including
consideration of contractual obligations
with such service providers and
whether those obligations are subject to
alteration or termination as a result of
initiation of the recovery and orderly
wind-down plan. This requirement
would ensure that the covered clearing
agency has considered the nature of its
contractual obligations with the
identified service providers (such as
contracts, arrangements, agreements,
and licenses) and whether the service
providers could be contractually
obligated to perform in a recovery or
orderly wind-down. Generally, this
should include consideration of
whether a service provider’s contractual
relationship with the covered clearing
agency would be affected by a recovery
or orderly wind-down.83 Currently, the
RWPs often identify some set of service
providers, but the Commission believes
that the identified sets may not, for all
covered clearing agencies, be sufficient
to align with this rule, if adopted,
because the covered clearing agencies
do not uniformly ensure that they have
addressed all such service providers and
instead identify some different subset
thereof. Moreover, the RWPs generally
do not address how the covered clearing
agency would ensure that such service
providers would continue to provide
such critical services in the event of
recovery and during an orderly winddown, including consideration of the
contractual obligations with such
service providers.
More generally, the Commission
believes that the requirement to identify
and describe any critical service
providers and address how the covered
clearing agency would ensure that such
service providers would be legally
obligated to perform in a recovery or
during an orderly wind-down should
help regulatory planning in the event of
a resolution. To create an actionable
resolution plan that would allow a
resolution authority to ensure the
continued provision of the covered
clearing agency’s critical services and,
accordingly, to avoid market
critical services, as identified by the covered
clearing agency in proposed Rule 17ad–26(a)(1). See
section III.B.a supra.
83 For example, the covered clearing agency
should consider whether its contractual
relationships with such providers would transfer to
a new entity in the event of the creation of a new
entity or the sale or transfer of the business in an
orderly wind-down.
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interruption or any potential financial
instability, the resolution authority
would need to be able to identify the
critical services, as well as the scope
and nature of underlying service
providers. Further, the requirement that
the plan address the continued
provision of services in the event of a
recovery or during an orderly winddown should also help a resolution
authority, in that it should enable a
better understanding of the terms and
conditions of the relationship between
the covered clearing agency and the
service provider.
d. Scenarios
Having identified its critical services,
proposed Rule 17ad–26(a)(3) would
then require an RWP to identify and
describe scenarios that may potentially
prevent a covered clearing agency from
being able to provide its critical services
as a going concern, including scenarios
arising from uncovered credit losses (as
described in Rule 17Ad–22(e)(4)(viii)),
uncovered liquidity shortfalls (as
described in Rule 17Ad–22(e)(7)(viii)),
and general business losses (as
described in Rule 17Ad–22(e)(15)).84
These scenarios are consistent with the
current requirement in Rule 17Ad–
22(e)(3)(ii). Identification and
description of scenarios is essential to
evaluating what is necessary to achieve
a recovery of the clearing agency and, in
the event that recovery fails, ensuring
the orderly wind-down of the clearing
agency and transfer of critical services
to a new entity. Identifying the
scenarios enables a covered clearing
agency to make the reasonable and
appropriate preparations to achieve a
recovery or, in the event that recovery
fails, avoid a disorderly wind-down
arising from those scenarios that could
transmit risk through the U.S. securities
markets and the broader financial
system.
Because the covered clearing agencies
should contemplate the inability to
provide services as a going concern,
these scenarios would necessarily go
beyond those contemplated in business
as usual circumstances, business
continuity planning, crisis management,
or failure management. That is, unlike
those types of scenarios, recovery and
wind-down planning scenarios would
involve shocks that could potentially
84 Rule 17Ad–22(e)(3)(ii) refers to identifies
several specific bases for recovery and orderly
wind-down that should be covered by the plans:
credit losses, liquidity shortfalls, and losses from
general business risk. Proposed rule 17ad–26(a)(3)
would reference those same bases and include
cross-references to where those bases are addressed
in the Covered Clearing Agency Standards.
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cause the covered clearing agency to
become insolvent and cease operations.
When identifying scenarios, the
covered clearing agency generally
should consider the various risks to
which it is exposed, which will vary
across different covered clearing
agencies serving different markets. The
proposed rule would require that the
covered clearing agency consider
scenarios arising from uncovered credit
losses, uncovered liquidity shortfalls,
and general business losses. This set of
scenarios would therefore include
scenarios arising from the default of a
participant and also those arising from
events not related to a participant
default, such as a general business loss.
Other potential scenarios that are not
related to a participant default could
include the realization of investment or
custody losses, the failure of a third
party, such as a settlement bank, to
perform a critical function for the
covered clearing agency, or scenarios
caused by an SCI event or other
significant operational disruption, such
as a significant cybersecurity incident.
In addition, a covered clearing agency
that is part of a larger organization may
be exposed to risks arising from other
entities within the organization. Put
more generally, the identified scenarios
take into account various risks to which
the covered clearing agency is exposed
that may potentially prevent the covered
clearing agency from being able to
provide its critical services, which will
vary across different types of covered
clearing agencies (i.e., a central
counterparty versus a central securities
depository) and even across covered
clearing agencies of the same type.
The Commission believes that the
identified scenarios generally should be
structured such that the underlying
assumptions ensure that the scenarios
are sufficiently severe, such that they
would result in the need for a recovery
or orderly wind-down. These scenarios
generally should include both
idiosyncratic and system-wide stress
scenarios, taking into account the
possibility of contagion in a stress event
and of simultaneous crises in several
significant markets. Although all
covered clearing agencies generally
consider at a high level what
circumstances may cause them to enter
recovery or wind-down (e.g., whether a
recovery or wind-down would arise
from the default of a participant or from
issues unrelated to a participant
default), the RWPs do not all identify
particular scenarios the covered clearing
agencies have considered when
developing the RWP or contain detailed
analyses of each particular scenario.
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Each scenario generally should be
analyzed individually in the recovery
plan, with the analysis including: a
description of the scenario; the events
that are likely to trigger the scenario; the
covered clearing agency’s process for
monitoring such events; the market
conditions, operational and financial
issues, and other relevant circumstances
that are likely to result from the
scenario; the potential financial and
operational impact of the scenario on
the covered clearing agency and its
participants, internal and external
service providers, and relevant affiliated
companies, both in an orderly and
stressed market (e.g., where markets are
unavailable or there are limited solvent
counterparties); and the specific steps
that the covered clearing agency would
expect to take if the scenario occurs or
appears likely to occur, including,
without limitation, any governance or
other procedures that may be necessary
to implement the relevant tools or use
the relevant resources and to ensure that
such implementation occurs in
sufficient time to achieve the intended
effect.
e. Triggers
Proposed Rule 17ad–26(a)(4) would
require a covered clearing agency’s RWP
to identify and describe the criteria that
would trigger the implementation of its
RWP and the process that the covered
clearing agency uses to monitor and
determine whether the criteria have
been met, including the governance
arrangements applicable to such
process. Given that the implementation
of a covered clearing agency’s RWPs
would most likely occur during a period
of significant stress at the covered
clearing agency or in the market in
general, the Commission believes that
the covered clearing agency needs to
identify in advance what criteria could
trigger implementation of its RWP. Such
ex ante identification of potential
triggers can help ensure that a covered
clearing agency not only implements its
plan pursuant to the established RWP
but that, before it implements such
plans, it is aware of the triggering events
that may necessitate use of the RWP.
Thoughtful consideration of triggers can
help ensure that the steps taken in
anticipation of a potential recovery or
wind-down have been planned for and
coordinated to minimize the onward
transmission of risk to the U.S. financial
system. Currently, covered clearing
agencies identify triggers in their RWPs
but differ with respect to how much
they identify the specific monitoring or
governance processes for such triggers.
The covered clearing agency generally
should consider defining both
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quantitative and qualitative criteria that
would trigger the implementation of
part or all of the recovery plan or of an
orderly wind-down plan. Moreover, the
covered clearing agency generally
should consider triggers that would be
applicable in circumstances involving
the default of its participant(s), as well
as those that would be applicable in
circumstances not related to the default
of a participant or participants. When
determining triggers, the covered
clearing agency also generally should
consider whether the likely timing of a
triggering event in the identified
scenarios would permit sufficient time
for implementation of the RWP.
There may be circumstances in which
the trigger is obvious. For example,
when a participant of a covered clearing
agency defaults, the recovery plan likely
would be triggered when the covered
clearing agency has exhausted its prefunded financial resources, its
qualifying liquid resources,85 or any
other liquidity arrangements that it has
in place to deal with default-related
shortfalls, or when it has become
unlikely that the pre-funded financial
resources and/or the liquidity
arrangements will be sufficient. In other
circumstances, the covered clearing
agency may have to employ more
judgment with respect to how to
develop appropriate triggers. For
example, a covered clearing agency may
need to exercise judgment to determine
an appropriate capital level to trigger
activation of its RWP in the event of
persistent or extraordinary capital losses
from general business risks.
The identification of triggers does not
mean that such triggers should be selfexecuting. Instead, the importance of
identifying triggers lies in ensuring that
a covered clearing agency considers and
identifies ex ante when it would initiate
its RWP. Therefore, the Commission
believes that the RWP also must identify
and describe the process that the
covered clearing agency uses to monitor
and determine whether the criteria have
been met, including the governance
arrangements applicable to such
process. Specifying the monitoring
process would allow the covered
clearing agency to ensure that it has
reliable and appropriate processes to
analyze the facts and circumstances
related to the triggers identified in the
RWP. Consistent with its obligations
under Rule 17Ad–22(e)(3), the
identification of the governance process
generally should include clearly
defining the responsibilities of board
members, senior management, and
business units, including with respect to
85 See
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escalation within the covered clearing
agency, and it also generally should
specify whether and to what extent the
covered clearing agency may exercise
discretion in its monitoring and
determination whether the triggering
criteria have been met. The Commission
believes that including the related
governance in the RWP is important to
allow the covered clearing agency to use
the RWP in a crisis because the RWP
would set forth clear and defined roles
and avoid potential confusion at the
time of the RWP’s implementation.
f. Rules, Policies, Procedures, and Tools
Proposed Rule 17ad–26(a)(5) would
require a covered clearing agency’s RWP
to identify and describe the rules,
policies, procedures, and any other tools
or resources the covered clearing agency
would rely upon in a recovery or
orderly wind-down. The Commission
believes that describing the rules,
policies, procedures, and any other tools
or resources is essential to a covered
clearing agency’s RWP. The requirement
to describe rules, policies, procedures,
and any other tools or resources that
may be used in advance for certain
situations would provide some level of
predictability in such a situation and
avoid unexpected actions because it
would allow participants to understand
the potential of tools or resources that
could be used, including whether any of
the tools would require participant
involvement or resources (such as a
cash call).
Generally, the rules, policies,
procedures, and any other tools or
resources should address shortfalls
arising in the stress scenarios identified
by the covered clearing agency, whether
caused by participant default or by some
other event, that are not covered by prefunded financial resources. They should
also address situations where the
covered clearing agency does not have
sufficient qualifying liquid resources to
meet its obligations on time. In addition,
the tools should address other losses or
liquidity shortfalls, including those
arising from general business risks that
may or may not develop more slowly
than a sudden default or other event.
However, the Commission is not
prescribing particular tools, such as
tear-up or margin haircutting, that a
covered clearing agency would be
required to include in its RWP. The
Commission believes that this proposed
requirement preserves discretion for
each covered clearing agency to
consider the full range of available
recovery tools and select those most
appropriate for the circumstances of the
covered clearing agency, including the
products cleared and the markets
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served.86 It would also allow a covered
clearing agency to consider the ways in
which its ownership structure (such as
whether it is a subsidiary of a larger
organization, owned by its participants,
etc.) could impact its execution of its
RWP or use of the tools set forth therein,
including through the applicable
governance arrangements or because of
tools that rely on a parent or affiliated
organization.
The current RWPs identify the tools
and other resources that the covered
clearing agency would use in a recovery
or orderly wind-down. Certain of those
tools, which may often be referred to as
the covered clearing agency’s default
waterfall,87 may involve the allocation
of losses to its members or, potentially,
to other shareholders or creditors of the
covered clearing agency, among others,
and covered clearing agencies are
required to address such loss allocation
under the Covered Clearing Agency
Standards.88 As part of their recovery
and wind-down planning, the
Commission believes that covered
clearing agencies generally should
consider their loss allocation policies in
light of the scenarios identified in
response to proposed Rule 17ad–
26(a)(3), including the need for any
additional tools or loss allocation
processes to address different scenarios.
When identifying the tools and other
resources that a covered clearing agency
may include in a recovery or orderly
wind-down plan, the Commission
believes that the covered clearing
agency generally should consider the
following characteristics to evaluate the
appropriateness of a tool or tools for a
particular recovery scenario or an
orderly wind-down, including the
sequence in which the tools should be
used. First, the set of tools should
comprehensively address how the
covered clearing agency would continue
to provide critical services in all
relevant scenarios. Second, the tools
should be effective, meaning that they
should be reliable, timely, and have a
strong legal basis. Being effective
generally should mean that the covered
clearing agency has a high degree of
confidence that it could employ the tool
86 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70809.
87 See note 150 infra.
88 See 17 CFR 240.17Ad–22(e)(4)(viii) (requiring
that a covered clearing agency establish, implement,
maintain and enforce written policies and
procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit
exposures to participants and those arising from its
payment, clearing, and settlement processes,
including by addressing allocation of credit losses
the covered clearing agency may face if its collateral
and other resources are insufficient to fully cover
its credit exposures).
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in all relevant circumstances, including
a time of stress. Third, the tools
generally should be transparent, so as to
allow the covered clearing agency’s
participants and the broader market
participants to understand how they
would operate and allow those who
would bear losses and liquidity
shortfalls to measure, manage, and
control their potential losses and
liquidity shortfalls. Finally, the tools
generally should take into account
whether the tools create appropriate
incentives for the covered clearing
agency’s owners, direct and indirect
participants, and other relevant
stakeholders, and they generally should
seek to minimize the potential impact
that the tools may have on participants
and the financial system more broadly.
When analyzing the tools to be
included in its RWP, a covered clearing
agency generally should consider: (i) a
description of the tools that the covered
clearing agency would expect to use in
each scenario; (ii) the order in which
each tool would be expected to be used;
(iii) the time frame within which the
tool would be used; (iv) the governance
and approval processes and
arrangements within the covered
clearing agency for the use of each of the
tools available, including the exercise of
any available discretion; (v) the
processes to obtain any approvals
external to the covered clearing agency
(including any regulatory approvals)
that would be necessary to use each of
the tools available, and the steps that
might be taken if such approval is not
obtained; (vi) the steps necessary to
implement the tools; (vii) the roles and
responsibilities of all parties, including
non-defaulting participants; (viii)
whether the tool is mandatory or
voluntary; and (ix) an assessment of the
associated risks from the use of each
tool to non-defaulting clearing members
and their customers, linked financial
market infrastructures, and the financial
system more broadly.
g. Timely Implementation
Proposed Rule 17ad–26(a)(6) would
require a covered clearing agency’s RWP
to address how the rules, policies,
procedures, and any other tools or
resources identified in paragraph (5)
would ensure timely implementation of
the recovery and orderly wind-down
plan. The Commission believes that this
is an important element of a covered
clearing agency’s RWP, that is, to
provide, in advance, a level of
predictability as to how such measures
would be implemented, which is
important to participants as discussed
in section III.B.e infra, and to ensure
that the covered clearing agency has a
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strategy for use of the various tools set
forth in the RWP recovery and orderly
wind-down plans. As noted earlier, the
implementation and use of a covered
clearing agency’s RWP will likely occur
when the covered clearing agency itself,
as well as the wider financial markets,
are experiencing heightened levels of
stress. Requiring that the covered
clearing agency address in its RWP how
its procedures to ensure timely
implementation of an RWP increases the
likelihood that actions taken will be
predictable and orderly and will occur
at an appropriate time to address the
circumstances at hand. Currently, the
Commission believes that the covered
clearing agencies’ RWPs address how
the covered clearing agencies’
procedures would be timely
implemented, including by identifying
the applicable governance and steps that
would need to be taken to use particular
tools and/or by discussing the order in
which tools would be deployed. A
covered clearing agency generally
should consider whether its RWP
provides for pre-determined escalation
processes within the covered clearing
agency’s senior management and with
its board of directors, to ensure careful
and timely consideration of the
appropriate next steps.
Timely implementation generally
should mean that a covered clearing
agency is able to deploy the tools
identified in its plan as needed and
when appropriate, for example, that it
has identified the appropriate escalation
and approval processes to use a
particular tool or resource. In this sense,
implementation does not refer to
completion of the plan, but merely to
putting the plan into practice.
h. Notification to the Commission
Proposed Rule 17ad–26(a)(7) would
require a covered clearing agency’s RWP
to include procedures for informing the
Commission as soon as practicable
when the covered clearing agency is
considering initiating a recovery or
orderly wind-down. The systemic risk
concerns raised by a recovery or orderly
wind-down of a covered clearing agency
are significant, and while the
Commission already maintains regular
contact with each of the covered
clearing agencies through its
supervisory program, the Commission
believes it is critical that notice of
potential recovery and wind-down
events be provided as soon as
practicable.
Providing notice to the Commission
can help ensure that the Commission
has the opportunity to consider whether
a covered clearing agency engages the
recovery or wind-down event consistent
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with its established RWP and the
requirements of Commission rules to
help mitigate the potential onward
transmission of systemic risk and ensure
that a wind-down, if necessary, is
orderly. This is particularly important
with respect to covered clearing
agencies which often serve as the sole
provider of clearance and settlement
services in a particular market and of
which several are designated clearing
agencies. Currently, many of the
covered clearing agencies’ RWPs
reference notification to the
Commission, but often lack detail on the
procedures to ensure such notification.
Moreover, providing notice to the
Commission would, in turn, help the
Commission ensure that it has
information that it can share with other
relevant authorities, such as the
resolution authority, regarding the
potential need for resolution. This
communication between the
Commission and other regulators would
be essential in the potential event of a
recovery or wind-down so that the other
regulators can consider appropriate
actions that they may wish to take, such
as if the FDIC is appointed as the
resolution authority for a covered
clearing agency, as discussed in section
II.C supra. Given its supervisory role
with respect to the covered clearing
agencies, the Commission is uniquely
situated both to obtain and effectively
share and communicate this information
to other regulatory authorities.
i. Testing
Proposed Rule 17aAd–26(a)(8) would
also require that an RWP include
procedures for testing the covered
clearing agency’s ability to implement
the recovery and wind-down plans at
least every twelve months, including by
requiring the covered clearing agency’s
participants and, when practicable,
other stakeholders to participate in the
testing of its plans, providing for
reporting the results of the testing to the
covered clearing agency’s board of
directors and senior management, and
specifying the procedures for, as
appropriate, amending the plans to
address the results of the testing. The
Commission believes that it is important
to require testing because including
testing should help to ensure that the
RWP will be effective in the event of an
actual recovery or orderly wind-down.
Currently, some covered clearing
agencies do not provide for testing their
RWPs or test them separately from any
testing required under 17 CFR
240.17Ad–22(e)(13) (‘‘Rule 17Ad–
22(e)(13)’’), while others do incorporate
some testing requirements, with varying
degrees of specificity about the
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frequency of and participants in such
testing and how to incorporate the
results of such testing into the RWPs.
The Commission believes that the
testing under this proposed rule likely
would be similar in nature to that
required under Rule 17Ad–22(e)(13), in
that it would simulate how the RWP
would perform in crisis situations,
including the participation of senior
management and the board of directors.
Such testing could involve examining
how a covered clearing agency’s
procedures would work in practice, by
applying them to a hypothetical
scenario that would cause the covered
clearing agency to use its RWP. Testing
must involve the covered clearing
agency’s participants and, where
practicable, other stakeholders. Such
other stakeholders could include, for
example, liquidity providers or
settlement banks. By specifying that the
participation of other stakeholders must
occur where practicable, the
Commission recognizes that a covered
clearing agency may have limited ability
to require said participation by all such
stakeholders in all circumstances.
Including participants and other
stakeholders in such testing should help
to ensure that procedures will be
practical and effective in the face of a
recovery or orderly wind-down. In
addition to the relevant employees,
participants, and other stakeholders that
would be involved in testing RWPs, a
covered clearing agency may determine,
as appropriate, to include members of
its board of directors or similar
governing body, and to invite linked
clearing agencies, significant indirect
participants, providers of credit
facilities, and other service providers to
participate. The Commission believes
including participants and, where
practicable, stakeholders in periodic
testing is appropriate because a
successful recovery or orderly winddown will require coordination among
these parties, particularly during
periods of market stress.
The Commission believes that at least
every twelve months is an appropriate
time period for testing RWPs. Given that
many other aspects of a covered clearing
agency’s risk management are required
to be tested at least annually, many of
which are likely to be related to or
referenced in the covered clearing
agency’s RWP,89 the Commission
believes that this time period strikes an
appropriate balance between the need to
test RWPs and the desire to avoid
imposing duplicative requirements. A
covered clearing agency may choose to
89 See, e.g., 17 CFR 240.17Ad–22(e)(13)(iii) and
(e)(3)(i).
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conduct this testing and review of the
RWP, to the extent practicable, as part
of its annual testing and review of its
participant default rules and
procedures, in accordance with Rule
17Ad–22(e)(13), or as part of its
business continuity testing.
The Commission believes that the
RWPs should provide for reporting the
results of the testing to the covered
clearing agency’s board of directors and
senior management. This reporting
would help ensure that the board of
directors and senior management have
an understanding of the testing. This
understanding, in turn, would then
inform senior management in
considering whether the testing
indicates the need for potential changes
to an RWP. This understanding would
also inform the board of directors in its
review and approval of a covered
clearing agency’s RWP, which it would
be required to do under proposed Rule
17ad–26(a)(9). Finally, the Commission
believes that the RWPs should specify
the procedures for, as appropriate,
amending the plans to address the
results of the testing. Such procedures
would ensure that the covered clearing
agency takes into account the results of
the testing and incorporates it into the
plan, as appropriate.
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j. Periodic Review
Proposed Rule 17ad–26(a)(9) would
require the board of directors of a
covered clearing agency to review and
approve its RWP at least every twelve
months or following material changes to
the covered clearing agency’s operations
that would significantly affect the
viability or execution of the plans, with
such review informed, as appropriate by
the covered clearing agency’s testing of
the plans as required in the prior section
of the proposal rule. Because the risks
that a covered clearing agency faces and
the markets it serves are ever evolving,
it is important that a covered clearing
agency’s RWP accounts for the evolving
nature of risks and markets. The
Commission understands that covered
clearing agencies with RWPs already
engage in some level of ongoing review,
and the Commission has reviewed
changes to RWPs as proposed rule
changes under section 19(b) of the
Exchange Act.90 The Commission
90 See, e.g., Securities Exchange Act Releases No.
91429 (Mar. 29, 2021), 86 FR 17421 (Apr. 2, 2021)
(SR–DTC–2021–004); 91430 (Mar. 29, 2021), 86 FR
17432 (Apr. 2, 2021) (SR–FICC–2021–002); 94983
(May 25, 2022), 87 FR 33223 (June 1, 2022) (SR–
ICC–2022–004); ICEEU 2019 Order, supra note 41,
84 FR 34455; 88578 (Apr. 7, 2020), 85 FR 20561
(Apr. 13, 2020) (SR–LCH SA–2020–001); 91428
(Mar. 29, 2021), 86 FR 17440 (Apr. 2, 2021) (SR–
NSCC–2021–004); 90712 (Dec. 17, 2020), 85 FR
84050 (Dec. 23, 2020) (SR–OCC–2020–013).
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believes that a covered clearing agency
should perform the board of directors
level review under proposed Rule 17ad–
26 at least once every twelve months.
Moreover, the Commission believes that
a required review every twelve months
represents an appropriate frequency to
address any changes in the markets
served and products cleared by a
covered clearing agency. The
Commission further believes that it is
also important to revisit an RWP if there
is a material change to the covered
clearing agency’s operations, to ensure
that the RWP continues to address the
risks that the covered clearing agency
faces. The Commission has proposed
requiring review and approval of a
covered clearing agency’s RWP by its
board of directors because such
requirement is important to ensure that
the RWP is considered and addressed at
the most senior levels of the governance
framework of the covered clearing
agency, consistent with the importance
of the RWP.
Currently, the existing RWPs
generally provide for review and
approval by a covered clearing agency’s
board of directors, but not all the plans
provide for a review every twelve
months and some do not specifically
reference the need to review following
material changes to the covered clearing
agency’s operations. Therefore, the
Commission believes that this proposed
rule would strengthen the RWPs by
ensuring review and approval by the
board of directors every twelve months
and review following material changes.
It would also help ensure that the
review and approval by the board of
directors is informed, as appropriate, by
the results of the covered clearing
agency’s testing discussed in section
III.B.2.j supra. The Commission believes
that any procedures adopted with
respect to the review and approval
conducted by the board of directors
generally should provide for substantive
consideration of the plan and whether it
appropriately takes into account the
specific characteristics of the covered
clearing agency, including its
ownership, organizational, and
operational structures, as well as the
size, systemic importance, global reach,
and/or the risks inherent in the products
it clears.
Moreover, in the event that a recovery
or wind-down process is activated, the
Commission believes that it likely
would be appropriate to conduct an
additional review by the board of
directors immediately after the
conclusion of the execution of the RWP,
even if it is well before the next periodic
review. In addition, a covered clearing
agency generally should consider the
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extent to which any new policy
statements from a standard setting body,
such as CPMI–IOSCO, while not
binding, might tend to support updating
or revising existing RWPs to ensure that
the clearing agency’s approach to risk
management, recovery, and wind-down
are effective at maintaining the core
functions of the covered clearing
agencies in a recovery or resolution
scenario and mitigating the potential for
transmitting systemic risk through the
financial system.
3. Request for Comment
The Commission requests comment
on all aspects of proposed Rule 17ad–
26. In particular, the Commission
requests comment on the following
specific topics:
10. Should the Commission adopt
proposed Rule 17ad–26 to prescribe the
contents of a covered clearing agency’s
recovery and wind-down plans?
11. Does proposed Rule 17ad–26
adequately identify and describe the
elements that a covered clearing agency
would be required to include in its
RWP? If other elements should be
included, please identify such elements
and explain why they should be
included. If certain elements should not
be included, please identify such
elements and explain why they should
not be included.
12. Are there any other elements that
should be included in a covered
clearing agency’s RWP to facilitate the
planning processes of a resolution
authority? If so, please identify such
elements and explain how they should
help facilitate resolution planning.
13. Should the Commission set more
prescriptive requirements with respect
to any of the elements of a covered
clearing agency’s RWP? If so, what
should the Commission require, and
why?
14. Are there other elements that a
covered clearing agency should consider
in its RWP that would better align the
incentives of various stakeholders and
hence facilitate a productive
collaboration among them in a recovery
and wind-down event?
15. As discussed above, in 2016,
CFTC staff issued guidance with respect
to the contents of recovery and winddown planning.91 Do commenters
believe that there are any aspects of that
guidance which should be codified in
the Commission’s proposed Rule 17ad–
26? If so, please identify such aspects
and explain why they should be
included.
16. Should the Commission also
require that a covered clearing agency’s
91 See
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RWP set forth a viable strategy for its
recovery and/or orderly wind-down, to
ensure that a covered clearing agency
take into account how the items
included in the RWP fit together as a
cohesive whole and that the RWP takes
into account a covered clearing agency’s
unique characteristics and
circumstances, including ownership
and governance structures, effect on
direct and indirect participants,
membership base, markets served, the
risks inherent in products cleared, and
risk management needs. Would such a
requirement be beneficial, or are these
elements already captured by the
proposed rule text?
17. With the additional requirements
in proposed Rule 17ad–26, would a
covered clearing agency retain an
appropriate amount of discretion to
consider the specific characteristics of
the covered clearing agency when
creating its RWP?
18. Do commenters agree with the
proposed definition of ‘‘service
provider’’, including the distinction
between third parties and affiliates, and
the proposed definition of ‘‘affiliate’’?
19. Do commenters agree that the
RWP should identify and describe the
covered clearing agency’s critical
payment, clearing, and settlement
services and address how the covered
clearing agency would continue to
provide such critical services in the
event of a recovery and during an
orderly wind-down, including the
identification of the staffing necessary to
support such critical services and
analysis of how such staffing would
continue in the event of a recovery and
during an orderly wind-down? Should
the Commission further define
‘‘staffing’’ to specify that it refers to
particular positions or offices within the
covered clearing agency?
20. Do commenters agree that the
RWP should identify and describe a
covered clearing agency’s critical
service providers, specify to which
services such service providers are
relevant, and address how the covered
clearing agency would ensure that such
providers can be legally obligated to
perform in the event of a recovery or
orderly wind-down, including
consideration of contractual obligations
with such service providers and
whether those obligations are subject to
alteration or termination as a result of
initiation of the recovery and orderly
wind-down plan?
21. Do commenters agree that the
proposed rule should require that the
covered clearing agency identify the
scenarios that may potentially prevent
the covered clearing agency from being
able to provide its critical payment,
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clearing, and settlement services as a
going concern, including uncovered
credit losses (as described in paragraph
(e)(4)(viii) of 17 CFR 240.17Ad–22),
uncovered liquidity shortfalls (as
described in paragraph (e)(7)(viii) of 17
CFR 240.17Ad–22), and general
business losses (as described in
paragraph (e)(15) of 17 CFR 240.17Ad–
22)?
22. Should the Commission instead
identify particular scenarios that a
covered clearing agency has to address
in its RWP? If so, should the
Commission include any or all of the
following scenarios: (i) credit losses or
liquidity shortfalls created by single and
multiple clearing member defaults; (ii)
liquidity shortfall created by a
combination of clearing member default
and a failure of a liquidity provider to
perform; (iii) settlement bank failure;
(iv) custodian or depository bank
failure; (v) losses resulting from
investment risk; (vi) losses from poor
business results; (vii) financial effects
from cybersecurity events; (viii) fraud
(internal, external, and/or actions of
criminals or of public enemies); (ix)
legal liabilities, including those not
specific to the covered clearing agency’s
business as a covered clearing agency;
(x) losses resulting from
interconnections and interdependencies
among the covered clearing agency and
its parent, affiliates, and/or internal or
external service providers; (xi) losses
resulting from interconnections and
interdependencies with other covered
clearing agencies; and (xii) losses
resulting from issues relating to services
that are ancillary to the covered clearing
agency’s critical services? Should the
Commission require consideration of
scenarios involving multiple failures
(e.g., a member default occurring
simultaneously, or nearly so, with a
failure of a service provider) that, in the
judgment of the covered clearing
agency, are particularly relevant to its
business? Does this set omit any
potential additional scenarios?
23. With respect to scenarios, should
the Commission also require that the
RWP include an analysis that includes:
(i) a description of the scenario; (ii) the
events that are likely to trigger the
scenario; (iii) the covered clearing
agency’s process for monitoring for such
events; (iv) the market conditions,
operational and financial difficulties
and other relevant circumstances that
are likely to result from the scenario; (v)
the potential financial and operational
impact of the scenario on the covered
clearing agency and on its clearing
members, internal and external service
providers and relevant affiliated
companies, both in an orderly market
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34725
and in a disorderly market; and (vi) the
specific steps the covered clearing
agency would expect to take when the
scenario occurs, or appears likely to
occur, including, without limitation,
any governance or other procedures that
may be necessary to implement the
relevant recovery tools and to ensure
that such implementation occurs in
sufficient time for the recovery tools to
achieve their intended effect?
24. Do commenters believe that the
Commission should prescribe any
particular tools that a covered clearing
agency must include in its RWP, such
as a cash call, gains-based haircutting,
or full or partial tear-up? If so, please
identify such tools and explain why
they should be required.
25. Proposed Rule 17ad–26 would
also require that the RWP identify
triggers but does not prescribe a list of
specific triggers. Should the
Commission prescribe any particular
triggers, whether qualitative or
quantitative? For example, should the
Commission require that a covered
clearing agency should consider using
the exhaustion of its prefunded
resources as a trigger?
26. Should the Commission prescribe
that a covered clearing agency’s RWP
also identify criteria that could show
when recovery is successful and the
covered clearing agency would return to
normal operations?
27. With respect to the requirement to
identify and describe the process that
the covered clearing agency uses to
monitor and determine whether the
criteria that would trigger
implementation of the RWP have been
met, including the governance
arrangements applicable to such
process, should the Commission require
that the description also include
identification of any areas in which the
covered clearing agency could exercise
discretion?
28. Proposed Rule 17ad–26(a)(5)
would require the covered clearing
agency to identify and describe the
rules, policies, procedures, and any
other tools or resources the covered
clearing agency would rely upon in a
recovery or orderly wind-down to
address the scenarios identified in the
recovery and wind-down plan. Should
the Commission also require that a
covered clearing agency’s RWP include
any or all of the following: (i) a
description of the tools that the covered
clearing agency would expect to use in
each scenario; (ii) the order in which
each tool would be expected to be used;
(iii) the time frame within which the
tool would be used; (iv) the governance
and approval processes and
arrangements within the covered
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clearing agency for the use of each of the
tools available, including the exercise of
any available discretion; (v) the
processes to obtain any approvals
external to the covered clearing agency
(including any regulatory approvals)
that would be necessary to use each of
the tools available, and the steps that
might be taken if such approval is not
obtained; (vi) the steps necessary to
implement the tools; (vii) the roles and
responsibilities of all parties, including
non-defaulting participants; (viii)
whether the tool is mandatory or
voluntary; and (ix) an assessment of the
associated risks from the use of each
tool to non-defaulting clearing members
and their customers, linked financial
market infrastructures, and the financial
system more broadly? Should the
Commission require the covered
clearing agency to estimate the potential
size of the resources that the covered
clearing agency would expect to receive
from each tool?
29. Proposed Rule 17d–26 would
require that the RWP address how the
identified tools, procedures, or other
resources would ensure timely
implementation of the RWP. Do
commenters agree with the need to
ensure timely implementation? Should
the Commission specify that timely
implementation means that a covered
clearing agency is able to deploy the
tools identified in its plan as needed
and when appropriate, for example, that
it has identified the appropriate
escalation and approval processes to use
a particular tool or resource?
30. Proposed Rule 17ad–26(a)(7)
would require procedures for informing
the Commission as soon as practicable
when the covered clearing agency is
considering initiating a recovery or
orderly wind-down. Should the
Commission instead or additionally
require that the procedures provide for
informing the Commission when the
triggers set forth in proposed Rule 17ad–
26(a)(5) have been met? Should the
Commission also require notification to
the covered clearing agency’s
participants and/or other stakeholders
in the event of recovery or orderly winddown, or initiation of the RWP?
31. Should the Commission prescribe
a particular form of notice for informing
the Commission, consistent with the
requirement in proposed Rule 17ad–
26(a)(7)? For example, should the
Commission require written notice, or
would telephonic notice be sufficient?
32. Proposed Rule 17ad–26(a)(8)
would require procedures for testing the
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covered clearing agency’s ability to
implement the recovery and wind-down
plans at least every twelve months, by
requiring the covered clearing agency’s
participants and, when practicable,
other stakeholders to participate in the
testing of its plans and specifying the
procedures for, as appropriate,
amending the plans to address the
results of the testing. Do commenters
agree with this proposed requirement?
Should the covered clearing agency be
required to mandate that participants
participate in testing? Similarly, should
the covered clearing agency be required
to mandate that other stakeholders
participate in testing unless the covered
clearing agency determines that it
would be impracticable to do so?
Should testing be less frequent? For
example, should testing occur at least
every 24 months?
33. Proposed Rule 17ad–26(a)(9)
would require procedures for reviewing
and approving a covered clearing
agency’s RWP by the board of directors
at least every twelve months. Should the
Commission impose a more, or less,
frequent review cycle? And if so, why?
Should the Commission require review
and approval by the board of directors
of an RWP following material changes to
the covered clearing agency’s operations
that would significantly affect the
viability or execution of the plans?
IV. Economic Analysis
A. Introduction
The Commission is sensitive to the
economic consequences and effects of
the proposed rule and amendments,
including their benefits and costs.92 The
Commission acknowledges that, since
many of these proposals could require a
covered clearing agency to adopt new
policies and procedures, the economic
effects and consequences of these rules
include those flowing from the
substantive results of those new policies
and procedures. Further, section 17A of
the Exchange Act directs the
Commission to have due regard for the
public interest, the protection of
92 Under section 3(f) of the Exchange Act,
whenever the Commission engages in rulemaking
under the Exchange Act and is required to consider
or determine whether an action is necessary or
appropriate in the public interest, it must consider,
in addition to the protection of investors, whether
the action will promote efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f). In addition,
section 23(a)(2) of the Exchange Act prohibits the
Commission from adopting any rule that would
impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the
Exchange Act. See 15 U.S.C. 78w(a)(2).
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investors, the safeguarding of securities
and funds, and maintenance of fair
competition among brokers and dealers,
clearing agencies, and transfer agents
when using its authority to facilitate the
establishment of a national system for
clearance and settlement of transactions
in securities.93
This section addresses the likely
economic effects of the proposed rule
and amendments, including their
anticipated and estimated benefits and
costs and their likely effects on
efficiency, competition, and capital
formation. It is not feasible to quantify
many of the benefits and costs. For
example, risk management is an area of
key concern for all clearing agency
stakeholders. Perceptions of risk affect
how clearing agencies are operated, and
those operations, in turn, affect
perceptions of risk. Any change to the
policies and procedures about how
clearing agencies act in times of crisis
affects the behavior of clearing agencies
and participants in complex ways not
only during a crisis but also before the
crisis, and those behavioral changes
may affect the likelihood and severity of
a crisis. While the Commission has
attempted to quantify economic effects
where possible, much of the discussion
of economic effects is qualitative in
nature. The Commission also discusses
the potential economic effects of certain
alternatives to the approaches
recommended in this proposal.
B. Economic Baseline
To consider the effect of the proposed
rule and amendments, the Commission
first explains the current state of affairs
in the market (i.e., the economic
baseline). All of the potential benefits
and costs from adopting the proposed
rule and amendments are changes
relative to the economic baseline. The
economic baseline in this proposal
considers: (1) the current market for
covered clearing agency activities,
including the number of covered
clearing agencies, the distribution of
participants across these clearing
agencies, and the level of activity these
clearing agencies process; (2) the current
regulatory framework for covered
clearing agencies; (3) the current
recovery and wind-down plans of
covered clearing agencies; and (4) the
current risk-based margin systems of
covered clearing agencies.
93 See
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1. Description of Market
Of the nine registered clearing
agencies, seven are currently in
operation.94 Six provide central
counterparty (‘‘CCP’’) services 95 and
one provides central securities
depository (‘‘CSD’’) services.96 National
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94 There are two registered but inactive clearing
agencies: Boston Stock Exchange Clearing
Corporation (‘‘BSECC’’) and Stock Clearing
Corporation of Philadelphia (‘‘SCCP’’). Neither has
provided clearing services in well over a decade.
See Self-Regulatory Organizations; The Boston
Stock Clearing Corporation; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Amend the Articles of Organization and ByLaws, Exchange Act Release No. 63629 (Jan. 3,
2011), 76 FR 1473, 1474 (Jan. 3, 2011) (BSECC
‘‘returned all clearing funds to its members by
September 30, 2010, and [] no longer maintains
clearing members or has any other clearing
operations as of that date. [ ] BSECC [ ] maintain[s]
its registration as a clearing agency with the
Commission for possible active operations in the
future.’’); Self-Regulatory Organizations; Stock
Clearing Corporation of Philadelphia; Notice of
Filing and Immediate Effectiveness of Proposed
Rule Change Relating to the Suspension of Certain
Provisions Due to Inactivity, Exchange Act Release
No. 63268 (Nov. 8, 2010), 75 FR 69730, 69731 (Nov.
15, 2010) (SCCP ‘‘returned all clearing fund
deposits by September 30, 2009; [and] as of that
date SCCP no longer maintains clearing members or
has any other clearing operations. [] SCCP []
maintain[s] its registration as a clearing agency for
possible active operations in the future.’’). Because
they do not provide clearing services, BSECC and
SCCP are not included in the economic baseline or
the consideration of benefits and costs.
95 A CCP is a type of registered clearing agency
that acts as the buyer to every seller and the seller
to every buyer, providing a trade guaranty with
respect to transactions submitted for clearing by the
CCP’s participants. See 17 CFR 240.17Ad–22(a)(2);
Definition of ‘‘Covered Clearing Agency’’, Exchange
Act Release No. 88616 (Apr. 9, 2020), 85 FR 28853,
28855 (May 14, 2020) (‘‘CCA Definition Adopting
Release’’). A CCP may perform a variety of risk
management functions to manage the market,
credit, and liquidity risks associated with
transactions submitted for clearing. For example,
CCPs help manage the effects of a participant
default by closing out the defaulting participant’s
open positions and using financial resources
available to the CCP to absorb any losses. In this
way, the CCP can prevent the onward transmission
of financial risk. See, e.g., Shortening the Securities
Transaction Settlement Cycle, Exchange Act
Release No. 94196 (Feb. 9, 2022), 87 FR 10436,
10448 (Feb. 24, 2022).
96 A CSD is a type of registered clearing agency
that acts as a depository for handling securities,
whereby all securities of a particular class or series
of any issuer deposited within the system are
treated as fungible. Through use of a CSD, securities
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Securities Clearing Corporation
(‘‘NSCC’’), Fixed Income Clearing
Corporation (‘‘FICC’’), and Depository
Trust Company (‘‘DTC’’) are all covered
clearing agencies that are subsidiaries of
Depository Trust & Clearing Corporation
(‘‘DTCC’’). NSCC offers clearance and
settlement services for equities,
corporate and municipal debt, American
depositary receipts, exchange traded
funds, and unit investment trusts.
FICC’s Mortgage-Backed Securities
Division (‘‘MBSD’’) provides clearing,
netting, and risk management services
for trades in the mortgage-backed
securities market. FICC’s Government
Securities Division (‘‘GSD’’) provides
clearing, netting, and risk management
services for trades in U.S. Government
debt, including buy-sell transactions
and repurchase agreement transactions.
DTC provides end-of-day net settlement
for clients, processes corporate actions,
provides securities movements for
NSCC’s net settlements, and it provides
settlement for institutional trades.
ICE Clear Credit LLC (‘‘ICC’’) and ICE
Clear Europe Limited (‘‘ICEEU’’) are
both covered clearing agencies for credit
default swaps (‘‘CDS’’), and they are
both subsidiaries of Intercontinental
Exchange, Inc. (‘‘ICE’’). LCH SA is
another covered clearing agency that
offers clearing for CDS, and it is a
France-based subsidiary of LCH Group
Holdings Ltd, which, in turn, is majority
owned by the London Stock Exchange
Group plc. The seventh covered clearing
agency, Options Clearing Corporation
(‘‘OCC’’), offers clearing services for
exchange-traded U.S. equity options.
Covered clearing agencies operate
under one of two broad ownership
models. In one model, the covered
clearing agency is member-owned,97
may be transferred, loaned, or pledged by
bookkeeping entry without the physical delivery of
certificates. A CSD also may permit or facilitate the
settlement of securities transactions more generally.
See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad–
22(a)(3); CCA Definition Adopting Release, supra
note 95, at 28856.
97 See, e.g., Exchange Act Release No. 52922 (Dec.
7, 2005), 70 FR 74070 (Dec. 14, 2005) (explaining
that participants of DTC, FICC, and NSCC that make
full use of the services of one or more of these
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34727
while in the other model, the covered
clearing agency is publicly traded.98
Covered clearing agencies currently
operate specialized clearing services
and face limited competition in their
markets. For each of the following asset
classes, for example, there is only one
covered clearing agency serving as a
central counterparty: exchange-traded
equity options (OCC), government
securities (FICC), mortgage-backed
securities (FICC), and equity securities
(NSCC). There is also only one covered
clearing agency providing central
securities depository services (DTC).
Covered clearing agency activities
exhibit high barriers to entry and
economies of scale.99 These features of
the existing markets, and the resulting
concentration of clearing and settlement
services within a handful of entities,
inform the Commission’s examination
of the effects of the proposed rule and
amendments on competition, efficiency,
and capital formation, as discussed
below. Table 1 summarizes the most
recent data on the number of
participants at each covered clearing
agency.100
clearing agency subsidiaries of DTCC are required
to purchase DTCC common shares).
98 OCC is owned by certain options exchanges.
ICC and ICEEU are both subsidiaries of ICE (a
publicly traded company). LCH SA is a subsidiary
of LCH Group Holdings, Ltd., which is majorityowned by London Stock Exchange Group plc (a
publicly traded company).
99 See Alistair Milne, Central Securities
Depositories and Securities Clearing and
Settlement: Business Practice and Public Policy
Concerns, in Analyzing the Economics of Financial
Market Infrastructures 334, 335 (Martin Diehl, et al.
eds., 2016) available at https://doi.org/10.4018/9781-4666-8745-5.ch017 (‘‘Clearing and settlement
operations have evolved over time to become
remarkably complex. This complexity creates
business challenges, especially for management of
liquidity, which could potentially have systemic
consequences for the wider financial system. This
complexity may also increase the barriers to entry
that can discourage competition in trade settlement
and securities services.’’).
100 Data Membership requirements vary across the
covered clearing agencies. For example, the selfclearing minimum net-capital requirement is $500
thousand for NSCC, while OCC’s net capital
requirement is $2.5 million. Multiple memberships
by the same firm are much more common at NSCC
than at the other covered clearing agencies.
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TABLE 1 a—NUMBER OF PARTICIPANTS AT COVERED CLEARING AGENCIES IN MARCH 2023
Covered clearing agency
Number of
participants
Subsidiaries of The Depository Trust & Clearing Corporation:
National Securities Clearing Corporation b ...................................................................................................................................
The Depository Trust Company c .................................................................................................................................................
Fixed Income Clearing Corporation (Government Securities Division) d .....................................................................................
Fixed Income Clearing Corporation (Mortgage Backed Securities Division) e ............................................................................
Subsidiaries of Intercontinental Exchange:
ICE Clear Credit f ..........................................................................................................................................................................
ICE Clear Europe (CDS Participants Only) g ...............................................................................................................................
Subsidiaries of LCH:
LCH SA (CDSClear Participants Only) h ......................................................................................................................................
The Options Clearing Corporation i .....................................................................................................................................................
3,931
844
213
140
........................
29
29
........................
25
188
a Participant
statistics were taken from the websites of each of the listed clearing agencies in March 2023.
DTCC, NSCC Member Directories, available at https://www.dtcc.com/client-center/nscc-directories.
DTC Member Directories, available at https://www.dtcc.com/client-center/dtc-directories.
d DTCC, FICC–GOV Member Directories, available at https://www.dtcc.com/client-center/ficc-gov-directories.
e DTCC, FICC–MBS Member Directories, available at https://www.dtcc.com/client-center/ficc-mbs-directories.
f ICE, ICE Clear Credit Participants, available at https://www.theice.com/clear-credit/participants.
g ICE, ICE Clear Europe Membership, available at https://www.theice.com/clear-europe/membership.
h LCH, LCH SA Membership, available at https://www.lch.com/membership/member-search.
i OCC, Member Directory, available at https://www.theocc.com/Company-Information/Member-Directory.
b See
c DTCC,
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Covered clearing agencies have
become an essential part of the
infrastructure of the U.S. securities
markets due to their role as
intermediaries. For example, in 2021
approximately $1.1 trillion (65%) of the
notional amount of all single-name CDS
transactions in the United States were
centrally cleared.101 The average daily
value of equities trades cleared by NSCC
in 2021 was $2.0 trillion; at FICC, the
total net value of government securities
transactions in 2021 was $1,419 trillion
and the total net par value for mortgage
backed securities in 2021 was $69
trillion; and DTC settled a total of $152
trillion of securities in 2021.102 In
addition, in 2022, OCC cleared 10.32
billion options contracts.103
Central clearing benefits the markets
by significantly reducing participants’
counterparty risk and through more
efficient netting of margin requirements.
Consequently, central clearing also
benefits the financial system as a whole
by increasing financial resilience and
the ability to monitor and manage
risk.104 The role of a clearing agency in
101 Data from DTCC’s Trade Information
Warehouse, compiled by Commission staff.
102 See DTCC, Annual Report 9 (2021), available
at https://www.dtcc.com/∼/media/files/downloads/
about/annual-reports/DTCC-2021-Annual-Report.
103 See OCC, Press Release ‘‘OCC Clears RecordSetting 10.38 Billion Total Contracts in 2022 (Jan.
4, 2023), available at https://www.theocc.com/
newsroom/press-releases/2023/0103occclearsrecord
setting1038billiontotalcontractsin2022.
104 See Darrell Duffie, Still the World’s Safe
Haven? Redesigning the U.S. Treasury Market After
the COVID–19 Crisis 15 (Hutchins Center Working
Paper, Paper No. 62, 2020), available at https://
www.brookings.edu/wp-content/uploads/2020/05/
wp62_duffie_v2.pdf (‘‘Central clearing increases the
transparency of settlement risk to regulators and
market participants, and in particular allows the
CCP to identify concentrated positions and crowded
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promoting resilience highlights its
central importance in the functioning of
markets.105 If a CCP is unable to perform
its risk management functions
effectively, it can transmit risk
throughout the financial system.
Similarly, if a CSD is unable to perform
its functions, market participants may
be unable to settle their transactions,
which may transmit risk throughout the
financial system.
Disruption to a clearing agency’s
operations, or failure on the part of a
clearing agency to meet its obligations,
could serve as a source of contagion,
resulting in significant costs not only to
the clearing agency itself and its
participants but also to other market
participants and the broader U.S.
financial system.106 Absent proper risk
trades, adjusting margin requirements accordingly.
Central clearing also improves market safety by
lowering exposure to settlement failures . . . . As
depicted, settlement failures rose less in March
[2020] for [U.S. Treasury] trades that were centrally
cleared by FICC than for all trades involving
primary dealers. A possible explanation is that
central clearing reduces ‘daisy-chain’ failures,
which occur when firm A fails to deliver a security
to firm B, causing firm B to fail to firm C, and so
on.’’).
105 See generally Albert J. Menkveld & Guillaume
Vuillemey, The Economics of Central Clearing, 13
Ann. Rev. Fin. Econ. 153 (2021).
106 See generally Dietrich Domanski, Leonardo
Gambacorta, & Cristina Picillo, Central Clearing:
Trends and Current Issues, BIS Q. Rev. (Dec. 2015),
https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf
(describing links between CCP financial risk
management and systemic risk); Darrell Duffie, Ada
Li, & Theo Lubke, Policy Perspectives on OTC
Derivatives Market Infrastructure 9 (Fed. Res. Bank
N.Y. Staff Rep., Paper No. 424, 2010), available at
https://www.newyorkfed.org/research/staff_reports/
sr424.pdf (‘‘If a CCP is successful in clearing a large
quantity of derivatives trades, the CCP is itself a
systemically important financial institution. The
failure of a CCP could suddenly expose many major
market participants to losses. Any such failure,
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management, a clearing agency failure
could destabilize the financial system.
As a result, proper management of the
risks associated with central clearing
helps ensure the stability of the U.S.
securities markets and the broader U.S.
financial system.107
moreover, is likely to have been triggered by the
failure of one or more large clearing agency
participants, and therefore to occur during a period
of extreme market fragility.’’); Craig Pirrong, The
Inefficiency of Clearing Mandates 11–14, 16–17,
24–26 (Policy Analysis Working Paper, Paper No.
655, 2010), available at https://www.cato.org/pubs/
pas/PA665.pdf (stating, among other things, that
‘‘CCPs are concentrated points of potential failure
that can create their own systemic risks,’’ that ‘‘[a]t
most, creation of CCPs changes the topology of the
network of connections among firms, but it does not
eliminate these connections,’’ that clearing may
lead speculators and hedgers to take larger
positions, that a CCP’s failure to effectively price
counterparty risks may lead to moral hazard and
adverse selection problems, that the main effect of
clearing would be to ‘‘redistribute losses
consequent to a bankruptcy or run,’’ and that
clearing entities have failed or come under stress in
the past, including in connection with the 1987
market break); see Glenn Hubbard et al., Report of
the Task Force on Financial Stability, Brookings
Inst., 96 (June 2021), available at https://
www.brookings.edu/wp-content/uploads/2021/06/
financial-stability_report.pdf (‘‘In short, the
systemic consequences from a failure of a major
CCP, or worse, multiple CCPs, would be severe.
Pervasive reforms of derivatives markets following
2008 are, in effect, unfinished business; the
systemic risk of CCPs has been exacerbated and left
unaddressed.’’); Froukelien Wendt, Central
Counterparties: Addressing their Too Important to
Fail Nature (working paper Jan. 2015), available at
https://ssrn.com/abstract=2568596 (retrieved from
SSRN Elsevier database) (assessing the potential
channels for contagion arising from CCP
interconnectedness); Manmohan Singh, Making
OTC Derivatives Safe—A Fresh Look 5–11 (IMF
Working Paper, Paper No. 11/66, 2011), available at
https://www.imf.org/external/pubs/ft/wp/2011/
wp1166.pdf (addressing factors that could lead
central counterparties to be ‘‘risk nodes’’ that may
threaten systemic disruption).
107 See Paolo Saguato, Financial Regulation,
Corporate Governance, and the Hidden Costs of
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2. Overview of the Existing Regulatory
Framework
The existing regulatory framework for
clearing agencies registered with the
Commission includes section 17A of the
Exchange Act, the Dodd-Frank Act, and
the related rules adopted by the
Commission.108
Clearing agencies registered with the
Commission may also be subject to
other domestic or foreign regulation.109
Specifically, clearing agencies operating
in the U.S. may also be subject to
regulation by the CFTC (as clearing
agencies for futures or swaps) and the
Board of Governors (as systemically
important financial market utilities or
state member banks).110 Additionally,
LCH SA is regulated by l’Autorite´ des
marche´s financiers, l’Autorite´ de
Controˆle Prudentiel et de Re´solution,
and the Banque de France, and it is
subject to European Market
Infrastructure Regulation (EMIR).111
ICEEU is regulated by the Bank of
England, and it is subject to the UK’s
incorporation of EMIR into the UK
framework.112
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3. Current Recovery and Wind-Down
Plans
As discussed in section II supra, each
covered clearing agency, as part of a
sound risk-management framework, is
currently required to include plans for
the recovery and orderly wind-down of
the covered clearing agency necessitated
by credit losses, liquidity shortfalls,
losses from general business risk, or any
other losses (such plans are referred to
as RWPs).113 The covered clearing
Clearinghouses, 82 Ohio St. L.J. 1071, 1074–75
(2021), available at https://moritzlaw.osu.edu/sites/
default/files/2022-03/18.%20Saguato_v82-6_10711140.pdf (‘‘[T]he decision to centralize risk in
clearinghouses made them critical for the stability
of the financial system, to the point that they are
considered not only too-big-to-fail, but also tooimportant-to-fail institutions.’’).
108 See supra section II.
109 See supra section III.D.2.
110 See 12 U.S.C. 5472, 5469. Currently, ICC,
ICEEU, LCH SA, and OCC are also regulated by the
CFTC. DTC, FICC, NSCC, ICC, and OCC have been
designated systemically important financial market
utilities by the Financial Stability Oversight
Council (see infra note 138 and the accompanying
text). DTC is also a state member bank of the
Federal Reserve System. The Board of Governors
addresses certain recovery and wind-down plans in
Regulation HH (see supra notes 68 and
accompanying text), and the CFTC requires certain
derivatives clearing organizations to maintain
recovery and wind-down plans through Regulation
39.39(b) and subsequent guidance (see supra notes
69 and accompanying text).
111 See LCH, Company Structure, available at
https://www.lch.com/about-us/structure-andgovernance/company-structure.
112 See ICE, ICEEU Regulation, available at
https://www.theice.com/clear-europe/regulation;
see also https://www.fca.org.uk/markets/uk-emir.
113 See supra note 16 and accompanying text.
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agency may have one RWP or may
maintain two separate documents,
referring to one as the recovery plan and
the other as the wind-down plan.
Although the Commission did not
include specific requirements for RWPs
when the rule was adopted, the
Commission did offer general guidance
about what covered clearing agencies
should consider when creating their
RWPs.114 The RWPs are subject to the
rule filing requirement of Rule 19b–4,
and all seven active covered clearing
agencies have submitted their plans and
subsequent revisions to the Commission
for review, public comment, and
approval.115 Additionally, all of the
covered clearing agencies have
submitted confidential treatment
requests with their RWPs pursuant to 17
CFR 240.24b–2. The Commission has
also reviewed these confidential
treatment requests and concluded that
the redacted material could be withheld
from the public under the Freedom of
Information Act.116 Due to the
confidential treatment of the RWPs, the
current release includes aggregated,
anonymized analyses of the RWPs
submitted to the Commission by the
clearing agencies. Additionally, Form
19b–4, which is public, requires a
description of the proposed rule change
for public comment.117 To the extent
that information in the baseline has
been drawn from public sources, such
as the covered clearing agencies’ SRO
rule filings, we have included
attribution accordingly. All seven active
covered clearing agencies have
approved RWPs in place, and the plans
differ in, for example, length, style,
emphasis, and specificity.
a. Critical Clearing and Settlement
Services
Each RWP currently includes what
the covered clearing agency has
identified and described as its critical
payment, clearing, and settlement
services, as well as the criteria that the
covered clearing agency employs to
make such a determination as to what
constitutes critical services.118
114 CCA Standards Adopting Release, supra note
7, 81 FR at 70810. See also supra section II.A
(discussing the guidance).
115 See supra section II generally, including note
32 on Form 19b–4 and note 41 for proposed rule
changes.
116 See, e.g., https://www.sec.gov/rules/sro/nscc/
2018/34-82430-ex5a.pdf (as an example of the
redacted filing materials posted for SR–NSCC–
2017–017). See also supra notes 32 and 41 and
accompanying text.
117 See supra note 32.
118 See, e.g., Exchange Act Release Nos. 82462
(Jan. 2, 2018), 83 FR 884, 885 (Jan. 8, 2018) (SR–
DTC–2017–021) (stating that the RWP provided a
description of its services and the criteria to
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34729
Depending on their operations and the
structure of their RWPs, covered
clearing agencies currently identify
between one and a dozen or more
critical services in those RWPs.
Currently, no covered clearing agency
has analyses in its RWP regarding the
staffing levels necessary to support the
critical services that they list or how
such staffing would continue in the
event of a recovery operation or during
an orderly wind-down.
b. Service Providers
Each RWP identifies and describes, to
varying degrees, certain service
providers, including both affiliates and
third parties, upon which the associated
covered clearing agency relies to
provide its critical payment, clearing,
and settlement services. Most plans do
not explicitly link the identified service
providers to the covered clearing
agencies’ critical services. Some of the
RWPs state that they assume critical
service providers will continue to
perform in the event of a wind-down; at
least one RWP states that it analyzes its
contractual arrangements with respect
to continuing to provide services during
a recovery; 119 and at least one RWP
determine which services are considered critical)
(‘‘DTC 2017 Notice’’); 82431 (Jan. 2, 2018), 83 FR
871, 872 (Jan. 8, 2018) (SR–FICC–2017–021) (stating
that the RWP provided a description of its services
and the criteria to determine which services are
considered critical) (‘‘FICC 2017 Notice’’); ICC 2021
Order, supra note 41, 86 FR at 26561 (stating that
the ICC recovery plan explains that ICC’s sole
critical operation is provides credit default swap
clearing services); ICEEU 2019 Order, supra note
41, 84 FR at 34455 (stating that ICEEU identified
its futures and option and credit default swap
product clearing services, as well as its treasury and
banking services, as critical services); 82316 (Dec.
13, 2017), 82 FR 60246, 60247 (Dec. 19, 2017) (SR–
LCH SA–2017–012) (stating that LCH SA performed
an assessment on identification of critical functions
and shared services in accordance with Financial
Stability Board guidance) (‘‘LCH 2017 Notice’’);
82430 (Jan. 2, 2018), 83 FR 841, 842 (Jan. 8, 2018)
(SR–NSCC–2017–017) (stating that the RWP
provided a description of its services and the
criteria to determine which services are considered
critical) (‘‘NSCC 2017 Notice’’); 82352 (Dec. 19,
2017), 82 FR 61072, 61074–75 (Dec. 26, 2017) (SR–
OCC–2017–021) (stating that OCC’s RWP identifies
critical services and critical support functions)
(‘‘OCC 2017 Notice’’).
119 For example, OCC’s plan discusses the critical
vendors for each of the identified critical services,
as well as the Critical Support Functions, as well
as the critical external interconnections that OCC
maintains with other FMUs, exchanges (including
designated contract markets), clearing and
settlement banks, custodian banks, letter of credit
banks, clearing members and credit facility lenders,
and the appendices to the plan identifies key
vendors and service providers, as well as key
agreements to be maintained. OCC 2017 Notice,
supra note 118, 82 FR at 61075. ICC’s plan
categorizes its critical services by those that are
provided to ICC by its parent company versus those
that are provided by external third parties, and it
also details the IT systems and applications critical
to ICC’s clearing operations, including those
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states that it is reducing dependencies
on third parties.
c. Scenarios
Each RWP generally identifies and
describes certain scenarios that may
potentially prevent the covered clearing
agency from being able to provide its
critical payment, clearing, and
settlement services as a going
concern.120 The RWPs differ in the
number of scenarios identified and
described as well as the extent of the
specificity with which each scenario is
discussed. For example, some RWPs
present short qualitative analyses of
member defaults, while others present
long, detailed quantitative analyses of
member defaults.
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d. Criteria That Would Trigger
Implementation
Each RWP identifies and describes
criteria that would trigger the
implementation of the recovery and
orderly wind-down plan.121 The RWPs
provided by ICE, those provided by external third
parties, and those that ICC itself provides. Further,
the plan analyzes ICC’s contractual arrangements in
the context of continuing services under those
contracts during recovery. ICC 2017 Notice and
Order, supra note 41, 82 FR at 26561–62. In
addition, NSCC’s, FICC’s, and DTC’s plans identify
external service providers for which the
relationships are managed by a particular office
within DTCC. See, e.g., Securities Exchange Act
Release Nos. 91428 (Mar. 29, 2021), 86 FR 17440,
17442 (Mar. 29, 2021) (SR–NSCC–2021–004)
(‘‘NSCC 2021 Notice’’); 91430 (Mar. 29, 2021), 86
FR 17432, 17433–34 (Apr. 2, 2021) (SR–FICC–2021–
002) (‘‘FICC 2021 Notice’’); 91429 (Mar. 29, 2021),
86 FR 17421, 17422 (Mar. 29, 2021) (SR–DTC–
2021–004) (‘‘DTC 2021 Notice’’).
120 For example, OCC’s plan identifies and
considers scenarios that may potentially prevent it
from being able to provide its critical services as a
going concern. See OCC 2017 Notice, supra note
118, 82 FR at 61073. ICC’s plan describes potential
stress scenarios that may prevent it from being able
to meet obligations and provide services and the
recovery tools available to it to address these stress
scenarios. See Securities Exchange Act Release No.
91439 (Mar. 30, 2021), 86 FR 17649, 17650 (Apr.
5, 2021) (SR–ICC–2021–005) (‘‘ICC 2021 Notice’’).
ICEEU’s plans outlines a number of firm-specific
and market-wide stress scenarios that, in its
determination, may result in significant losses or
liquidity shortfall, suspension or failure of its
critical services and related functions and systems,
and damage to other market infrastructure, with
resulting uncertainty in the markets for which
ICEEU clears. See Exchange Act Release No. 82496
(Jan. 12, 2018), 83 FR 2855 (Jan. 19, 2018) (SR–
ICEEU–2017–016). LCH SA’s plans categorizes
potential stress scenarios in two ways as a result of
either: (i) Clearing member defaults and (ii) nonclearing member events. See LCH 2017 Notice,
supra note 118, 82 FR at 60248. In addition, each
of the plans for NSCC, FICC, and DTC discuss, at
a general level, scenarios in terms of uncovered
losses or liquidity shortfalls that could result from
the default of one or more of its members as well
as losses that could arising from non-default events.
See, e.g., NSCC 2021 Notice, supra note 119, 86 FR
at 17441; FICC 2021 Notice, supra note 119, 86 FR
at 17433; DTC 2021 Notice, supra note 119, 86 FR
17421.
121 See OCC 2017 Notice, supra note 118, 82 FR
at 61079–80 (discussing OCC’s identification of
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differ in the number of identified
triggering criterion and the detail in
which they discuss each triggering
criteria; there are also differences in the
descriptions of the processes that
covered clearing agencies use to monitor
and determine whether the triggering
criteria have been met, thus causing
their RWPs to be activated.
e. Rules, Policies, Procedures, and Other
Tools or Resources
Each RWP describes, to varying
degrees, the rules, policies, procedures,
and other tools or resources the covered
clearing agency would rely upon in a
recovery or orderly wind-down to
address the scenarios identified in the
RWP.122
f. Procedures To Ensure Timely
Implementation
Each RWP mentions, to varying
degrees, mechanisms that would ensure
timely implementation of the RWP.123
Some of the RWPs include specific
procedures to ensure timely
implementation of a recovery and
orderly wind-down plan after specific
criteria have been triggered. One of the
RWPs has taken steps to ensure timely
qualitative trigger events for both recovery and
wind-down); 83 FR at 34183, 34221, and 44970
(stating the DTC, NSCC, and FICC have identified
wind-down triggers and that a covered clearing
agency would have entered ‘‘recovery phase’’ when
it issues its first loss allocation round); ICC 2021
Order, supra note 41, 86 FR at 26562; 84 FR at
24455 (ICEEU).
122 See, e.g., 83 FR at 34220–21 (identifying
NSCC’s recovery tool characteristics); FICC 2017
Notice, supra note 118, 83 FR at 878 (identifying
FICC’s recovery tool characteristics); 83 FR at 44970
(identifying DTC’s recovery tool characteristics);
OCC 2017 Notice, supra note 118, 82 FR at 61075–
80 (identifying OCC’s enhanced risk management
and recovery tools); ICC 2021 Order, supra note 41,
86 FR at 26562 (identifying ICC’s recovery tools);
84 FR at 34456 (identifying key aspects of recovery
tools for ICEEU); 83 FR at 28886–87 (describing
LCH SA’s tools).
123 Each of the plans for NSCC, FICC, and DTC
provides a description of the governance and
process around management of a stress event along
a ‘‘Crisis Continuum’’ timeline. See, e.g., NSCC
2017 Notice, supra note 118, 83 FR at 842; FICC
2017 Notice, supra note 118, 83 FR at 872; DTC
2017 Notice, supra note 118, 83 FR at 886. OCC’s
recovery plan outlines an escalation process for the
occurrence of a ‘‘Recovery Trigger Event’’ as well
as provides general descriptions of how it would
anticipate deploying its recovery tools in response
to the six stress scenarios it identified. OCC 2017
Notice, supra note 118, 82 FR at 61079–80. The ICC
recovery plan describes the governance
arrangements that provide oversight and direction
of the plan. See ICC 2021 Notice, supra note 120,
86 FR 17649. ICEEU revised its recovery plan to
more clearly address decision-making during
recovery in 2019. See Securities Exchange Act
Release No. 85907 (May 21, 2019), 84 FR 24549
(May 28, 2019) (SR–ICEEU–2019–013) (‘‘ICEEU
2019 Notice’’). The LCH SA recovery plan identifies
the groups and individuals within LCH SA that are
responsible for the various aspects of plan. See LCH
2017 Notice, supra note 118, 82 FR at 60250.
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completion of a recovery or orderly
wind-down.
g. Procedures for Informing the
Commission
Each RWP generally refers to
informing the Commission about
recovery or orderly wind-down
activities, but the majority of RWPs do
not include specific procedures for
informing the Commission. Some of the
RWPs state that they will inform the
Commission after a recovery or winddown has been initiated.
h. Testing
Three RWPs provide for annual plan
testing but with varying degrees of
specificity about the participants’
involvement as well as the frequency of
such testing. One such covered clearing
agency specifically refers to sharing the
results of the testing with the board of
directors and another states that the
RWP would be updated as appropriate
as a result of the testing.124 The
remaining covered clearing agencies do
not mention testing in their RWPs.
i. Plan Reviews
Each RWP provides for periodic plan
reviews, typically annually or
biennially.125 Two RWPs provide for
124 See ICC 2021 Order, supra note 41, 86 FR at
26562 (referencing testing its Recovery Plan at least
annually, as part of its annual default management
drills and providing the results of such testing, as
well as any changes it recommends due to such
testing, to the ICC Board and Risk Committee);
ICCEU, 83 FR at 2857 (referencing testing elements
of the Recovery Plan as part of normal operations
and risk management procedures); LCH 2017
Notice, supra note 118, 82 FR at 60250 (referencing
fire drills intended to simulate all aspects of a
member default, including the auctioning of the
defaulting members portfolio to non-defaulting
members (where appropriate) and involving the
participation of members and relevant functions
within the LCH SA organization., with revisions to
the recovery plan as appropriate in light of the
testing).
125 NSCC, FICC, and DTC review their respective
RWPs biennially. See NSCC 2021 Notice, supra
note 119, 86 FR at 17441; FICC 2021 Notice, supra
note 119, 86 FR at 17433; DTC 2021 Notice, supra
note 119, 86 FR at 17421. OCC conducts an annual
review of its RWP. See Securities Exchange Act
Release No. 90315 (Nov. 3, 2020), 85 FR 71384,
71385 (Nov. 9, 2020) (SR–OCC–2020–013); see also
OCC 2017 Notice, supra note 118, 82 FR at 61080.
ICC’s RWP describes governance arrangements that
provide for oversight and direction in respect to
review and testing of the plans. See ICC 2021
Notice, supra note 120, 86 FR at 17651–52. The
ICEEU recovery plan is subject to annual review
and ad hoc reviews may be commissioned if the
business materially changes. See Securities
Exchange Act Release No. 83651 (Jul. 17, 2018), 83
FR 34891, 34893 (Jul. 23, 2018) (SR–ICEEU–2017–
016 and SR–ICEEU–2017–017). In addition, ICEEU
requires annual testing of the plan via a table-top
exercise to ensure ICE Clear Europe staff’s
understanding of the plan and its implementation.
See ICEEU 2019 Notice, supra note 123, 84 FR at
24550. LCH SA decided to review its wind-down
plan on an annual basis or more frequently, if
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non-scheduled reviews. In the existing
plans, the boards of directors of the
covered clearing agency are responsible
for the review and approval of the
RWPs, but the plans vary in whether
they specify that such review will also
occur after material changes to the
covered clearing agency’s operations or
in light of the results of periodic testing
of the RWPs.
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4. Current Risk-Based Margin
As discussed in section III.A supra,
Rule 17Ad-22(e)(6) requires covered
clearing agencies that provide central
counterparty services to establish
written policies and procedures
reasonably designed to cover its credit
exposure to its participants by
establishing a risk-based margin systems
with certain characteristics. Intraday
margining represents an important tool
that covered clearing agencies use to
manage risk exposures on a real-time
basis, by virtue of allowing a quick
response to volatility spikes that call for
changes in collateral to cover actual and
potential losses.
a. Monitoring Exposure and Intraday
Margin Calls
Each covered clearing agency
currently has some ability to monitor for
intraday exposure and to make certain
intraday margin calls. The frequency of
intraday monitoring and margin calls
varies across markets, and it is
responsive to the risk characteristics of
the underlying markets and
participants. Participants are generally
required to post margin within an hour
of notification or at specified times
pursuant to the covered clearing
agency’s rules and procedures. The
current practice of covered clearing
agencies is to release excess margin to
participants only once a day at a prescheduled time.
For example, OCC revalues its
participants’ portfolios throughout the
day to calculated updated account net
asset value, and its rules provide it the
authority to issue intraday margin calls.
Its intraday calls are generally issued
between 11 a.m. and 1:30 p.m. when
unrealized losses of an account, based
on its start-of-day positions, exceed 50%
of the account’s total margin.126 NSCC’s
rules provide the authority to impose
intraday mark-to-market charges, and it
tracks intraday market price and
required. See Securities Exchange Act Release No.
88297 (Feb. 27, 2020), 85 FR 12814 (Mar. 4, 2020)
(SR–LCH SA–2020–001).
126 See Options Clearing Corporation, Disclosure
Framework at 52, available at https://
www.theocc.com/getmedia/4664dece-7172-42a58f55-5982f358b696/pfmi-disclosures.pdf, and OCC
Rule 609 (regarding intra-day margin calls).
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position changes in 15-minute intervals.
NSCC generally collects additional
margin if the difference between the
most recent mark-to-market price of a
participant’s net positions and the most
recent observed market price exceeds a
predetermined threshold, which is
currently 80 percent of the participant’s
volatility charge and may be reduced if
NSCC determines that a reduction of the
threshold is appropriate to mitigate risk
during volatile market conditions.127
FICC’s GSD and FICC’s MBSD have
the authority to make intraday margin
calls.128 FICC monitors changes in
pricing and positions frequently
throughout the day, and it may collect
intraday margin to cover the price
movement from those participants with
a significant exposure in an identified
security or net portfolio and the market
value of those positions.129
ICC also monitors each participant’s
intraday profit and loss to determine if
its intraday exposure is covered by the
margin on deposit, and it may issue
margin calls to participants that are not
sufficiently collateralized.130 LCH SA
also has the ability and authority to
make intraday margin calls that are
based on intraday positions and
valuations.131
b. Reliable Sources of Timely Price Data
and Other Substantive Inputs
Covered clearing agencies use price
data as well as other data sources and
other substantive inputs in their risk127 See NSCC Disclosure Framework at 58,
available at https://www.dtcc.com/-/media/Files/
Downloads/legal/policy-and-compliance/NSCC_
Disclosure_Framework.pdf (‘‘NSCC Disclosure
Framework’’), and NSCC Rules, Procedure XV
(defining intraday mark-to-market charge).
128 See FICC’s GSD Rule 4, section 2a (regarding
the intraday supplemental fund deposit); FICC’s
MBSD Rule 1 (defining intraday VaR and intraday
mark-to-market charges) and Rule 4, section 2(b)
(regarding the daily margin requirement) and
section 3a (regarding the intraday requirements). In
addition, FICC’s GSD collects margin twice a day
under its current rules, notwithstanding any
additional intraday margin calls. See FICC’s GSD
Rules, schedule of timeframes.
129 See generally note 128 supra and FICC
Disclosure Framework at 65, available at https://
www.dtcc.com/-/media/Files/Downloads/legal/
policy-and-compliance/FICC_Disclosure_
Framework.pdf.
130 ICC Disclosure Framework at 22–23, available
at https://www.theice.com/publicdocs/clear_credit/
ICEClearCredit_DisclosureFramework.pdf, and ICC
Rule 401.
131 See generally LCH SA Disclosure Framework
at 31, available at https://www.lch.com/system/
files/media_root/LCH%20SA%20%20Comprehensive%20Disclosure
%20as%20required%20by%20SEC
%20Rule%2017Ad-22%28e%29%2823%29_
2022%20Q32022.pdf, and LCH CDS Clearing
Procedures section 2.21 (describing ‘‘extraordinary
margin’’ that LCH SA may require to cover the risk
of price/spread fluctuations occurring on an
intraday basis).
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34731
based margin systems, which is
expected given the substantive
differences in the markets and
participants they serve. Based on its
supervisory experience, the Commission
understands that all covered clearing
agencies generally have policies and
procedures in place to use a risk-based
margin system that uses reliable sources
of timely price data and includes
procedures and sound valuation models
for addressing circumstances in which
price data are not readily available or
reliable. The Commission also
understands that if a covered clearing
agency uses other substantive inputs,
such as portfolio size, asset price
volatility, duration, convexity, and
outputs from external model vendors,
which are not required by the
Commission’s rules, not all covered
clearing agencies have policies and
procedures for addressing
circumstances in which those
substantive inputs are not readily
available or reliable so that the covered
clearing agency can continue to meet its
requirements under Rule 17Ad–22(e)(6).
The policies and procedures used
when price data or other substantive
inputs are not available vary from one
RWP to another. For example, the
largest component of margin at FICC’s
GSD is typically its ‘‘VaR Charge.’’ The
VaR Charge is based on the potential
price volatility of unsettled positions
using a sensitivity-based Value-at-Risk
(‘‘VaR’’) methodology over a ten-year
historical look-back period. In addition,
FICC’s GSD also uses an alternative
‘‘Margin Proxy’’ calculation as a back-up
VaR Charge calculation to the sensitivity
approach in the event that FICC
experiences a data disruption with the
third-party vendor upon which FICC
relies to produce the sensitivity-based
VaR Charge.132 FICC’s MBSD relies
upon a similar approach, that is, using
a sensitivity-based VaR methodology as
its primary model, which relies upon
third-party data, as well as a Margin
Proxy, and it also uses an additional
alternative calculation referred to as the
‘‘Minimum Margin Amount’’ that also
does not rely on external vendor data.133
132 See generally FICC Disclosure Framework at
62, Exchange Act Release No. 82779 (Feb. 26, 2018)
(File No. SR–FICC–2018–801) (describing both the
sensitivity-based VaR model that would use a third
party vendor to supply security-level risk
sensitivity data and relevant historical risk factor
time series data and the use of the Margin Proxy
in the event of a disruption at FICC’s third-party
vendor, as well as the procedures that would govern
in the event that the vendor fails to deliver such
data).
133 See, e.g., FICC Disclosure Framework at 64; 81
FR 95669 (Dec. 28, 2016) (describing both the
sensitivity-based VaR model that would use a third
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NSCC relies upon a parametric VaR
model to determine the potential future
exposure of a given portfolio based on
historical price movements, using 153
days as the minimum sample period for
the historical data. For certain
securities, including fixed income
securities, UITs, illiquid securities,
securities that are amendable to
statistical analysis only in a complex
manner and securities that are less
amenable to statistical analysis, a
haircut-based volatility charge is
applied in lieu of the VaR charge.134
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C. Consideration of Benefits and Costs
as Well as the Effects on Efficiency,
Competition, and Capital Formation
The following discussion sets forth
the potential economic effects stemming
from adopting the proposed rule and
amendments, including the effects on
efficiency, competition, and capital
formation.
The benefits and costs discussed in
this subsection are relative to the
economic baseline discussed
previously, which includes the covered
clearing agencies’ current RWPs and
their current risk-based margin
practices. In some instances, the
proposals reflect what the Commission
understands to be current practices at
many covered clearing agencies. To the
extent that a covered clearing agency’s
current practices align with part of a
proposed rule or amendment, the
covered clearing agency, its
participants, and the broader market
would have already absorbed the
benefits and costs of that part of the
proposed rule and amendments and,
therefore, might not experience any
direct benefits or costs if the
Commission adopts that part of the new
rule or amendments. In this case, the
Commission believes that imposing
these requirements on covered clearing
agencies that have largely implemented
the proposals in this release would
essentially codify these elements and
ensure that the covered clearing
agencies are required to continue to
include these elements in their RWPs or
risk-based margin systems.
Additionally, the proposed rule and
amendments would ensure that the
RWPs and risk-based margin systems of
party vendor to supply security-level risk
sensitivity data and relevant historical risk factor
time series data and the use of the Margin Proxy
in the event of a disruption at FICC’s third-party
vendor, as well as the procedures that would govern
in the event that the vendor fails to deliver such
data); Exchange Act Release No. 92145 (June 10,
2021), 86 FR 32079 (June 16, 2021) (File No. SR–
FICC–2020–804) (describing the calculation of the
Minimum Margin Amount).
134 See NSCC Disclosure Framework, supra note
127, at 58–61.
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any new covered clearing agency would
be required to have RWPs that contain
all of the proposed elements.
Disruptions in the operations at any of
the covered clearing agencies would
cause significant negative externalities
in the markets they serve, which would
likely spill over into other markets.
These ripple effects would negatively
affect numerous market participants,
including investors. Because covered
clearing agencies may not internalize
the full cost of these externalities, their
investments in their RWPs and riskbased margin systems might be
suboptimal from a public welfare
perspective. An important benefit of the
proposed rule and amendments is that
they require covered clearing agencies
to maintain a higher investment than
they might otherwise maintain.
The Commission recognizes that the
existing rules allow a degree of
discretion that would be reduced or
eliminated by the proposals. Even if
covered clearing agencies would not
need to change their current practices
significantly to align with the proposals,
if adopted, they would incur indirect
costs in terms of less discretion in the
future. For example, a covered clearing
agency that currently plans an annual
review of its RWP would lose the ability
to change to a biennial review in the
future.
The costs discussed in this subsection
would be borne by covered clearing
agencies and their participants. For
covered clearing agencies owned by
participants, all of the costs will
ultimately be passed on to participants
because they are residual beneficiaries
of the covered clearing agency. For
covered clearing agencies not owned by
participants, the level of pass-through
would depend upon a number of
factors, including the level of
competition among clearing agencies. In
both cases, the participants will likely
pass through some of these costs to their
customers, the level of which will
depend on factors such as the
customers’ sensitivities to costs and the
amount of competition between
participants for customers. Generally, if
a covered clearing agency does not face
significant competition, it will have an
incentive to absorb part of the cost
increase. On the other hand, in the
extreme case of a perfectly competitive
market, there are no economic profits
and price equals marginal costs so an
increase in cost could be fully passed
through to the customer.135 If the
135 More specifically, the market clearing quantity
of the good or service supplied will adjust and the
extent of industry-wide cost pass-through in a
perfectly competitive market depends on the
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Commission adopts the proposed rule
and amendments, to the extent that a
covered clearing agency’s current
practices are misaligned with a
proposed rule or amendment, the
covered clearing agency, as discussed in
the remainder of this subsection, would
need to modify its RWP or risk-based
margin system in order to comply with
the new standards. The resulting
benefits and costs would increase with
the amount of modifications. Because
the Commission has previously stated
that RWPs are rules for purposes of a
covered clearing agency’s SRO
obligations, and because the covered
clearing agencies already have filed
such RWPs with the Commission for
approval, any such modifications would
be subject to Commission review and
public comment pursuant to Rule 19b–
4,136 the costs of which are included in
the cost estimates presented in this
subsection. Similarly, the Commission
considers changes to a covered clearing
agency’s risk-based margin system as
part of the SRO rule filing process,
making any such modifications also
subject to Commission review and
public comment pursuant to Rule 19b–
4, the costs of which are included in the
cost estimates presented in this
subsection. Adopting the proposed rule
and amendments could also cause a
clearing agency to make different
business decisions, such as capital
expenditure decisions, that may not be
subject to the same Commission review
process.
1. Proposed Rule 17ad–26
Proposed Rule 17ad–26 sets forth nine
elements that must be included in a
covered clearing agency’s RWP. The
remainder of this subsection discusses
each of these elements in turn,
explaining how some would make
RWPs more effective in guiding the
covered clearing agencies during times
of recovery or wind-down while others
would help participants and regulators
better understand how the covered
clearing agencies will prepare for and
respond to stress. The Commission
believes that this proposed rule would
reduce systemic risk to the extent that
it reduces the risk of unsuccessful
recoveries, disorderly wind-downs, and
negative spillovers to other clearing
elasticity of demand relative to supply. The more
elastic is demand, and the less elastic is supply, the
smaller the extent of pass-through, all else being
equal. See RBB Economics, Cost Pass-Through:
Theory, Measurement and Potential Policy
Implications, 4 (Feb. 2014), available at https://
assets.publishing.service.gov.uk/government/
uploads/system/uploads/attachment_data/file/
320912/Cost_Pass-Through_Report.pdf.
136 Supra note 115.
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agencies and to other markets.137 These
benefits are expected to increase with
the amount of change each covered
clearing agency makes to align itself
with the rule. Proposed Rule 17ad–26
would require covered clearing agencies
to modify their RWPs to the extent their
RWPs do not already align with the
proposed rule. The Commission
anticipates that these changes may
result in the covered clearing agencies
being more aware of potential risks and
the associated costs of certain factors
under their control, which could, in
turn, lead to the covered clearing agency
making changes to certain business
practices.
a. Critical Clearing and Settlement
Services
Proposed Rule 17ad–26(a)(1) requires
RWPs to identify and describe their
critical payment, clearing, and
settlement services and to address how
the covered clearing agency would
continue to provide such critical
services in the event of a recovery and
during an orderly wind-down, including
the identification of the staffing
necessary to support such critical
services and analysis of how such
staffing would continue in the event of
a recovery and during an orderly winddown.
Covered clearing agencies play an
important role as financial market
utilities. By virtue of the unique services
that they offer, the network effects
under which they operate, and their
specialization by asset class, any failure
of the covered clearing agency to
provide their critical services would
have implications with respect to
financial stability.138 Policies and
procedures that increase the resiliency
of covered clearing agencies have, as a
result, direct benefits on the stability of
U.S. financial markets.
Each of the covered clearing agencies’
RWPs currently identifies its critical
services, as stated in the baseline
analysis, but they differ in the degree to
which they address continuation.
Markets in which the dominant
covered clearing agencies are currently
less comprehensive in addressing
continuation in their RWPs are expected
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137 See
supra note 106 and accompanying text.
of the seven covered clearing agencies
have been designated by the Financial Stability
Oversight Council as Significantly Important
Financial Market Utilities (‘‘SIFMUs’’) because the
failure or disruption to the functioning of the
financial market utility could create or increase the
risk of significant liquidity or credit problems
spreading among financial institutions or markets.
See Designations, U.S. Dep’t Treasury, available at
https://home.treasury.gov/policy-issues/financialmarkets-financial-institutions-and-fiscal-service/
fsoc/designations.
138 Five
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to benefit from this requirement because
they would be required to work through
and memorialize in their RWPs how the
clearing agency would continue to
provide its critical services in case of a
recovery or during an orderly winddown.
As mentioned in the economic
baseline section, none of the covered
clearing agencies currently identifies the
staffing necessary to support critical
services or provides in their RWPs
analyses of how such staffing would
continue in the event of a recovery and
during an orderly wind-down. Because
covered clearing agencies do not
currently identify the staffing necessary
to support critical services and how
such staffing would continue during
times of crisis, this new requirement
likely would provide benefits to the
market. Forward-looking analyses
around issues such as potential staffing
shortfalls and employment agreement
terms that are robust regardless of the
financial situation of the covered
clearing agency should provide each
covered clearing agency with additional
certainty and clarity around the
presence of key personnel that would
deploy the RWPs and supervise their
implementation.
Similarly, the current lack of these
staffing analyses creates costs that
covered clearing agencies would have to
assume, in terms of both drafting the
analyses and implementing the resulting
conclusions from the analyses. For
instance, a covered clearing agency may
conclude when undertaking this
analysis that key personnel could easily
leave their organization in case of a
recovery or wind-down scenario. In that
case, the covered clearing agency may
wish to incur the extra costs attendant
to strengthening its employee
agreements so that key employees
remain at the covered clearing agency
during a sale or transfer of one or more
of its critical services to another entity
or a receiver.
b. Service Providers
Proposed Rule 17ad–26(a)(2) requires
RWPs to identify and describe any
service providers upon which the
covered clearing agency relies to
provide the services identified in Rule
17ad–26(a)(1), specify to what services
such service providers are relevant, and
address how the covered clearing
agency would ensure that such service
providers would continue to perform in
the event of a recovery and during an
orderly wind-down. As stated in the
baseline analysis, the RWPs differ in
their degree of alignment with this
proposed rule and the level of
descriptiveness of service providers.
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34733
The markets that likely would benefit
the most from this proposed
requirement are the ones in which the
dominant covered clearing agencies’
RWPs are currently the least
comprehensive in identifying and
describing the required service provides
and identifying how those service
providers will perform in the event of a
recovery and during an orderly winddown, as they would be better prepared
to manage and negotiate with service
providers to ensure their continued
performance. Covered clearing agencies
that make more changes in identifying
the service providers and the critical
services provided by each critical
service provider likely will bring more
benefits to the markets they serve by
putting themselves in a better position
to manage their service providers during
a recovery or orderly wind-down.
Each covered clearing agency would
incur costs to bring its RWP into
alignment with the proposed rule. These
alignment costs would depend on the
extent of the enhancements the covered
clearing agency makes to its RWP,
including any contractual changes with
the service providers.
c. Scenarios
Proposed Rule 17ad–26(a)(3) requires
RWPs to identify and describe scenarios
that may potentially prevent the covered
clearing agency from being able to
provide its critical payment, clearing,
and settlement services as a going
concern, including uncovered credit
losses, uncovered liquidity shortfalls,
and general business losses. As stated in
the baseline analysis, each of the
covered clearing agencies’ RWPs
currently identifies and describes, to
varying degrees, certain relevant
scenarios. The Commission believes that
the more significant benefits of being
required to identify these scenarios
would accrue to those markets in which
the dominant covered clearing agencies
lack breadth and specificity in
identifying and describing their
scenarios. By better understanding the
circumstances that could threaten their
ability to provide their critical services,
these covered clearing agencies can take
steps to reduce the likelihood of these
scenarios and, should they materialize,
be better prepared to achieve a recovery
or orderly wind-down.
Each covered clearing agency would
incur costs to bring its RWP into
alignment with the proposed rule. The
alignment costs would depend on the
extent of the enhancements the covered
clearing agency makes to its RWP. The
Commission believes that the costs to
modify plans that require changes,
including those that need to be
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expanded to include additional
scenarios, would be modest but would
vary across covered clearing agencies
because of differences in the markets
and participants they serve.
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d. Criteria That Would Trigger
Implementation
Proposed Rule 17ad–26(a)(4) requires
RWPs to identify and describe criteria
that would trigger the implementation
of the RWPs. As stated in the baseline
analysis, each covered clearing agency’s
RWP identifies and describes, to varying
degrees, criteria that would trigger the
implementation of a recovery or orderly
wind-down. The Commission believes
that the largest benefits of this rule
likely would accrue to the markets in
which the dominant covered clearing
agencies that currently have the least
comprehensive RWPs in identifying and
describing appropriate triggers. The ex
ante identification and description of
triggers should have the benefit of being
a disciplining mechanism that signals
when the covered clearing agency may
act during periods of market stress.139
The Commission further believes that
the ex ante identification and
description of triggers would lead
covered clearing agencies to anticipate
and prepare for market stress or other
events that could lead to a recovery or
wind-down.
Each covered clearing agency would
incur costs to bring its RWP into
alignment with the proposed rule. The
alignment costs would depend on the
extent of the enhancements the covered
clearing agency makes to its RWP.
e. Rules, Policies, Procedures, and Other
Tools or Resources
Proposed Rule 17ad–26(a)(5) requires
RWPs to identify and describe the rules,
policies, procedures, and any other tools
or resources the covered clearing agency
would use in a recovery or orderly
wind-down to address the scenarios
identified in the RWP. The Commission
believes that the markets that likely
would benefit the most from this
requirement are the ones in which the
dominant covered clearing agencies
have the least comprehensive RWPs in
describing how the rules, policies,
procedures, tools and other resources
would be used during a recovery or
wind-down. Making these changes to
their RWPs should enable the covered
139 Ansgar Walther and Lucy White, Rules Versus
Discretion in Bank Resolution, Banque de France
(Mar. 25, 2016), available at https://acpr.banquefrance.fr/sites/default/files/medias/documents/
waltherwhite.pdf (‘‘[T]he optimal regulatory
arrangement is a combination of rules and
discretion: Discretion when public information is
relatively benign, and rules when public
information is more negative.’’).
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clearing agencies to more fully
anticipate how future crises might
impact their operations, which should
enhance their ability to respond and
accordingly decrease the expected costs
borne by covered clearing agencies, the
participants, and other stakeholders in
future crises. For example, if a covered
clearing agency determines that it needs
a new rule to respond to a specific
scenario and if that scenario ever
materializes, the covered clearing
agency should be better positioned to
respond appropriately to it.
Each covered clearing agency would
incur costs to bring its RWP into
alignment with the proposed rule. The
alignment costs would depend on the
extent of the enhancements the covered
clearing agency makes to its RWP.
Covered clearing agencies that
determine that they need to include
more responses, different resources, or
better descriptions would incur more
costs as they make appropriate revisions
to their RWPs and their resources. The
Commission believes that the costs to
modify plans that require changes,
including those that need to be
expanded, would increase in the
number of required changes such as the
number of new rules the covered
clearing agency is required to adopt.
f. Procedures To Ensure Timely
Implementation
Proposed Rule 17ad–26(a)(6) requires
RWPs to address how the rules, policies,
procedures, and any other tools or
resources identified in 17ad–26(a)(5)
would ensure timely implementation of
the RWP. As stated in the baseline
analysis, each RWP mentions the
concept of timeliness in either recovery
or wind-down, but most RWPs do not
list specific procedures to ensure timely
implementation of itself. A key benefit
of this rule is that covered clearing
agencies will address in their RWPs
how the RWP will be implemented in a
timely manner when the need arises.
The Commission believes that a timely
start will increase the chance that the
covered clearing agency is able to
address the underlying problem in a
timely manner and with lower costs to
the various stakeholders. The benefits of
this rule likely would accrue primarily
to the markets in which the dominant
covered clearing agencies add more or
better rules, policies, procedures, tools,
or other resources to ensure timely
implementation of their RWPs.
Each covered clearing agency would
incur costs to bring its RWP into
alignment with the proposed rule. The
alignment costs would depend on the
extent of the enhancements the covered
clearing agency makes to its RWP. The
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Commission believes that the costs to
modify plans that require changes,
including those that need to be
expanded to include additional rules,
policies, procedures, or any other tool or
resource would be modest because
current RWPs already place some focus
on timeliness as a desired feature.
g. Procedures for Informing the
Commission
Proposed Rule 17ad–26(a)(7) requires
RWPs to include procedures for
informing the Commission as soon as
practicable when the covered clearing
agency is considering initiating a
recovery or orderly wind-down. As
stated in the baseline analysis, each
RWP generally refers to informing the
Commission, but not every plan
includes specific procedures, and some
plans include procedures for informing
the Commission after initiating a
recovery or orderly wind-down.
Providing notice to the Commission
may help ensure that the Commission
has the opportunity to consider whether
a covered clearing agency engages the
recovery or wind-down event consistent
with its established RWPs and the
requirements of Commission rules to
help mitigate the potential onward
transmission of system risk and may
help ensure that a wind-down, if
necessary, is orderly. These benefits
likely would accrue primarily to the
markets in which the dominant covered
clearing agencies currently do not have
procedures in place for informing the
Commission as soon as practicable.
Each covered clearing agency would
incur costs to bring its RWP into
alignment with the proposed rule. The
alignment costs would depend on the
extent of the enhancements the covered
clearing agency makes to its RWP. The
Commission believes that the costs to
modify plans that require changes,
including those that need to be
expanded to include additional
procedures would be modest because
current RWPs already place some focus
on informing the Commission.
h. Testing
Proposed Rule 17ad–26(a)(8) requires
RWPs to include procedures for testing
the covered clearing agency’s ability to
implement the recovery and wind-down
plans at least every twelve months,
including by requiring the covered
clearing agency’s participants and,
when practicable, other stakeholders to
participate in the testing of its plans,
providing for reporting the results of the
testing to the covered clearing agency’s
board of directors and senior
management, and specifying the
procedures for, as appropriate,
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amending the plans to address the
results of the testing. As stated in the
baseline analysis, only a few RWPs refer
to plan testing. The Commission
believes that the markets that likely
would benefit the most from this
requirement are those in which the
dominant covered clearing agencies
have the least comprehensive policies
around testing in their RWPs because
those covered clearing agencies would
create procedures for more frequent
testing, and those changes should help
ensure that those RWPs remain current
and take into account changing system
and market conditions.
The Commission believes that the
costs to start plan tests every twelve
months will not be large for the four
covered clearing agencies that do not
mention plan testing in their RWPs
because they might be able to leverage
existing requirements around default
management testing.140 On a
preliminary basis, the Commission
believes that the corresponding testing
costs for the covered clearing agencies’
participants and, when practicable,
other stakeholders likely will be
moderate, in part because the covered
clearing agencies are already required to
include such entities in their default
procedures testing under Rule 17Ad–
22(e)(13). The costs for any subsequent
RWP amendments likely will be small.
i. Plan Reviews
Proposed Rule 17ad–26(a)(9) requires
RWPs to include procedures requiring
review and approval by the board of
directors of the plans at least every
twelve months or following material
changes to the covered clearing agency’s
operations that would significantly
affect the viability or execution of the
plans, with such review informed, as
appropriate, by the covered clearing
agency’s testing of the plans. As stated
in the baseline analysis, each RWP
makes reference to periodic plan
reviews, typically annually or
biennially.
The Commission believes that the
markets that likely would benefit the
most from this requirement are those in
which the dominant covered clearing
agencies currently have the least
comprehensive RWPs in addressing
plan review because they would create
more frequent procedures for review,
and more frequent reviews, in turn,
should help ensure that RWPs remain
current and take into account any
changes to the covered clearing
agencies’ operations.
Each covered clearing agency would
incur costs to bring its RWP into
140 See
17 CFR 240.17Ad–22(e)(13).
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alignment with the proposed rule. The
alignment costs would depend on the
extent of the enhancements the covered
clearing agency makes to its RWP. The
Commission believes that the costs to
modify plans that have biennial reviews
to replace them with annual reviews
will be modest. The costs to review
RWPs after material changes to the
covered clearing agencies’ operations
will depend on the nature and number
of material changes that result in new
reviews.
j. Burden Estimate Associated With
Proposed Rule 17ad–26
The Commission has estimated the
initial and ongoing cost burden of
adopting proposed rule 17ad–26.
Accordingly, the Commission
preliminarily believes that eight
respondent clearing agencies would
incur an aggregate one-time burden of
approximately 960 hours (or 120 hours
each) to review and update existing
policies and procedures. The cost
estimate associated with the initial
burden is based on 20 hours for an
assistant general counsel at $551 per
hour; 50 hours for a compliance
attorney at $432 per hour; 35 hours for
a business risk analyst at $ 235 per hour;
and 15 hours for a senior risk
management specialist at $423 per hour.
The initial burden for one covered
clearing agency is $47,190, and it is
$377,520 for all eight covered clearing
agencies.
Proposed Rule 17ad–26 would also
impose ongoing burdens on a
respondent covered clearing agency.
The proposed rule would require
ongoing monitoring and compliance
activities with respect to the written
policies and procedures created in
response to the proposed rule. Based on
the Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to existing 17 CFR
240.17Ad–22(e)(2) (‘‘Rule 17Ad–
22(e)(2)’’),141 the Commission
preliminarily estimates that the ongoing
activities required by proposed Rule
17ad–26 would impose an aggregate
annual burden on respondent covered
clearing agencies of 320 hours (40 hours
for each covered clearing agency). The
ongoing burden is based on 10 hours for
an assistant general counsel at $551 per
hour and 30 hours for a compliance
attorney at $432 per hour, totaling
$18,470 per covered clearing agency and
$147,760 for all eight covered clearing
agencies.142
141 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70892 (discussing Rule 17Ad–
22(e)(2)).
142 All values were determined from SIFMA’s
October 2013 values (see, Management and
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34735
2. Amendments to Rule 17Ad–22(e)(6)
Rule 17Ad–22(e)(6) requires covered
clearing agencies that provide central
counterparty services to establish a riskbased margin system to manage their
credit exposures to their participants.
The proposed amendment to Rule
17Ad–22(e)(6)(ii) will strengthen the
requirements: (a) by requiring that
covered clearing agencies monitor
intraday risk exposures to their
participants on an ongoing basis, and (b)
by providing additional specificity to
the circumstances in which covered
clearing agencies should have policies
and procedures in place to make
intraday margin calls. The proposed
amendment to Rule 17Ad–22(e)(6)(iv)
will amend the requirements by
ensuring covered clearing agencies can
meet their Rule 17Ad–22(e)(6)
obligations when their price data and
substantive inputs are not available by
including procedures to use price data
or substantive inputs from an alternate
source or to use an alternate risk-based
margin system that does not similarly
rely on the unavailable or unreliable
substantive inputs.
a. Monitoring Exposure and Intraday
Margin Calls
The ability to assess intraday margin
calls is an important tool that covered
clearing agencies have to manage their
credit exposures to their participants.
The proposed amendment to Rule
17Ad–22(e)(6)(ii) requires covered
clearing agencies to monitor exposure
on an ongoing basis and to make
intraday margin calls as frequently as
circumstances warrant, including when
risk thresholds specified by the covered
clearing agency are breached or when
the products cleared or markets served
display elevated volatility, which would
help reduce, but not eliminate, their
credit exposure to their participants.
Each covered clearing agency would
have to determine how to operationalize
‘‘on an ongoing basis’’ and ‘‘as
frequently as circumstances warrant’’
given its own market and participants.
Each covered clearing agency would
also need to ensure that its systems are
capable of monitoring exposure and
making margin calls at those
frequencies. As discussed in the
baseline analysis, each covered clearing
agency is already capable of monitoring
exposure and collecting margin on an
intraday basis; nevertheless, some
covered clearing agencies might need to
Professional Earnings in the Security Industry—
2013 (Oct. 7, 2013) and adjusted to March 2023
values using the Bureau of Labor Statistics’ CPI
Inflation Calculator, available at https://
www.bls.gov/data/inflation_calculator.htm.
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make changes to align with the
proposed amendment such as increasing
the frequency of exposure monitoring
and improving their information
technology so they can process more
frequent margin calls.
To the extent a covered clearing
agency currently aligns with the
proposed amendment it will not
experience new benefits from its
adoption. Nevertheless, the proposed
amendment will have incremental
benefits for the market because it will
ensure that the covered clearing
agencies continue to meet the standard
of the proposed amendment that they
are currently aligned with and that any
new covered clearing agency that
provides central counterparty services
meets the same standard.
The Commission further believes that
the costs to modify the risk-based
margin systems that require changes
would be modest because covered
clearing agencies have already incurred
the initial costs of building their risk
management infrastructure, including
the ability to make intraday margin calls
based on some sort of intraday
monitoring. Once those costs have been
incurred and amortized, the variable
costs of modifying the frequency of the
monitoring, and any additional margin
calls, are likely low.
To the extent that the proposed
amendment results in covered clearing
agencies making more unanticipated
margin calls, participants may face
increased liquidity-management costs.
This may potentially result in
procyclicality problems that exacerbate
market stress: margin calls during
periods of declining asset prices may
cause participants to sell assets, putting
further negative pressure on asset prices
and the market that may spill over into
other covered clearing agencies and
their markets. This stress may be
transmitted by participants that are
members of more than one covered
clearing agency when, for example, a
margin call in one market makes a
participant sell assets in a different
market. The stress may also be
transmitted by assets that are linked
between markets, such as the link
between option prices (OCC) and equity
prices (NSCC). Various industry
participants have expressed concerns
that excessive intraday margin calls,
especially unanticipated ones, have the
potential to exacerbate liquidity issues
for clearing members who would have
to post new liquid collateral to the
covered clearing agency with little
notice.143 On the other hand, such
143 Revisiting Procyclicality: The Impact of the
COVID Crisis on CCP Margin Requirements, Futures
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intraday margin calls reduce credit risk
during periods of market stress.
b. Reliable Sources of Timely Price Data
and Other Substantive Inputs
The Commission believes that every
covered clearing agency has a risk-based
margin system that largely aligns with
the proposed amendment to Rule 17Ad–
22(e)(6)(iv), with the exception of at
least one covered clearing agency that
likely would need to implement
additional changes to its risk-based
margin system to ensure that it could
continue to meet its obligations under
Rule 17Ad–22(e)(6) in the event of the
unavailability of a substantive inputs
from a third party. If that one covered
clearing agency were to lose access to its
price data or other inputs, it may be
unable to perform its critical payment,
clearing, and settlement services, and
that, in turn, may force it into a winddown, which may have negative
implications for its participants and the
broader financial system.
The incremental benefits of these
proposed amendments beyond the
baseline lie primarily in expanding the
scope of this rule beyond price data and
further specifying the nature of the
procedures that a covered clearing
agency uses in the event that such data
or inputs are not readily available or
reliable and in ensuring that any new
covered clearing agency keeps that same
standard of the proposed amendment.
The Commission is unable to estimate
the specific quantitative benefit of that
covered clearing agency meeting the
proposed amendment, but it believes
that it is substantial because the
proposed amendment reduces the risk
that the covered clearing agency fails to
provide its critical payment, clearing,
and settlement services in future
periods of high market stress. For
example, the Options Clearing
Corporation cleared a year-to-date
average daily volume of 46.3 million
contracts through March 2023, and
DTCC reported that the average daily
cleared broker-to-broker transactions
was $2 trillion in 2021.144 Assuming
that a price data shortage happens by
the end of a regular trading day, when
there is increased activity in the
financial markets,145 even a one-hour
price data feed malfunction could affect
Indus. Ass’n (Oct. 2020), available at https://
www.fia.org/sites/default/files/2020-10/FIA_
WP_Procyclicality_CCP%20Margin%20
Requirements.pdf.
144 See OCC Clears Over 1B Total Contracts in
March 2023, Highest Month on Record and up
12.2% Year-Over-Year, supra note 103 and DTCC
2021 Annual Report, supra note 100.
145 Trading after the opening bell and right before
the closing bell are usually the two busiest trading
periods for both equities and equity options.
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the normal processing of millions of
options contracts and hundreds of
billions of dollars of equity transactions.
Moreover, a price data shortage in one
covered clearing agency that is closely
interconnected to another covered
clearing agency 146 could result in spillover effects that spread to that other
covered clearing agency, magnifying the
effect of the initial price data shortage.
c. Burden Estimate Associated With
Proposed Amendments to Rule 17Ad–
22(e)(6)
Overall, the Commission
preliminarily believes that the estimated
burdens for the proposed amendment to
Rule 17Ad–22(e)(6) may require a
respondent covered clearing agency to
make fairly substantial changes to its
policies and procedures. Based on the
similar policies and procedures
requirements and the corresponding
burden estimates previously made by
the Commission for several rules in the
Covered Clearing Agency Standards
where the Commission anticipated
similar burdens,147 the Commission
preliminarily estimates that respondent
covered clearing agencies would incur
an aggregate one-time burden of
approximately 903 hours (or 129 hours
per covered clearing agency) to review
existing policies and procedures and
create new policies and procedures. The
initial cost is based on 20 hours for an
assistant general counsel at $551 per
hour; 40 hours for a compliance
attorney at $432 per hour; 12 hours for
a computer operations manager at $521
146 For instance, OCC and NSCC have an
information-sharing agreement to facilitate the
settlement and delivery of physically-settled stock
options cleared by OCC via NSCC. See Securities
Exchange Act Release No. 37731 (September 26,
1996), 61 FR 51731 (October 3, 1996) (SR–OCC–96–
04 and SRNSCC–96–11) (Order Approving
Proposed Rule Change Related to an Amended and
Restated Options Exercise Settlement Agreement
Between the Options Clearing Corporation and the
National Securities Clearing Corporation);
Securities Exchange Act Release No. 43837 (January
12, 2001), 66 FR 6726 (January 22, 2001) (SR–OCC–
00–12) (Order Granting Accelerated Approval of a
Proposed Rule Change Relating to the Creation of
a Program to Relieve Strains on Clearing Members’
Liquidity in Connection With Exercise Settlements);
and Securities Exchange Act Release No. 58988
(November 20, 2008), 73 FR 72098 (November 26,
2008) (SR–OCC–2008–18 and SR–NSCC–2008–09)
(Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Changes Relating to
Amendment No. 2 to the Third Amended and
Restated Options Exercise Settlement Agreement).
147 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70892 and 70895–97 (discussing
Rules 17Ad–22(e)(2) and (13)). Although the
proposed rule amendment is with respect to Rule
17Ad–22(e)(6), the Commission believes that these
Rules present the best overall comparison to the
current proposed rule amendment, in light of the
nature of the changes needed to implement the
proposal here and what was proposed in the
Covered Clearing Agency Standards.
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per hour; 20 hours for a senior
programmer at $392 per hour; 25 hours
for a senior risk management specialist
at $423 per hour; and 12 hours for a
senior business analyst at $324 per
hour. In total, the initial burden is
estimated to be $56,855 per covered
clearing agency or $397,985 for all seven
covered clearing agencies combined.
The proposed amendments to Rule
17Ad–22(e)(6) would also impose
ongoing burdens on the covered clearing
agencies. The proposed rule would
require ongoing monitoring and
compliance activities with respect to the
written policies and procedures created
in response to the proposed rule. Based
on the similar reporting requirements
and the corresponding burden estimates
previously made by the Commission for
several rules in the Covered Clearing
Agency Standards where the
Commission anticipated similar
burdens,148 the Commission
preliminarily estimates that the ongoing
activities required by the proposed
amendments to Rule 17Ad–22(e)(6)
would impose an aggregate annual
burden on covered clearing agencies of
595 hours (or 85 hours per covered
clearing agency). The cost of the
ongoing burden was estimated assuming
25 hours for a compliance attorney at
$432 per hour; 40 hours for a business
risk analyst at $235 per hour; and 20
hours for a senior risk management
specialist at $423 per hour, totaling
$30,660 per covered clearing agency or
$214,620 for all seven covered clearing
agencies combined.149
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3. Efficiency, Competition, and Capital
Formation
a. Efficiency
The Commission believes that the
proposed rule and amendments, if
adopted, may improve informational
and productive efficiency in the market
for cleared securities.
Covered clearing agencies current
policies and procedures largely align
with proposed Rule 17ad–26. Therefore,
the Commission does not expect
substantive efficiency changes due to
the proposed new rule.
The proposed amendment to Rule
17Ad–22(e)(6)(ii) would benefit
participants by providing increased
specificity around the methods used by
148 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70893 and 70895–96 (discussing
Rules 17Ad–22(e)(6) and (13)).
149 All values were determined from SIFMA’s
October 2013 values (see, Management and
Professional Earnings in the Security Industry—
2013 (Oct. 7, 2013) and adjusted to March 2023
values using the Bureau of Labor Statistics’ CPI
Inflation Calculator, available at https://
www.bls.gov/data/inflation_calculator.htm.
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covered clearing agencies to assess
intraday margin calls, thus enabling
more efficient planning in the use of
scarce margin funds.
The proposed amendment to Rule
17Ad–22(e)(6)(iv) would increase
informational efficiency during periods
when price data or other substantive
inputs are not available. Calculating
margin and managing and disseminating
risk information are core competencies
of all covered clearing agencies, and
various stakeholders rely on those data
outputs. By requiring secondary
sources, the proposed amendment may
mitigate the reduction in efficiency that
would otherwise happen when primary
sources fail at a covered clearing that
does not have secondary sources.
Having the ability to continue
calculating margin and disseminating
that information to participants even
when primary data are not available will
prevent informational efficiency to
decrease when price data or other
substantive inputs are not available.
b. Competition
As described in the baseline, covered
clearing agencies are currently not
subject to strong competitive pressures
given high start-up costs, the network
effects that are inherent in the clearing
business, and their subsequent
historical consolidation by market
segments (options clearing for OCC,
equities clearing for NSCC, fixedincome clearing for FICC, etc.). In terms
of potential new entrants in the market
for clearing and settlement services, the
incremental costs of the proposed Rule
17ad–26 and the proposed amendment
to Rule 17Ad–22(e)(6)(ii) are small and,
therefore, unlikely to be noteworthy
barriers to entry. The amendment to
Rule 17Ad–22(e)(6)(iv) may have a
modest effect on competition because
they are start-up costs that a new
competitor would have to assume to
enter into the covered clearing agency
market.
c. Capital Formation
The Commission expects the effects of
the proposed rule and amendments on
capital formation to be second-order
because the proposal focuses on issues
related to secondary market trading and
not on issues related to primary market
issuances. To the degree that market
participants view equity and fixedincome covered clearing agencies as
more reliable venues for risk transfer,
they may increase their activity and
therefore signal a demand for more
capital-creating securities.
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34737
D. Reasonable Alternatives to the
Proposed Rule and Amendments
1. Establish Precise Triggers for
Implementation of RWPs Across
Covered Clearing Agencies
Instead of requiring covered clearing
agencies to identify and implement their
own triggers to resolution and winddown procedures, the Commission
could adopt a more prescriptive
approach and determine specific
triggers that covered clearing agencies
would be required to follow. For
example, the Commission could specify
that exhausting prefunded financial
resources in the waterfall structure of a
covered clearing agency would
immediately trigger a recovery or winddown procedure.150 Alternatively, the
Commission could require a trigger
when unfunded commitments to the
CCP are called upon and reach a
specific dollar number.
This alternative would harmonize
triggers across covered clearing agencies
and would create a single standard that
market participants could rely on,
eliminating any confusion or ambiguity
attendant to different triggers.
Nevertheless, covered clearing agencies
are active in different markets (equities,
bonds, options, CDS, etc.), have
different organizational structures, and
focus on different risks. As an example,
one of the OCC’s focus areas is
monitoring option sensitivities, and, as
a result, its margin models and waterfall
structure are responsive to that
consideration while FICC, on the other
hand, focuses on duration and
convexity so its waterfall structure is
more responsive to those risks. The
Commission preliminarily believes that
having this more prescriptive approach
would be unresponsive to the
characteristics of each market and could
expose covered clearing agencies to
150 See John W. McPartland and Rebecca Lewis,
The Goldilocks Problem: How to Get Incentives and
Default Waterfalls ‘‘Just Right’’, 41 Econ. Persps. 1,
2 (Mar. 2017), available at https://
www.chicagofed.org/publications/economicperspectives/2017/1-mcpartland-lewis (‘‘All CCPs
have a default waterfall that provides financial
resources for managing a clearing member default.
The waterfall consists of both prefunded resources
and unfunded obligations. When a clearing member
defaults, the CCP must continue to meet defaulter’s
financial obligations, whose performance it
guarantees, to the non-defaulting clearing members,
attempt to find clearing members willing accept the
defaulter’s clients, and return to a matched book
status by liquidating or auctioning off the
defaulter’s positions. If the CCP cannot find other
clearing members willing to onboard the defaulter’s
clients, then the clients’ positions must be
liquidated in order to restore the CCP to a matched
book status. The default waterfall provides funding
to cover the cost of meeting the defaulter’s
obligations and liquidating the defaulter’s positions,
as well as, if necessary, those of its clients.’’).
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recovery or wind-down triggers that are
not aligned with the actual risks.
ddrumheller on DSK120RN23PROD with PROPOSALS3
2. Establish Specific Scenarios and
Analyses
Instead of requiring covered clearing
agencies to identify scenarios that may
prevent the covered clearing agency
from being able to provide its critical
payment, clearing, and settlement
services, the Commission could adopt a
more prescriptive approach and identify
specific scenarios in new Rule 17ad–26
that each covered clearing agency must
include in its RWP. For example, the
Commission could identify the scenario
of the default of the covered clearing
agency’s one or two largest participants
and scenarios of specific business risks
such as the default of a custodian bank
or a significant cyber-attack.151 The
Commission could also require more
detail regarding how each the covered
clearing agency analyzes these
scenarios.152
This alternative approach may reduce
compliance costs by establishing the
151 Additional such scenarios that could be
enumerated in new Rule 17ad–26 could include
any or all of the following scenarios: (A) credit
losses or liquidity shortfalls created by single and
multiple clearing member defaults; (B) liquidity
shortfall created by a combination of clearing
member default and a failure of a liquidity provider
to perform; (C) settlement bank failure; (D)
custodian or depository bank failure; (E) losses
resulting from investment risk; (F) losses from poor
business results; (G) financial effects from
cybersecurity events; (H) fraud (internal, external,
and/or actions of criminals or of public enemies);
(I) legal liabilities, including those not specific to
the covered clearing agency’s business as a covered
clearing agency; (J) losses resulting from
interconnections and interdependencies among the
covered clearing agency and its parent, affiliates,
and/or internal or external service providers; (K)
losses resulting from interconnections and
interdependencies with other covered clearing
agencies; and (L) losses resulting from issues
relating to services that are ancillary to the covered
clearing agency’s critical services. It could also
include scenarios involving multiple failures (e.g.,
a member default occurring simultaneously, or
nearly so, with a failure of a service provider) that,
in the judgment of the covered clearing agency, are
particularly relevant to its business.
152 That is, the Commission could require in new
Rule 17ad–26 that the RWP include an analysis that
includes: (A) a description of the scenario; (B) the
events that are likely to trigger the scenario; (C) the
covered clearing agency’s process for monitoring for
such events; (D) the market conditions, operational
and financial difficulties and other relevant
circumstances that are likely to result from the
scenario; (E) the potential financial and operational
impact of the scenario on the covered clearing
agency and on its clearing members, internal and
external service providers and relevant affiliated
companies, both in an orderly market and in a
disorderly market; and (F) the specific steps the
covered clearing agency would expect to take when
the scenario occurs, or appears likely to occur,
including, without limitation, any governance or
other procedures that may be necessary to
implement the relevant recovery tools and to ensure
that such implementation occurs in sufficient time
for the recovery tools to achieve their intended
effect.
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precise scope of the rule which could
allow covered clearing agencies to tailor
their RWPs to the enumerated
requirements for identifying scenarios
and analyses. In addition, including
elements similar to those proscribed by
other agencies that also regulate several
covered clearing agencies could result
in certain efficiencies and reduced costs
for those covered clearing agencies.
However, the Commission preliminarily
believes that the proposed approach
retains flexibility compared to this
alternative by permitting the scenarios
to vary across covered clearing agencies
because the underlying risks vary across
markets and participants. Because
participants vary in size and economic
significance across covered clearing
agencies, scenarios invoking a predetermined number of failures or fixed
dollar amounts may have significantly
different effects in one covered clearing
agency than in another.
3. Establish Specific Rules, Policies,
Procedures, Tools, and Resources
Instead of requiring covered clearing
agencies to describes the rules, policies,
procedures, and any other tools or
resources the covered clearing agency
would rely upon in a recovery or
orderly wind-down to address the
scenarios identified in their RWPs, the
Commission could adopt a more
prescriptive approach and identify in
new Rule 17ad–26 the rules, policies,
procedures, and any other tools or
resources for all covered clearing
agencies. The Commission could also
require in Rule 17ad–26 more detail
regarding how a covered clearing agency
analyzes its rules, policies, procedures,
tools, and resources.153
This alternative approach may reduce
compliance costs by establishing the
precise scope of the rule, which could
153 For example, the Commission could require in
new Rule 17ad–26 that the RWP include an analysis
that includes: (i) a description of the tools that the
covered clearing agency would expect to use in
each scenario; (ii) the order in which each tool
would be expected to be used; (iii) the time frame
within which the tool would be used; (iv) the
governance and approval processes and
arrangements within the covered clearing agency
for the use of each of the tools available, including
the exercise of any available discretion; (v) the
processes to obtain any approvals external to the
covered clearing agency (including any regulatory
approvals) that would be necessary to use each of
the tools available, and the steps that might be
taken if such approval is not obtained; (vi) the steps
necessary to implement the tools; (vii) the roles and
responsibilities of all parties, including nondefaulting participants; (viii) whether the tool is
mandatory or voluntary; (ix) an assessment of the
associated risks from the use of each tool to nondefaulting clearing members and their customers,
linked financial market infrastructures, and the
financial system more broadly; and (x), for winddown, an assessment of the likelihood that the tool
would result in orderly wind-down.
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allow covered clearing agencies to tailor
their RWPs to the enumerated
requirements for describing rules,
policies, procedures, and other tools or
resources. In addition, including
elements similar to those proscribed by
other agencies that also regulate several
covered clearing agencies could result
in certain efficiencies and reduced costs
for those covered clearing agencies.154
However, the Commission
preliminarily believes that it is better to
permit the rules, policies, procedures,
and any other tools or resources to vary
across covered clearing agencies
because the underlying risks and
resources vary. For example, a covered
clearing agency that clears products of
longer duration may have a greater need
for a tear-up tool that extinguishes a
participant’s positions in certain
circumstances than a covered clearing
agency that clears contracts with a
relatively short settlement cycle. In
addition, the overall volume of
transactions settled by a covered
clearing agency may affect the choice of
its liquidity tools or resources, as the
covered clearing agency would have to
ensure that it had sufficient liquidity
resources to complete settlement.
4. Require the Identification of
Interconnections and Interdependencies
In addition to the requirements with
respect to service providers set forth in
proposed Rule 17ad–26(a)(2), the
Commission could require that the
covered clearing agency’s RWP identify
any financial or operational
interconnections and interdependencies
that the covered clearing agency has
with other market participants. This
would allow for consideration of the
impact of the multiple roles and
relationships that a single financial
entity may have with respect to the
covered clearing agency including
affiliated entities and third parties (e.g.,
a single entity that acts as both a
clearing member and a settlement bank
and a liquidity provider).155
The Commission preliminarily
believes that it is better not to include
this particular requirement. A covered
clearing agency is already required to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to identify,
monitor, and manage risks related to
154 See supra section IV.B.2, supra footnotes 68
and 69, and Request for Comments 15, 20–22, and
27.
155 More specifically, a bank holding company
structure may operate through a set of legal entities
(e.g., a broker-dealer/futures commission merchant
separate from a bank separate from an information
technology service provider), each of which has
different relationships with the covered clearing
agency.
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any link the covered clearing agency
establishes with one or more other
clearing agencies, financial market
utilities, or trading markets.156 This
requirement, in conjunction with the
proposed requirement to identify and
describe service providers for critical
services and to specify to which critical
service they relate, should accomplish
the same general objective, making this
reasonable alternative inferior to the
proposed policy choice.
5. Establish a Specific Monitoring
Frequency for Intraday Margin Calls
The proposed amendment to Rule
17Ad–22(e)(6)(ii) expressly incorporates
the requirement of intraday monitoring
to ensure that such monitoring is done
on an ongoing basis. One reasonable
alternative is to prescribe the necessary
frequency of monitoring as opposed to
‘‘on an ongoing basis’’. For example,
covered clearing agencies could be
required to monitor exposure every 5 or
15 minutes.
The Commission preliminarily
believes, however, that monitoring on
an ongoing basis is preferable because a
fixed, pre-specified monitoring
frequency may not be responsive
enough to risk differences that exist
across the markets served by the
covered clearing agencies or to volatility
changes that may happen through time.
ddrumheller on DSK120RN23PROD with PROPOSALS3
6. Adopt Only Certain Elements of
Proposed Rule 17ad–26
Instead of adopting all nine elements
of proposed Rule 17ad–26, the
Commission could adopt a subset of the
proposed elements. For example, the
Commission could drop the proposed
element to identify service providers or
the proposed element to address how
the covered clearing agency would
ensure that the service providers would
continue to perform in the event of a
recovery and during and orderly winddown. Alternatively, the Commission
could drop the proposed element for
plan review or the proposed element for
plan testing.
The Commission preliminarily
believes that it is better to adopt all nine
elements of proposed Rule 17ad–26
because each element helps ensure that
the plan is fit for purpose and provides
sufficient identification of how a
covered clearing agency would operate
in a recovery and how it would handle
an orderly wind-down.
156 17
CFR 240.17Ad–22(e)(20).
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7. Focus Intraday Margin Requirements
on a Subset of Covered Clearing
Agencies
As an alternative to implementing the
proposed intraday margin amendments
on a blanket basis, the Commission
could adopt a more tailored approach
that imposes the requirements only on
a subset of covered clearing agencies
that operate in certain markets such as
those markets with the highest levels of
activity 157 or those markets that have
only one covered clearing agency.158 A
more tailored market-level risk-based
approach would adjust to the size and
systemic importance of each market,
which would reduce the counter-factual
compliance costs for the covered
clearing agencies in the markets with
less activity or with more than one
available clearing agency.
However, the Commission
preliminarily believes that the proposed
amendments already include an
appropriate adjustment for market-level
risk insofar as they would require the
covered clearing agencies to consider
their own particular facts and
circumstances when aligning with the
proposed rules. For example, the
proposed amendment to Rule 17Ad–
22(e)(6)(ii) would require covered
clearing agencies to have the operational
capacity to make intraday margin calls
‘‘as frequently as circumstances
warrant,’’ and that frequency is
expected to vary across markets and
through time.
E. Request for Comment
The Commission requests comment
on all aspects of this initial economic
analysis, including the potential
benefits and costs, all effects on
efficiency, competition (including any
effects on barriers to entry), and capital
formation, and reasonable alternatives
to the proposed rule and amendments.
We request and encourage any
interested person to submit comments
regarding the proposed rule and
amendments, our analysis of the
potential effects of the proposed rule
and amendments, and other matters that
157 Activity could be measured in different ways,
including the number or value of cleared
transactions. Average daily settlement value is
much higher in the equity market (NSCC) than it
is in the fixed income market (FICC). See DTCC,
Annual Report (2021), available at https://
www.dtcc.com/∼/media/files/downloads/about/
annual-reports/DTCC-2021-Annual-Report.
158 The following securities markets have only
one central counterparty: exchange-traded equity
options (OCC), government securities (FICC),
mortgage-backed securities (FICC), and equity
securities (NSCC). The market for central securities
depository services has only one provider (DTC).
The credit default swaps market is served by LCH
SA, ICC, and ICEEU.
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may have an effect on the proposed rule
and amendments. We request that
commenters identify sources of data and
information as well as provide data and
information to assist us in analyzing the
economic consequences of the proposed
rule and amendments and each
reasonable alternative. We are also
interested in comments on the
qualitative benefits and costs we have
identified and any qualitative benefits
and costs we may have overlooked,
including those associated with each
reasonable alternative. In addition, we
are interested in comments on any other
reasonable alternative, including any
alternative that would distinguish
covered clearing agencies based on
certain factors, such as organizational
structure or products cleared.
34. For covered clearing agencies that
are currently able to calculate and
collect intraday margin, how costly is it
to start monitoring exposure on an
ongoing basis, and how costly is it to
make intraday margin calls as frequently
as circumstances warrant?
35. How quickly are participants able
to satisfy margin calls during periods of
market calm? How quickly are
participants able to satisfy margin calls
during periods of market stress?
36. How much more costly is it for
participants to satisfy margin calls in
periods of market stress than in periods
of markets calm? How does an increase
of margin call frequency affect costs for
participants in periods of market stress?
37. How much more costly is it for
participants to satisfy margin calls that
are unanticipated than those that are
anticipated? To what extend do
participants model when the covered
clearing agency is likely to make margin
calls? How will the proposed
amendments affect participants’ ability
or incentive to model the timing of
margin calls?
38. Should the length of time
participants takes to satisfy a margin
call influence the decision of the
covered clearing agency to make a
margin call? For example, should
covered clearing agencies refrain from
issuing a new margin call before the
participants have responded to a prior
margin call? Why or why not?
39. Do commenters believe that
certain participants of covered clearing
agencies, including, for example,
participants with less capital or using
smaller settlement banks, could face
operational challenges or pricing
disadvantages, if proposed Rule 17Ad–
22(e)(ii) were to result in more frequent
margin calls? If so, please explain those
challenges and disadvantages.
40. How costly is it for covered
clearing agencies to secure the use of
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price data or substantive inputs from an
alternate source? Must the data or
substantive inputs subscription be
purchased outright, or can the covered
clearing agency, for a lower fee,
purchase an option to use the data and
substantive inputs only when its
primary sources prove inadequate?
41. How costly is it for covered
clearing agencies to secure the use of
alternate risk-based margin systems?
Would covered clearing agencies create
their own alternate risk-based margin
systems, or would they secure access to
one from a third party, and, if so, at
what cost?
42. Are our estimates of the costs to
secure alternate data inputs reasonable?
Why or why not?
43. Proposed Rule 17ad–26(a)(2)
requires RWPs to address how the
covered clearing agency would ensure
that service providers would continue to
perform in the event of a recovery and
during an orderly wind-down. Would it
be better for RWPs to address instead
how the covered clearing agency would
continue to provide its critical services
in the event of the non-performance of
one or more service providers? Why or
why not?
44. How costly will it be for covered
clearing agencies to test their plans as
required in proposed Rule 17ad–
26(a)(8)? What costs will be incurred by
the participants and, when practicable,
other stakeholders? Will any of these
costs substantively vary based on
whether or not the current RWP
includes testing?
ddrumheller on DSK120RN23PROD with PROPOSALS3
V. Paperwork Reduction Act
The proposed amendments to Rule
17Ad–22(e)(6) and Proposed Rule 17ad–
26 contain ‘‘collection of information’’
requirements within the PRA.159 The
Commission is submitting the proposed
collections of information to the Office
of Management and Budget (‘‘OMB’’) for
review in accordance with the PRA. The
title of these information collections is
‘‘Clearing Agency Standards for
Operation and Governance’’ (OMB
Control No. 3235–0695). An agency may
not conduct or sponsor, and a person is
not required to respond to, a collection
of information unless it displays a
currently valid OMB control number.
A. Proposed Amendment to Rule 17Ad–
22(e)(6)
Respondents under this Rule 17Ad–
22(e)(6) are covered clearing agencies
159 See
44 U.S.C. 3501 et seq.
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that provide central counterparty
services, of which there are currently
six. The Commission anticipates that
one additional entity may seek to
register as a clearing agency to provide
CCP services in the next three years, and
so for purposes of this proposal the
Commission has assumed seven
respondents.
The purpose of this collection of
information is to enable a covered
clearing agency to have the authority
and operational capacity to monitor
intraday exposures on an ongoing basis
and to collect intraday margin in certain
specified circumstances. The collection
is mandatory. To the extent that the
Commission receives confidential
information pursuant to this collection
of information, such information would
be kept confidential subject to the
provisions of applicable law.160
The proposed amendments to Rule
17Ad–22(e)(6) would require a covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures. The proposed rule
amendment contains similar provisions
to existing covered clearing agency rules
(i.e., Rule 17Ad–22(e)(6)(ii) and (iv)),
but would also impose additional
requirements that do not appear in the
existing Rule 17Ad–22. As a result, the
Commission preliminarily believes that
a respondent covered clearing agency
would incur burdens of reviewing and
updating existing policies and
procedures to consider whether they
comply with the proposed amendment
to Rule 17Ad–22(e)(6) and, in some
cases, may need to create new policies
and procedures to comply with the
proposed amendments to Rule 17Ad–
22(e)(6). For example, a covered clearing
agency likely would need to review its
existing margin methodology and
consider whether any additional
changes are necessary to ensure that it
can meet the strengthened requirements
of the proposed rule.
The Commission preliminarily
believes that the estimated PRA burdens
for the proposed amendment to Rule
160 See, e.g., 5 U.S.C. 552. Exemption 4 of the
Freedom of Information Act provides an exemption
for trade secrets and commercial or financial
information obtained from a person and privileged
or confidential. See 5 U.S.C. 552(b)(4). Exemption
8 of the Freedom of Information Act provides an
exemption for matters that are contained in or
related to examination, operating, or condition
reports prepared by, on behalf of, or for the use of
an agency responsible for the regulation or
supervision of financial institutions. See 5 U.S.C.
552(b)(8).
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17Ad–22(e)(6) may require a respondent
covered clearing agency to make fairly
substantial changes to its policies and
procedures. Based on the similar
policies and procedures requirements
and the corresponding burden estimates
previously made by the Commission for
several rules in the Covered Clearing
Agency Standards where the
Commission anticipated similar
burdens,161 the Commission
preliminarily estimates that respondent
covered clearing agencies would incur
an aggregate one-time burden of
approximately 903 hours to review
existing policies and procedures and
create new policies and procedures.162
The proposed amendments to Rule
17Ad–22(e)(6) would impose ongoing
burdens on a respondent covered
clearing agencies. The proposed rule
would require ongoing monitoring and
compliance activities with respect to the
written policies and procedures created
in response to the proposed rule. Based
on the similar reporting requirements
and the corresponding burden estimates
previously made by the Commission for
several rules in the Covered Clearing
Agency Standards where the
Commission anticipated similar
burdens,163 the Commission
preliminarily estimates that the ongoing
activities required by the proposed
amendments to Rule 17Ad–22(e)(6)
would impose an aggregate annual
burden on respondent covered clearing
agencies of 560 hours.164
161 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70892 and 70895–97 (discussing
Rules 17Ad–22(e)(2) and (13)). Although the
proposed rule amendment is with respect to Rule
17Ad–22(e)(6), the Commission believes that these
Rules present the best overall comparison to the
current proposed rule amendment, in light of the
nature of the changes needed to implement the
proposal here and what was proposed in the
Covered Clearing Agency Standards.
162 This figure was calculated as follows:
(Assistant General Counsel for 20 hours) +
(Compliance Attorney for 40 hours) + (Computer
Operations Manager for 12 hours) + (Senior
Programmer for 20 hours) + (Senior Risk
Management Specialist for 25 hours) + (Senior
Business Analyst for 12 hours) = 129 hours × 7
respondent clearing agencies = 903 hours.
163 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70893 and 70895–96 (discussing
Rules 17Ad–22(e)(6) and (13)).
164 This figure was calculated as follows:
(Compliance Attorney for 25 hours + Business Risk
Analyst for 40 hours + Senior Risk Management
Specialist for 20 hours) = 85 hours × 7 respondent
clearing agencies = 560 hours.
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Name of information collection
Type of burden
Number of
respondents
Initial burden
per entity
Aggregate
initial burden
Ongoing
burden per
entity
Aggregate
ongoing
burden
17Ad–22(e)(6) .........................
Recordkeeping ...............
7
129
903
85
595
B. Proposed Rule 17Ad–26
Respondents under proposed Rule
17ad–26 are covered clearing agencies,
of which there is currently seven. The
Commission anticipates that one
additional entity may seek to register as
a covered clearing agency in the next
three years, and so for purposes of this
proposal the Commission has assumed
eight respondents.
The purpose of the collections under
proposed Rule 17ad–26 is to ensure that
covered clearing agencies include a set
of particular items in the recovery and
wind-down plans currently required
under Rule 17Ad–22(e)(3)(ii). The
collections are mandatory. To the extent
that the Commission receives
confidential information pursuant to
this collection of information, such
information would be kept confidential
subject to the provisions of applicable
law.165
Because of the existence of current
Rule 17Ad–22(e)(3)(ii), which means
that covered clearing agencies are
already required to maintain RWPs,
Proposed Rule 17ad–26 would impose
on a covered clearing agency similar
burdens as when, for example, Rule
17Ad–22(e)(2) was proposed and
covered clearing agencies generally had
governance arrangements in place at
that time.166 Based on the Commission’s
review and understanding of the
covered clearing agencies’ existing
RWPs,167 respondent covered clearing
agencies generally have written rules,
policies, and procedures similar to the
requirements that would be imposed
under the Proposed Rule 17ad–26. The
PRA burden imposed by the proposed
rule would therefore be minimal and
would likely be limited to the review of
current policies and procedures and
updating existing policies and
procedures where appropriate to ensure
compliance with the proposed rule.
Accordingly, the Commission
preliminarily believes that respondent
clearing agencies would incur an
aggregate one-time burden of
approximately 960 hours to review and
update existing policies and
procedures.168
Proposed Rule 17ad–26 would also
impose ongoing burdens on a
respondent covered clearing agency.
The proposed rule would require
ongoing monitoring and compliance
activities with respect to the written
policies and procedures created in
response to the proposed rule. Based on
the Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to existing Rule
17Ad–22(e)(2),169 the Commission
preliminarily estimates that the ongoing
activities required by proposed Rule
17ad–26 would impose an aggregate
annual burden on respondent covered
clearing agencies of 40 hours.170
Name of information collection
Type of burden
Number of
respondents
Initial burden
per entity
Aggregate
initial burden
Ongoing
burden per
entity
Aggregate
ongoing
burden
17ad–26 ..................................
Recordkeeping ...............
8
120
960
40
320
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to:
45. Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
Commission’s functions, including
whether the information shall have
practical utility;
46. Evaluate the accuracy of the
Commission’s estimates of the burdens
of the proposed collections of
information;
47. Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected;
48. Evaluate whether there are ways
to minimize the burden of collection of
information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology;
and
49. Evaluate whether the proposed
rules and rule amendments would have
any effects on any other collection of
information not previously identified in
this section.
Persons submitting comments on the
collection of information requirements
should direct them to the Office of
Management and Budget, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
send a copy of their comments to
Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090, with
reference to File Number S7–10–23.
Requests for materials submitted to
OMB by the Commission with regard to
this collection of information should be
in writing, with reference to File
Number S7–10–23 and be submitted to
the Securities and Exchange
Commission, Office of FOIA/PA
Services, 100 F Street NE, Washington,
DC 20549–2736. As OMB is required to
make a decision concerning the
collection of information between 30
and 60 days after publication, a
comment to OMB is best assured of
having its full effect if OMB receives it
within 30 days of publication.
165 See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of
the Freedom of Information Act provides an
exemption for trade secrets and commercial or
financial information obtained from a person and
privileged or confidential. See 5 U.S.C. 552(b)(4).
Exemption 8 of the Freedom of Information Act
provides an exemption for matters that are
contained in or related to examination, operating,
or condition reports prepared by, on behalf of, or
for the use of an agency responsible for the
regulation or supervision of financial institutions.
See 5 U.S.C. 552(b)(8).
166 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70892 (discussing Rule 17Ad–
22(e)(2)).
167 See supra, note 41.
168 This figure was calculated as follows:
((Assistant General Counsel for 20 hours) +
(Compliance Attorney for 50 hours) + (Business
Risk Analyst for 35 hours) + (Senior Risk
Management Specialist for 15) = 120 hours × 8
respondent clearing agencies = 960 hours.
169 See CCA Standards Adopting Release, supra
note 7, 81 FR at 70892 (discussing Rule 17Ad–
22(e)(2)).
170 This figure was calculated as follows:
((Assistant General Counsel for 10 hours) +
Compliance Attorney for 30 hours)) × 8 respondent
clearing agencies = 320 hours.
C. Request for Comment
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VI. Small Business Regulatory
Enforcement Fairness Act
Under the Small Business Regulatory
Enforcement Fairness Act of 1996,171 a
rule is ‘‘major’’ if it has resulted, or is
likely to result in: an annual effect on
the economy of $100 million or more; a
major increase in costs or prices for
consumers or individual industries; or
significant adverse effects on
competition, investment, or innovation.
The Commission requests comment on
whether the proposed rules and rule
amendments would be a ‘‘major’’ rule
for purposes of the Small Business
Regulatory Enforcement Fairness Act. In
addition, the Commission solicits
comment and empirical data on: the
potential effect on the U.S. economy on
annual basis; any potential increase in
costs or prices for consumer or
individual industries; and any potential
effect on competition, investment, or
innovation.
ddrumheller on DSK120RN23PROD with PROPOSALS3
VII. Regulatory Flexibility Act
Certification
The Regulatory Flexibility Act
(‘‘RFA’’) requires the Commission, in
promulgating rules, to consider the
impact of those rules on small
entities.172 Section 603(a) of the
Administrative Procedure Act,173 as
amended by the RFA, generally requires
the Commission to undertake a
regulatory flexibility analysis of all
proposed rules to determine the impact
of such rulemaking on ‘‘small
entities.’’ 174 Section 605(b) of the RFA
states that this requirement shall not
apply to any proposed rule which, if
adopted, would not have a significant
economic impact on a substantial
number of small entities.175
The proposed amendments to Rule
17Ad–22 and new Rule 17ad–26 would
apply to covered clearing agencies,
which would include registered clearing
agencies that provide the services of a
central counterparty or central securities
depository.176 For the purposes of
Commission rulemaking and as
applicable to the proposed amendments
to Rule 17Ad–22 and the addition of
proposed Rule 17ad–26, a small entity
includes, when used with reference to a
171 Public Law 104–121, Title II, 110 Stat. 857
(1996).
172 See 5 U.S.C. 601 et seq.
173 5 U.S.C. 603(a).
174 Section 601(b) of the RFA permits agencies to
formulate their own definitions of ‘‘small entities.’’
See 5 U.S.C. 601(b). The Commission has adopted
definitions for the term ‘‘small entity’’ for the
purposes of rulemaking in accordance with the
RFA. These definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0–10, 17 CFR
240.0–10.
175 See 5 U.S.C. 605(b).
176 17 CFR 240.17AD–22(a)(5).
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22:46 May 26, 2023
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clearing agency, a clearing agency that
(i) compared, cleared, and settled less
than $500 million in securities
transactions during the preceding fiscal
year, (ii) had less than $200 million of
funds and securities in its custody or
control at all times during the preceding
fiscal year (or at any time that it has
been in business, if shorter), and (iii) is
not affiliated with any person (other
than a natural person) that is not a small
business or small organization.177
Based on the Commission’s existing
information about the clearing agencies
currently registered with the
Commission, the Commission
preliminarily believes that such entities
exceed the thresholds defining ‘‘small
entities’’ set out above. While other
clearing agencies may emerge and seek
to register as clearing agencies, the
Commission preliminarily does not
believe that any such entities would be
‘‘small entities’’ as defined in Exchange
Act Rule 0–10.178 In any case, clearing
agencies can only become subject to the
new requirements under proposed Rule
17Ad–22(e) should they meet the
definition of a covered clearing agency,
as described above. Accordingly, the
Commission preliminarily believes that
any such registered clearing agencies
will exceed the thresholds for ‘‘small
entities’’ set forth in Exchange Act Rule
0–10.
For the reasons described above, the
Commission certifies that the proposed
amendments to Rules 17Ad–22 and
proposed new Rule 17ad–26 would not
have a significant economic impact on
a substantial number of small entities
for purposes of the RFA. The
Commission requests comment
regarding this certification. The
Commission requests that commenters
describe the nature of any impact on
small entities, including clearing
agencies, and provide empirical data to
support the extent of the impact.
VIII. Statutory Authority
The Commission is proposing
amendments to 17 CFR 240.17Ad–22
and proposing 17 CFR 240.17ad–26
under the Commission’s rulemaking
authority set forth in section 17A of the
Exchange Act, 15 U.S.C. 78q–1 and
Section 23(a), 15 U.S.C. 78w(a), and in
Section 805 of the Clearing Supervision
Act, 15 U.S.C. 5464.
177 See
17 CFR 240.0–10(d).
17 CFR 240.0–10(d). The Commission
based this determination on its review of public
sources of financial information about registered
clearing agencies and lifecycle event service
providers for OTC derivatives.
178 See
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Fmt 4701
Sfmt 4702
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping
requirements, Securities.
Text of Amendments
In accordance with the foregoing, title
17, chapter II of the Code of Federal
Regulations is proposed to be amended
as follows:
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
continues to read, and the sectional
authority for § 240.17Ad–22 is revised
to read, as follows:
■
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll,
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
3, 80b–4, 80b–11, and 7201 et seq., 8302; 7
U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18
U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat.
1376 (2010); and Pub. L. 112–106, sec. 503
and 602, 126 Stat. 326 (2012), unless
otherwise noted.
*
*
*
*
*
Section 240.17ad–22 is also issued under
12 U.S.C. 5461 et seq.
*
*
*
*
*
2. Amend § 240.17Ad–22 by:
a. Redesignating § 240.17Ad–22 as
§ 240.17ad–22; and
■ b. Revising paragraphs (e)(6)(ii) and
(iv) in newly redesignated § 240.17ad–
22.
The revisions read as follows:
■
■
§ 240.17ad–22
agencies.
*
Standards for clearing
*
*
*
*
(e) * * *
(6) * * *
(ii) Marks participant positions to
market and collects margin, including
variation margin or equivalent charges if
relevant, at least daily, monitors
intraday exposures on an ongoing basis,
and includes the authority and
operational capacity to make intraday
margin calls as frequently as
circumstances warrant, including when
risk thresholds specified by the covered
clearing agency are breached or when
the products cleared or markets served
display elevated volatility;
*
*
*
*
*
(iv) Uses reliable sources of timely
price data and other substantive inputs,
and uses procedures and, with respect
to price data, sound valuation models,
for addressing circumstances in which
price data or other substantive inputs
are not readily available or reliable to
ensure that the covered clearing agency
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Federal Register / Vol. 88, No. 103 / Tuesday, May 30, 2023 / Proposed Rules
can continue to meet its obligations
under this section. Such procedures
shall include the use of price data or
substantive inputs from an alternate
source or, if it does not use an alternate
source, the use of an alternate risk-based
margin system that does not similarly
rely on the unavailable or unreliable
substantive input;
*
*
*
*
*
■ 3. Section 240.17ad–26 is added to
read as follows:
§ 240.17ad–26 Covered Clearing Agency
Recovery and Orderly Wind-Down Plans.
ddrumheller on DSK120RN23PROD with PROPOSALS3
(a) The plans for the recovery and
orderly wind-down of the covered
clearing agency referenced in 17 CFR
240.17ad–22(e)(3)(ii) shall:
(1) Identify and describe the covered
clearing agency’s critical payment,
clearing, and settlement services and
address how the covered clearing
agency would continue to provide such
critical services in the event of a
recovery and during an orderly winddown, including the identification of
the staffing necessary to support such
critical services and analysis of how
such staffing would continue in the
event of a recovery and during an
orderly wind-down;
(2) Identify and describe any service
providers upon which the covered
clearing agency relies to provide the
services identified in paragraph (a)(1) of
this section, specify to what services
such service providers are relevant, and
address how the covered clearing
agency would ensure that such service
providers would continue to perform in
the event of a recovery and during an
orderly wind-down, including
consideration of contractual obligations
with such service providers and
whether those obligations are subject to
alteration or termination as a result of
initiation of the recovery and orderly
wind-down plan;
(3) Identify and describe scenarios
that may potentially prevent the covered
clearing agency from being able to
provide its critical payment, clearing,
and settlement services identified in
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22:46 May 26, 2023
Jkt 259001
paragraph (a)(1) of this section as a
going concern, including uncovered
credit losses (as described in paragraph
(e)(4)(viii) of 17 CFR 240.17ad–22),
uncovered liquidity shortfalls (as
described in paragraph (e)(7)(viii) of 17
CFR 240.17ad–22), and general business
losses (as described in paragraph (e)(15)
of 17 CFR 240.17ad–22);
(4) Identify and describe criteria that
would trigger the implementation of the
recovery and orderly wind-down plans
and the process that the covered
clearing agency uses to monitor and
determine whether the criteria have
been met, including the governance
arrangements applicable to such
process;
(5) Identify and describe the rules,
policies, procedures, and any other tools
or resources the covered clearing agency
would rely upon in a recovery or
orderly wind-down;
(6) Address how the rules, policies,
procedures, and any other tools or
resources identified in paragraph (a)(5)
of this section would ensure timely
implementation of the recovery and
orderly wind-down plan;
(7) Include procedures for informing
the Commission as soon as practicable
when the covered clearing agency is
considering initiating a recovery or
orderly wind-down;
(8) Include procedures for testing the
covered clearing agency’s ability to
implement the recovery and wind-down
plans at least every twelve months,
including by requiring the covered
clearing agency’s participants and,
when practicable, other stakeholders to
participate in the testing of its plans,
providing for reporting the results of the
testing to the covered clearing agency’s
board of directors and senior
management, and specifying the
procedures for, as appropriate,
amending the plans to address the
results of the testing; and
(9) Include procedures requiring
review and approval by the board of
directors of the plans at least every
twelve months or following material
changes to the covered clearing agency’s
PO 00000
Frm 00037
Fmt 4701
Sfmt 9990
34743
operations that would significantly
affect the viability or execution of the
plans, with such review informed, as
appropriate by the covered clearing
agency’s testing of the plans.
(b) Definitions. For the purposes of
this section:
Affiliate means a person that directly
or indirectly controls, is controlled by,
or is under common control with the
covered clearing agency.
Orderly wind-down means the actions
of a covered clearing agency to effect the
permanent cessation, sale, or transfer of
one or more of its critical services in a
manner that would not increase the risk
of significant liquidity, credit, or
operational problems spreading among
financial institutions or markets and
thereby threaten the stability of the U.S.
financial system.
Recovery means the actions of a
covered clearing agency, consistent with
its rules, procedures, and other ex ante
contractual arrangements, to address
any uncovered loss, liquidity shortfall,
or capital inadequacy, whether arising
from participant default or other causes
(such as business, operational, or other
structural weaknesses), including
actions to replenish any depleted
prefunded financial resources and
liquidity arrangements, as necessary to
maintain the covered clearing agency’s
viability as a going concern and to
continue its provision of critical
services.
Service provider means any person,
including an affiliate or a third party,
that is contractually obligated to the
covered clearing agency in any way
related to the provision of critical
services, as identified by the covered
clearing agency in 17 CFR 240.17ad–
26(a)(1).
By the Commission.
Dated: May 17, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–10889 Filed 5–26–23; 8:45 am]
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 88, Number 103 (Tuesday, May 30, 2023)]
[Proposed Rules]
[Pages 34708-34743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10889]
[[Page 34707]]
Vol. 88
Tuesday,
No. 103
May 30, 2023
Part IV
Securities and Exchange Commission
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17 CFR Part 240
Covered Clearing Agency Resilience and Recovery and Wind-Down Plans;
Proposed Rule
Federal Register / Vol. 88 , No. 103 / Tuesday, May 30, 2023 /
Proposed Rules
[[Page 34708]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-97516; File No. S7-10-23]
RIN 3235-AN19
Covered Clearing Agency Resilience and Recovery and Wind-Down
Plans
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing to amend certain portions of the Covered Clearing Agency
Standards under the Securities Exchange Act of 1934 (``Exchange Act'')
to strengthen the existing rules regarding margin with respect to
intraday margin and the use of substantive inputs to a covered clearing
agency's risk-based margin system. The Commission is also proposing a
new rule to establish requirements for the contents of a covered
clearing agency's recovery and wind-down plan.
DATES: Comments should be received on or before July 17, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File Number S7-10-23 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-10-23. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's website (https://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's Public
Reference Room. Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Elizabeth L. Fitzgerald, Assistant
Director, Jesse Capelle, Special Counsel, Office of Clearance and
Settlement at (202) 551-5710, Division of Trading and Markets, U.S.
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-7010.
Table of Contents
I. Introduction
II. Regulatory Framework
A. The Covered Clearing Agency Standards
B. Statutory Requirements for Covered Clearing Agencies as Self-
Regulatory Organizations
C. Title II of the Dodd-Frank Act
III. Proposal
A. Amendments Regarding Risk Management
1. Proposed Changes to Rule 17Ad-22(e)(6)
2. Discussion
3. Request for Comment
D. Contents of Recovery and Wind-Down Plans
1. Proposed Rule 17Ad-26
2. Discussion
4. Request for Comment
IV. Economic Analysis
A. Introduction
B. Economic Baseline
1. Description of Market
2. Overview of the Existing Regulatory Framework
3. Current Recovery and Wind-Down Plans
4. Current Risk-Based Margin
E. Consideration of Benefits and Costs as well as the Effects on
Efficiency, Competition, and Capital Formation
1. Proposed Rule 17Ad-26
2. Amendments to Rule 17Ad-22(e)(6)
3. Efficiency, Competition, and Capital Formation
F. Reasonable Alternatives to the Proposed Rule and Amendments
1. Establish Precise Triggers for Implementation of RWPs Across
Covered Clearing Agencies
2. Establish Specific Scenarios and Analyses
3. Establish Specific Rules, Policies, Procedures, Tools, and
Resources
4. Require the Identification of Interconnections and
Interdependencies
5. Establish a Specific Monitoring Frequency for Intraday Margin
Calls
6. Adopt Only Certain Elements of Proposed Rule 17Ad-26
7. Focus Intraday Margin Requirements on a Subset of Covered
Clearing Agencies
G. Request for Comment
V. Paperwork Reduction Act
A. Proposed Amendment to Rule 17Ad-22(e)(6)
B. Proposed Rule 17Ad-26
H. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority
I. Introduction
Section 17A of the Exchange Act directs the Commission to
facilitate the establishment of a national system for the prompt and
accurate clearance and settlement of securities transactions and
provides the Commission with the authority to regulate those entities
critical to the clearance and settlement process.\1\ The enactment of
the Payment, Clearing, and Settlement Supervision Act (``Clearing
Supervision Act'') in Title VIII of the Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act'') reaffirmed the importance
of the national system for clearance and settlement.\2\ Specifically,
Congress found that the ``proper functioning of the financial markets
is dependent upon safe and efficient arrangements for the clearing and
settlement of payments, securities, and other financial transactions.''
\3\
---------------------------------------------------------------------------
\1\ See 15 U.S.C. 78q-1(a)(2)(A).
\2\ See 12 U.S.C. 5461-5472.
\3\ See 12 U.S.C. 5461(a)(1).
---------------------------------------------------------------------------
In recognition of the importance of clearance and settlement to the
securities markets, the Commission adopted 17 CFR 240.17Ad-22(e)
(``Rule 17Ad-22(e)''), which sets forth standards for covered clearing
agencies registered with the Commission.\4\ These standards address all
aspects of a covered clearing agency's operations, including financial
risk management, operational risk, default management, governance, and
participation requirements.\5\ In this release, the Commission is
proposing changes to augment and strengthen the requirements of these
rules, referred to as the Covered Clearing Agency Standards, in three
ways.\6\
---------------------------------------------------------------------------
\4\ A covered clearing agency is a registered clearing agency
that provides the services of a central counterparty or a central
securities depository. 17 CFR 240.17Ad-22(a)(5).
\5\ See section II.A infra (providing more information on the
Covered Clearing Agency Standards).
\6\ In addition, the Commission is proposing to amend the CFR
section designation for 17 CFR 240.17Ad-22 to replace the uppercase
letter with the corresponding lowercase letter. Accordingly, 17 CFR
240.17Ad-22 is proposed to be redesignated as 17 CFR 240.17ad-22.
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[[Page 34709]]
First, the Commission is proposing changes with respect to the
Covered Clearing Agency Standards regarding the intraday collection of
margin set forth in 17 CFR 240.17Ad-22(e)(6)(ii) (``Rule 17Ad-
22(e)(6)(ii)''). This proposal would build upon and strengthen the
existing requirement that a covered clearing agency have policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, among
other things, includes the authority and operational capacity to make
intraday margin calls in defined circumstances. Specifically, the
proposed amendments to this rule would require that the covered
clearing agency have policies and procedures to establish a risk-based
margin system that includes the authority and operational capacity to
monitor intraday exposure on an ongoing basis and to make intraday
margin calls as frequently as circumstances warrant, including when
risk thresholds specified by the covered clearing agency are breached
or when the products cleared or markets served display elevated
volatility.
Second, the proposal would amend and expand the requirements of 17
CFR 240.17Ad-22(e)(6)(iv) (``Rule 17Ad-22(e)(6)(iv)'') to provide that
a covered clearing agency have policies and procedures that would apply
in the event that the covered clearing agency relies on substantive
inputs from third parties to calculate margin using a risk-based margin
system and, specifically, when such inputs are not readily available or
reliable. This proposal would require that the procedures used in such
circumstances must include substantive inputs from an alternate source
or, if it does not use an alternate source, the use of an alternate
risk-based margin system that does not similarly rely on the
unavailable or unreliable substantive inputs.
Finally, the Commission is proposing to prescribe requirements for
the contents of a covered clearing agency's recovery and orderly wind-
down plan (``RWP''). At the time that it adopted the Covered Clearing
Agency Standards in 2016, the Commission required in 17 CFR 240.17Ad-
22(e)(3)(ii) (``Rule 17Ad-27(e)(3)(ii)'') that a covered clearing
agency's policies and procedures include an RWP, but the Commission
declined to include requirements for the content of the RWP, stating
that, given the nature of recovery and resolution planning, such plans
are likely to closely reflect the specific characteristics of the
covered clearing agency, including its ownership, organizational, and
operational structures, as well as the size, systemic importance,
global reach, and/or the risks inherent in the products it clears.\7\
The Commission continues to believe that an RWP should closely reflect
the specific characteristics of the covered clearing agency. However,
at this time, based on its supervisory experience considering the RWPs
of the covered clearing agencies, the Commission believes that there
are certain elements that must be included in each covered clearing
agency's plan, to ensure that the plan is fit for purpose and provides
sufficient identification of how a covered clearing agency would
operate in a recovery and how it would achieve an orderly wind-down.
Accordingly, the Commission is proposing a new rule at 17 CFR 240.17ad-
26 (``Rule 17ad-26''), which would identify certain elements that a
covered clearing agency would be required to include in an RWP and
would also include definitions of recovery and orderly wind-down, which
would identify the objective that these plans are designed to meet. As
discussed further in sections III.B and IV.B infra, many of these
elements are already contained in existing covered clearing agencies'
RWPs, while other elements would be new to all or most of the existing
RWPs. The Commission believes that the elements identified in new Rule
17ad-26 would accomplish three objectives. First, the rule would
bolster existing plans by requiring certain new elements be included.
Second, for the elements that are already contained in existing RWPs,
the rule would codify these elements and ensure that the plans are
required to continue to include these elements in their RWPs. Finally,
the rule would ensure that the RWPs of any new covered clearing
agencies would contain all of these elements.
---------------------------------------------------------------------------
\7\ Standards for Covered Clearing Agencies Adopting Release,
Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR 70786, 70808-
09 (Oct. 13, 2016) (``CCA Standards Adopting Release'').
---------------------------------------------------------------------------
However, with respect to changes to RWPs and to risk management
rules more generally, the Commission would need to approve any proposed
rule changes and, in filings for which an advance notice is required,
not object to any such notice, as discussed further in section II.B
infra. The Commission believes that this process should ensure that it
is able to consider such changes and their consistency with the
Exchange Act and the rules and regulations thereunder.
II. Regulatory Framework
A. The Covered Clearing Agency Standards
In 1975, Congress added section 17A to the Exchange Act as part of
the Securities Acts Amendments of 1975, which, as noted in section I
supra, directed the Commission to facilitate the establishment of: (i)
a national system for the prompt and accurate clearance and settlement
of securities transactions (other than exempt securities which
typically includes U.S. Treasury securities, except as discussed
further below), and (ii) linked or coordinated facilities for clearance
and settlement of securities transactions.\8\ In so doing, Congress
made several findings related to the importance of the clearance and
settlement of securities transactions and the relationship of clearance
and settlement of securities transactions to the protection of
investors. Specifically, Congress found that the prompt and accurate
clearance and settlement of securities transactions are necessary for
the protection of investors and persons facilitating transactions by
and acting on behalf of investors.\9\ In facilitating the establishment
of the national clearance and settlement system, the Commission must
have due regard for the public interest, the protection of investors,
the safeguarding of securities and funds, and maintenance of fair
competition among brokers and dealers, clearing agencies, and transfer
agents.\10\
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\8\ See 15 U.S.C. 78q-1; Report of the Senate Committee on
Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at 4 (1975)
(stating the Committee's belief that ``the banking and security
industries must move quickly toward the establishment of a fully
integrated national system for the prompt and accurate processing
and settlement of securities transactions'').
\9\ See 15 U.S.C. 78q-1(a)(1)(A); see also 15 U.S.C. 78q-1(B),
(C), and (D) (setting forth additional findings related to the
national system of clearance and settlement).
\10\ See 15 U.S.C. 78q-1(a)(2)(A).
---------------------------------------------------------------------------
The Commission's ability to achieve these goals is based upon the
regulation of clearing agencies registered with the Commission.\11\
Specifically, section 17A of the Exchange Act provides the Commission
with authority to adopt rules as necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Exchange Act (including for the prompt and
accurate clearance and settlement of securities transactions) and
prohibits a clearing agency from engaging in any activity in
[[Page 34710]]
contravention of such rules and regulations.\12\
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\11\ Under the Exchange Act and the regulations thereunder, any
entity performing the functions of a clearing agency must register
with the Commission or seek an exemption from registration. 15
U.S.C. 78q-1(b)(1); see also 17 CFR 240.17Ad-22(a)(5) (defining
covered clearing agency).
\12\ See 15 U.S.C. 78q-1(d)(1); see also 15 U.S.C. 78q-1(b)(2)
(referring to the Commission's ability to adopt rules with respect
to the application of section 17A).
---------------------------------------------------------------------------
The Commission has exercised its broad authority to prescribe
requirements for the prompt and accurate clearance and settlement of
securities transactions and the safeguarding of securities and funds.
Most recently, the Commission promulgated the Covered Clearing Agency
Standards.\13\ These standards require covered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to, as applicable, meet certain minimum
standards regarding, among other things, operations, governance, and
risk management.\14\
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\13\ CCA Standards Adopting Release, supra note 7, 81 FR at
70839.
\14\ See generally 17 CFR 240.17Ad-22(e). A covered clearing
agency is a registered clearing agency that provides the services of
a central counterparty or a central securities depository. 17 CFR
240.17Ad-22(a)(5).
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One of the Covered Clearing Agency Standards concerns the
maintaining of a sound risk management framework for comprehensively
managing legal, credit, liquidity, operational, general business,
investment, custody, and other risks that arise in or are borne by the
covered clearing agency.\15\ As part of maintaining a sound risk
management framework, a covered clearing agency is required to include
plans for the recovery and orderly wind-down of the covered clearing
agency necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses.\16\ At that time, the
Commission stated that it understands that when a financial company
becomes non-viable as a going concern or insolvent, recovery refers to
actions taken that allow the financial company to sustain its critical
operations and services; by contrast, resolution, or wind-down, refers
to the transferring of a financial company's critical operations and
services to an alternate entity.\17\
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\15\ See 17 CFR 240.17Ad-22(e)(3).
\16\ See 17 CFR 240.17Ad-22(e)(3)(ii).
\17\ CCA Standards Adopting Release, supra note 7, 81 FR at
70808 n.251. In this release, the Commission is proposing
definitions of ``recovery'' and ``orderly wind-down'' that would
apply to the RWPs addressed by this release. See infra section
III.B.2.a.
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At the time of adoption of the Covered Clearing Agency Standards,
the Commission declined to articulate requirements for all RWPs.\18\
Rather, the Commission stated that, given the nature of recovery and
resolution planning, such plans are likely to closely reflect the
specific characteristics of the covered clearing agency, including its
ownership, organizational, and operational structures, as well as the
size, systemic importance, global reach, and/or the risks inherent in
the products it clears. While the Commission declined to articulate
requirements, it did provide guidance for covered clearing agencies in
developing RWPs. In the Covered Clearing Agency Standards Adopting
Release, the Commission stated that a covered clearing agency generally
should consider whether: (i) it can identify scenarios that may
potentially prevent it from being able to provide its critical services
as a going concern and assess the effectiveness of a full range of
options for recovery or orderly wind-down; (ii) it has prepared
appropriate plans for its recovery or orderly wind-down based on the
results of that assessment; and (iii) it has provided relevant
authorities with the information needed for purposes of recovery and
resolution planning.\19\ The Commission also stated in the CCA
Standards Adopting Release that, with respect to recovery tools, a
covered clearing agency generally should consider the following when
developing its recovery tools: (i) whether the set of recovery tools
comprehensively addresses how the covered clearing agency would
continue to provide critical services in all relevant scenarios; (ii)
the extent to which each tool is reliable, timely, and has a strong
legal basis; (iii) whether the tools are transparent and designed to
allow those who would bear losses and liquidity shortfalls to measure,
manage, and control their potential losses and liquidity shortfalls;
(iv) whether the tools create appropriate incentives for the covered
clearing agency's owners, direct and indirect participants, and other
relevant stakeholders; and (v) whether the tools are designed to
minimize the negative impact on direct and indirect participants and
the financial system more broadly.\20\
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\18\ Id. at 70808.
\19\ Id. at 70810. As discussed in section III.B infra, the
Commission is proposing to codify elements in proposed Rule 17ad-26
that are consistent with this guidance, with the exception of the
guidance related to ``resolution planning.'' With respect to the
guidance related to providing relevant authorities with the
information needed for purposes of recovery and resolution planning,
the Commission continues to support and reiterates this prior
guidance. See infra section III.B.2.
\20\ Id. The Commission is also proposing to codify the first
section of this guidance in proposed Rule 17ad-26(a)(5). See section
III.B.2.c infra. With respect to the remaining items of this
guidance, the Commission continues to support and reiterates this
prior guidance in section III.B.2.d infra.
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Relatedly, the Covered Clearing Agency Standards also address the
financial resources necessary for a covered clearing agency's recovery
or orderly wind-down. Specifically, 17 CFR 240.17Ad-22(e)(15) requires
written policies and procedures reasonably designed to, among other
things, hold sufficient liquid net assets funded by equity to cover
potential general business losses so that the covered clearing agency
can continue operations and services as a going concern if those losses
materialize.\21\ This requirement encompasses: (i) determining the
amount of liquid net assets funded by equity based upon the covered
clearing agency's general business risk profile and the length of time
required to achieve a recovery or orderly wind-down, as appropriate, of
its critical operations and services if such action is taken; (ii)
holding liquid net assets funded by equity equal to the greater of
either (x) six months of the covered clearing agency's current
operating expenses, or (y) the amount determined by the board of
directors to be sufficient to ensure a recovery or orderly wind-down of
critical operations and services of the covered clearing agency, as
contemplated by the RWPs established under current Rule 17Ad-
22(e)(3)(ii),\22\ and (iii) maintaining a viable plan, approved by the
board of directors and updated at least annually, for raising
additional equity should its equity fall close to or below the amount
required under paragraph (ii).\23\ With respect to the policies and
procedures related to maintaining a viable plan for raising additional
equity, the Commission stated that a viable plan generally should
enable the covered clearing agency to hold sufficient liquid net assets
to achieve recovery or orderly wind-down.\24\
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\21\ 17 CFR 240.17Ad-22(e)(15).
\22\ This amount shall be in addition to resources held to cover
participant defaults or other risks covered under the credit risk
standard in 17 CFR 240.17Ad-22(b)(3) or 17Ad-22(e)(4)(i) through
(iii), as applicable, and the liquidity risk standard in 17 CFR
240.17Ad-22(e)(7)(i) and (ii), and it shall be of high quality and
sufficiently liquid to allow the covered clearing agency to meet its
current and projected operating expenses under a range of scenarios,
including in adverse market conditions. 17 CFR 240.17Ad-
22(e)(15)(ii)(A) and (B).
\23\ 17 CFR 240.17Ad-22(e)(15)(i), (ii), and (iii).
\24\ CCA Standards Adopting Release, supra note 7, 81 FR at
70836.
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Another of the Covered Clearing Agency Standards sets forth
requirements for written policies and procedures reasonably designed
to, among other things, establish a risk-based margin system to cover
the covered clearing agency's credit
[[Page 34711]]
exposures to its participants if the covered clearing agency provides
central counterparty services.\25\ At a minimum, such a system, among
other things, must mark participant positions to market and collect
margin, including variation margin or equivalent charges if relevant,
at least daily and include the authority and operational capacity to
make intraday margin calls in defined circumstances.\26\ The Commission
stated that defined circumstances would generally include margin calls
on both a scheduled and unscheduled basis.\27\
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\25\ See 17 CFR 240.17Ad-22(e)(6).
\26\ See 17 CFR 240.17Ad-22(e)(6)(ii).
\27\ CCA Standards Adopting Release, supra note 7, 81 FR at
70818.
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In addition, a covered clearing agency's risk-based margin system
has to use reliable sources of timely price data and use procedures and
sound valuation models for addressing circumstances in which pricing
data are not readily available or reliable.\28\ The Commission stated
that in selecting price data sources, a covered clearing agency
generally should consider the ability of the provider to provide data
in a variety of market conditions, including periods of market stress,
and not select data sources based on their cost alone to ensure that
such price data sources are reliable.\29\
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\28\ See 17 CFR 240.17Ad-22(e)(6)(iv).
\29\ CCA Standards Adopting Release, supra note 7, 81 FR at
70819.
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B. Statutory Requirements for Covered Clearing Agencies as Self-
Regulatory Organizations
A covered clearing agency is, by definition, a registered clearing
agency, meaning that it is a self-regulatory organization (``SRO'') for
purposes of the Exchange Act.\30\ Therefore, as a SRO, a covered
clearing agency is required to file with the Commission any proposed
rule or proposed change in its rules, including additions or deletions
from its rules.\31\ The Commission has specified the format and process
for filing such proposed rule changes in Form 19b-4, which is intended
to elicit information necessary for the public to provide meaningful
comment on the proposed rule change and for the Commission to determine
whether the proposed rule change is consistent with the requirements of
the Exchange Act and the rules and regulations thereunder.\32\
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\30\ 17 CFR 240.17Ad-22(a)(5) (defining a covered clearing
agency); 15 U.S.C. 78c(a)(26) (defining an SRO to include a
registered clearing agency).
\31\ An SRO must submit proposed rule changes to the Commission
for review and approval pursuant to Rule 19b-4 under the Exchange
Act. A stated policy, practice, or interpretation of an SRO, such as
its written policies and procedures, would generally be deemed to be
a proposed rule change. See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
\32\ See Form 19b-4, General Instruction B. The Form 19b-4
specifies the contents that must be included in a proposed rule
change filing, including, among other items, a statement of purpose
for the proposed rule change, which describes the reasons for
adopting the proposed rule change, any problems the proposed rule
change is intended to address, the manner in which the proposed rule
change will operate to resolve those problems, the manner in which
the proposed rule change will affect various persons (e.g., brokers,
dealers, issuers, and investors), and any significant problems known
to the SRO that persons affected are likely to have in complying
with the proposed rule change. Id. at Form 19b-4 Information section
3. The SRO must also include in its proposed rule change the
complete text of the proposed rule. Id. at Form 19b-4 Information
section 1. The SRO may request confidential treatment of any portion
of its filing, see 17 CFR 240.24b-2, but it would still have to
comply with the requirements of Form 19b-4 with respect to
describing the contents of the proposed rule change for public
comment.
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The Commission publishes all proposed rule changes for comment.\33\
Proposed rule changes are generally required to be approved by the
Commission prior to going into effect; however, certain types of
proposed rule changes take effect upon filing with the Commission.\34\
When considering whether to approve or disapprove a proposed rule
change, the Commission shall approve the proposed rule change if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to the particular type of SRO.\35\ The rule
filing process provides transparency to market participants and the
public about new initiatives and changes to governance, operations, and
risk management at the clearing agency.
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\33\ See 15 U.S.C. 78s(b)(1).
\34\ See 15 U.S.C. 78s(b)(3)(A) (setting forth the types of
proposed rule changes that take effect upon filing with the
Commission). The Commission may temporarily suspend those rule
changes within 60 days of filing and institute proceedings to
determine whether to approve or disapprove the rule changes. 15
U.S.C. 78s(b)(3)(C).
\35\ 15 U.S.C. 78s(b)(1)(C)(i). On the other hand, the
Commission shall disapprove a proposed rule change if it cannot make
such a finding. 15 U.S.C. 78s(b)(1)(C)(ii).
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In addition, clearing agencies registered with the Commission are
financial market utilities, as defined in section 803(6) of the Dodd-
Frank Act.\36\ A clearing agency that has been designated by the
Financial Stability Oversight Council as systemically important or
likely to become systemically important, and for which the Commission
is the Supervisory Authority (``designated clearing agency''), is
required to file 60-days advance notice with the Commission of changes
to rules, procedures, and operations that could materially affect the
nature or level of risk presented by the designated clearing agency
(``advance notice'').\37\ Such an advance notice also requires
consultation with the Board of Governors of the Federal Reserve System
(``Board of Governors'').\38\ The Clearing Supervision Act authorizes
the Commission to object to changes proposed in such an advance notice,
which would prevent the clearing agency from implementing its proposed
change(s).\39\
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\36\ See 12 U.S.C. 5462(6).
\37\ The Dodd-Frank Act defines a ``designated clearing entity''
as a designated financial market utility that is either a
derivatives clearing organization registered under section 5b of the
Commodity Exchange Act (7 U.S.C. 7a-1) or a clearing agency
registered with the Securities and Exchange Commission under section
17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1). See 12
U.S.C. 5462(3). The Commission is the Supervisory Agency, as defined
in 12 U.S.C. 5462(8), for four designated clearing agencies (the
Depository Trust Company, the National Securities Clearing
Corporation, the Fixed Income Clearing Corporation, and the Options
Clearing Corporation). See 12 U.S.C. 5465(e)(1)(A). The Commission
published a final rule concerning the filing of advance notices for
designated clearing agencies in 2012. See 17 CFR 240.19b-4(n);
Exchange Act Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July
13, 2012).
\38\ See 12 U.S.C. 5465(e)(1)(B).
\39\ See 12 U.S.C. 5465(e)(1)(E) and (F).
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The covered clearing agencies' obligations as SROs and, as
applicable, designated clearing agencies, are important when
considering the types of changes that the Commission is proposing. If
the covered clearing agency has to make changes to its rules to align
with any of the proposed rules, if adopted, the covered clearing agency
would be obligated to consider whether any proposed rule change and/or
advance notice is necessary. For example, the Commission previously has
stated that recovery and wind-down plans, and material changes thereto,
would constitute a proposed rule change under section 19(b) of the
Exchange Act and, for designated clearing agencies, an advance notice
under the Clearing Supervision Act because such plans and material
changes thereto would constitute changes to a stated policy, practice,
or interpretation of the covered clearing agency and, for designated
clearing agencies, a proposed change to its operations that could
materially affect the nature or level of risk presented by the
designated clearing agency.\40\
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\40\ CCA Standards Adopting Release, supra note 7, 81 FR at
70809.
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Indeed, covered clearing agencies have submitted RWPs, and material
changes thereto, for public comment and Commission review pursuant to
the proposed rule change and advance
[[Page 34712]]
notice processes, as appropriate.\41\ The Commission continues to
believe that such RWPs, and material changes thereto, would constitute
a proposed rule change under section 19(b) of the Exchange Act and, for
designated clearing agencies, an advance notice under the Clearing
Supervision Act because such plans and material changes thereto would
constitute changes to a stated policy, practice, or interpretation of
the covered clearing agency and, for designated clearing agencies, a
proposed change to its operations that could materially affect the
nature or level of risk presented by the designated clearing agency.
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\41\ See, e.g., Securities Exchange Act Release Nos. 91429 (Mar.
29, 2021), 86 FR 17421 (Apr. 2, 2021) (SR-DTC-2021-004); 83972 (Aug.
28, 2018), 83 FR 44964 (Sept. 4, 2018) (SR-DTC-2017-021); 83953
(Aug. 27, 2018), 83 FR 44381 (Aug. 30, 2018) (SR-DTC-2017-803);
91430 (Mar. 29, 2021), 86 FR 17432 (Apr. 2, 2021) (SR-FICC-2021-
002); 83973 (Aug. 28, 2018), 83 FR 44942 (Sept. 4, 2018) (SR-FICC-
2017-021); 83954 (Aug. 27, 2018), 83 FR 44361 (Aug. 30, 2018) (SR-
FICC-2017-805); 94983 (May 25, 2022), 87 FR 33223 (June 1, 2022)
(SR-ICC-2022-004); 91806 (May 10, 2021), 86 FR 26561 (May 14, 2021)
(SR-ICC-2021-005) (``ICC 2021 Order''); 79750 (Jan. 6, 2017), 82 FR
3831 (Jan. 12, 2017) (SR-ICC-2016-013) (``ICC 2017 Notice and
Order''); 86364 (July 12, 2019), 84 FR 34455 (July 18, 2019) (SR-
ICEEU-2019-013) (``ICEEU 2019 Order''; 84498 (Oct. 29, 2018), 83 FR
55219 (Nov. 2, 2018) (SR-ICEEU-2018-014); 83651 (July 17, 2018), 83
FR 34891 (July 23, 2018) (SR-ICEEU-2017-016 and SR-ICEEU-2017-017);
88578 (Apr. 7, 2020), 85 FR 20561 (Apr. 13, 2020) (SR-LCH SA-2020-
001); 87720 (Dec. 11, 2019), 84 FR 68989 (Dec. 11, 2019) (SR-LCH SA-
2019-008); 83451 (June 15, 2018), 83 FR 28886 (June 21, 2018) (SR-
LCH SA-2017-012 and SR-LCH SA-2017-013); 91428 (Mar. 29, 2021), 86
FR 17440 (Apr. 2, 2021) (SR-NSCC-2021-004); 83974 (Aug. 28, 2018),
83 FR 44988 (Sept. 4, 2018), (SR-NSCC-2017-017); 83955 (Aug. 27,
2018), 83 FR 44340 (Aug. 30, 2018) (SR-NSCC-2017-805); 90712 (Dec.
17, 2020), 85 FR 84050 (Dec. 23, 2020) (SR-OCC-2020-013); 90701
(Dec. 17, 2020), 85 FR 83662 (Dec. 22, 2020) (SR-OCC-2020-806);
83918 (Aug. 23, 2018), 83 FR 44091 (Aug. 29, 2018) (SR-OCC-2017-
021); 83928 (Aug. 23, 2018), 83 FR 44109 (Aug. 29, 2018) (SR-OCC-
2017-810).
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C. Title II of the Dodd-Frank Act
Title II of the Dodd-Frank Act establishes a process for the
appointment of the Federal Deposit Insurance Corporation (``FDIC'') as
receiver of a failing financial company if, among other things, its
failure would otherwise have serious adverse effects on financial
stability in the United States.\42\ This Title II authority would
relate to covered clearing agencies, to the extent that they are
determined, pursuant to the process described in this section, to be
covered financial companies for purposes of the statute, meaning that
the FDIC could be appointed as a receiver for a covered clearing
agency.
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\42\ See 12 U.S.C. 5383.
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Under this process, certain specified Federal regulatory
authorities must recommend to the Secretary of the Treasury (the
``Secretary'') that the Secretary appoint the FDIC as receiver of the
company. For most entities, including covered clearing agencies, the
recommending agencies would be the Board of Governors and the FDIC.\43\
Upon receipt of such recommendations, the Secretary must make certain
determinations to implement Title II's orderly liquidation authority.
Specifically, the Secretary shall take action to appoint the FDIC as
receiver, if the Secretary (in consultation with the President)
determines generally that, inter alia, the company is a financial
company in default or in danger of default; the failure of the company
and its resolution under otherwise applicable Federal or State law
would have serious adverse effects on financial stability in the United
States; and no viable private sector alternative is available to
prevent the default.\44\
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\43\ See 12 U.S.C. 5383(a)(1)(A). By contrast, if the entity is
a broker or dealer, the recommending agencies would be the Board of
Governors and the Commission. See 12 U.S.C. 5383(a)(1)(B).
\44\ See 12 U.S.C. 5383(b).
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Notably for this proposal, a covered clearing agency would be
subject to this sort of orderly liquidation if two conditions are met.
First, it must be considered to be a financial company, which includes
any company that is incorporated or organized under any provision of
Federal law or the laws of any State and is predominately engaged in
activities that the Board of Governors has determined are financial in
nature or incidental thereto.\45\ Second, pursuant to the process
described above, the Secretary would have to determine to implement an
orderly liquidation authority.\46\ If both those conditions occur, then
the covered clearing agency would be considered a ``covered financial
company.'' \47\ In that case, the FDIC would serve as the receiver for
the covered clearing agency.\48\
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\45\ See 12 U.S.C. 5381(11)(A) and (B)(iii). Activities that are
financial in nature include, but are not limited to, lending,
exchanging, transferring, investing for others, or safeguarding
money or securities. 12 U.S.C. 1843(k)(4).
\46\ See 12 U.S.C. 5383(b).
\47\ See 12 U.S.C. 5381(a)(8).
\48\ Title II refers to the FDIC as the receiver in an orderly
liquidation. More generally, the orderly liquidation process is
often referred to as resolution. See Resolution of Systemically
Important Financial Institutions: The Single Point of Entry
Strategy, 78 FR 76614, 76615 (Dec. 18, 2013) (referring generally to
the orderly liquidation process as resolution). Existing guidance by
standard-setting bodies generally refers to the governmental entity
conducting a resolution as the resolution authority. See, e.g.,
Financial Stability Board, Key Attributes of Effective Resolution
Regimes, section 2.1 (2014). For purposes of this release, the
Commission uses the more general term ``resolution authority'' to
encompass the role of the FDIC as a receiver in an orderly
liquidation.
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Once appointed as the resolution authority, the FDIC essentially
``steps into the shoes'' of the financial company and is able to use
any powers and resources available to the financial company.\49\ The
FDIC as the resolution authority is responsible for the operations of
the financial company, including, among other things, taking over the
assets of and operating the financial company, collecting all
obligations and money owed to the financial company, and performing all
functions of the financial company in the financial company's name.\50\
In addition, the FDIC shall liquidate and wind-up the financial
company's affairs, including taking steps to realize upon the company's
assets, as appropriate (e.g., through the sale of assets or the
transfer of assets to a bridge company).\51\ A covered clearing
agency's RWP would be helpful to the FDIC if it were to serve as the
resolution authority for a covered clearing agency. Such a plan could
provide insights, allowing the resolution authority (i.e., the FDIC) to
obtain an understanding of the covered clearing agency's critical
services, how it provides such services, and how it would be able to
continue providing such services in the event of a recovery or an
orderly wind-down.
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\49\ Specifically, the FDIC as receiver serves as the successor
to the financial company, holding all rights, titles, powers, and
privileges of the financial company and its assets, and of any
stockholder, member, officer, or director of such company, and it
takes title to the books, records, and assets of any previous
receiver or other legal custodian of such covered financial company.
See 12 U.S.C. 5390(a)(1)(A).
\50\ 12 U.S.C. 5390(a)(1)(B).
\51\ 12 U.S.C. 5390(a)(1)(D).
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III. Proposal
The Commission is proposing amendments to existing rules and an
additional rule under section 17A of the Exchange Act. Specifically,
the Commission is proposing to amend Rule 17Ad-22(e)(6)(ii) with
respect to intraday margin, to require that a covered clearing agency's
risk-based margin system monitors intraday exposures on an ongoing
basis and includes the authority and operational capacity to make
intraday margin calls as frequently as circumstances warrant, including
when risk thresholds specified by the covered clearing agency are
breached or when the products cleared or markets served display
elevated volatility. Second, the Commission is proposing to amend Rule
17Ad-22(e)(6)(iv) with respect to the use of sources of information in
a covered clearing agency's risk-based margin system, to require
policies and procedures reasonably designed to have
[[Page 34713]]
a covered clearing agency use reliable sources for both price data, as
the current rule requires, and other substantive inputs to its risk-
based margin system and to require that the covered clearing agency use
procedures for when such inputs and price data are not available or
reliable. Finally, the Commission is proposing new Rule 17ad-26 that
would require a covered clearing agency to include nine specific
elements in its RWP. Each of these proposed rules is discussed further
below.
A. Amendments Regarding Risk Management
1. Proposed Changes to Rule 17Ad-22(e)(6)
The Commission is proposing to amend Rule 17Ad-22(e)(6)(ii) to
strengthen its requirements: first, by further requiring that a covered
clearing agency have policies and procedures reasonably designed to
monitor intraday exposures on an ongoing basis; and second, by
providing additional specificity to the circumstances in which a
covered clearing agency should have policies and procedures to collect
intraday margin. Specifically, as proposed, Rule 17ad-22(e)(6)(ii)
would require a covered clearing agency that provides central
counterparty services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, marks participant positions to market and
collects margin, including variation margin or equivalent charges if
relevant, at least daily, monitors intraday exposures on an ongoing
basis, and includes the authority and operational capacity to make
intraday margin calls as frequently as circumstances warrant, including
when risk thresholds specified by the covered clearing agency are
breached or when the products cleared or markets served display
elevated volatility.
The Commission is also proposing to amend Rule 17Ad-22(e)(6)(iv) to
strengthen its requirements: first, by expanding the scope of the rule
to apply to both price data and other substantive inputs to a covered
clearing agency's risk-based margin system; second, by further
specifying the level to which the covered clearing agency's procedures
must perform when price data or other substantive inputs are not
available or reliable; and third, by providing that the procedures used
when price data or other inputs are not available or reliable should
include alternate sources or an alternate risk-based margin system.
2. Discussion
a. Amendments to Rule 17Ad-22(e)(6)(ii)
As discussed above, when considering the adoption of Rule 17Ad-
22(e)(6)(ii) in 2014, the Commission stated that requiring covered
clearing agencies to have the authority and operational capacity to
make intraday margin calls in defined circumstances would ``benefit
covered clearing agencies by covering settlement risk created by
intraday price movements.'' \52\ Thus, the current rule requires that
covered clearing agencies have the authority and operational capacity
to make intraday margin calls. Importantly, the Commission understands
that the ``operational capacity'' to make intraday margin calls
includes the ability to monitor intraday exposure; otherwise, it would
be impossible for a covered clearing agency to make appropriate
intraday margin calls if it were not monitoring its intraday exposure.
Therefore, under the current rule, covered clearing agencies have some
ability to monitor for intraday exposure and make intraday margin
calls,\53\ but there currently are no requirements to monitor for
intraday exposure or regarding what frequency at which to monitor
intraday exposures.
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\52\ Standards for Covered Clearing Agencies Standards Proposing
Release, Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR
29507, 29529 (May 22, 2014) (``CCA Standards Proposing Release'').
The Commission adopted Rule 17Ad-22(e)(6)(ii) in substantially the
form it was proposed. See CCA Standards Adopting Release, supra note
7, 81 FR at 70786.
\53\ See section IV.B.4.a infra.
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The Commission is now proposing to amend Rule 17Ad-22(e)(6)(ii) to
incorporate a requirement of intraday monitoring and to require that
such monitoring is done on an ongoing basis. The Commission continues
to believe that it is essential that a covered clearing agency monitor
its intraday exposure because the covered clearing agency faces a risk
that its exposure to its participants can change rapidly as a result of
intraday changes in prices, positions, or both. Moreover, the
Commission believes that requiring that such monitoring occur on an
ongoing basis will contribute to ensuring that the covered clearing
agency is sufficiently informed and situated to take appropriate
actions to manage any intraday exposure that arises.\54\ Therefore, the
Commission is proposing to amend Rule 17Ad-22(e)(6)(ii) to require that
a covered clearing agency's written policies and procedures be
reasonably designed to ensure that such monitoring occurs on an ongoing
basis.
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\54\ See CPMI-IOSCO, Resilience of central counterparties
(CCPs): Further guidance on the PFMI, paragraph 5.2.2 (July 2017),
available at (discussing how a CCP addresses intraday exposure in
its margin system and stating that ``a CCP faces the risk that its
exposure to its participants can change rapidly as a result of
intraday changes in prices, positions, or both; ie adverse price
movements, as well as participants building larger positions through
new trading (and settlement of maturing trades). For the purposes of
addressing these and other forms of risk that may arise intraday, a
CCP should address and monitor on an ongoing basis how such risks
affect all components of its margin system, including initial
margin, variation margin and add-on charges.'').
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The Commission is not prescribing a particular time period or
frequency that would constitute an ongoing basis because the Commission
believes that the covered clearing agency should be able to tailor its
monitoring to the particular products cleared and markets served. The
Commission believes that this requirement to monitor intraday exposure
on an ongoing basis should allow flexibility to determine what
monitoring frequency is appropriate to the particular market. For
example, more frequent monitoring may be necessary for a covered
clearing agency that operates in markets where intraday trading may be
more prevalent or where intraday exposures may tend to be larger
because of specific features, such as the settlement process. Being
able to monitor, on an ongoing basis, any decrease in the margin
coverage as compared to the changes in intraday credit exposures in its
participants' portfolios should help the covered clearing agency ensure
that it is able to collect margin sufficient to cover its participants'
exposures. A covered clearing agency generally should consider whether
its intraday monitoring considers how participants' exposures would
affect all risks faced by the covered clearing agency, including those
that may already be contemplated by variation margin, initial margin,
or add-on charges.
Currently, Rule 17ad-22(e)(6)(ii) refers only to the covered
clearing agency's ability to collect intraday margin ``in defined
circumstances.'' The proposed amendment to Rule 17Ad-22(e)(6)(ii) would
amend this to require covered clearing agencies to have policies and
procedures to establish a risk-based margin system with the ability to
make intraday margin calls as frequently as circumstances warrant,
including when risk thresholds specified by the covered clearing agency
are breached or when the products cleared or markets served display
elevated volatility. The Commission believes that this proposed
requirement would build upon and expand the current rule's requirement
that provides
[[Page 34714]]
for the authority and operational capacity to make intraday margin
calls in defined circumstances \55\ by identifying particular instances
in which a covered clearing agency needs to have policies and
procedures to collect margin, such as the breach of specific risk
thresholds or in times of elevated volatility, while continuing to
provide flexibility to covered clearing agencies to make intraday
margin calls as frequently as circumstances warrant. Moreover, as the
Commission stated when adopting the Covered Clearing Agency Standards,
this proposed amendment would continue to reflect that intraday margin
calls should be able to be made on both a scheduled and unscheduled
basis,\56\ but would also provide more specificity as to what
constitutes the appropriate scheduled and unscheduled bases.
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\55\ Currently, Rule 17Ad-22(e)(6)(ii) does not define what
constitutes ``defined circumstances.''
\56\ CCA Standards Adopting Release, supra note 7, 81 FR at
70818.
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The Commission believes that the proposed requirement for a covered
clearing agency to have the authority and operational capacity to make
intraday margin calls when the markets served display elevated
volatility should ensure that the covered clearing agency develops
policies and procedures to determine when it considers volatility to be
elevated above typical levels, and potentially necessitating the
collection of additional margin, in a manner specific to the products
cleared and markets served. The Commission also believes that the
proposed requirement for a covered clearing agency to have the
authority and operational capacity to make intraday margin calls when
specific risk thresholds are breached should ensure that the covered
clearing agency considers ex ante the degree of exposure that
necessitates additional margin to take into account new cleared
positions and current market prices, in a manner specific to the
products cleared and market served. Further, the Commission also
believes that the requirement to specify thresholds that would trigger
intraday margin calls, if breached, could improve participants' ability
to understand when they may be subject to additional margin calls and,
therefore, to be able to prepare accordingly to provide additional
financial resources in anticipation of additional margin calls. In
addition, specifying that a covered clearing agency should have the
authority and operational capacity to make intraday margin calls in
times of elevated volatility also makes clear to participants when they
may be subject to additional margin calls and recognizes that intraday
exposures may occur more frequently in volatile markets.
b. Amendments to Rule 17Ad-22(e)(6)(iv)
Currently, Rule 17Ad-22(e)(6)(iv) requires the establishment of a
risk-based margin system that uses reliable sources of timely price
data and uses procedures and sound valuation models for addressing
circumstances in which pricing data are not readily available or
reliable. When it proposed Rule 17Ad-22(e)(6)(iv), the Commission
stated that a covered clearing agency should use reliable sources of
timely price data because its margin system needs such data to operate
with a high degree of accuracy and reliability, given the risks that
the covered clearing agency's size, operation, and importance pose to
the U.S. securities markets.\57\ The Commission also recognized that,
in some situations, price data may not be available or reliable, such
as in instances where third party data providers experience lapses in
service or where limited liquidity otherwise makes price discovery
difficult, and that establishing appropriate procedures and sound
valuation models is a useful step a covered clearing agency can take to
help protect itself in such situations.\58\
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\57\ CCA Standards Proposing Release, supra note 52, 79 FR at
29529.
\58\ Id.
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Based on its experience with the Covered Clearing Agency Standards
since their adoption in 2016, including its review and understanding of
the covered clearing agencies' margin methodologies and, specifically,
whether the methodologies rely on substantive inputs other than price
data, the Commission believes that it is appropriate to expand the
scope of this rule beyond price data to encompass other substantive
inputs to a covered clearing agency's risk-based margin system.\59\ As
discussed in more detail in section IV.B.4.b infra, covered clearing
agencies generally use risk-based margin systems to calculate margin.
Covered clearing agencies' use of other substantive inputs, beyond
price data (which is already addressed in current Rule 17Ad-
22(e)(6)(iv)), from other entities as part of the risk-based margin
system varies, and some do not rely on such substantive inputs. These
types of inputs could include, for example, portfolio size, volatility,
and sensitivity to various risk factors that are likely to influence
security prices; \60\ other examples of substantive inputs include
duration and convexity, as well as the results of margin models run by
third parties. Similarly, the procedures used when such substantive
inputs are not available vary. The Commission believes that certain
covered clearing agencies would need to develop additional procedures,
or refine existing procedures, that would apply when the specific
substantive inputs used by a covered clearing agency are not readily
available or reliable, in order to ensure that the covered clearing
agency can continue to meet its requirements under Rule 17Ad-22(e)(6).
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\59\ Despite some organizational changes to the rule to
accommodate the proposal, Rule 17Ad-22(e)(6)(iv), as it relates to
pricing data, is not being amended in this proposal, except with
respect to the proposed new requirement to ensure that any
procedures used when pricing data is not readily available or
reliable must ensure that the covered clearing agency continues to
meet its requirements under Rule 17Ad-22(e)(6). However, the
Commission is proposing to standardize references to such data in
the rule, which currently refers to both price and pricing data, to
refer only to price data. The Commission previously used the two
words interchangeably in Rule 17Ad-22(e)(6)(ii).
\60\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70855. Other portions of the Covered Clearing Agency Standards
reference a model's inputs, along with parameters and assumptions,
as part of a covered clearing agency's sensitivity analysis, which
is required by current Rule 17Ad-22(e)(6)(vi).
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In some instances, a covered clearing agency relies on third
parties for these inputs. For similar reasons as the Commission
discussed when proposing Rule 17Ad-22(e)(6)(iv), there is a need to use
reliable sources for such inputs. The unavailability or unreliability
of an input to a margin system, for example, if a third party provider
does not perform, could potentially affect the covered clearing
agency's ability to calculate margin. Currently, the Commission's rules
do not address how a covered clearing agency plans for circumstances in
which a substantive input to its risk-based margin system is not
readily available or reliable. This proposed amendment to Rule 17ad-
22(e)(6)(iv) would require that the covered clearing agency addresses
such circumstances and develops appropriate procedures, for those
covered clearing agencies that use such substantive inputs.
Establishing procedures for when such substantive inputs from third
parties are not available or reliable should, in turn, help ensure that
the covered clearing agency can continue to calculate and collect
margin commensurate with, the risks and particular attributes of each
relevant product, portfolio, and market, as required under Rule 17Ad-
22(e)(6)(i), in such circumstances.
The Commission is therefore proposing to amend Rule 17Ad-
22(e)(6)(iv) to expand its scope beyond
[[Page 34715]]
price data to encompass other substantive inputs to its risk-based
margin system and to impose requirements on a covered clearing agency
to have procedures when such substantive inputs are not readily
available or reliable. For purposes of this rule, the Commission
believes that ``substantive'' refers to any inputs used by the covered
clearing agency that are necessary for the risk-based margin system to
calculate margin, and it is meant to distinguish from other potential
inputs that may not be consequential to the calculation of margin,
which would not be encompassed by this proposed rule. The Commission is
not requiring that covered clearing agencies use such substantive
inputs, but establishing requirements in the event that they do use
such substantive inputs.
Further, the Commission is proposing to impose a new requirement
that would further elaborate on the procedures necessary when price
data is not available and that would also apply to substantive inputs
to a covered clearing agency's risk-based margin system. Currently, the
rule requires that the covered clearing agency use procedures and sound
valuation models only when price data is not readily available or
reliable. The proposed amendment would, with respect to both price data
and other substantive inputs, require that such procedures should
address circumstances in which price data or substantive inputs are not
readily available or reliable, in order to ensure that the covered
clearing agency be able to meet its requirements under Rule 17Ad-
22(e)(6) and cover its credit exposures to its participants. The
Commission believes that specifying the level to which these backup
procedures should perform, that is, that the procedures should ensure
that the covered clearing agency can continue to meet its requirements
under Rule 17Ad-22(e)(6), should help ensure that covered clearing
agencies adopt sufficiently robust procedures.
The Commission also proposes to further specify that the procedures
for when the price data or substantive inputs are not readily available
or reliable shall include the use of price data or substantive inputs
from an alternate source or the use of an alternate risk-based margin
system that does not similarly rely on the same unavailable or
unreliable substantive input. With respect to the use of an alternate
source, such an alternate source generally should meet the same level
of reliability of the primary source, whether that alternate is sourced
from an external provider or created internally. With respect to
policies and procedures for the use of an alternate risk-based margin
system if the covered clearing agency does not use an alternate source,
this potential alternate risk-based margin system needs to be an
alternate margin model that does not rely on the same data source that
is unavailable or unreliable, to ensure that the covered clearing
agency can continue to meet its requirements under Rule 17Ad-22(e)(6).
Any alternative risk-based margin system would be subject to the
requirements of 17 CFR 240.17Ad-22(e)(6)(vi) and (vii), with respect to
monitoring, review, testing, and verification, and model validation.
With respect to both, a covered clearing agency generally should
consider its reliance on any third party sources for purposes of its
risk-based margin system and consider whether an alternate system or
source of data or other inputs that is internal to the covered clearing
agency, and does not rely upon any third party provider, would be
appropriate, given the importance of calculating margin for a covered
clearing agency to cover its exposure to its participants.\61\
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\61\ 17 CFR 240.17Ad-22(e)(6).
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3. Request for Comment
The Commission is requesting comment on all aspects of the proposed
amendments to Rule 17Ad-22(e)(6). The Commission also solicits comment
on the particular questions set forth below, and encourages commenters
to submit any relevant data or analysis in connection with their
answers.
1. Should Rule 17Ad-22(e)(6) be amended to require that covered
clearing agencies have policies and procedures reasonably designed to
monitor intraday exposures and to require that monitoring to occur on
an ongoing basis? Do commenters have views on what constitutes an
ongoing basis, and does it differ for products cleared or markets
served by a covered clearing agency? For example, would an ongoing
basis in the equity market be different than in the security-based
swaps market?
2. Should Rule 17Ad-22(e)(6) be amended to require that covered
clearing agencies have policies and procedures reasonably designed to
make intraday margin calls as frequently as circumstances warrant,
including when risk thresholds specified by the covered clearing agency
are breached or when the products cleared or markets served display
elevated volatility?
3. Should the Commission prescribe particular risk thresholds for
intraday margin calls? If so, what should those thresholds be and what
is the basis for those thresholds, and should the threshold applicable
to particular asset classes (e.g., equities, fixed income, options,
etc.) be determined jointly or separately?
4. Should the Commission identify additional circumstances that may
warrant intraday margin calls beyond when the products cleared or
markets served display elevated volatility? If so, what should those
circumstances be?
5. Do commenters believe that certain participants of covered
clearing agencies, including, for example, participants with less
capital or using smaller settlement banks, could face operational
challenges or pricing disadvantages, if proposed Rule 17Ad-22(e)(6)(ii)
were to result in more frequent margin calls?
6. Should Rule 17Ad-22(e)(6)(iv) be amended to expand its scope to
encompass other substantive inputs to a covered clearing agency's risk-
based margin system? Should the Commission identify any particular
types of substantive inputs or further specify what types of inputs
should be included within the scope of the rule?
7. Should Rule 17Ad-22(e)(6)(iv) be amended to state that the
procedures used when price data or other substantive inputs are not
readily available or reliable should ensure that the covered clearing
agency can continue to meet its obligations under Rule 17Ad-22(e)(6)?
8. Should Rule 17Ad-22(e)(6)(iv) be amended to further describe
that the procedures used by a covered clearing agency when price data
or other substantive inputs are not readily available or reliable shall
include the use of price data or substantive inputs from an alternate
source or the use of an alternate risk-based margin system?
9. Do commenters have views on whether the Commission should
require that any alternate source should be independent of third party
providers, that is, within the sole control of the covered clearing
agency?
B. Contents of Recovery and Wind-Down Plans
1. Proposed Rule 17ad-26
Proposed Rule 17ad-26(a) would require that a covered clearing
agency's recovery and wind-down plan, the existence of which is
required in current Rule 17Ad-22(e)(3)(ii), shall: (1) identify and
describe the covered clearing agency's critical payment, clearing, and
settlement services and address how the covered clearing agency would
continue to provide such critical services in the event of recovery
[[Page 34716]]
and during an orderly wind-down, including the identification of the
staffing necessary to support such critical services and analysis of
how such staffing would continue in the event of a recovery and during
an orderly wind-down; (2) identify and describe any service providers
upon which the covered clearing agency relies to provide its critical
payment, clearing, and settlement services identified in paragraph (1),
specify to what critical services such service providers are relevant,
and address how the covered clearing agency would ensure that service
providers would continue to provide such critical services in the event
of a recovery and during an orderly wind-down, including consideration
of contractual obligations with such service providers and whether
those obligations are subject to alteration or termination as a result
of initiation of the recovery and orderly wind-down plan; (3) identify
and describe scenarios that may potentially prevent the covered
clearing agency from being able to provide its critical payment,
clearing, and settlement services as a going concern, including
scenarios arising from uncovered credit losses, uncovered liquidity
shortfalls, or general business losses; (4) identify and describe
criteria that could trigger the implementation of the recovery and
orderly wind-down plan and the process that the covered clearing agency
uses to monitor and determine whether the criteria have been met,
including the governance arrangements applicable to such process; (5)
identify and describe the rules, policies, procedures, and any other
tools the covered clearing agency would use in a recovery or orderly
wind-down; (6) address how the rules, policies, procedures, and any
other tools or resources identified in paragraph (5) would ensure
timely implementation of the recovery and orderly wind-down plans; (7)
include procedures for informing the Commission as soon as practicable
when the covered clearing agency is considering initiating a recovery
or orderly wind-down; (8) include procedures for testing the covered
clearing agency's ability to implement the recovery and wind-down plans
at least every twelve months, including by requiring the covered
clearing agency's participants and, when practicable, other
stakeholders to participate in the testing of its plans, providing for
reporting the results of the testing to the covered clearing agency's
board of directors and senior management, and specifying the procedures
for, as appropriate, amending the plans to address the results of the
testing; and (9) include procedures for review of the plans by the
board of directors at least every twelve months or following material
changes to the system or environment in which the covered clearing
agency operates that would significantly affect the viability or
execution of the plans, with such review informed, as appropriate by
the covered clearing agency's testing of the plans as required in the
prior section of the proposed rule. Proposed Rule 17ad-26(b) would
provide definitions of ``affiliate,'' ``recovery,'' ``orderly wind-
down,'' and ``service provider'' for purposes of this rule.
2. Discussion
As discussed in section II.A supra, when the Commission adopted
Rule 17Ad-22(e)(3)(ii), it did not establish requirements for specific
elements to include in such RWPs. Since that time, however, the
Commission has reviewed and approved RWPs for each of the seven covered
clearing agencies, as well as periodic updates to those plans.\62\ In
so doing, the Commission has continued to develop its understanding of
what are the essential elements of RWPs.\63\
---------------------------------------------------------------------------
\62\ See infra note 41.
\63\ CCA Standards Adopting Release, supra note 7, 81 FR at
70809.
---------------------------------------------------------------------------
In addition, the Commission has continued to participate in the
development of guidance by international standard setting bodies in the
areas of recovery and resolution of financial market infrastructures,
which would include covered clearing agencies. The Committee on
Payments and Market Infrastructure and the International Organization
of Securities Commissions (together, ``CPMI-IOSCO'') published a report
entitled Recovery of financial market infrastructures, which sets forth
a policy statement on both the recovery planning process and the
content of recovery plans.\64\ With respect to resolution planning, the
Financial Stability Board (``FSB'') published a policy statement
regarding resolution and resolution planning for central
counterparties.\65\ To accommodate the development of effective RWPs
while this guidance was being developed, and in recognition of the need
to further develop an understanding of effective recovery and
resolution strategies for different types of market infrastructure, the
Commission extended the compliance date for Rule 17Ad-22(e)(3)(ii) to
allow the affected clearing agencies to consider this emerging guidance
before submitting their RWPs for review and approval.\66\ Additional
guidance has since followed, and work on the recovery and resolution of
clearing agencies continues.\67\
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\64\ See CPMI-IOSCO, Recovery of financial market
infrastructures (July 2017), https://www.bis.org/cpmi/publ/d162.pdf
(``CPMI-IOSCO Recovery Guidance''). The guidance covers a number of
topics: first, recovery planning, including the importance of
recovery planning, the relationship between risk management,
recovery, and resolution, the process of recovery planning, the
content of recovery plans, and the role of the authorities in
recovery; second, general considerations with respect to recovery
tools, including risk categories and failure scenarios that may
require the use of recovery tools, characteristics of recovery
tools, and considerations for allocating losses and liquidity
shortfalls; and third, specific recovery tools, including tools to
allocate uncovered losses caused by participant default, tools to
address uncovered liquidity shortfalls, tools to replenish financial
resources, tools to re-establish a matched book following
participant default, and tools to address losses not caused by
participant default.
\65\ See Guidance on CCP Resolution and Resolution Planning
(July 5, 2017), https://www.fsb.org/wp-content/uploads/P050717-1.pdf; Guidance on Central Counterparty Resolution and Resolution
Planning: Consultative Document (Feb. 1, 2017), https://www.fsb.org/wp-content/uploads/Guidance-on-Central-Counterparty-Resolution-and-Resolution-Planning.pdf.
\66\ See Securities Exchange Act Release No. 80978 (Apr. 5,
2017), 82 FR 17300 (Apr. 10, 2017) (granting a temporary exemption
to covered clearing agencies from compliance with Rule 17Ad-
22(e)(3)(ii) among other requirements); see also Letter from Michael
C. Bodson, President and Chief Executive Officer, DTCC (Feb. 15,
2017), https://www.sec.gov/comments/s7-03-14/s70314-1594398-132354.pdf.
\67\ See, e.g., FSB, CPMI-IOSCO, Central Counterparty Financial
Resources for Recovery and Resolution (Mar. 10, 2022), https://www.fsb.org/wp-content/uploads/P090322.pdf.
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Other U.S. authorities have established and had the opportunity to
administer requirements for certain specific elements to be included in
the RWPs of the financial market utilities they supervise. For example,
Regulation HH, issued by the Board of Governors, was amended in 2014 to
identify seven elements that must be addressed or be included in
recovery and wind-down plans.\68\ These elements are substantially
similar to those proposed in Rule 17ad-26. Similarly, the CFTC's
regulatory framework includes specific requirements for RWPs as applied
to clearing entities within its authority.\69\
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\68\ 12 CFR 234.3(a)(3)(iii); see also Final Rule, Financial
Market Utilities, Docket No. R-1477 (Oct. 28, 2014), 79 FR 65543
(Nov. 5, 2014).
\69\ See Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013) (adopting 17 CFR 39.39(b) and
(c)). For example, 17 CFR 39.39(c)(1) states that the plans shall
identify scenarios that may potentially prevent a derivatives
clearing organization from being able to meet its obligations,
provide its critical operations and services as a going concern, and
assess the effectiveness of a full range of options for recovery or
orderly wind-down. CFTC staff also released a memorandum with
additional guidance for affected entities on the subjects and
analysis that should be included in a viable RWP, as well as
questions that affected entities should consider in evaluation tools
for inclusion and designing proposed rule changes to support the
inclusion of particular tools in such plans. See Memorandum from
Jeffrey M. Bandman, Acting Director, Division of Clearing and Risk,
CFTC Letter No. 16-61 (July 21, 2016), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/16-61.pdf.
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[[Page 34717]]
Based on this supervisory experience, including its review and
approval of the RWPs for the covered clearing agencies, the Commission
believes it is now appropriate to specify elements for inclusion in a
covered clearing agency's RWP by proposing Rule 17ad-26. The Commission
has observed that the covered clearing agencies have, to a great
degree, converged in terms of the types of elements that are included
in each plan. As discussed in more detail in section IV.B.3 infra and
in the discussion of each particular element below, the current RWPs
contain or address many of the elements being proposed for inclusion,
but the current plans do not contain all the elements that would be
required under the proposed rule. Therefore, the Commission believes
that codifying these nine elements, and the related definitions, will
help ensure that RWPs continue to be effective at planning for and
managing a range of recovery and orderly wind-down scenarios that could
risk transmitting systemic risk through the U.S. securities markets and
the broader financial system, by accomplishing three objectives. First,
the rule would bolster existing plans by requiring certain new elements
be included. Second, for the elements that are already contained in
existing RWPs, the rule would codify these elements and ensure that the
plans are required to continue to include these elements in their RWPs,
and any future changes to the RWPs would be subject to Commission
review for consistency with these requirements, as discussed in section
II.B supra. Finally, the rule would ensure that the RWPs of any new
covered clearing agencies would contain all of these elements.
When adopting the Covered Clearing Agency Standards, the Commission
stated that a covered clearing agency generally should have policies
and procedures to provide the relevant resolution authorities with
information needed for the purposes of resolution planning, including
its recovery and wind-down plan.\70\ The Commission also explained that
it works with the FDIC and other resolution authorities, as
appropriate, to help ensure the development of effective resolution
strategies for covered clearing agencies, and that providing the
Commission and the FDIC information for resolution planning would
promote the ongoing development of these resolution strategies.\71\ The
Commission continues to believe that this is the case, and that the
ongoing development of these strategies will be further promoted by
specifically requiring that RWPs contain certain elements and ensuring
that RWPs address these specified elements.
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\70\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70810.
\71\ Id.
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The Commission believes that codifying these items as part of
recovery and wind-down plans would help assist relevant resolution
authorities develop and improve resolution plans for covered clearing
agencies in resolution. For example, by ensuring that these items are
included in RWPs, a resolution authority will have a more comprehensive
understanding of what the covered clearing agencies' critical payment,
clearing, and settlement services are, as well as what providers
support such services, thereby allowing a resolution authority to
connect, or ``map,'' the various providers to the critical services to
ensure continuity of clearance and settlement by a covered clearing
agency in resolution.
a. Proposed Definitions
The Commission believes that definitions of the terms ``recovery''
and ``orderly wind-down'' would provide covered clearing agencies, as
well as market participants, a precise description of the meaning of
these terms, which are not currently defined in the Commission's rules
and are often used together, and somewhat interchangeably, by market
participants. Further, these definitions would help covered clearing
agencies understand the precise goal for which their RWPs should be
reasonably designed to meet. The Commission believes that the RWPs
generally should set forth the covered clearing agency's viable
strategy for ensuring that they address how a covered clearing agency
would achieve a recovery or orderly wind-down, using the tools and
resources available under its rules and procedures.
Current Rule 17Ad-22(e)(3)(ii) and proposed Rule 17ad-26 both refer
to plans for recovery and orderly wind-down, and, therefore, a covered
clearing agency should prepare plans for both recovery and orderly
wind-down. Providing separate definitions specifies that these are two
distinct events, both of which a covered clearing agency should include
in its recovery and wind-down planning. Simply including a plan for
what a covered clearing agency would do in recovery is not sufficient,
and a plan for one event does not serve as a substitute for the other.
For example, there may be circumstances in which a covered clearing
agency attempts to recover but the recovery effort eventually fails. As
part of its planning, a covered clearing agency generally should
identify and maintain the relevant supporting information necessary to
support its RWP.
Moreover, because these definitions refer to actions of a covered
clearing agency only, as opposed to any other entity, neither a
recovery plan nor an orderly wind-down plan should be based on
assumptions of government intervention or support.
Proposed Rule 17ad-26(b) would define ``recovery'' to mean the
actions of a covered clearing agency, consistent with its rules,
procedures, and other ex ante contractual arrangements, to address any
uncovered loss, liquidity shortfall, or capital inadequacy, whether
arising from participant default or other causes (such as business,
operational, or other structural weaknesses), including actions to
replenish any depleted prefunded financial resources and liquidity
arrangements, as necessary to maintain the covered clearing agency's
viability as a going concern and to continue its provision of critical
services. The Commission believes that this proposed definition is
generally consistent with its previous understanding of recovery, as
set forth in the CCA Standards Adopting Release, in that this proposed
definition also focuses on the actions of the covered clearing agency
that are beyond its typical business operations and refers to
situations in which the covered clearing agency's ability to serve as a
going concern is in question, that is, it goes beyond the covered
clearing agency's ``business as usual'' operations.\72\
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\72\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70808, n. 251 (when addressing comments regarding recovery and wind-
down plans, stating the Commission's general understanding that: (i)
when a financial company becomes non-viable as a going concern or
insolvent, recovery refers to actions taken that allow the financial
company to sustain its critical operations and services; (ii)
resolution (or wind-down), by contrast, refers to the transferring
of the financial company's critical operations and services to an
alternate entity.).
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Proposed Rule 17ad-26(b) would define ``orderly wind-down'' to mean
the actions of a covered clearing agency to effect the permanent
cessation, sale, or transfer of one or more of its critical services in
a manner that would not increase the risk of significant liquidity,
credit, or operational problems spreading among financial institutions
or markets and thereby threaten the stability of the U.S. financial
system. The Commission believes that this
[[Page 34718]]
definition would clarify that an orderly wind-down is distinct from a
resolution in that orderly wind-down continues to rest within the
control of the covered clearing agency while resolution would involve a
governmental entity as the resolution authority, such as the FDIC as a
receiver. The Commission further believes that this proposed definition
would identify the specific goals of an orderly wind-down, in that the
actions of a covered clearing agency should not increase the risk of
significant liquidity, credit, or operational problems spreading among
financial institutions or markets and thereby threaten the stability of
the U.S. financial system, and that it would serve as a final and
binding solution to whatever circumstance necessitated the wind-down,
that is, not a temporary stopgap measure. This distinguishes an orderly
wind-down from winding down the covered clearing agency as quickly as
possible.
To be orderly, a wind-down generally should include a covered
clearing agency providing notice to allow participants to transition to
alternative arrangements in an orderly manner, as well as maintaining
the operation of critical services. Moreover, for a wind-down involving
the sale or transfer of all or a portion of the covered clearing agency
to be orderly, the covered clearing agency generally should consider
the separability of the parts of the covered clearing agency and
whether there are certain portions of the covered clearing agency's
business that could be sold or transferred as separate businesses.
b. Critical Services
Proposed Rule 17ad-26(a)(1) would require each covered clearing
agency's RWP to identify and describe the covered clearing agency's
critical payment, clearing, and settlement services and address how the
covered clearing agency would continue to provide such critical
services in the event of recovery and during an orderly wind-down,
including the identification of the staffing necessary to support such
critical services and analysis of how such staffing would continue in
the event of a recovery and during an orderly wind-down.
The Commission believes that, regardless of the products cleared or
markets served, the necessary first step in effective recovery and
wind-down planning must be identifying and describing the critical
services that are provided to market participants, as required under
this proposed rule. As stated above, market participants rely on the
services of covered clearing agencies to facilitate payment, clearing,
and settlement for the U.S. securities markets. The Commission believes
that identifying and describing the critical services in an RWP should
ensure that the covered clearing agency focuses its recovery and wind-
down plans on its ability to continue to provide those services on an
ongoing basis, even under stress. Covered clearing agencies already
identify and describe their critical services in the existing RWPs, as
well as the criteria used to determine what services are critical.
However, covered clearing agencies generally do not provide specific
information as to the staffing necessary to support a recovery or
orderly wind-down.
When identifying what is a critical payment, clearing, or
settlement service, the Commission believes that the covered clearing
agency generally should consider the impact that any interruption to
particular services would have on the covered clearing agency's
participants and the smooth functioning of the markets that it serves,
as well as whether the service is available from any substitute
provider. In this proposed rule, the Commission believes that
``critical'' would refer to the importance of the service to the
covered clearing agency's participants, and to the proper functioning
of the markets that the covered clearing agency services. The inability
of a covered clearing agency to provide these services would have
implications with respect to financial stability. The failure to
provide these critical services would likely have a material negative
impact on participants or third parties, give rise to contagion, and
undermine general confidence in the markets served.
The Commission believes that, after identifying the critical
services, the next step of effective recovery and wind-down planning is
to address how the covered clearing agency would continue to provide
such critical services in the event of recovery and during an orderly
wind-down, as required under proposed Rule 17ad-26(a)(1). This
requirement should continue to ensure that a covered clearing agency
has developed policies and procedures to continue providing its
critical services in the event of a recovery or orderly wind-down.
Further, by addressing how to continue providing such services, the
recovery plan should also allow the covered clearing agency to evaluate
how to ensure the orderly transfer of those services to a new or an
existing entity as part of a wind-down, in the event that recovery is
unsuccessful.
In addition, the Commission believes that the consideration of how
the covered clearing agency would continue to provide its identified
critical services must include the identification of the staffing
necessary to support such critical services and analysis of how such
staffing would continue in the event of a recovery and during an
orderly wind-down, in order to ensure that the necessary personnel are
available to continue operating the covered clearing agency. The
Commission believes that this aspect of the proposal generally should
include identification of key business units and/or employees who may
be necessary to implement and execute the critical services identified
in the RWP. As part of this process, the covered clearing agency
generally should consider how it would retain the services of any
personnel who are essential to the execution of the plans, including
whether they are or should be subject to employment agreements and an
analysis of the terms of employment agreements (e.g., whether such
agreements would allow the employee to continue working in the event
that ownership of the covered clearing agency were to transfer in the
event of a recovery or orderly wind-down). In addition, the covered
clearing agency generally may consider, as part of this process, any
``key person risk'' that exists within its organization and how it
would address such risk in its RWP.
Finally, the Commission believes that this proposed requirement
regarding the identification and description of critical services
should also assist a resolution authority, as discussed in section II.C
supra, with resolution planning. A key obligation of a resolution
authority is to ensure the continued provision of an entity's critical
services, to avoid harm to the broader market.\73\ Understanding what
those critical services are, and the covered clearing agency's strategy
for ensuring that such critical services
[[Page 34719]]
continue to be provided, therefore is essential for resolution
planning.
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\73\ See, e.g., Resolution of Systemically Important Financial
Institutions: The Single Point of Entry Strategy, 78 FR 76614, 76615
(Dec. 18, 2013) (``In resolving a failed or failing SIFI . . . the
FDIC seeks to preserve financial stability by maintaining the
critical services, operations and funding mechanisms conducted
throughout the company's operating subsidiaries.''); 12 U.S.C.
5384(a) (stating that the purpose of the FDIC's orderly liquidation
authority is to provide the necessary authority to liquidate failing
financial companies that pose a significant risk to the financial
stability of the United States in a manner that mitigates such risk
and minimizes moral hazard). See also Financial Stability Board, Key
Attributes of Effective Resolution Regimes, Annex 1.1 (2014)
(identifying as the objective of CCP resolution the pursuit of
financial stability and ensuring the continuity of critical CCP
functions in all jurisdictions where those functions are critical);
Financial Stability Board, Guidance on Central Counterparty
Resolution and Resolution Planning, section 1.2 (July 2017).
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i. Interaction With Other Commission Rules
The Commission acknowledges that there likely will be some
connection between what a covered clearing agency identifies as its
critical services for purposes of inclusion in its recovery and wind-
down plan and what it identifies as Critical SCI systems for purposes
of Regulation Systems Compliance Integrity (``Regulation SCI'').
Regulation SCI is designed to strengthen the infrastructure of the U.S.
securities markets, reduce the occurrence of systems issues in those
markets, improve their resiliency when technological issues arise, and
implement an updated and formalized regulatory framework, thereby
helping to ensure more effective Commission oversight of such
systems.\74\ However, inclusion in a covered clearing agency's recovery
plan as a critical service would have no impact on a covered clearing
agency's obligations under Regulation SCI. This proposed rule is
designed to improve and strengthen a covered clearing agency's recovery
and wind-down plan, whereas Regulation SCI is focused on, among other
things, strengthening the infrastructure of the U.S. securities markets
and improving its resilience when technological issues arise.
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\74\ Securities Exchange Act Release No. 73639 (Nov. 19, 2014),
79 FR 72252, 72253, 72256 (Dec. 5, 2014) (``Regulation SCI Adopting
Release'').
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The key market participants that are currently subject to
Regulation SCI are called ``SCI entities'' and encompass certain SROs,
including registered clearing agencies.\75\ Regulation SCI is designed
to apply to the automated systems important to the functioning of the
U.S. securities markets and requires SCI entities to, among other
things, establish, maintain, and enforce written policies and
procedures reasonably designed to ensure that their key automated
systems have levels of capacity, integrity, resiliency, availability,
and security adequate to maintain their operational capability and
promote the maintenance of fair and orderly markets, and that such
systems operate in accordance with the Exchange Act and the rules and
regulations thereunder and the entities' rules and governing documents,
as applicable.\76\
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\75\ As stated above, see note 30, a covered clearing agency is
a registered clearing agency and therefore is subject to Regulation
SCI. See 17 CFR 242.1000 (defining SCI entity and SCI self-
regulatory organization).
\76\ See 17 CFR 242.1001.
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Regulation SCI applies to the systems of, or operated by or on
behalf of, SCI entities, that directly support any one of six core
securities market functions--trading, clearance and settlement, order
routing, market data, market regulation, and market surveillance (``SCI
systems'').\77\ Regulation SCI also identifies a subset of SCI systems
defined as ``Critical SCI systems,'' which are those systems whose
functions are critical to the operation of the markets, including those
that represent single points of failure, and are therefore subject to
certain heightened requirements.\78\ Specifically, Critical SCI systems
means, any SCI systems of, or operated by or on behalf of, an SCI
entity that directly support functionality relating to, among other
things, clearance and settlement systems of clearing agencies.\79\
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\77\ See 17 CFR.242.1000 (defining SCI systems).
\78\ See 17 CFR 242.1000 (defining Critical SCI systems) and
1001(a)(2)(iv) (imposing heightened requirements); see also
Regulation SCI Adopting Release, supra note 74, at 72277.
\79\ 17 CFR 242.1000(a) (defining Critical SCI systems).
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When discussing the inclusion of clearance and settlement systems
of clearing agencies as a Critical SCI system, the Commission stated
that the clearance and settlement of securities is fundamental to
securities market activity.\80\ The Commission identified a variety of
services that clearing agencies perform to help ensure that trades
settle on time and at the agreed upon terms, including comparing
transaction information (or reporting to members the results of
exchange comparison operations), calculating settlement obligations
(including net settlement), collecting margin (such as initial and
variation margin), and serving as a depository to hold securities as
certificates or in dematerialized form to facilitate automated
settlement.\81\
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\80\ Regulation SCI Adopting Release, supra note 74, at 72278.
\81\ Id.
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As stated above in section III.B.2.b, a covered clearing agency's
critical services, for purposes of inclusion in an RWP, would encompass
its critical payment, clearing, and settlement services. Thus, those
services could be supported by the covered clearing agency's Critical
SCI systems, as defined in Regulation SCI.
c. Identification of Service Providers
Proposed Rule 17ad-26(a)(2) would require each covered clearing
agency's RWP to identify and describe any service providers upon which
the covered clearing agency relies to provide its critical payment,
clearing, and settlement services, identifying to what critical
services such third parties are relevant, and address how the covered
clearing agency would ensure that such service providers would continue
to provide such critical services in the event of recovery and during
an orderly wind-down. In addition, the Commission is proposing to
define in proposed Rule 17ad-26(b) the term ``service provider'' as any
person, including an affiliate or a third party, that is contractually
obligated to the covered clearing agency in any way related to the
provision of critical services, as identified by the covered clearing
agency in proposed Rule 17ad-26(a)(1), discussed in section III.B.2.b
infra. This definition includes both ``external'' third-party service
providers, such as technology or data providers, and those ``internal''
service providers that may be affiliated with the covered clearing
agency, such as when a covered clearing agency is part of a holding
company and receives certain services pursuant to agreements with that
holding company. The Commission also proposes to define ``affiliate''
in proposed Rule 17ad-26(b) to mean a person that directly or
indirectly controls, is controlled by, or is under common control with
the covered clearing agency. It would include a holding company that
owns the covered clearing agency.
Based on its supervisory experience, the Commission has observed
that covered clearing agencies have used services provided by service
providers to help ensure the prompt and accurate clearance and
settlement of securities transactions. Service providers may be
affiliates or third party entities and can perform a wide variety of
functions, such as providers of technology, data, or other services.
For service providers that are necessary for the covered clearing
agency to provide its core payment, clearing, and settlement services,
the failure of the service provider to perform its obligations could
pose significant operational risks and have substantial effects on the
ability of the covered clearing agency to perform its risk management
function and facilitate prompt and accurate clearance and settlement.
In a recovery or orderly wind-down, the continued performance of a
service provider of its function would remain essential.
The Commission is therefore proposing to require that an RWP
specifically identify and describe such service providers, to ensure
that the RWP considers what providers are necessary for the covered
clearing agency to continue providing its critical services. This
requirement would
[[Page 34720]]
ensure that the covered clearing agency has identified which service
providers relate to which critical services. This identification must
include both affiliated service providers and non-affiliated service
providers. The covered clearing agency also generally should consider
whether there are any interdependencies or interconnections amongst its
service providers, that is, whether a service provider supporting
critical services also provides other, unrelated services to the
covered clearing agency. Regardless of the nature of the service
provider, it is essential that an RWP identify such providers to ensure
that the covered clearing agency understands the relationships that it
should maintain to continue providing its critical services.\82\
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\82\ The Commission proposed Rule 17Ad-25(i), which would
establish policy and procedure requirements for clearing agency
boards of directors to oversee relationships with service providers
for critical services to, among other things, confirm and document
that risks related to relationships with service providers for
critical services are managed in a manner consistent with its risk
management framework, review senior management's monitoring of
relationships with service providers for critical services, and
review and approve plans for entering into third-party relationships
where the engagement entails being a service provider for critical
services to the registered clearing agency. See Clearing Agency
Governance and Conflicts of Interest Proposing Release, Exchange Act
Release No. 34-95431 (Aug. 8, 2022), 87 FR 51812, 51836 (Aug. 23,
2022). In addition, the Commission proposed a new subparagraph (ix)
under Rule 1001(a)(2) of Regulation SCI regarding third party
provider management, which would require that SCI entities have a
third party provider management program that includes: initial and
periodic review of contracts with such third party providers for
consistency with the SCI entity's obligations under Regulation SCI;
and a risk-based assessment of each third party provider's
criticality to the SCI entity, including analyses of third party
provider concentration, of key dependencies if the third party
provider's functionality, support, or service were to become
unavailable or materially impaired, and of any potential security,
including cybersecurity, risks posed. Proposing Release, Regulation
Systems Compliance and Integrity, Exchange Act Release No. 97143
(Mar. 15, 2023), 88 FR 23146 (Apr. 14, 2023). Although this aspect
of proposed rule 17ad-26 also relates to third party providers and/
or service providers, the Commission does not believe that these
proposed rules have any substantive overlap. This proposed rule
would require that a covered clearing agency identify certain
service providers for purposes of its recovery and wind-down plan.
The Commission encourages commenters to review the proposals with
respect to clearing agency governance and Regulation SCI to
determine whether they might affect their comments on this proposing
release. Further, the Commission recognizes that the CA Governance
Proposal includes a proposed defined term for ``service providers
for critical services,'' which would mean any person that is
contractually obligated to the registered clearing agency for the
purpose of supporting clearance and settlement functionality or any
other purposes material to the business of the registered clearing
agency. In this release, the Commission is proposing to define
``service provider'' as any person that is contractually obligated
to the covered clearing agency in any way related to the provision
of critical services, as identified by the covered clearing agency
in proposed Rule 17ad-26(a)(1). See section III.B.a supra.
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In addition, the Commission is proposing to require that an RWP
address how the covered clearing agency would ensure that service
providers could continue to perform in the event of a recovery or
during an orderly wind-down, including consideration of contractual
obligations with such service providers and whether those obligations
are subject to alteration or termination as a result of initiation of
the recovery and orderly wind-down plan. This requirement would ensure
that the covered clearing agency has considered the nature of its
contractual obligations with the identified service providers (such as
contracts, arrangements, agreements, and licenses) and whether the
service providers could be contractually obligated to perform in a
recovery or orderly wind-down. Generally, this should include
consideration of whether a service provider's contractual relationship
with the covered clearing agency would be affected by a recovery or
orderly wind-down.\83\ Currently, the RWPs often identify some set of
service providers, but the Commission believes that the identified sets
may not, for all covered clearing agencies, be sufficient to align with
this rule, if adopted, because the covered clearing agencies do not
uniformly ensure that they have addressed all such service providers
and instead identify some different subset thereof. Moreover, the RWPs
generally do not address how the covered clearing agency would ensure
that such service providers would continue to provide such critical
services in the event of recovery and during an orderly wind-down,
including consideration of the contractual obligations with such
service providers.
---------------------------------------------------------------------------
\83\ For example, the covered clearing agency should consider
whether its contractual relationships with such providers would
transfer to a new entity in the event of the creation of a new
entity or the sale or transfer of the business in an orderly wind-
down.
---------------------------------------------------------------------------
More generally, the Commission believes that the requirement to
identify and describe any critical service providers and address how
the covered clearing agency would ensure that such service providers
would be legally obligated to perform in a recovery or during an
orderly wind-down should help regulatory planning in the event of a
resolution. To create an actionable resolution plan that would allow a
resolution authority to ensure the continued provision of the covered
clearing agency's critical services and, accordingly, to avoid market
interruption or any potential financial instability, the resolution
authority would need to be able to identify the critical services, as
well as the scope and nature of underlying service providers. Further,
the requirement that the plan address the continued provision of
services in the event of a recovery or during an orderly wind-down
should also help a resolution authority, in that it should enable a
better understanding of the terms and conditions of the relationship
between the covered clearing agency and the service provider.
d. Scenarios
Having identified its critical services, proposed Rule 17ad-
26(a)(3) would then require an RWP to identify and describe scenarios
that may potentially prevent a covered clearing agency from being able
to provide its critical services as a going concern, including
scenarios arising from uncovered credit losses (as described in Rule
17Ad-22(e)(4)(viii)), uncovered liquidity shortfalls (as described in
Rule 17Ad-22(e)(7)(viii)), and general business losses (as described in
Rule 17Ad-22(e)(15)).\84\ These scenarios are consistent with the
current requirement in Rule 17Ad-22(e)(3)(ii). Identification and
description of scenarios is essential to evaluating what is necessary
to achieve a recovery of the clearing agency and, in the event that
recovery fails, ensuring the orderly wind-down of the clearing agency
and transfer of critical services to a new entity. Identifying the
scenarios enables a covered clearing agency to make the reasonable and
appropriate preparations to achieve a recovery or, in the event that
recovery fails, avoid a disorderly wind-down arising from those
scenarios that could transmit risk through the U.S. securities markets
and the broader financial system.
---------------------------------------------------------------------------
\84\ Rule 17Ad-22(e)(3)(ii) refers to identifies several
specific bases for recovery and orderly wind-down that should be
covered by the plans: credit losses, liquidity shortfalls, and
losses from general business risk. Proposed rule 17ad-26(a)(3) would
reference those same bases and include cross-references to where
those bases are addressed in the Covered Clearing Agency Standards.
---------------------------------------------------------------------------
Because the covered clearing agencies should contemplate the
inability to provide services as a going concern, these scenarios would
necessarily go beyond those contemplated in business as usual
circumstances, business continuity planning, crisis management, or
failure management. That is, unlike those types of scenarios, recovery
and wind-down planning scenarios would involve shocks that could
potentially
[[Page 34721]]
cause the covered clearing agency to become insolvent and cease
operations.
When identifying scenarios, the covered clearing agency generally
should consider the various risks to which it is exposed, which will
vary across different covered clearing agencies serving different
markets. The proposed rule would require that the covered clearing
agency consider scenarios arising from uncovered credit losses,
uncovered liquidity shortfalls, and general business losses. This set
of scenarios would therefore include scenarios arising from the default
of a participant and also those arising from events not related to a
participant default, such as a general business loss. Other potential
scenarios that are not related to a participant default could include
the realization of investment or custody losses, the failure of a third
party, such as a settlement bank, to perform a critical function for
the covered clearing agency, or scenarios caused by an SCI event or
other significant operational disruption, such as a significant
cybersecurity incident. In addition, a covered clearing agency that is
part of a larger organization may be exposed to risks arising from
other entities within the organization. Put more generally, the
identified scenarios take into account various risks to which the
covered clearing agency is exposed that may potentially prevent the
covered clearing agency from being able to provide its critical
services, which will vary across different types of covered clearing
agencies (i.e., a central counterparty versus a central securities
depository) and even across covered clearing agencies of the same type.
The Commission believes that the identified scenarios generally
should be structured such that the underlying assumptions ensure that
the scenarios are sufficiently severe, such that they would result in
the need for a recovery or orderly wind-down. These scenarios generally
should include both idiosyncratic and system-wide stress scenarios,
taking into account the possibility of contagion in a stress event and
of simultaneous crises in several significant markets. Although all
covered clearing agencies generally consider at a high level what
circumstances may cause them to enter recovery or wind-down (e.g.,
whether a recovery or wind-down would arise from the default of a
participant or from issues unrelated to a participant default), the
RWPs do not all identify particular scenarios the covered clearing
agencies have considered when developing the RWP or contain detailed
analyses of each particular scenario.
Each scenario generally should be analyzed individually in the
recovery plan, with the analysis including: a description of the
scenario; the events that are likely to trigger the scenario; the
covered clearing agency's process for monitoring such events; the
market conditions, operational and financial issues, and other relevant
circumstances that are likely to result from the scenario; the
potential financial and operational impact of the scenario on the
covered clearing agency and its participants, internal and external
service providers, and relevant affiliated companies, both in an
orderly and stressed market (e.g., where markets are unavailable or
there are limited solvent counterparties); and the specific steps that
the covered clearing agency would expect to take if the scenario occurs
or appears likely to occur, including, without limitation, any
governance or other procedures that may be necessary to implement the
relevant tools or use the relevant resources and to ensure that such
implementation occurs in sufficient time to achieve the intended
effect.
e. Triggers
Proposed Rule 17ad-26(a)(4) would require a covered clearing
agency's RWP to identify and describe the criteria that would trigger
the implementation of its RWP and the process that the covered clearing
agency uses to monitor and determine whether the criteria have been
met, including the governance arrangements applicable to such process.
Given that the implementation of a covered clearing agency's RWPs would
most likely occur during a period of significant stress at the covered
clearing agency or in the market in general, the Commission believes
that the covered clearing agency needs to identify in advance what
criteria could trigger implementation of its RWP. Such ex ante
identification of potential triggers can help ensure that a covered
clearing agency not only implements its plan pursuant to the
established RWP but that, before it implements such plans, it is aware
of the triggering events that may necessitate use of the RWP.
Thoughtful consideration of triggers can help ensure that the steps
taken in anticipation of a potential recovery or wind-down have been
planned for and coordinated to minimize the onward transmission of risk
to the U.S. financial system. Currently, covered clearing agencies
identify triggers in their RWPs but differ with respect to how much
they identify the specific monitoring or governance processes for such
triggers.
The covered clearing agency generally should consider defining both
quantitative and qualitative criteria that would trigger the
implementation of part or all of the recovery plan or of an orderly
wind-down plan. Moreover, the covered clearing agency generally should
consider triggers that would be applicable in circumstances involving
the default of its participant(s), as well as those that would be
applicable in circumstances not related to the default of a participant
or participants. When determining triggers, the covered clearing agency
also generally should consider whether the likely timing of a
triggering event in the identified scenarios would permit sufficient
time for implementation of the RWP.
There may be circumstances in which the trigger is obvious. For
example, when a participant of a covered clearing agency defaults, the
recovery plan likely would be triggered when the covered clearing
agency has exhausted its pre-funded financial resources, its qualifying
liquid resources,\85\ or any other liquidity arrangements that it has
in place to deal with default-related shortfalls, or when it has become
unlikely that the pre-funded financial resources and/or the liquidity
arrangements will be sufficient. In other circumstances, the covered
clearing agency may have to employ more judgment with respect to how to
develop appropriate triggers. For example, a covered clearing agency
may need to exercise judgment to determine an appropriate capital level
to trigger activation of its RWP in the event of persistent or
extraordinary capital losses from general business risks.
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\85\ See 17 CFR 240.17Ad-22(a)(14).
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The identification of triggers does not mean that such triggers
should be self-executing. Instead, the importance of identifying
triggers lies in ensuring that a covered clearing agency considers and
identifies ex ante when it would initiate its RWP. Therefore, the
Commission believes that the RWP also must identify and describe the
process that the covered clearing agency uses to monitor and determine
whether the criteria have been met, including the governance
arrangements applicable to such process. Specifying the monitoring
process would allow the covered clearing agency to ensure that it has
reliable and appropriate processes to analyze the facts and
circumstances related to the triggers identified in the RWP. Consistent
with its obligations under Rule 17Ad-22(e)(3), the identification of
the governance process generally should include clearly defining the
responsibilities of board members, senior management, and business
units, including with respect to
[[Page 34722]]
escalation within the covered clearing agency, and it also generally
should specify whether and to what extent the covered clearing agency
may exercise discretion in its monitoring and determination whether the
triggering criteria have been met. The Commission believes that
including the related governance in the RWP is important to allow the
covered clearing agency to use the RWP in a crisis because the RWP
would set forth clear and defined roles and avoid potential confusion
at the time of the RWP's implementation.
f. Rules, Policies, Procedures, and Tools
Proposed Rule 17ad-26(a)(5) would require a covered clearing
agency's RWP to identify and describe the rules, policies, procedures,
and any other tools or resources the covered clearing agency would rely
upon in a recovery or orderly wind-down. The Commission believes that
describing the rules, policies, procedures, and any other tools or
resources is essential to a covered clearing agency's RWP. The
requirement to describe rules, policies, procedures, and any other
tools or resources that may be used in advance for certain situations
would provide some level of predictability in such a situation and
avoid unexpected actions because it would allow participants to
understand the potential of tools or resources that could be used,
including whether any of the tools would require participant
involvement or resources (such as a cash call).
Generally, the rules, policies, procedures, and any other tools or
resources should address shortfalls arising in the stress scenarios
identified by the covered clearing agency, whether caused by
participant default or by some other event, that are not covered by
pre-funded financial resources. They should also address situations
where the covered clearing agency does not have sufficient qualifying
liquid resources to meet its obligations on time. In addition, the
tools should address other losses or liquidity shortfalls, including
those arising from general business risks that may or may not develop
more slowly than a sudden default or other event.
However, the Commission is not prescribing particular tools, such
as tear-up or margin haircutting, that a covered clearing agency would
be required to include in its RWP. The Commission believes that this
proposed requirement preserves discretion for each covered clearing
agency to consider the full range of available recovery tools and
select those most appropriate for the circumstances of the covered
clearing agency, including the products cleared and the markets
served.\86\ It would also allow a covered clearing agency to consider
the ways in which its ownership structure (such as whether it is a
subsidiary of a larger organization, owned by its participants, etc.)
could impact its execution of its RWP or use of the tools set forth
therein, including through the applicable governance arrangements or
because of tools that rely on a parent or affiliated organization.
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\86\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70809.
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The current RWPs identify the tools and other resources that the
covered clearing agency would use in a recovery or orderly wind-down.
Certain of those tools, which may often be referred to as the covered
clearing agency's default waterfall,\87\ may involve the allocation of
losses to its members or, potentially, to other shareholders or
creditors of the covered clearing agency, among others, and covered
clearing agencies are required to address such loss allocation under
the Covered Clearing Agency Standards.\88\ As part of their recovery
and wind-down planning, the Commission believes that covered clearing
agencies generally should consider their loss allocation policies in
light of the scenarios identified in response to proposed Rule 17ad-
26(a)(3), including the need for any additional tools or loss
allocation processes to address different scenarios.
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\87\ See note 150 infra.
\88\ See 17 CFR 240.17Ad-22(e)(4)(viii) (requiring that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by addressing allocation of credit
losses the covered clearing agency may face if its collateral and
other resources are insufficient to fully cover its credit
exposures).
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When identifying the tools and other resources that a covered
clearing agency may include in a recovery or orderly wind-down plan,
the Commission believes that the covered clearing agency generally
should consider the following characteristics to evaluate the
appropriateness of a tool or tools for a particular recovery scenario
or an orderly wind-down, including the sequence in which the tools
should be used. First, the set of tools should comprehensively address
how the covered clearing agency would continue to provide critical
services in all relevant scenarios. Second, the tools should be
effective, meaning that they should be reliable, timely, and have a
strong legal basis. Being effective generally should mean that the
covered clearing agency has a high degree of confidence that it could
employ the tool in all relevant circumstances, including a time of
stress. Third, the tools generally should be transparent, so as to
allow the covered clearing agency's participants and the broader market
participants to understand how they would operate and allow those who
would bear losses and liquidity shortfalls to measure, manage, and
control their potential losses and liquidity shortfalls. Finally, the
tools generally should take into account whether the tools create
appropriate incentives for the covered clearing agency's owners, direct
and indirect participants, and other relevant stakeholders, and they
generally should seek to minimize the potential impact that the tools
may have on participants and the financial system more broadly.
When analyzing the tools to be included in its RWP, a covered
clearing agency generally should consider: (i) a description of the
tools that the covered clearing agency would expect to use in each
scenario; (ii) the order in which each tool would be expected to be
used; (iii) the time frame within which the tool would be used; (iv)
the governance and approval processes and arrangements within the
covered clearing agency for the use of each of the tools available,
including the exercise of any available discretion; (v) the processes
to obtain any approvals external to the covered clearing agency
(including any regulatory approvals) that would be necessary to use
each of the tools available, and the steps that might be taken if such
approval is not obtained; (vi) the steps necessary to implement the
tools; (vii) the roles and responsibilities of all parties, including
non-defaulting participants; (viii) whether the tool is mandatory or
voluntary; and (ix) an assessment of the associated risks from the use
of each tool to non-defaulting clearing members and their customers,
linked financial market infrastructures, and the financial system more
broadly.
g. Timely Implementation
Proposed Rule 17ad-26(a)(6) would require a covered clearing
agency's RWP to address how the rules, policies, procedures, and any
other tools or resources identified in paragraph (5) would ensure
timely implementation of the recovery and orderly wind-down plan. The
Commission believes that this is an important element of a covered
clearing agency's RWP, that is, to provide, in advance, a level of
predictability as to how such measures would be implemented, which is
important to participants as discussed in section III.B.e infra, and to
ensure that the covered clearing agency has a
[[Page 34723]]
strategy for use of the various tools set forth in the RWP recovery and
orderly wind-down plans. As noted earlier, the implementation and use
of a covered clearing agency's RWP will likely occur when the covered
clearing agency itself, as well as the wider financial markets, are
experiencing heightened levels of stress. Requiring that the covered
clearing agency address in its RWP how its procedures to ensure timely
implementation of an RWP increases the likelihood that actions taken
will be predictable and orderly and will occur at an appropriate time
to address the circumstances at hand. Currently, the Commission
believes that the covered clearing agencies' RWPs address how the
covered clearing agencies' procedures would be timely implemented,
including by identifying the applicable governance and steps that would
need to be taken to use particular tools and/or by discussing the order
in which tools would be deployed. A covered clearing agency generally
should consider whether its RWP provides for pre-determined escalation
processes within the covered clearing agency's senior management and
with its board of directors, to ensure careful and timely consideration
of the appropriate next steps.
Timely implementation generally should mean that a covered clearing
agency is able to deploy the tools identified in its plan as needed and
when appropriate, for example, that it has identified the appropriate
escalation and approval processes to use a particular tool or resource.
In this sense, implementation does not refer to completion of the plan,
but merely to putting the plan into practice.
h. Notification to the Commission
Proposed Rule 17ad-26(a)(7) would require a covered clearing
agency's RWP to include procedures for informing the Commission as soon
as practicable when the covered clearing agency is considering
initiating a recovery or orderly wind-down. The systemic risk concerns
raised by a recovery or orderly wind-down of a covered clearing agency
are significant, and while the Commission already maintains regular
contact with each of the covered clearing agencies through its
supervisory program, the Commission believes it is critical that notice
of potential recovery and wind-down events be provided as soon as
practicable.
Providing notice to the Commission can help ensure that the
Commission has the opportunity to consider whether a covered clearing
agency engages the recovery or wind-down event consistent with its
established RWP and the requirements of Commission rules to help
mitigate the potential onward transmission of systemic risk and ensure
that a wind-down, if necessary, is orderly. This is particularly
important with respect to covered clearing agencies which often serve
as the sole provider of clearance and settlement services in a
particular market and of which several are designated clearing
agencies. Currently, many of the covered clearing agencies' RWPs
reference notification to the Commission, but often lack detail on the
procedures to ensure such notification.
Moreover, providing notice to the Commission would, in turn, help
the Commission ensure that it has information that it can share with
other relevant authorities, such as the resolution authority, regarding
the potential need for resolution. This communication between the
Commission and other regulators would be essential in the potential
event of a recovery or wind-down so that the other regulators can
consider appropriate actions that they may wish to take, such as if the
FDIC is appointed as the resolution authority for a covered clearing
agency, as discussed in section II.C supra. Given its supervisory role
with respect to the covered clearing agencies, the Commission is
uniquely situated both to obtain and effectively share and communicate
this information to other regulatory authorities.
i. Testing
Proposed Rule 17aAd-26(a)(8) would also require that an RWP include
procedures for testing the covered clearing agency's ability to
implement the recovery and wind-down plans at least every twelve
months, including by requiring the covered clearing agency's
participants and, when practicable, other stakeholders to participate
in the testing of its plans, providing for reporting the results of the
testing to the covered clearing agency's board of directors and senior
management, and specifying the procedures for, as appropriate, amending
the plans to address the results of the testing. The Commission
believes that it is important to require testing because including
testing should help to ensure that the RWP will be effective in the
event of an actual recovery or orderly wind-down. Currently, some
covered clearing agencies do not provide for testing their RWPs or test
them separately from any testing required under 17 CFR 240.17Ad-
22(e)(13) (``Rule 17Ad-22(e)(13)''), while others do incorporate some
testing requirements, with varying degrees of specificity about the
frequency of and participants in such testing and how to incorporate
the results of such testing into the RWPs.
The Commission believes that the testing under this proposed rule
likely would be similar in nature to that required under Rule 17Ad-
22(e)(13), in that it would simulate how the RWP would perform in
crisis situations, including the participation of senior management and
the board of directors. Such testing could involve examining how a
covered clearing agency's procedures would work in practice, by
applying them to a hypothetical scenario that would cause the covered
clearing agency to use its RWP. Testing must involve the covered
clearing agency's participants and, where practicable, other
stakeholders. Such other stakeholders could include, for example,
liquidity providers or settlement banks. By specifying that the
participation of other stakeholders must occur where practicable, the
Commission recognizes that a covered clearing agency may have limited
ability to require said participation by all such stakeholders in all
circumstances.
Including participants and other stakeholders in such testing
should help to ensure that procedures will be practical and effective
in the face of a recovery or orderly wind-down. In addition to the
relevant employees, participants, and other stakeholders that would be
involved in testing RWPs, a covered clearing agency may determine, as
appropriate, to include members of its board of directors or similar
governing body, and to invite linked clearing agencies, significant
indirect participants, providers of credit facilities, and other
service providers to participate. The Commission believes including
participants and, where practicable, stakeholders in periodic testing
is appropriate because a successful recovery or orderly wind-down will
require coordination among these parties, particularly during periods
of market stress.
The Commission believes that at least every twelve months is an
appropriate time period for testing RWPs. Given that many other aspects
of a covered clearing agency's risk management are required to be
tested at least annually, many of which are likely to be related to or
referenced in the covered clearing agency's RWP,\89\ the Commission
believes that this time period strikes an appropriate balance between
the need to test RWPs and the desire to avoid imposing duplicative
requirements. A covered clearing agency may choose to
[[Page 34724]]
conduct this testing and review of the RWP, to the extent practicable,
as part of its annual testing and review of its participant default
rules and procedures, in accordance with Rule 17Ad-22(e)(13), or as
part of its business continuity testing.
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\89\ See, e.g., 17 CFR 240.17Ad-22(e)(13)(iii) and (e)(3)(i).
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The Commission believes that the RWPs should provide for reporting
the results of the testing to the covered clearing agency's board of
directors and senior management. This reporting would help ensure that
the board of directors and senior management have an understanding of
the testing. This understanding, in turn, would then inform senior
management in considering whether the testing indicates the need for
potential changes to an RWP. This understanding would also inform the
board of directors in its review and approval of a covered clearing
agency's RWP, which it would be required to do under proposed Rule
17ad-26(a)(9). Finally, the Commission believes that the RWPs should
specify the procedures for, as appropriate, amending the plans to
address the results of the testing. Such procedures would ensure that
the covered clearing agency takes into account the results of the
testing and incorporates it into the plan, as appropriate.
j. Periodic Review
Proposed Rule 17ad-26(a)(9) would require the board of directors of
a covered clearing agency to review and approve its RWP at least every
twelve months or following material changes to the covered clearing
agency's operations that would significantly affect the viability or
execution of the plans, with such review informed, as appropriate by
the covered clearing agency's testing of the plans as required in the
prior section of the proposal rule. Because the risks that a covered
clearing agency faces and the markets it serves are ever evolving, it
is important that a covered clearing agency's RWP accounts for the
evolving nature of risks and markets. The Commission understands that
covered clearing agencies with RWPs already engage in some level of
ongoing review, and the Commission has reviewed changes to RWPs as
proposed rule changes under section 19(b) of the Exchange Act.\90\ The
Commission believes that a covered clearing agency should perform the
board of directors level review under proposed Rule 17ad-26 at least
once every twelve months. Moreover, the Commission believes that a
required review every twelve months represents an appropriate frequency
to address any changes in the markets served and products cleared by a
covered clearing agency. The Commission further believes that it is
also important to revisit an RWP if there is a material change to the
covered clearing agency's operations, to ensure that the RWP continues
to address the risks that the covered clearing agency faces. The
Commission has proposed requiring review and approval of a covered
clearing agency's RWP by its board of directors because such
requirement is important to ensure that the RWP is considered and
addressed at the most senior levels of the governance framework of the
covered clearing agency, consistent with the importance of the RWP.
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\90\ See, e.g., Securities Exchange Act Releases No. 91429 (Mar.
29, 2021), 86 FR 17421 (Apr. 2, 2021) (SR-DTC-2021-004); 91430 (Mar.
29, 2021), 86 FR 17432 (Apr. 2, 2021) (SR-FICC-2021-002); 94983 (May
25, 2022), 87 FR 33223 (June 1, 2022) (SR-ICC-2022-004); ICEEU 2019
Order, supra note 41, 84 FR 34455; 88578 (Apr. 7, 2020), 85 FR 20561
(Apr. 13, 2020) (SR-LCH SA-2020-001); 91428 (Mar. 29, 2021), 86 FR
17440 (Apr. 2, 2021) (SR-NSCC-2021-004); 90712 (Dec. 17, 2020), 85
FR 84050 (Dec. 23, 2020) (SR-OCC-2020-013).
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Currently, the existing RWPs generally provide for review and
approval by a covered clearing agency's board of directors, but not all
the plans provide for a review every twelve months and some do not
specifically reference the need to review following material changes to
the covered clearing agency's operations. Therefore, the Commission
believes that this proposed rule would strengthen the RWPs by ensuring
review and approval by the board of directors every twelve months and
review following material changes. It would also help ensure that the
review and approval by the board of directors is informed, as
appropriate, by the results of the covered clearing agency's testing
discussed in section III.B.2.j supra. The Commission believes that any
procedures adopted with respect to the review and approval conducted by
the board of directors generally should provide for substantive
consideration of the plan and whether it appropriately takes into
account the specific characteristics of the covered clearing agency,
including its ownership, organizational, and operational structures, as
well as the size, systemic importance, global reach, and/or the risks
inherent in the products it clears.
Moreover, in the event that a recovery or wind-down process is
activated, the Commission believes that it likely would be appropriate
to conduct an additional review by the board of directors immediately
after the conclusion of the execution of the RWP, even if it is well
before the next periodic review. In addition, a covered clearing agency
generally should consider the extent to which any new policy statements
from a standard setting body, such as CPMI-IOSCO, while not binding,
might tend to support updating or revising existing RWPs to ensure that
the clearing agency's approach to risk management, recovery, and wind-
down are effective at maintaining the core functions of the covered
clearing agencies in a recovery or resolution scenario and mitigating
the potential for transmitting systemic risk through the financial
system.
3. Request for Comment
The Commission requests comment on all aspects of proposed Rule
17ad-26. In particular, the Commission requests comment on the
following specific topics:
10. Should the Commission adopt proposed Rule 17ad-26 to prescribe
the contents of a covered clearing agency's recovery and wind-down
plans?
11. Does proposed Rule 17ad-26 adequately identify and describe the
elements that a covered clearing agency would be required to include in
its RWP? If other elements should be included, please identify such
elements and explain why they should be included. If certain elements
should not be included, please identify such elements and explain why
they should not be included.
12. Are there any other elements that should be included in a
covered clearing agency's RWP to facilitate the planning processes of a
resolution authority? If so, please identify such elements and explain
how they should help facilitate resolution planning.
13. Should the Commission set more prescriptive requirements with
respect to any of the elements of a covered clearing agency's RWP? If
so, what should the Commission require, and why?
14. Are there other elements that a covered clearing agency should
consider in its RWP that would better align the incentives of various
stakeholders and hence facilitate a productive collaboration among them
in a recovery and wind-down event?
15. As discussed above, in 2016, CFTC staff issued guidance with
respect to the contents of recovery and wind-down planning.\91\ Do
commenters believe that there are any aspects of that guidance which
should be codified in the Commission's proposed Rule 17ad-26? If so,
please identify such aspects and explain why they should be included.
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\91\ See note 69 supra.
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16. Should the Commission also require that a covered clearing
agency's
[[Page 34725]]
RWP set forth a viable strategy for its recovery and/or orderly wind-
down, to ensure that a covered clearing agency take into account how
the items included in the RWP fit together as a cohesive whole and that
the RWP takes into account a covered clearing agency's unique
characteristics and circumstances, including ownership and governance
structures, effect on direct and indirect participants, membership
base, markets served, the risks inherent in products cleared, and risk
management needs. Would such a requirement be beneficial, or are these
elements already captured by the proposed rule text?
17. With the additional requirements in proposed Rule 17ad-26,
would a covered clearing agency retain an appropriate amount of
discretion to consider the specific characteristics of the covered
clearing agency when creating its RWP?
18. Do commenters agree with the proposed definition of ``service
provider'', including the distinction between third parties and
affiliates, and the proposed definition of ``affiliate''?
19. Do commenters agree that the RWP should identify and describe
the covered clearing agency's critical payment, clearing, and
settlement services and address how the covered clearing agency would
continue to provide such critical services in the event of a recovery
and during an orderly wind-down, including the identification of the
staffing necessary to support such critical services and analysis of
how such staffing would continue in the event of a recovery and during
an orderly wind-down? Should the Commission further define ``staffing''
to specify that it refers to particular positions or offices within the
covered clearing agency?
20. Do commenters agree that the RWP should identify and describe a
covered clearing agency's critical service providers, specify to which
services such service providers are relevant, and address how the
covered clearing agency would ensure that such providers can be legally
obligated to perform in the event of a recovery or orderly wind-down,
including consideration of contractual obligations with such service
providers and whether those obligations are subject to alteration or
termination as a result of initiation of the recovery and orderly wind-
down plan?
21. Do commenters agree that the proposed rule should require that
the covered clearing agency identify the scenarios that may potentially
prevent the covered clearing agency from being able to provide its
critical payment, clearing, and settlement services as a going concern,
including uncovered credit losses (as described in paragraph
(e)(4)(viii) of 17 CFR 240.17Ad-22), uncovered liquidity shortfalls (as
described in paragraph (e)(7)(viii) of 17 CFR 240.17Ad-22), and general
business losses (as described in paragraph (e)(15) of 17 CFR 240.17Ad-
22)?
22. Should the Commission instead identify particular scenarios
that a covered clearing agency has to address in its RWP? If so, should
the Commission include any or all of the following scenarios: (i)
credit losses or liquidity shortfalls created by single and multiple
clearing member defaults; (ii) liquidity shortfall created by a
combination of clearing member default and a failure of a liquidity
provider to perform; (iii) settlement bank failure; (iv) custodian or
depository bank failure; (v) losses resulting from investment risk;
(vi) losses from poor business results; (vii) financial effects from
cybersecurity events; (viii) fraud (internal, external, and/or actions
of criminals or of public enemies); (ix) legal liabilities, including
those not specific to the covered clearing agency's business as a
covered clearing agency; (x) losses resulting from interconnections and
interdependencies among the covered clearing agency and its parent,
affiliates, and/or internal or external service providers; (xi) losses
resulting from interconnections and interdependencies with other
covered clearing agencies; and (xii) losses resulting from issues
relating to services that are ancillary to the covered clearing
agency's critical services? Should the Commission require consideration
of scenarios involving multiple failures (e.g., a member default
occurring simultaneously, or nearly so, with a failure of a service
provider) that, in the judgment of the covered clearing agency, are
particularly relevant to its business? Does this set omit any potential
additional scenarios?
23. With respect to scenarios, should the Commission also require
that the RWP include an analysis that includes: (i) a description of
the scenario; (ii) the events that are likely to trigger the scenario;
(iii) the covered clearing agency's process for monitoring for such
events; (iv) the market conditions, operational and financial
difficulties and other relevant circumstances that are likely to result
from the scenario; (v) the potential financial and operational impact
of the scenario on the covered clearing agency and on its clearing
members, internal and external service providers and relevant
affiliated companies, both in an orderly market and in a disorderly
market; and (vi) the specific steps the covered clearing agency would
expect to take when the scenario occurs, or appears likely to occur,
including, without limitation, any governance or other procedures that
may be necessary to implement the relevant recovery tools and to ensure
that such implementation occurs in sufficient time for the recovery
tools to achieve their intended effect?
24. Do commenters believe that the Commission should prescribe any
particular tools that a covered clearing agency must include in its
RWP, such as a cash call, gains-based haircutting, or full or partial
tear-up? If so, please identify such tools and explain why they should
be required.
25. Proposed Rule 17ad-26 would also require that the RWP identify
triggers but does not prescribe a list of specific triggers. Should the
Commission prescribe any particular triggers, whether qualitative or
quantitative? For example, should the Commission require that a covered
clearing agency should consider using the exhaustion of its prefunded
resources as a trigger?
26. Should the Commission prescribe that a covered clearing
agency's RWP also identify criteria that could show when recovery is
successful and the covered clearing agency would return to normal
operations?
27. With respect to the requirement to identify and describe the
process that the covered clearing agency uses to monitor and determine
whether the criteria that would trigger implementation of the RWP have
been met, including the governance arrangements applicable to such
process, should the Commission require that the description also
include identification of any areas in which the covered clearing
agency could exercise discretion?
28. Proposed Rule 17ad-26(a)(5) would require the covered clearing
agency to identify and describe the rules, policies, procedures, and
any other tools or resources the covered clearing agency would rely
upon in a recovery or orderly wind-down to address the scenarios
identified in the recovery and wind-down plan. Should the Commission
also require that a covered clearing agency's RWP include any or all of
the following: (i) a description of the tools that the covered clearing
agency would expect to use in each scenario; (ii) the order in which
each tool would be expected to be used; (iii) the time frame within
which the tool would be used; (iv) the governance and approval
processes and arrangements within the covered
[[Page 34726]]
clearing agency for the use of each of the tools available, including
the exercise of any available discretion; (v) the processes to obtain
any approvals external to the covered clearing agency (including any
regulatory approvals) that would be necessary to use each of the tools
available, and the steps that might be taken if such approval is not
obtained; (vi) the steps necessary to implement the tools; (vii) the
roles and responsibilities of all parties, including non-defaulting
participants; (viii) whether the tool is mandatory or voluntary; and
(ix) an assessment of the associated risks from the use of each tool to
non-defaulting clearing members and their customers, linked financial
market infrastructures, and the financial system more broadly? Should
the Commission require the covered clearing agency to estimate the
potential size of the resources that the covered clearing agency would
expect to receive from each tool?
29. Proposed Rule 17d-26 would require that the RWP address how the
identified tools, procedures, or other resources would ensure timely
implementation of the RWP. Do commenters agree with the need to ensure
timely implementation? Should the Commission specify that timely
implementation means that a covered clearing agency is able to deploy
the tools identified in its plan as needed and when appropriate, for
example, that it has identified the appropriate escalation and approval
processes to use a particular tool or resource?
30. Proposed Rule 17ad-26(a)(7) would require procedures for
informing the Commission as soon as practicable when the covered
clearing agency is considering initiating a recovery or orderly wind-
down. Should the Commission instead or additionally require that the
procedures provide for informing the Commission when the triggers set
forth in proposed Rule 17ad-26(a)(5) have been met? Should the
Commission also require notification to the covered clearing agency's
participants and/or other stakeholders in the event of recovery or
orderly wind-down, or initiation of the RWP?
31. Should the Commission prescribe a particular form of notice for
informing the Commission, consistent with the requirement in proposed
Rule 17ad-26(a)(7)? For example, should the Commission require written
notice, or would telephonic notice be sufficient?
32. Proposed Rule 17ad-26(a)(8) would require procedures for
testing the covered clearing agency's ability to implement the recovery
and wind-down plans at least every twelve months, by requiring the
covered clearing agency's participants and, when practicable, other
stakeholders to participate in the testing of its plans and specifying
the procedures for, as appropriate, amending the plans to address the
results of the testing. Do commenters agree with this proposed
requirement? Should the covered clearing agency be required to mandate
that participants participate in testing? Similarly, should the covered
clearing agency be required to mandate that other stakeholders
participate in testing unless the covered clearing agency determines
that it would be impracticable to do so? Should testing be less
frequent? For example, should testing occur at least every 24 months?
33. Proposed Rule 17ad-26(a)(9) would require procedures for
reviewing and approving a covered clearing agency's RWP by the board of
directors at least every twelve months. Should the Commission impose a
more, or less, frequent review cycle? And if so, why? Should the
Commission require review and approval by the board of directors of an
RWP following material changes to the covered clearing agency's
operations that would significantly affect the viability or execution
of the plans?
IV. Economic Analysis
A. Introduction
The Commission is sensitive to the economic consequences and
effects of the proposed rule and amendments, including their benefits
and costs.\92\ The Commission acknowledges that, since many of these
proposals could require a covered clearing agency to adopt new policies
and procedures, the economic effects and consequences of these rules
include those flowing from the substantive results of those new
policies and procedures. Further, section 17A of the Exchange Act
directs the Commission to have due regard for the public interest, the
protection of investors, the safeguarding of securities and funds, and
maintenance of fair competition among brokers and dealers, clearing
agencies, and transfer agents when using its authority to facilitate
the establishment of a national system for clearance and settlement of
transactions in securities.\93\
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\92\ Under section 3(f) of the Exchange Act, whenever the
Commission engages in rulemaking under the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, it must consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f). In addition, section 23(a)(2) of the Exchange Act prohibits
the Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
\93\ See supra note 10.
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This section addresses the likely economic effects of the proposed
rule and amendments, including their anticipated and estimated benefits
and costs and their likely effects on efficiency, competition, and
capital formation. It is not feasible to quantify many of the benefits
and costs. For example, risk management is an area of key concern for
all clearing agency stakeholders. Perceptions of risk affect how
clearing agencies are operated, and those operations, in turn, affect
perceptions of risk. Any change to the policies and procedures about
how clearing agencies act in times of crisis affects the behavior of
clearing agencies and participants in complex ways not only during a
crisis but also before the crisis, and those behavioral changes may
affect the likelihood and severity of a crisis. While the Commission
has attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature. The Commission
also discusses the potential economic effects of certain alternatives
to the approaches recommended in this proposal.
B. Economic Baseline
To consider the effect of the proposed rule and amendments, the
Commission first explains the current state of affairs in the market
(i.e., the economic baseline). All of the potential benefits and costs
from adopting the proposed rule and amendments are changes relative to
the economic baseline. The economic baseline in this proposal
considers: (1) the current market for covered clearing agency
activities, including the number of covered clearing agencies, the
distribution of participants across these clearing agencies, and the
level of activity these clearing agencies process; (2) the current
regulatory framework for covered clearing agencies; (3) the current
recovery and wind-down plans of covered clearing agencies; and (4) the
current risk-based margin systems of covered clearing agencies.
[[Page 34727]]
1. Description of Market
Of the nine registered clearing agencies, seven are currently in
operation.\94\ Six provide central counterparty (``CCP'') services \95\
and one provides central securities depository (``CSD'') services.\96\
National Securities Clearing Corporation (``NSCC''), Fixed Income
Clearing Corporation (``FICC''), and Depository Trust Company (``DTC'')
are all covered clearing agencies that are subsidiaries of Depository
Trust & Clearing Corporation (``DTCC''). NSCC offers clearance and
settlement services for equities, corporate and municipal debt,
American depositary receipts, exchange traded funds, and unit
investment trusts. FICC's Mortgage-Backed Securities Division
(``MBSD'') provides clearing, netting, and risk management services for
trades in the mortgage-backed securities market. FICC's Government
Securities Division (``GSD'') provides clearing, netting, and risk
management services for trades in U.S. Government debt, including buy-
sell transactions and repurchase agreement transactions. DTC provides
end-of-day net settlement for clients, processes corporate actions,
provides securities movements for NSCC's net settlements, and it
provides settlement for institutional trades.
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\94\ There are two registered but inactive clearing agencies:
Boston Stock Exchange Clearing Corporation (``BSECC'') and Stock
Clearing Corporation of Philadelphia (``SCCP''). Neither has
provided clearing services in well over a decade. See Self-
Regulatory Organizations; The Boston Stock Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
To Amend the Articles of Organization and By-Laws, Exchange Act
Release No. 63629 (Jan. 3, 2011), 76 FR 1473, 1474 (Jan. 3, 2011)
(BSECC ``returned all clearing funds to its members by September 30,
2010, and [] no longer maintains clearing members or has any other
clearing operations as of that date. [ ] BSECC [ ] maintain[s] its
registration as a clearing agency with the Commission for possible
active operations in the future.''); Self-Regulatory Organizations;
Stock Clearing Corporation of Philadelphia; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Relating to the
Suspension of Certain Provisions Due to Inactivity, Exchange Act
Release No. 63268 (Nov. 8, 2010), 75 FR 69730, 69731 (Nov. 15, 2010)
(SCCP ``returned all clearing fund deposits by September 30, 2009;
[and] as of that date SCCP no longer maintains clearing members or
has any other clearing operations. [] SCCP [] maintain[s] its
registration as a clearing agency for possible active operations in
the future.''). Because they do not provide clearing services, BSECC
and SCCP are not included in the economic baseline or the
consideration of benefits and costs.
\95\ A CCP is a type of registered clearing agency that acts as
the buyer to every seller and the seller to every buyer, providing a
trade guaranty with respect to transactions submitted for clearing
by the CCP's participants. See 17 CFR 240.17Ad-22(a)(2); Definition
of ``Covered Clearing Agency'', Exchange Act Release No. 88616 (Apr.
9, 2020), 85 FR 28853, 28855 (May 14, 2020) (``CCA Definition
Adopting Release''). A CCP may perform a variety of risk management
functions to manage the market, credit, and liquidity risks
associated with transactions submitted for clearing. For example,
CCPs help manage the effects of a participant default by closing out
the defaulting participant's open positions and using financial
resources available to the CCP to absorb any losses. In this way,
the CCP can prevent the onward transmission of financial risk. See,
e.g., Shortening the Securities Transaction Settlement Cycle,
Exchange Act Release No. 94196 (Feb. 9, 2022), 87 FR 10436, 10448
(Feb. 24, 2022).
\96\ A CSD is a type of registered clearing agency that acts as
a depository for handling securities, whereby all securities of a
particular class or series of any issuer deposited within the system
are treated as fungible. Through use of a CSD, securities may be
transferred, loaned, or pledged by bookkeeping entry without the
physical delivery of certificates. A CSD also may permit or
facilitate the settlement of securities transactions more generally.
See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad-22(a)(3); CCA
Definition Adopting Release, supra note 95, at 28856.
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ICE Clear Credit LLC (``ICC'') and ICE Clear Europe Limited
(``ICEEU'') are both covered clearing agencies for credit default swaps
(``CDS''), and they are both subsidiaries of Intercontinental Exchange,
Inc. (``ICE''). LCH SA is another covered clearing agency that offers
clearing for CDS, and it is a France-based subsidiary of LCH Group
Holdings Ltd, which, in turn, is majority owned by the London Stock
Exchange Group plc. The seventh covered clearing agency, Options
Clearing Corporation (``OCC''), offers clearing services for exchange-
traded U.S. equity options.
Covered clearing agencies operate under one of two broad ownership
models. In one model, the covered clearing agency is member-owned,\97\
while in the other model, the covered clearing agency is publicly
traded.\98\
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\97\ See, e.g., Exchange Act Release No. 52922 (Dec. 7, 2005),
70 FR 74070 (Dec. 14, 2005) (explaining that participants of DTC,
FICC, and NSCC that make full use of the services of one or more of
these clearing agency subsidiaries of DTCC are required to purchase
DTCC common shares).
\98\ OCC is owned by certain options exchanges. ICC and ICEEU
are both subsidiaries of ICE (a publicly traded company). LCH SA is
a subsidiary of LCH Group Holdings, Ltd., which is majority-owned by
London Stock Exchange Group plc (a publicly traded company).
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Covered clearing agencies currently operate specialized clearing
services and face limited competition in their markets. For each of the
following asset classes, for example, there is only one covered
clearing agency serving as a central counterparty: exchange-traded
equity options (OCC), government securities (FICC), mortgage-backed
securities (FICC), and equity securities (NSCC). There is also only one
covered clearing agency providing central securities depository
services (DTC). Covered clearing agency activities exhibit high
barriers to entry and economies of scale.\99\ These features of the
existing markets, and the resulting concentration of clearing and
settlement services within a handful of entities, inform the
Commission's examination of the effects of the proposed rule and
amendments on competition, efficiency, and capital formation, as
discussed below. Table 1 summarizes the most recent data on the number
of participants at each covered clearing agency.\100\
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\99\ See Alistair Milne, Central Securities Depositories and
Securities Clearing and Settlement: Business Practice and Public
Policy Concerns, in Analyzing the Economics of Financial Market
Infrastructures 334, 335 (Martin Diehl, et al. eds., 2016) available
at https://doi.org/10.4018/978-1-4666-8745-5.ch017 (``Clearing and
settlement operations have evolved over time to become remarkably
complex. This complexity creates business challenges, especially for
management of liquidity, which could potentially have systemic
consequences for the wider financial system. This complexity may
also increase the barriers to entry that can discourage competition
in trade settlement and securities services.'').
\100\ Data Membership requirements vary across the covered
clearing agencies. For example, the self-clearing minimum net-
capital requirement is $500 thousand for NSCC, while OCC's net
capital requirement is $2.5 million. Multiple memberships by the
same firm are much more common at NSCC than at the other covered
clearing agencies.
[[Page 34728]]
Table 1 a--Number of Participants at Covered Clearing Agencies in March
2023
------------------------------------------------------------------------
Number of
Covered clearing agency participants
------------------------------------------------------------------------
Subsidiaries of The Depository Trust & Clearing
Corporation:
National Securities Clearing Corporation \b\........ 3,931
The Depository Trust Company \c\.................... 844
Fixed Income Clearing Corporation (Government 213
Securities Division) \d\...........................
Fixed Income Clearing Corporation (Mortgage Backed 140
Securities Division) \e\...........................
Subsidiaries of Intercontinental Exchange: ..............
ICE Clear Credit \f\................................ 29
ICE Clear Europe (CDS Participants Only) \g\........ 29
Subsidiaries of LCH: ..............
LCH SA (CDSClear Participants Only) \h\............. 25
The Options Clearing Corporation \i\.................... 188
------------------------------------------------------------------------
\a\ Participant statistics were taken from the websites of each of the
listed clearing agencies in March 2023.
\b\ See DTCC, NSCC Member Directories, available at https://www.dtcc.com/client-center/nscc-directories.
\c\ DTCC, DTC Member Directories, available at https://www.dtcc.com/client-center/dtc-directories.
\d\ DTCC, FICC-GOV Member Directories, available at https://www.dtcc.com/client-center/ficc-gov-directories.
\e\ DTCC, FICC-MBS Member Directories, available at https://www.dtcc.com/client-center/ficc-mbs-directories.
\f\ ICE, ICE Clear Credit Participants, available at https://www.theice.com/clear-credit/participants.
\g\ ICE, ICE Clear Europe Membership, available at https://www.theice.com/clear-europe/membership.
\h\ LCH, LCH SA Membership, available at https://www.lch.com/membership/member-search.
\i\ OCC, Member Directory, available at https://www.theocc.com/Company-Information/Member-Directory.
Covered clearing agencies have become an essential part of the
infrastructure of the U.S. securities markets due to their role as
intermediaries. For example, in 2021 approximately $1.1 trillion (65%)
of the notional amount of all single-name CDS transactions in the
United States were centrally cleared.\101\ The average daily value of
equities trades cleared by NSCC in 2021 was $2.0 trillion; at FICC, the
total net value of government securities transactions in 2021 was
$1,419 trillion and the total net par value for mortgage backed
securities in 2021 was $69 trillion; and DTC settled a total of $152
trillion of securities in 2021.\102\ In addition, in 2022, OCC cleared
10.32 billion options contracts.\103\
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\101\ Data from DTCC's Trade Information Warehouse, compiled by
Commission staff.
\102\ See DTCC, Annual Report 9 (2021), available at https://
www.dtcc.com/~/media/files/downloads/about/annual-reports/DTCC-2021-
Annual-Report.
\103\ See OCC, Press Release ``OCC Clears Record-Setting 10.38
Billion Total Contracts in 2022 (Jan. 4, 2023), available at https://www.theocc.com/newsroom/press-releases/2023/0103occclearsrecordsetting1038billiontotalcontractsin2022.
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Central clearing benefits the markets by significantly reducing
participants' counterparty risk and through more efficient netting of
margin requirements. Consequently, central clearing also benefits the
financial system as a whole by increasing financial resilience and the
ability to monitor and manage risk.\104\ The role of a clearing agency
in promoting resilience highlights its central importance in the
functioning of markets.\105\ If a CCP is unable to perform its risk
management functions effectively, it can transmit risk throughout the
financial system. Similarly, if a CSD is unable to perform its
functions, market participants may be unable to settle their
transactions, which may transmit risk throughout the financial system.
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\104\ See Darrell Duffie, Still the World's Safe Haven?
Redesigning the U.S. Treasury Market After the COVID-19 Crisis 15
(Hutchins Center Working Paper, Paper No. 62, 2020), available at
https://www.brookings.edu/wp-content/uploads/2020/05/wp62_duffie_v2.pdf (``Central clearing increases the transparency of
settlement risk to regulators and market participants, and in
particular allows the CCP to identify concentrated positions and
crowded trades, adjusting margin requirements accordingly. Central
clearing also improves market safety by lowering exposure to
settlement failures . . . . As depicted, settlement failures rose
less in March [2020] for [U.S. Treasury] trades that were centrally
cleared by FICC than for all trades involving primary dealers. A
possible explanation is that central clearing reduces `daisy-chain'
failures, which occur when firm A fails to deliver a security to
firm B, causing firm B to fail to firm C, and so on.'').
\105\ See generally Albert J. Menkveld & Guillaume Vuillemey,
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153
(2021).
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Disruption to a clearing agency's operations, or failure on the
part of a clearing agency to meet its obligations, could serve as a
source of contagion, resulting in significant costs not only to the
clearing agency itself and its participants but also to other market
participants and the broader U.S. financial system.\106\ Absent proper
risk management, a clearing agency failure could destabilize the
financial system. As a result, proper management of the risks
associated with central clearing helps ensure the stability of the U.S.
securities markets and the broader U.S. financial system.\107\
---------------------------------------------------------------------------
\106\ See generally Dietrich Domanski, Leonardo Gambacorta, &
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS
Q. Rev. (Dec. 2015), https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf
(describing links between CCP financial risk management and systemic
risk); Darrell Duffie, Ada Li, & Theo Lubke, Policy Perspectives on
OTC Derivatives Market Infrastructure 9 (Fed. Res. Bank N.Y. Staff
Rep., Paper No. 424, 2010), available at https://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is successful in
clearing a large quantity of derivatives trades, the CCP is itself a
systemically important financial institution. The failure of a CCP
could suddenly expose many major market participants to losses. Any
such failure, moreover, is likely to have been triggered by the
failure of one or more large clearing agency participants, and
therefore to occur during a period of extreme market fragility.'');
Craig Pirrong, The Inefficiency of Clearing Mandates 11-14, 16-17,
24-26 (Policy Analysis Working Paper, Paper No. 655, 2010),
available at https://www.cato.org/pubs/pas/PA665.pdf (stating, among
other things, that ``CCPs are concentrated points of potential
failure that can create their own systemic risks,'' that ``[a]t
most, creation of CCPs changes the topology of the network of
connections among firms, but it does not eliminate these
connections,'' that clearing may lead speculators and hedgers to
take larger positions, that a CCP's failure to effectively price
counterparty risks may lead to moral hazard and adverse selection
problems, that the main effect of clearing would be to
``redistribute losses consequent to a bankruptcy or run,'' and that
clearing entities have failed or come under stress in the past,
including in connection with the 1987 market break); see Glenn
Hubbard et al., Report of the Task Force on Financial Stability,
Brookings Inst., 96 (June 2021), available at https://www.brookings.edu/wp-content/uploads/2021/06/financial-stability_report.pdf (``In short, the systemic consequences from a
failure of a major CCP, or worse, multiple CCPs, would be severe.
Pervasive reforms of derivatives markets following 2008 are, in
effect, unfinished business; the systemic risk of CCPs has been
exacerbated and left unaddressed.''); Froukelien Wendt, Central
Counterparties: Addressing their Too Important to Fail Nature
(working paper Jan. 2015), available at https://ssrn.com/abstract=2568596 (retrieved from SSRN Elsevier database) (assessing
the potential channels for contagion arising from CCP
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A
Fresh Look 5-11 (IMF Working Paper, Paper No. 11/66, 2011),
available at https://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf
(addressing factors that could lead central counterparties to be
``risk nodes'' that may threaten systemic disruption).
\107\ See Paolo Saguato, Financial Regulation, Corporate
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J.
1071, 1074-75 (2021), available at https://moritzlaw.osu.edu/sites/default/files/2022-03/18.%20Saguato_v82-6_1071-1140.pdf (``[T]he
decision to centralize risk in clearinghouses made them critical for
the stability of the financial system, to the point that they are
considered not only too-big-to-fail, but also too-important-to-fail
institutions.'').
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[[Page 34729]]
2. Overview of the Existing Regulatory Framework
The existing regulatory framework for clearing agencies registered
with the Commission includes section 17A of the Exchange Act, the Dodd-
Frank Act, and the related rules adopted by the Commission.\108\
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\108\ See supra section II.
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Clearing agencies registered with the Commission may also be
subject to other domestic or foreign regulation.\109\ Specifically,
clearing agencies operating in the U.S. may also be subject to
regulation by the CFTC (as clearing agencies for futures or swaps) and
the Board of Governors (as systemically important financial market
utilities or state member banks).\110\ Additionally, LCH SA is
regulated by l'Autorit[eacute] des march[eacute]s financiers,
l'Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution,
and the Banque de France, and it is subject to European Market
Infrastructure Regulation (EMIR).\111\ ICEEU is regulated by the Bank
of England, and it is subject to the UK's incorporation of EMIR into
the UK framework.\112\
---------------------------------------------------------------------------
\109\ See supra section III.D.2.
\110\ See 12 U.S.C. 5472, 5469. Currently, ICC, ICEEU, LCH SA,
and OCC are also regulated by the CFTC. DTC, FICC, NSCC, ICC, and
OCC have been designated systemically important financial market
utilities by the Financial Stability Oversight Council (see infra
note 138 and the accompanying text). DTC is also a state member bank
of the Federal Reserve System. The Board of Governors addresses
certain recovery and wind-down plans in Regulation HH (see supra
notes 68 and accompanying text), and the CFTC requires certain
derivatives clearing organizations to maintain recovery and wind-
down plans through Regulation 39.39(b) and subsequent guidance (see
supra notes 69 and accompanying text).
\111\ See LCH, Company Structure, available at https://www.lch.com/about-us/structure-and-governance/company-structure.
\112\ See ICE, ICEEU Regulation, available at https://www.theice.com/clear-europe/regulation; see also https://www.fca.org.uk/markets/uk-emir.
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3. Current Recovery and Wind-Down Plans
As discussed in section II supra, each covered clearing agency, as
part of a sound risk-management framework, is currently required to
include plans for the recovery and orderly wind-down of the covered
clearing agency necessitated by credit losses, liquidity shortfalls,
losses from general business risk, or any other losses (such plans are
referred to as RWPs).\113\ The covered clearing agency may have one RWP
or may maintain two separate documents, referring to one as the
recovery plan and the other as the wind-down plan. Although the
Commission did not include specific requirements for RWPs when the rule
was adopted, the Commission did offer general guidance about what
covered clearing agencies should consider when creating their
RWPs.\114\ The RWPs are subject to the rule filing requirement of Rule
19b-4, and all seven active covered clearing agencies have submitted
their plans and subsequent revisions to the Commission for review,
public comment, and approval.\115\ Additionally, all of the covered
clearing agencies have submitted confidential treatment requests with
their RWPs pursuant to 17 CFR 240.24b-2. The Commission has also
reviewed these confidential treatment requests and concluded that the
redacted material could be withheld from the public under the Freedom
of Information Act.\116\ Due to the confidential treatment of the RWPs,
the current release includes aggregated, anonymized analyses of the
RWPs submitted to the Commission by the clearing agencies.
Additionally, Form 19b-4, which is public, requires a description of
the proposed rule change for public comment.\117\ To the extent that
information in the baseline has been drawn from public sources, such as
the covered clearing agencies' SRO rule filings, we have included
attribution accordingly. All seven active covered clearing agencies
have approved RWPs in place, and the plans differ in, for example,
length, style, emphasis, and specificity.
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\113\ See supra note 16 and accompanying text.
\114\ CCA Standards Adopting Release, supra note 7, 81 FR at
70810. See also supra section II.A (discussing the guidance).
\115\ See supra section II generally, including note 32 on Form
19b-4 and note 41 for proposed rule changes.
\116\ See, e.g., https://www.sec.gov/rules/sro/nscc/2018/34-82430-ex5a.pdf (as an example of the redacted filing materials
posted for SR-NSCC-2017-017). See also supra notes 32 and 41 and
accompanying text.
\117\ See supra note 32.
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a. Critical Clearing and Settlement Services
Each RWP currently includes what the covered clearing agency has
identified and described as its critical payment, clearing, and
settlement services, as well as the criteria that the covered clearing
agency employs to make such a determination as to what constitutes
critical services.\118\ Depending on their operations and the structure
of their RWPs, covered clearing agencies currently identify between one
and a dozen or more critical services in those RWPs. Currently, no
covered clearing agency has analyses in its RWP regarding the staffing
levels necessary to support the critical services that they list or how
such staffing would continue in the event of a recovery operation or
during an orderly wind-down.
---------------------------------------------------------------------------
\118\ See, e.g., Exchange Act Release Nos. 82462 (Jan. 2, 2018),
83 FR 884, 885 (Jan. 8, 2018) (SR-DTC-2017-021) (stating that the
RWP provided a description of its services and the criteria to
determine which services are considered critical) (``DTC 2017
Notice''); 82431 (Jan. 2, 2018), 83 FR 871, 872 (Jan. 8, 2018) (SR-
FICC-2017-021) (stating that the RWP provided a description of its
services and the criteria to determine which services are considered
critical) (``FICC 2017 Notice''); ICC 2021 Order, supra note 41, 86
FR at 26561 (stating that the ICC recovery plan explains that ICC's
sole critical operation is provides credit default swap clearing
services); ICEEU 2019 Order, supra note 41, 84 FR at 34455 (stating
that ICEEU identified its futures and option and credit default swap
product clearing services, as well as its treasury and banking
services, as critical services); 82316 (Dec. 13, 2017), 82 FR 60246,
60247 (Dec. 19, 2017) (SR-LCH SA-2017-012) (stating that LCH SA
performed an assessment on identification of critical functions and
shared services in accordance with Financial Stability Board
guidance) (``LCH 2017 Notice''); 82430 (Jan. 2, 2018), 83 FR 841,
842 (Jan. 8, 2018) (SR-NSCC-2017-017) (stating that the RWP provided
a description of its services and the criteria to determine which
services are considered critical) (``NSCC 2017 Notice''); 82352
(Dec. 19, 2017), 82 FR 61072, 61074-75 (Dec. 26, 2017) (SR-OCC-2017-
021) (stating that OCC's RWP identifies critical services and
critical support functions) (``OCC 2017 Notice'').
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b. Service Providers
Each RWP identifies and describes, to varying degrees, certain
service providers, including both affiliates and third parties, upon
which the associated covered clearing agency relies to provide its
critical payment, clearing, and settlement services. Most plans do not
explicitly link the identified service providers to the covered
clearing agencies' critical services. Some of the RWPs state that they
assume critical service providers will continue to perform in the event
of a wind-down; at least one RWP states that it analyzes its
contractual arrangements with respect to continuing to provide services
during a recovery; \119\ and at least one RWP
[[Page 34730]]
states that it is reducing dependencies on third parties.
---------------------------------------------------------------------------
\119\ For example, OCC's plan discusses the critical vendors for
each of the identified critical services, as well as the Critical
Support Functions, as well as the critical external interconnections
that OCC maintains with other FMUs, exchanges (including designated
contract markets), clearing and settlement banks, custodian banks,
letter of credit banks, clearing members and credit facility
lenders, and the appendices to the plan identifies key vendors and
service providers, as well as key agreements to be maintained. OCC
2017 Notice, supra note 118, 82 FR at 61075. ICC's plan categorizes
its critical services by those that are provided to ICC by its
parent company versus those that are provided by external third
parties, and it also details the IT systems and applications
critical to ICC's clearing operations, including those provided by
ICE, those provided by external third parties, and those that ICC
itself provides. Further, the plan analyzes ICC's contractual
arrangements in the context of continuing services under those
contracts during recovery. ICC 2017 Notice and Order, supra note 41,
82 FR at 26561-62. In addition, NSCC's, FICC's, and DTC's plans
identify external service providers for which the relationships are
managed by a particular office within DTCC. See, e.g., Securities
Exchange Act Release Nos. 91428 (Mar. 29, 2021), 86 FR 17440, 17442
(Mar. 29, 2021) (SR-NSCC-2021-004) (``NSCC 2021 Notice''); 91430
(Mar. 29, 2021), 86 FR 17432, 17433-34 (Apr. 2, 2021) (SR-FICC-2021-
002) (``FICC 2021 Notice''); 91429 (Mar. 29, 2021), 86 FR 17421,
17422 (Mar. 29, 2021) (SR-DTC-2021-004) (``DTC 2021 Notice'').
---------------------------------------------------------------------------
c. Scenarios
Each RWP generally identifies and describes certain scenarios that
may potentially prevent the covered clearing agency from being able to
provide its critical payment, clearing, and settlement services as a
going concern.\120\ The RWPs differ in the number of scenarios
identified and described as well as the extent of the specificity with
which each scenario is discussed. For example, some RWPs present short
qualitative analyses of member defaults, while others present long,
detailed quantitative analyses of member defaults.
---------------------------------------------------------------------------
\120\ For example, OCC's plan identifies and considers scenarios
that may potentially prevent it from being able to provide its
critical services as a going concern. See OCC 2017 Notice, supra
note 118, 82 FR at 61073. ICC's plan describes potential stress
scenarios that may prevent it from being able to meet obligations
and provide services and the recovery tools available to it to
address these stress scenarios. See Securities Exchange Act Release
No. 91439 (Mar. 30, 2021), 86 FR 17649, 17650 (Apr. 5, 2021) (SR-
ICC-2021-005) (``ICC 2021 Notice''). ICEEU's plans outlines a number
of firm-specific and market-wide stress scenarios that, in its
determination, may result in significant losses or liquidity
shortfall, suspension or failure of its critical services and
related functions and systems, and damage to other market
infrastructure, with resulting uncertainty in the markets for which
ICEEU clears. See Exchange Act Release No. 82496 (Jan. 12, 2018), 83
FR 2855 (Jan. 19, 2018) (SR-ICEEU-2017-016). LCH SA's plans
categorizes potential stress scenarios in two ways as a result of
either: (i) Clearing member defaults and (ii) non-clearing member
events. See LCH 2017 Notice, supra note 118, 82 FR at 60248. In
addition, each of the plans for NSCC, FICC, and DTC discuss, at a
general level, scenarios in terms of uncovered losses or liquidity
shortfalls that could result from the default of one or more of its
members as well as losses that could arising from non-default
events. See, e.g., NSCC 2021 Notice, supra note 119, 86 FR at 17441;
FICC 2021 Notice, supra note 119, 86 FR at 17433; DTC 2021 Notice,
supra note 119, 86 FR 17421.
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d. Criteria That Would Trigger Implementation
Each RWP identifies and describes criteria that would trigger the
implementation of the recovery and orderly wind-down plan.\121\ The
RWPs differ in the number of identified triggering criterion and the
detail in which they discuss each triggering criteria; there are also
differences in the descriptions of the processes that covered clearing
agencies use to monitor and determine whether the triggering criteria
have been met, thus causing their RWPs to be activated.
---------------------------------------------------------------------------
\121\ See OCC 2017 Notice, supra note 118, 82 FR at 61079-80
(discussing OCC's identification of qualitative trigger events for
both recovery and wind-down); 83 FR at 34183, 34221, and 44970
(stating the DTC, NSCC, and FICC have identified wind-down triggers
and that a covered clearing agency would have entered ``recovery
phase'' when it issues its first loss allocation round); ICC 2021
Order, supra note 41, 86 FR at 26562; 84 FR at 24455 (ICEEU).
---------------------------------------------------------------------------
e. Rules, Policies, Procedures, and Other Tools or Resources
Each RWP describes, to varying degrees, the rules, policies,
procedures, and other tools or resources the covered clearing agency
would rely upon in a recovery or orderly wind-down to address the
scenarios identified in the RWP.\122\
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\122\ See, e.g., 83 FR at 34220-21 (identifying NSCC's recovery
tool characteristics); FICC 2017 Notice, supra note 118, 83 FR at
878 (identifying FICC's recovery tool characteristics); 83 FR at
44970 (identifying DTC's recovery tool characteristics); OCC 2017
Notice, supra note 118, 82 FR at 61075-80 (identifying OCC's
enhanced risk management and recovery tools); ICC 2021 Order, supra
note 41, 86 FR at 26562 (identifying ICC's recovery tools); 84 FR at
34456 (identifying key aspects of recovery tools for ICEEU); 83 FR
at 28886-87 (describing LCH SA's tools).
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f. Procedures To Ensure Timely Implementation
Each RWP mentions, to varying degrees, mechanisms that would ensure
timely implementation of the RWP.\123\ Some of the RWPs include
specific procedures to ensure timely implementation of a recovery and
orderly wind-down plan after specific criteria have been triggered. One
of the RWPs has taken steps to ensure timely completion of a recovery
or orderly wind-down.
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\123\ Each of the plans for NSCC, FICC, and DTC provides a
description of the governance and process around management of a
stress event along a ``Crisis Continuum'' timeline. See, e.g., NSCC
2017 Notice, supra note 118, 83 FR at 842; FICC 2017 Notice, supra
note 118, 83 FR at 872; DTC 2017 Notice, supra note 118, 83 FR at
886. OCC's recovery plan outlines an escalation process for the
occurrence of a ``Recovery Trigger Event'' as well as provides
general descriptions of how it would anticipate deploying its
recovery tools in response to the six stress scenarios it
identified. OCC 2017 Notice, supra note 118, 82 FR at 61079-80. The
ICC recovery plan describes the governance arrangements that provide
oversight and direction of the plan. See ICC 2021 Notice, supra note
120, 86 FR 17649. ICEEU revised its recovery plan to more clearly
address decision-making during recovery in 2019. See Securities
Exchange Act Release No. 85907 (May 21, 2019), 84 FR 24549 (May 28,
2019) (SR-ICEEU-2019-013) (``ICEEU 2019 Notice''). The LCH SA
recovery plan identifies the groups and individuals within LCH SA
that are responsible for the various aspects of plan. See LCH 2017
Notice, supra note 118, 82 FR at 60250.
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g. Procedures for Informing the Commission
Each RWP generally refers to informing the Commission about
recovery or orderly wind-down activities, but the majority of RWPs do
not include specific procedures for informing the Commission. Some of
the RWPs state that they will inform the Commission after a recovery or
wind-down has been initiated.
h. Testing
Three RWPs provide for annual plan testing but with varying degrees
of specificity about the participants' involvement as well as the
frequency of such testing. One such covered clearing agency
specifically refers to sharing the results of the testing with the
board of directors and another states that the RWP would be updated as
appropriate as a result of the testing.\124\ The remaining covered
clearing agencies do not mention testing in their RWPs.
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\124\ See ICC 2021 Order, supra note 41, 86 FR at 26562
(referencing testing its Recovery Plan at least annually, as part of
its annual default management drills and providing the results of
such testing, as well as any changes it recommends due to such
testing, to the ICC Board and Risk Committee); ICCEU, 83 FR at 2857
(referencing testing elements of the Recovery Plan as part of normal
operations and risk management procedures); LCH 2017 Notice, supra
note 118, 82 FR at 60250 (referencing fire drills intended to
simulate all aspects of a member default, including the auctioning
of the defaulting members portfolio to non-defaulting members (where
appropriate) and involving the participation of members and relevant
functions within the LCH SA organization., with revisions to the
recovery plan as appropriate in light of the testing).
---------------------------------------------------------------------------
i. Plan Reviews
Each RWP provides for periodic plan reviews, typically annually or
biennially.\125\ Two RWPs provide for
[[Page 34731]]
non-scheduled reviews. In the existing plans, the boards of directors
of the covered clearing agency are responsible for the review and
approval of the RWPs, but the plans vary in whether they specify that
such review will also occur after material changes to the covered
clearing agency's operations or in light of the results of periodic
testing of the RWPs.
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\125\ NSCC, FICC, and DTC review their respective RWPs
biennially. See NSCC 2021 Notice, supra note 119, 86 FR at 17441;
FICC 2021 Notice, supra note 119, 86 FR at 17433; DTC 2021 Notice,
supra note 119, 86 FR at 17421. OCC conducts an annual review of its
RWP. See Securities Exchange Act Release No. 90315 (Nov. 3, 2020),
85 FR 71384, 71385 (Nov. 9, 2020) (SR-OCC-2020-013); see also OCC
2017 Notice, supra note 118, 82 FR at 61080. ICC's RWP describes
governance arrangements that provide for oversight and direction in
respect to review and testing of the plans. See ICC 2021 Notice,
supra note 120, 86 FR at 17651-52. The ICEEU recovery plan is
subject to annual review and ad hoc reviews may be commissioned if
the business materially changes. See Securities Exchange Act Release
No. 83651 (Jul. 17, 2018), 83 FR 34891, 34893 (Jul. 23, 2018) (SR-
ICEEU-2017-016 and SR-ICEEU-2017-017). In addition, ICEEU requires
annual testing of the plan via a table-top exercise to ensure ICE
Clear Europe staff's understanding of the plan and its
implementation. See ICEEU 2019 Notice, supra note 123, 84 FR at
24550. LCH SA decided to review its wind-down plan on an annual
basis or more frequently, if required. See Securities Exchange Act
Release No. 88297 (Feb. 27, 2020), 85 FR 12814 (Mar. 4, 2020) (SR-
LCH SA-2020-001).
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4. Current Risk-Based Margin
As discussed in section III.A supra, Rule 17Ad-22(e)(6) requires
covered clearing agencies that provide central counterparty services to
establish written policies and procedures reasonably designed to cover
its credit exposure to its participants by establishing a risk-based
margin systems with certain characteristics. Intraday margining
represents an important tool that covered clearing agencies use to
manage risk exposures on a real-time basis, by virtue of allowing a
quick response to volatility spikes that call for changes in collateral
to cover actual and potential losses.
a. Monitoring Exposure and Intraday Margin Calls
Each covered clearing agency currently has some ability to monitor
for intraday exposure and to make certain intraday margin calls. The
frequency of intraday monitoring and margin calls varies across
markets, and it is responsive to the risk characteristics of the
underlying markets and participants. Participants are generally
required to post margin within an hour of notification or at specified
times pursuant to the covered clearing agency's rules and procedures.
The current practice of covered clearing agencies is to release excess
margin to participants only once a day at a pre-scheduled time.
For example, OCC revalues its participants' portfolios throughout
the day to calculated updated account net asset value, and its rules
provide it the authority to issue intraday margin calls. Its intraday
calls are generally issued between 11 a.m. and 1:30 p.m. when
unrealized losses of an account, based on its start-of-day positions,
exceed 50% of the account's total margin.\126\ NSCC's rules provide the
authority to impose intraday mark-to-market charges, and it tracks
intraday market price and position changes in 15-minute intervals. NSCC
generally collects additional margin if the difference between the most
recent mark-to-market price of a participant's net positions and the
most recent observed market price exceeds a predetermined threshold,
which is currently 80 percent of the participant's volatility charge
and may be reduced if NSCC determines that a reduction of the threshold
is appropriate to mitigate risk during volatile market conditions.\127\
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\126\ See Options Clearing Corporation, Disclosure Framework at
52, available at https://www.theocc.com/getmedia/4664dece-7172-42a5-8f55-5982f358b696/pfmi-disclosures.pdf, and OCC Rule 609 (regarding
intra-day margin calls).
\127\ See NSCC Disclosure Framework at 58, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf (``NSCC Disclosure Framework''), and
NSCC Rules, Procedure XV (defining intraday mark-to-market charge).
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FICC's GSD and FICC's MBSD have the authority to make intraday
margin calls.\128\ FICC monitors changes in pricing and positions
frequently throughout the day, and it may collect intraday margin to
cover the price movement from those participants with a significant
exposure in an identified security or net portfolio and the market
value of those positions.\129\
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\128\ See FICC's GSD Rule 4, section 2a (regarding the intraday
supplemental fund deposit); FICC's MBSD Rule 1 (defining intraday
VaR and intraday mark-to-market charges) and Rule 4, section 2(b)
(regarding the daily margin requirement) and section 3a (regarding
the intraday requirements). In addition, FICC's GSD collects margin
twice a day under its current rules, notwithstanding any additional
intraday margin calls. See FICC's GSD Rules, schedule of timeframes.
\129\ See generally note 128 supra and FICC Disclosure Framework
at 65, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf.
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ICC also monitors each participant's intraday profit and loss to
determine if its intraday exposure is covered by the margin on deposit,
and it may issue margin calls to participants that are not sufficiently
collateralized.\130\ LCH SA also has the ability and authority to make
intraday margin calls that are based on intraday positions and
valuations.\131\
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\130\ ICC Disclosure Framework at 22-23, available at https://www.theice.com/publicdocs/clear_credit/ICEClearCredit_DisclosureFramework.pdf, and ICC Rule 401.
\131\ See generally LCH SA Disclosure Framework at 31, available
at https://www.lch.com/system/files/media_root/LCH%20SA%20-%20Comprehensive%20Disclosure%20as%20required%20by%20SEC%20Rule%2017Ad-22%28e%29%2823%29_2022%20Q32022.pdf, and LCH CDS Clearing
Procedures section 2.21 (describing ``extraordinary margin'' that
LCH SA may require to cover the risk of price/spread fluctuations
occurring on an intraday basis).
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b. Reliable Sources of Timely Price Data and Other Substantive Inputs
Covered clearing agencies use price data as well as other data
sources and other substantive inputs in their risk-based margin
systems, which is expected given the substantive differences in the
markets and participants they serve. Based on its supervisory
experience, the Commission understands that all covered clearing
agencies generally have policies and procedures in place to use a risk-
based margin system that uses reliable sources of timely price data and
includes procedures and sound valuation models for addressing
circumstances in which price data are not readily available or
reliable. The Commission also understands that if a covered clearing
agency uses other substantive inputs, such as portfolio size, asset
price volatility, duration, convexity, and outputs from external model
vendors, which are not required by the Commission's rules, not all
covered clearing agencies have policies and procedures for addressing
circumstances in which those substantive inputs are not readily
available or reliable so that the covered clearing agency can continue
to meet its requirements under Rule 17Ad-22(e)(6).
The policies and procedures used when price data or other
substantive inputs are not available vary from one RWP to another. For
example, the largest component of margin at FICC's GSD is typically its
``VaR Charge.'' The VaR Charge is based on the potential price
volatility of unsettled positions using a sensitivity-based Value-at-
Risk (``VaR'') methodology over a ten-year historical look-back period.
In addition, FICC's GSD also uses an alternative ``Margin Proxy''
calculation as a back-up VaR Charge calculation to the sensitivity
approach in the event that FICC experiences a data disruption with the
third-party vendor upon which FICC relies to produce the sensitivity-
based VaR Charge.\132\ FICC's MBSD relies upon a similar approach, that
is, using a sensitivity-based VaR methodology as its primary model,
which relies upon third-party data, as well as a Margin Proxy, and it
also uses an additional alternative calculation referred to as the
``Minimum Margin Amount'' that also does not rely on external vendor
data.\133\
[[Page 34732]]
NSCC relies upon a parametric VaR model to determine the potential
future exposure of a given portfolio based on historical price
movements, using 153 days as the minimum sample period for the
historical data. For certain securities, including fixed income
securities, UITs, illiquid securities, securities that are amendable to
statistical analysis only in a complex manner and securities that are
less amenable to statistical analysis, a haircut-based volatility
charge is applied in lieu of the VaR charge.\134\
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\132\ See generally FICC Disclosure Framework at 62, Exchange
Act Release No. 82779 (Feb. 26, 2018) (File No. SR-FICC-2018-801)
(describing both the sensitivity-based VaR model that would use a
third party vendor to supply security-level risk sensitivity data
and relevant historical risk factor time series data and the use of
the Margin Proxy in the event of a disruption at FICC's third-party
vendor, as well as the procedures that would govern in the event
that the vendor fails to deliver such data).
\133\ See, e.g., FICC Disclosure Framework at 64; 81 FR 95669
(Dec. 28, 2016) (describing both the sensitivity-based VaR model
that would use a third party vendor to supply security-level risk
sensitivity data and relevant historical risk factor time series
data and the use of the Margin Proxy in the event of a disruption at
FICC's third-party vendor, as well as the procedures that would
govern in the event that the vendor fails to deliver such data);
Exchange Act Release No. 92145 (June 10, 2021), 86 FR 32079 (June
16, 2021) (File No. SR-FICC-2020-804) (describing the calculation of
the Minimum Margin Amount).
\134\ See NSCC Disclosure Framework, supra note 127, at 58-61.
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C. Consideration of Benefits and Costs as Well as the Effects on
Efficiency, Competition, and Capital Formation
The following discussion sets forth the potential economic effects
stemming from adopting the proposed rule and amendments, including the
effects on efficiency, competition, and capital formation.
The benefits and costs discussed in this subsection are relative to
the economic baseline discussed previously, which includes the covered
clearing agencies' current RWPs and their current risk-based margin
practices. In some instances, the proposals reflect what the Commission
understands to be current practices at many covered clearing agencies.
To the extent that a covered clearing agency's current practices align
with part of a proposed rule or amendment, the covered clearing agency,
its participants, and the broader market would have already absorbed
the benefits and costs of that part of the proposed rule and amendments
and, therefore, might not experience any direct benefits or costs if
the Commission adopts that part of the new rule or amendments. In this
case, the Commission believes that imposing these requirements on
covered clearing agencies that have largely implemented the proposals
in this release would essentially codify these elements and ensure that
the covered clearing agencies are required to continue to include these
elements in their RWPs or risk-based margin systems. Additionally, the
proposed rule and amendments would ensure that the RWPs and risk-based
margin systems of any new covered clearing agency would be required to
have RWPs that contain all of the proposed elements.
Disruptions in the operations at any of the covered clearing
agencies would cause significant negative externalities in the markets
they serve, which would likely spill over into other markets. These
ripple effects would negatively affect numerous market participants,
including investors. Because covered clearing agencies may not
internalize the full cost of these externalities, their investments in
their RWPs and risk-based margin systems might be suboptimal from a
public welfare perspective. An important benefit of the proposed rule
and amendments is that they require covered clearing agencies to
maintain a higher investment than they might otherwise maintain.
The Commission recognizes that the existing rules allow a degree of
discretion that would be reduced or eliminated by the proposals. Even
if covered clearing agencies would not need to change their current
practices significantly to align with the proposals, if adopted, they
would incur indirect costs in terms of less discretion in the future.
For example, a covered clearing agency that currently plans an annual
review of its RWP would lose the ability to change to a biennial review
in the future.
The costs discussed in this subsection would be borne by covered
clearing agencies and their participants. For covered clearing agencies
owned by participants, all of the costs will ultimately be passed on to
participants because they are residual beneficiaries of the covered
clearing agency. For covered clearing agencies not owned by
participants, the level of pass-through would depend upon a number of
factors, including the level of competition among clearing agencies. In
both cases, the participants will likely pass through some of these
costs to their customers, the level of which will depend on factors
such as the customers' sensitivities to costs and the amount of
competition between participants for customers. Generally, if a covered
clearing agency does not face significant competition, it will have an
incentive to absorb part of the cost increase. On the other hand, in
the extreme case of a perfectly competitive market, there are no
economic profits and price equals marginal costs so an increase in cost
could be fully passed through to the customer.\135\ If the Commission
adopts the proposed rule and amendments, to the extent that a covered
clearing agency's current practices are misaligned with a proposed rule
or amendment, the covered clearing agency, as discussed in the
remainder of this subsection, would need to modify its RWP or risk-
based margin system in order to comply with the new standards. The
resulting benefits and costs would increase with the amount of
modifications. Because the Commission has previously stated that RWPs
are rules for purposes of a covered clearing agency's SRO obligations,
and because the covered clearing agencies already have filed such RWPs
with the Commission for approval, any such modifications would be
subject to Commission review and public comment pursuant to Rule 19b-
4,\136\ the costs of which are included in the cost estimates presented
in this subsection. Similarly, the Commission considers changes to a
covered clearing agency's risk-based margin system as part of the SRO
rule filing process, making any such modifications also subject to
Commission review and public comment pursuant to Rule 19b-4, the costs
of which are included in the cost estimates presented in this
subsection. Adopting the proposed rule and amendments could also cause
a clearing agency to make different business decisions, such as capital
expenditure decisions, that may not be subject to the same Commission
review process.
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\135\ More specifically, the market clearing quantity of the
good or service supplied will adjust and the extent of industry-wide
cost pass-through in a perfectly competitive market depends on the
elasticity of demand relative to supply. The more elastic is demand,
and the less elastic is supply, the smaller the extent of pass-
through, all else being equal. See RBB Economics, Cost Pass-Through:
Theory, Measurement and Potential Policy Implications, 4 (Feb.
2014), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/320912/Cost_Pass-Through_Report.pdf.
\136\ Supra note 115.
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1. Proposed Rule 17ad-26
Proposed Rule 17ad-26 sets forth nine elements that must be
included in a covered clearing agency's RWP. The remainder of this
subsection discusses each of these elements in turn, explaining how
some would make RWPs more effective in guiding the covered clearing
agencies during times of recovery or wind-down while others would help
participants and regulators better understand how the covered clearing
agencies will prepare for and respond to stress. The Commission
believes that this proposed rule would reduce systemic risk to the
extent that it reduces the risk of unsuccessful recoveries, disorderly
wind-downs, and negative spillovers to other clearing
[[Page 34733]]
agencies and to other markets.\137\ These benefits are expected to
increase with the amount of change each covered clearing agency makes
to align itself with the rule. Proposed Rule 17ad-26 would require
covered clearing agencies to modify their RWPs to the extent their RWPs
do not already align with the proposed rule. The Commission anticipates
that these changes may result in the covered clearing agencies being
more aware of potential risks and the associated costs of certain
factors under their control, which could, in turn, lead to the covered
clearing agency making changes to certain business practices.
---------------------------------------------------------------------------
\137\ See supra note 106 and accompanying text.
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a. Critical Clearing and Settlement Services
Proposed Rule 17ad-26(a)(1) requires RWPs to identify and describe
their critical payment, clearing, and settlement services and to
address how the covered clearing agency would continue to provide such
critical services in the event of a recovery and during an orderly
wind-down, including the identification of the staffing necessary to
support such critical services and analysis of how such staffing would
continue in the event of a recovery and during an orderly wind-down.
Covered clearing agencies play an important role as financial
market utilities. By virtue of the unique services that they offer, the
network effects under which they operate, and their specialization by
asset class, any failure of the covered clearing agency to provide
their critical services would have implications with respect to
financial stability.\138\ Policies and procedures that increase the
resiliency of covered clearing agencies have, as a result, direct
benefits on the stability of U.S. financial markets.
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\138\ Five of the seven covered clearing agencies have been
designated by the Financial Stability Oversight Council as
Significantly Important Financial Market Utilities (``SIFMUs'')
because the failure or disruption to the functioning of the
financial market utility could create or increase the risk of
significant liquidity or credit problems spreading among financial
institutions or markets. See Designations, U.S. Dep't Treasury,
available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.
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Each of the covered clearing agencies' RWPs currently identifies
its critical services, as stated in the baseline analysis, but they
differ in the degree to which they address continuation.
Markets in which the dominant covered clearing agencies are
currently less comprehensive in addressing continuation in their RWPs
are expected to benefit from this requirement because they would be
required to work through and memorialize in their RWPs how the clearing
agency would continue to provide its critical services in case of a
recovery or during an orderly wind-down.
As mentioned in the economic baseline section, none of the covered
clearing agencies currently identifies the staffing necessary to
support critical services or provides in their RWPs analyses of how
such staffing would continue in the event of a recovery and during an
orderly wind-down. Because covered clearing agencies do not currently
identify the staffing necessary to support critical services and how
such staffing would continue during times of crisis, this new
requirement likely would provide benefits to the market. Forward-
looking analyses around issues such as potential staffing shortfalls
and employment agreement terms that are robust regardless of the
financial situation of the covered clearing agency should provide each
covered clearing agency with additional certainty and clarity around
the presence of key personnel that would deploy the RWPs and supervise
their implementation.
Similarly, the current lack of these staffing analyses creates
costs that covered clearing agencies would have to assume, in terms of
both drafting the analyses and implementing the resulting conclusions
from the analyses. For instance, a covered clearing agency may conclude
when undertaking this analysis that key personnel could easily leave
their organization in case of a recovery or wind-down scenario. In that
case, the covered clearing agency may wish to incur the extra costs
attendant to strengthening its employee agreements so that key
employees remain at the covered clearing agency during a sale or
transfer of one or more of its critical services to another entity or a
receiver.
b. Service Providers
Proposed Rule 17ad-26(a)(2) requires RWPs to identify and describe
any service providers upon which the covered clearing agency relies to
provide the services identified in Rule 17ad-26(a)(1), specify to what
services such service providers are relevant, and address how the
covered clearing agency would ensure that such service providers would
continue to perform in the event of a recovery and during an orderly
wind-down. As stated in the baseline analysis, the RWPs differ in their
degree of alignment with this proposed rule and the level of
descriptiveness of service providers. The markets that likely would
benefit the most from this proposed requirement are the ones in which
the dominant covered clearing agencies' RWPs are currently the least
comprehensive in identifying and describing the required service
provides and identifying how those service providers will perform in
the event of a recovery and during an orderly wind-down, as they would
be better prepared to manage and negotiate with service providers to
ensure their continued performance. Covered clearing agencies that make
more changes in identifying the service providers and the critical
services provided by each critical service provider likely will bring
more benefits to the markets they serve by putting themselves in a
better position to manage their service providers during a recovery or
orderly wind-down.
Each covered clearing agency would incur costs to bring its RWP
into alignment with the proposed rule. These alignment costs would
depend on the extent of the enhancements the covered clearing agency
makes to its RWP, including any contractual changes with the service
providers.
c. Scenarios
Proposed Rule 17ad-26(a)(3) requires RWPs to identify and describe
scenarios that may potentially prevent the covered clearing agency from
being able to provide its critical payment, clearing, and settlement
services as a going concern, including uncovered credit losses,
uncovered liquidity shortfalls, and general business losses. As stated
in the baseline analysis, each of the covered clearing agencies' RWPs
currently identifies and describes, to varying degrees, certain
relevant scenarios. The Commission believes that the more significant
benefits of being required to identify these scenarios would accrue to
those markets in which the dominant covered clearing agencies lack
breadth and specificity in identifying and describing their scenarios.
By better understanding the circumstances that could threaten their
ability to provide their critical services, these covered clearing
agencies can take steps to reduce the likelihood of these scenarios
and, should they materialize, be better prepared to achieve a recovery
or orderly wind-down.
Each covered clearing agency would incur costs to bring its RWP
into alignment with the proposed rule. The alignment costs would depend
on the extent of the enhancements the covered clearing agency makes to
its RWP. The Commission believes that the costs to modify plans that
require changes, including those that need to be
[[Page 34734]]
expanded to include additional scenarios, would be modest but would
vary across covered clearing agencies because of differences in the
markets and participants they serve.
d. Criteria That Would Trigger Implementation
Proposed Rule 17ad-26(a)(4) requires RWPs to identify and describe
criteria that would trigger the implementation of the RWPs. As stated
in the baseline analysis, each covered clearing agency's RWP identifies
and describes, to varying degrees, criteria that would trigger the
implementation of a recovery or orderly wind-down. The Commission
believes that the largest benefits of this rule likely would accrue to
the markets in which the dominant covered clearing agencies that
currently have the least comprehensive RWPs in identifying and
describing appropriate triggers. The ex ante identification and
description of triggers should have the benefit of being a disciplining
mechanism that signals when the covered clearing agency may act during
periods of market stress.\139\ The Commission further believes that the
ex ante identification and description of triggers would lead covered
clearing agencies to anticipate and prepare for market stress or other
events that could lead to a recovery or wind-down.
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\139\ Ansgar Walther and Lucy White, Rules Versus Discretion in
Bank Resolution, Banque de France (Mar. 25, 2016), available at
https://acpr.banque-france.fr/sites/default/files/medias/documents/waltherwhite.pdf (``[T]he optimal regulatory arrangement is a
combination of rules and discretion: Discretion when public
information is relatively benign, and rules when public information
is more negative.'').
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Each covered clearing agency would incur costs to bring its RWP
into alignment with the proposed rule. The alignment costs would depend
on the extent of the enhancements the covered clearing agency makes to
its RWP.
e. Rules, Policies, Procedures, and Other Tools or Resources
Proposed Rule 17ad-26(a)(5) requires RWPs to identify and describe
the rules, policies, procedures, and any other tools or resources the
covered clearing agency would use in a recovery or orderly wind-down to
address the scenarios identified in the RWP. The Commission believes
that the markets that likely would benefit the most from this
requirement are the ones in which the dominant covered clearing
agencies have the least comprehensive RWPs in describing how the rules,
policies, procedures, tools and other resources would be used during a
recovery or wind-down. Making these changes to their RWPs should enable
the covered clearing agencies to more fully anticipate how future
crises might impact their operations, which should enhance their
ability to respond and accordingly decrease the expected costs borne by
covered clearing agencies, the participants, and other stakeholders in
future crises. For example, if a covered clearing agency determines
that it needs a new rule to respond to a specific scenario and if that
scenario ever materializes, the covered clearing agency should be
better positioned to respond appropriately to it.
Each covered clearing agency would incur costs to bring its RWP
into alignment with the proposed rule. The alignment costs would depend
on the extent of the enhancements the covered clearing agency makes to
its RWP. Covered clearing agencies that determine that they need to
include more responses, different resources, or better descriptions
would incur more costs as they make appropriate revisions to their RWPs
and their resources. The Commission believes that the costs to modify
plans that require changes, including those that need to be expanded,
would increase in the number of required changes such as the number of
new rules the covered clearing agency is required to adopt.
f. Procedures To Ensure Timely Implementation
Proposed Rule 17ad-26(a)(6) requires RWPs to address how the rules,
policies, procedures, and any other tools or resources identified in
17ad-26(a)(5) would ensure timely implementation of the RWP. As stated
in the baseline analysis, each RWP mentions the concept of timeliness
in either recovery or wind-down, but most RWPs do not list specific
procedures to ensure timely implementation of itself. A key benefit of
this rule is that covered clearing agencies will address in their RWPs
how the RWP will be implemented in a timely manner when the need
arises. The Commission believes that a timely start will increase the
chance that the covered clearing agency is able to address the
underlying problem in a timely manner and with lower costs to the
various stakeholders. The benefits of this rule likely would accrue
primarily to the markets in which the dominant covered clearing
agencies add more or better rules, policies, procedures, tools, or
other resources to ensure timely implementation of their RWPs.
Each covered clearing agency would incur costs to bring its RWP
into alignment with the proposed rule. The alignment costs would depend
on the extent of the enhancements the covered clearing agency makes to
its RWP. The Commission believes that the costs to modify plans that
require changes, including those that need to be expanded to include
additional rules, policies, procedures, or any other tool or resource
would be modest because current RWPs already place some focus on
timeliness as a desired feature.
g. Procedures for Informing the Commission
Proposed Rule 17ad-26(a)(7) requires RWPs to include procedures for
informing the Commission as soon as practicable when the covered
clearing agency is considering initiating a recovery or orderly wind-
down. As stated in the baseline analysis, each RWP generally refers to
informing the Commission, but not every plan includes specific
procedures, and some plans include procedures for informing the
Commission after initiating a recovery or orderly wind-down. Providing
notice to the Commission may help ensure that the Commission has the
opportunity to consider whether a covered clearing agency engages the
recovery or wind-down event consistent with its established RWPs and
the requirements of Commission rules to help mitigate the potential
onward transmission of system risk and may help ensure that a wind-
down, if necessary, is orderly. These benefits likely would accrue
primarily to the markets in which the dominant covered clearing
agencies currently do not have procedures in place for informing the
Commission as soon as practicable.
Each covered clearing agency would incur costs to bring its RWP
into alignment with the proposed rule. The alignment costs would depend
on the extent of the enhancements the covered clearing agency makes to
its RWP. The Commission believes that the costs to modify plans that
require changes, including those that need to be expanded to include
additional procedures would be modest because current RWPs already
place some focus on informing the Commission.
h. Testing
Proposed Rule 17ad-26(a)(8) requires RWPs to include procedures for
testing the covered clearing agency's ability to implement the recovery
and wind-down plans at least every twelve months, including by
requiring the covered clearing agency's participants and, when
practicable, other stakeholders to participate in the testing of its
plans, providing for reporting the results of the testing to the
covered clearing agency's board of directors and senior management, and
specifying the procedures for, as appropriate,
[[Page 34735]]
amending the plans to address the results of the testing. As stated in
the baseline analysis, only a few RWPs refer to plan testing. The
Commission believes that the markets that likely would benefit the most
from this requirement are those in which the dominant covered clearing
agencies have the least comprehensive policies around testing in their
RWPs because those covered clearing agencies would create procedures
for more frequent testing, and those changes should help ensure that
those RWPs remain current and take into account changing system and
market conditions.
The Commission believes that the costs to start plan tests every
twelve months will not be large for the four covered clearing agencies
that do not mention plan testing in their RWPs because they might be
able to leverage existing requirements around default management
testing.\140\ On a preliminary basis, the Commission believes that the
corresponding testing costs for the covered clearing agencies'
participants and, when practicable, other stakeholders likely will be
moderate, in part because the covered clearing agencies are already
required to include such entities in their default procedures testing
under Rule 17Ad-22(e)(13). The costs for any subsequent RWP amendments
likely will be small.
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\140\ See 17 CFR 240.17Ad-22(e)(13).
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i. Plan Reviews
Proposed Rule 17ad-26(a)(9) requires RWPs to include procedures
requiring review and approval by the board of directors of the plans at
least every twelve months or following material changes to the covered
clearing agency's operations that would significantly affect the
viability or execution of the plans, with such review informed, as
appropriate, by the covered clearing agency's testing of the plans. As
stated in the baseline analysis, each RWP makes reference to periodic
plan reviews, typically annually or biennially.
The Commission believes that the markets that likely would benefit
the most from this requirement are those in which the dominant covered
clearing agencies currently have the least comprehensive RWPs in
addressing plan review because they would create more frequent
procedures for review, and more frequent reviews, in turn, should help
ensure that RWPs remain current and take into account any changes to
the covered clearing agencies' operations.
Each covered clearing agency would incur costs to bring its RWP
into alignment with the proposed rule. The alignment costs would depend
on the extent of the enhancements the covered clearing agency makes to
its RWP. The Commission believes that the costs to modify plans that
have biennial reviews to replace them with annual reviews will be
modest. The costs to review RWPs after material changes to the covered
clearing agencies' operations will depend on the nature and number of
material changes that result in new reviews.
j. Burden Estimate Associated With Proposed Rule 17ad-26
The Commission has estimated the initial and ongoing cost burden of
adopting proposed rule 17ad-26. Accordingly, the Commission
preliminarily believes that eight respondent clearing agencies would
incur an aggregate one-time burden of approximately 960 hours (or 120
hours each) to review and update existing policies and procedures. The
cost estimate associated with the initial burden is based on 20 hours
for an assistant general counsel at $551 per hour; 50 hours for a
compliance attorney at $432 per hour; 35 hours for a business risk
analyst at $ 235 per hour; and 15 hours for a senior risk management
specialist at $423 per hour. The initial burden for one covered
clearing agency is $47,190, and it is $377,520 for all eight covered
clearing agencies.
Proposed Rule 17ad-26 would also impose ongoing burdens on a
respondent covered clearing agency. The proposed rule would require
ongoing monitoring and compliance activities with respect to the
written policies and procedures created in response to the proposed
rule. Based on the Commission's previous estimates for ongoing
monitoring and compliance burdens with respect to existing 17 CFR
240.17Ad-22(e)(2) (``Rule 17Ad-22(e)(2)''),\141\ the Commission
preliminarily estimates that the ongoing activities required by
proposed Rule 17ad-26 would impose an aggregate annual burden on
respondent covered clearing agencies of 320 hours (40 hours for each
covered clearing agency). The ongoing burden is based on 10 hours for
an assistant general counsel at $551 per hour and 30 hours for a
compliance attorney at $432 per hour, totaling $18,470 per covered
clearing agency and $147,760 for all eight covered clearing
agencies.\142\
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\141\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70892 (discussing Rule 17Ad-22(e)(2)).
\142\ All values were determined from SIFMA's October 2013
values (see, Management and Professional Earnings in the Security
Industry--2013 (Oct. 7, 2013) and adjusted to March 2023 values
using the Bureau of Labor Statistics' CPI Inflation Calculator,
available at https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------
2. Amendments to Rule 17Ad-22(e)(6)
Rule 17Ad-22(e)(6) requires covered clearing agencies that provide
central counterparty services to establish a risk-based margin system
to manage their credit exposures to their participants. The proposed
amendment to Rule 17Ad-22(e)(6)(ii) will strengthen the requirements:
(a) by requiring that covered clearing agencies monitor intraday risk
exposures to their participants on an ongoing basis, and (b) by
providing additional specificity to the circumstances in which covered
clearing agencies should have policies and procedures in place to make
intraday margin calls. The proposed amendment to Rule 17Ad-22(e)(6)(iv)
will amend the requirements by ensuring covered clearing agencies can
meet their Rule 17Ad-22(e)(6) obligations when their price data and
substantive inputs are not available by including procedures to use
price data or substantive inputs from an alternate source or to use an
alternate risk-based margin system that does not similarly rely on the
unavailable or unreliable substantive inputs.
a. Monitoring Exposure and Intraday Margin Calls
The ability to assess intraday margin calls is an important tool
that covered clearing agencies have to manage their credit exposures to
their participants. The proposed amendment to Rule 17Ad-22(e)(6)(ii)
requires covered clearing agencies to monitor exposure on an ongoing
basis and to make intraday margin calls as frequently as circumstances
warrant, including when risk thresholds specified by the covered
clearing agency are breached or when the products cleared or markets
served display elevated volatility, which would help reduce, but not
eliminate, their credit exposure to their participants.
Each covered clearing agency would have to determine how to
operationalize ``on an ongoing basis'' and ``as frequently as
circumstances warrant'' given its own market and participants. Each
covered clearing agency would also need to ensure that its systems are
capable of monitoring exposure and making margin calls at those
frequencies. As discussed in the baseline analysis, each covered
clearing agency is already capable of monitoring exposure and
collecting margin on an intraday basis; nevertheless, some covered
clearing agencies might need to
[[Page 34736]]
make changes to align with the proposed amendment such as increasing
the frequency of exposure monitoring and improving their information
technology so they can process more frequent margin calls.
To the extent a covered clearing agency currently aligns with the
proposed amendment it will not experience new benefits from its
adoption. Nevertheless, the proposed amendment will have incremental
benefits for the market because it will ensure that the covered
clearing agencies continue to meet the standard of the proposed
amendment that they are currently aligned with and that any new covered
clearing agency that provides central counterparty services meets the
same standard.
The Commission further believes that the costs to modify the risk-
based margin systems that require changes would be modest because
covered clearing agencies have already incurred the initial costs of
building their risk management infrastructure, including the ability to
make intraday margin calls based on some sort of intraday monitoring.
Once those costs have been incurred and amortized, the variable costs
of modifying the frequency of the monitoring, and any additional margin
calls, are likely low.
To the extent that the proposed amendment results in covered
clearing agencies making more unanticipated margin calls, participants
may face increased liquidity-management costs. This may potentially
result in procyclicality problems that exacerbate market stress: margin
calls during periods of declining asset prices may cause participants
to sell assets, putting further negative pressure on asset prices and
the market that may spill over into other covered clearing agencies and
their markets. This stress may be transmitted by participants that are
members of more than one covered clearing agency when, for example, a
margin call in one market makes a participant sell assets in a
different market. The stress may also be transmitted by assets that are
linked between markets, such as the link between option prices (OCC)
and equity prices (NSCC). Various industry participants have expressed
concerns that excessive intraday margin calls, especially unanticipated
ones, have the potential to exacerbate liquidity issues for clearing
members who would have to post new liquid collateral to the covered
clearing agency with little notice.\143\ On the other hand, such
intraday margin calls reduce credit risk during periods of market
stress.
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\143\ Revisiting Procyclicality: The Impact of the COVID Crisis
on CCP Margin Requirements, Futures Indus. Ass'n (Oct. 2020),
available at https://www.fia.org/sites/default/files/2020-10/FIA_WP_Procyclicality_CCP%20Margin%20Requirements.pdf.
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b. Reliable Sources of Timely Price Data and Other Substantive Inputs
The Commission believes that every covered clearing agency has a
risk-based margin system that largely aligns with the proposed
amendment to Rule 17Ad-22(e)(6)(iv), with the exception of at least one
covered clearing agency that likely would need to implement additional
changes to its risk-based margin system to ensure that it could
continue to meet its obligations under Rule 17Ad-22(e)(6) in the event
of the unavailability of a substantive inputs from a third party. If
that one covered clearing agency were to lose access to its price data
or other inputs, it may be unable to perform its critical payment,
clearing, and settlement services, and that, in turn, may force it into
a wind-down, which may have negative implications for its participants
and the broader financial system.
The incremental benefits of these proposed amendments beyond the
baseline lie primarily in expanding the scope of this rule beyond price
data and further specifying the nature of the procedures that a covered
clearing agency uses in the event that such data or inputs are not
readily available or reliable and in ensuring that any new covered
clearing agency keeps that same standard of the proposed amendment. The
Commission is unable to estimate the specific quantitative benefit of
that covered clearing agency meeting the proposed amendment, but it
believes that it is substantial because the proposed amendment reduces
the risk that the covered clearing agency fails to provide its critical
payment, clearing, and settlement services in future periods of high
market stress. For example, the Options Clearing Corporation cleared a
year-to-date average daily volume of 46.3 million contracts through
March 2023, and DTCC reported that the average daily cleared broker-to-
broker transactions was $2 trillion in 2021.\144\ Assuming that a price
data shortage happens by the end of a regular trading day, when there
is increased activity in the financial markets,\145\ even a one-hour
price data feed malfunction could affect the normal processing of
millions of options contracts and hundreds of billions of dollars of
equity transactions.
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\144\ See OCC Clears Over 1B Total Contracts in March 2023,
Highest Month on Record and up 12.2% Year-Over-Year, supra note 103
and DTCC 2021 Annual Report, supra note 100.
\145\ Trading after the opening bell and right before the
closing bell are usually the two busiest trading periods for both
equities and equity options.
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Moreover, a price data shortage in one covered clearing agency that
is closely interconnected to another covered clearing agency \146\
could result in spill-over effects that spread to that other covered
clearing agency, magnifying the effect of the initial price data
shortage.
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\146\ For instance, OCC and NSCC have an information-sharing
agreement to facilitate the settlement and delivery of physically-
settled stock options cleared by OCC via NSCC. See Securities
Exchange Act Release No. 37731 (September 26, 1996), 61 FR 51731
(October 3, 1996) (SR-OCC-96-04 and SRNSCC-96-11) (Order Approving
Proposed Rule Change Related to an Amended and Restated Options
Exercise Settlement Agreement Between the Options Clearing
Corporation and the National Securities Clearing Corporation);
Securities Exchange Act Release No. 43837 (January 12, 2001), 66 FR
6726 (January 22, 2001) (SR-OCC-00-12) (Order Granting Accelerated
Approval of a Proposed Rule Change Relating to the Creation of a
Program to Relieve Strains on Clearing Members' Liquidity in
Connection With Exercise Settlements); and Securities Exchange Act
Release No. 58988 (November 20, 2008), 73 FR 72098 (November 26,
2008) (SR-OCC-2008-18 and SR-NSCC-2008-09) (Notice of Filing and
Order Granting Accelerated Approval of Proposed Rule Changes
Relating to Amendment No. 2 to the Third Amended and Restated
Options Exercise Settlement Agreement).
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c. Burden Estimate Associated With Proposed Amendments to Rule 17Ad-
22(e)(6)
Overall, the Commission preliminarily believes that the estimated
burdens for the proposed amendment to Rule 17Ad-22(e)(6) may require a
respondent covered clearing agency to make fairly substantial changes
to its policies and procedures. Based on the similar policies and
procedures requirements and the corresponding burden estimates
previously made by the Commission for several rules in the Covered
Clearing Agency Standards where the Commission anticipated similar
burdens,\147\ the Commission preliminarily estimates that respondent
covered clearing agencies would incur an aggregate one-time burden of
approximately 903 hours (or 129 hours per covered clearing agency) to
review existing policies and procedures and create new policies and
procedures. The initial cost is based on 20 hours for an assistant
general counsel at $551 per hour; 40 hours for a compliance attorney at
$432 per hour; 12 hours for a computer operations manager at $521
[[Page 34737]]
per hour; 20 hours for a senior programmer at $392 per hour; 25 hours
for a senior risk management specialist at $423 per hour; and 12 hours
for a senior business analyst at $324 per hour. In total, the initial
burden is estimated to be $56,855 per covered clearing agency or
$397,985 for all seven covered clearing agencies combined.
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\147\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70892 and 70895-97 (discussing Rules 17Ad-22(e)(2) and (13)).
Although the proposed rule amendment is with respect to Rule 17Ad-
22(e)(6), the Commission believes that these Rules present the best
overall comparison to the current proposed rule amendment, in light
of the nature of the changes needed to implement the proposal here
and what was proposed in the Covered Clearing Agency Standards.
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The proposed amendments to Rule 17Ad-22(e)(6) would also impose
ongoing burdens on the covered clearing agencies. The proposed rule
would require ongoing monitoring and compliance activities with respect
to the written policies and procedures created in response to the
proposed rule. Based on the similar reporting requirements and the
corresponding burden estimates previously made by the Commission for
several rules in the Covered Clearing Agency Standards where the
Commission anticipated similar burdens,\148\ the Commission
preliminarily estimates that the ongoing activities required by the
proposed amendments to Rule 17Ad-22(e)(6) would impose an aggregate
annual burden on covered clearing agencies of 595 hours (or 85 hours
per covered clearing agency). The cost of the ongoing burden was
estimated assuming 25 hours for a compliance attorney at $432 per hour;
40 hours for a business risk analyst at $235 per hour; and 20 hours for
a senior risk management specialist at $423 per hour, totaling $30,660
per covered clearing agency or $214,620 for all seven covered clearing
agencies combined.\149\
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\148\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70893 and 70895-96 (discussing Rules 17Ad-22(e)(6) and (13)).
\149\ All values were determined from SIFMA's October 2013
values (see, Management and Professional Earnings in the Security
Industry--2013 (Oct. 7, 2013) and adjusted to March 2023 values
using the Bureau of Labor Statistics' CPI Inflation Calculator,
available at https://www.bls.gov/data/inflation_calculator.htm.
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3. Efficiency, Competition, and Capital Formation
a. Efficiency
The Commission believes that the proposed rule and amendments, if
adopted, may improve informational and productive efficiency in the
market for cleared securities.
Covered clearing agencies current policies and procedures largely
align with proposed Rule 17ad-26. Therefore, the Commission does not
expect substantive efficiency changes due to the proposed new rule.
The proposed amendment to Rule 17Ad-22(e)(6)(ii) would benefit
participants by providing increased specificity around the methods used
by covered clearing agencies to assess intraday margin calls, thus
enabling more efficient planning in the use of scarce margin funds.
The proposed amendment to Rule 17Ad-22(e)(6)(iv) would increase
informational efficiency during periods when price data or other
substantive inputs are not available. Calculating margin and managing
and disseminating risk information are core competencies of all covered
clearing agencies, and various stakeholders rely on those data outputs.
By requiring secondary sources, the proposed amendment may mitigate the
reduction in efficiency that would otherwise happen when primary
sources fail at a covered clearing that does not have secondary
sources. Having the ability to continue calculating margin and
disseminating that information to participants even when primary data
are not available will prevent informational efficiency to decrease
when price data or other substantive inputs are not available.
b. Competition
As described in the baseline, covered clearing agencies are
currently not subject to strong competitive pressures given high start-
up costs, the network effects that are inherent in the clearing
business, and their subsequent historical consolidation by market
segments (options clearing for OCC, equities clearing for NSCC, fixed-
income clearing for FICC, etc.). In terms of potential new entrants in
the market for clearing and settlement services, the incremental costs
of the proposed Rule 17ad-26 and the proposed amendment to Rule 17Ad-
22(e)(6)(ii) are small and, therefore, unlikely to be noteworthy
barriers to entry. The amendment to Rule 17Ad-22(e)(6)(iv) may have a
modest effect on competition because they are start-up costs that a new
competitor would have to assume to enter into the covered clearing
agency market.
c. Capital Formation
The Commission expects the effects of the proposed rule and
amendments on capital formation to be second-order because the proposal
focuses on issues related to secondary market trading and not on issues
related to primary market issuances. To the degree that market
participants view equity and fixed-income covered clearing agencies as
more reliable venues for risk transfer, they may increase their
activity and therefore signal a demand for more capital-creating
securities.
D. Reasonable Alternatives to the Proposed Rule and Amendments
1. Establish Precise Triggers for Implementation of RWPs Across Covered
Clearing Agencies
Instead of requiring covered clearing agencies to identify and
implement their own triggers to resolution and wind-down procedures,
the Commission could adopt a more prescriptive approach and determine
specific triggers that covered clearing agencies would be required to
follow. For example, the Commission could specify that exhausting
prefunded financial resources in the waterfall structure of a covered
clearing agency would immediately trigger a recovery or wind-down
procedure.\150\ Alternatively, the Commission could require a trigger
when unfunded commitments to the CCP are called upon and reach a
specific dollar number.
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\150\ See John W. McPartland and Rebecca Lewis, The Goldilocks
Problem: How to Get Incentives and Default Waterfalls ``Just
Right'', 41 Econ. Persps. 1, 2 (Mar. 2017), available at https://www.chicagofed.org/publications/economic-perspectives/2017/1-mcpartland-lewis (``All CCPs have a default waterfall that provides
financial resources for managing a clearing member default. The
waterfall consists of both prefunded resources and unfunded
obligations. When a clearing member defaults, the CCP must continue
to meet defaulter's financial obligations, whose performance it
guarantees, to the non-defaulting clearing members, attempt to find
clearing members willing accept the defaulter's clients, and return
to a matched book status by liquidating or auctioning off the
defaulter's positions. If the CCP cannot find other clearing members
willing to onboard the defaulter's clients, then the clients'
positions must be liquidated in order to restore the CCP to a
matched book status. The default waterfall provides funding to cover
the cost of meeting the defaulter's obligations and liquidating the
defaulter's positions, as well as, if necessary, those of its
clients.'').
---------------------------------------------------------------------------
This alternative would harmonize triggers across covered clearing
agencies and would create a single standard that market participants
could rely on, eliminating any confusion or ambiguity attendant to
different triggers. Nevertheless, covered clearing agencies are active
in different markets (equities, bonds, options, CDS, etc.), have
different organizational structures, and focus on different risks. As
an example, one of the OCC's focus areas is monitoring option
sensitivities, and, as a result, its margin models and waterfall
structure are responsive to that consideration while FICC, on the other
hand, focuses on duration and convexity so its waterfall structure is
more responsive to those risks. The Commission preliminarily believes
that having this more prescriptive approach would be unresponsive to
the characteristics of each market and could expose covered clearing
agencies to
[[Page 34738]]
recovery or wind-down triggers that are not aligned with the actual
risks.
2. Establish Specific Scenarios and Analyses
Instead of requiring covered clearing agencies to identify
scenarios that may prevent the covered clearing agency from being able
to provide its critical payment, clearing, and settlement services, the
Commission could adopt a more prescriptive approach and identify
specific scenarios in new Rule 17ad-26 that each covered clearing
agency must include in its RWP. For example, the Commission could
identify the scenario of the default of the covered clearing agency's
one or two largest participants and scenarios of specific business
risks such as the default of a custodian bank or a significant cyber-
attack.\151\ The Commission could also require more detail regarding
how each the covered clearing agency analyzes these scenarios.\152\
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\151\ Additional such scenarios that could be enumerated in new
Rule 17ad-26 could include any or all of the following scenarios:
(A) credit losses or liquidity shortfalls created by single and
multiple clearing member defaults; (B) liquidity shortfall created
by a combination of clearing member default and a failure of a
liquidity provider to perform; (C) settlement bank failure; (D)
custodian or depository bank failure; (E) losses resulting from
investment risk; (F) losses from poor business results; (G)
financial effects from cybersecurity events; (H) fraud (internal,
external, and/or actions of criminals or of public enemies); (I)
legal liabilities, including those not specific to the covered
clearing agency's business as a covered clearing agency; (J) losses
resulting from interconnections and interdependencies among the
covered clearing agency and its parent, affiliates, and/or internal
or external service providers; (K) losses resulting from
interconnections and interdependencies with other covered clearing
agencies; and (L) losses resulting from issues relating to services
that are ancillary to the covered clearing agency's critical
services. It could also include scenarios involving multiple
failures (e.g., a member default occurring simultaneously, or nearly
so, with a failure of a service provider) that, in the judgment of
the covered clearing agency, are particularly relevant to its
business.
\152\ That is, the Commission could require in new Rule 17ad-26
that the RWP include an analysis that includes: (A) a description of
the scenario; (B) the events that are likely to trigger the
scenario; (C) the covered clearing agency's process for monitoring
for such events; (D) the market conditions, operational and
financial difficulties and other relevant circumstances that are
likely to result from the scenario; (E) the potential financial and
operational impact of the scenario on the covered clearing agency
and on its clearing members, internal and external service providers
and relevant affiliated companies, both in an orderly market and in
a disorderly market; and (F) the specific steps the covered clearing
agency would expect to take when the scenario occurs, or appears
likely to occur, including, without limitation, any governance or
other procedures that may be necessary to implement the relevant
recovery tools and to ensure that such implementation occurs in
sufficient time for the recovery tools to achieve their intended
effect.
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This alternative approach may reduce compliance costs by
establishing the precise scope of the rule which could allow covered
clearing agencies to tailor their RWPs to the enumerated requirements
for identifying scenarios and analyses. In addition, including elements
similar to those proscribed by other agencies that also regulate
several covered clearing agencies could result in certain efficiencies
and reduced costs for those covered clearing agencies. However, the
Commission preliminarily believes that the proposed approach retains
flexibility compared to this alternative by permitting the scenarios to
vary across covered clearing agencies because the underlying risks vary
across markets and participants. Because participants vary in size and
economic significance across covered clearing agencies, scenarios
invoking a pre-determined number of failures or fixed dollar amounts
may have significantly different effects in one covered clearing agency
than in another.
3. Establish Specific Rules, Policies, Procedures, Tools, and Resources
Instead of requiring covered clearing agencies to describes the
rules, policies, procedures, and any other tools or resources the
covered clearing agency would rely upon in a recovery or orderly wind-
down to address the scenarios identified in their RWPs, the Commission
could adopt a more prescriptive approach and identify in new Rule 17ad-
26 the rules, policies, procedures, and any other tools or resources
for all covered clearing agencies. The Commission could also require in
Rule 17ad-26 more detail regarding how a covered clearing agency
analyzes its rules, policies, procedures, tools, and resources.\153\
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\153\ For example, the Commission could require in new Rule
17ad-26 that the RWP include an analysis that includes: (i) a
description of the tools that the covered clearing agency would
expect to use in each scenario; (ii) the order in which each tool
would be expected to be used; (iii) the time frame within which the
tool would be used; (iv) the governance and approval processes and
arrangements within the covered clearing agency for the use of each
of the tools available, including the exercise of any available
discretion; (v) the processes to obtain any approvals external to
the covered clearing agency (including any regulatory approvals)
that would be necessary to use each of the tools available, and the
steps that might be taken if such approval is not obtained; (vi) the
steps necessary to implement the tools; (vii) the roles and
responsibilities of all parties, including non-defaulting
participants; (viii) whether the tool is mandatory or voluntary;
(ix) an assessment of the associated risks from the use of each tool
to non-defaulting clearing members and their customers, linked
financial market infrastructures, and the financial system more
broadly; and (x), for wind-down, an assessment of the likelihood
that the tool would result in orderly wind-down.
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This alternative approach may reduce compliance costs by
establishing the precise scope of the rule, which could allow covered
clearing agencies to tailor their RWPs to the enumerated requirements
for describing rules, policies, procedures, and other tools or
resources. In addition, including elements similar to those proscribed
by other agencies that also regulate several covered clearing agencies
could result in certain efficiencies and reduced costs for those
covered clearing agencies.\154\
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\154\ See supra section IV.B.2, supra footnotes 68 and 69, and
Request for Comments 15, 20-22, and 27.
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However, the Commission preliminarily believes that it is better to
permit the rules, policies, procedures, and any other tools or
resources to vary across covered clearing agencies because the
underlying risks and resources vary. For example, a covered clearing
agency that clears products of longer duration may have a greater need
for a tear-up tool that extinguishes a participant's positions in
certain circumstances than a covered clearing agency that clears
contracts with a relatively short settlement cycle. In addition, the
overall volume of transactions settled by a covered clearing agency may
affect the choice of its liquidity tools or resources, as the covered
clearing agency would have to ensure that it had sufficient liquidity
resources to complete settlement.
4. Require the Identification of Interconnections and Interdependencies
In addition to the requirements with respect to service providers
set forth in proposed Rule 17ad-26(a)(2), the Commission could require
that the covered clearing agency's RWP identify any financial or
operational interconnections and interdependencies that the covered
clearing agency has with other market participants. This would allow
for consideration of the impact of the multiple roles and relationships
that a single financial entity may have with respect to the covered
clearing agency including affiliated entities and third parties (e.g.,
a single entity that acts as both a clearing member and a settlement
bank and a liquidity provider).\155\
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\155\ More specifically, a bank holding company structure may
operate through a set of legal entities (e.g., a broker-dealer/
futures commission merchant separate from a bank separate from an
information technology service provider), each of which has
different relationships with the covered clearing agency.
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The Commission preliminarily believes that it is better not to
include this particular requirement. A covered clearing agency is
already required to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to identify, monitor, and
manage risks related to
[[Page 34739]]
any link the covered clearing agency establishes with one or more other
clearing agencies, financial market utilities, or trading markets.\156\
This requirement, in conjunction with the proposed requirement to
identify and describe service providers for critical services and to
specify to which critical service they relate, should accomplish the
same general objective, making this reasonable alternative inferior to
the proposed policy choice.
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\156\ 17 CFR 240.17Ad-22(e)(20).
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5. Establish a Specific Monitoring Frequency for Intraday Margin Calls
The proposed amendment to Rule 17Ad-22(e)(6)(ii) expressly
incorporates the requirement of intraday monitoring to ensure that such
monitoring is done on an ongoing basis. One reasonable alternative is
to prescribe the necessary frequency of monitoring as opposed to ``on
an ongoing basis''. For example, covered clearing agencies could be
required to monitor exposure every 5 or 15 minutes.
The Commission preliminarily believes, however, that monitoring on
an ongoing basis is preferable because a fixed, pre-specified
monitoring frequency may not be responsive enough to risk differences
that exist across the markets served by the covered clearing agencies
or to volatility changes that may happen through time.
6. Adopt Only Certain Elements of Proposed Rule 17ad-26
Instead of adopting all nine elements of proposed Rule 17ad-26, the
Commission could adopt a subset of the proposed elements. For example,
the Commission could drop the proposed element to identify service
providers or the proposed element to address how the covered clearing
agency would ensure that the service providers would continue to
perform in the event of a recovery and during and orderly wind-down.
Alternatively, the Commission could drop the proposed element for plan
review or the proposed element for plan testing.
The Commission preliminarily believes that it is better to adopt
all nine elements of proposed Rule 17ad-26 because each element helps
ensure that the plan is fit for purpose and provides sufficient
identification of how a covered clearing agency would operate in a
recovery and how it would handle an orderly wind-down.
7. Focus Intraday Margin Requirements on a Subset of Covered Clearing
Agencies
As an alternative to implementing the proposed intraday margin
amendments on a blanket basis, the Commission could adopt a more
tailored approach that imposes the requirements only on a subset of
covered clearing agencies that operate in certain markets such as those
markets with the highest levels of activity \157\ or those markets that
have only one covered clearing agency.\158\ A more tailored market-
level risk-based approach would adjust to the size and systemic
importance of each market, which would reduce the counter-factual
compliance costs for the covered clearing agencies in the markets with
less activity or with more than one available clearing agency.
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\157\ Activity could be measured in different ways, including
the number or value of cleared transactions. Average daily
settlement value is much higher in the equity market (NSCC) than it
is in the fixed income market (FICC). See DTCC, Annual Report
(2021), available at https://www.dtcc.com/~/media/files/downloads/
about/annual-reports/DTCC-2021-Annual-Report.
\158\ The following securities markets have only one central
counterparty: exchange-traded equity options (OCC), government
securities (FICC), mortgage-backed securities (FICC), and equity
securities (NSCC). The market for central securities depository
services has only one provider (DTC). The credit default swaps
market is served by LCH SA, ICC, and ICEEU.
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However, the Commission preliminarily believes that the proposed
amendments already include an appropriate adjustment for market-level
risk insofar as they would require the covered clearing agencies to
consider their own particular facts and circumstances when aligning
with the proposed rules. For example, the proposed amendment to Rule
17Ad-22(e)(6)(ii) would require covered clearing agencies to have the
operational capacity to make intraday margin calls ``as frequently as
circumstances warrant,'' and that frequency is expected to vary across
markets and through time.
E. Request for Comment
The Commission requests comment on all aspects of this initial
economic analysis, including the potential benefits and costs, all
effects on efficiency, competition (including any effects on barriers
to entry), and capital formation, and reasonable alternatives to the
proposed rule and amendments. We request and encourage any interested
person to submit comments regarding the proposed rule and amendments,
our analysis of the potential effects of the proposed rule and
amendments, and other matters that may have an effect on the proposed
rule and amendments. We request that commenters identify sources of
data and information as well as provide data and information to assist
us in analyzing the economic consequences of the proposed rule and
amendments and each reasonable alternative. We are also interested in
comments on the qualitative benefits and costs we have identified and
any qualitative benefits and costs we may have overlooked, including
those associated with each reasonable alternative. In addition, we are
interested in comments on any other reasonable alternative, including
any alternative that would distinguish covered clearing agencies based
on certain factors, such as organizational structure or products
cleared.
34. For covered clearing agencies that are currently able to
calculate and collect intraday margin, how costly is it to start
monitoring exposure on an ongoing basis, and how costly is it to make
intraday margin calls as frequently as circumstances warrant?
35. How quickly are participants able to satisfy margin calls
during periods of market calm? How quickly are participants able to
satisfy margin calls during periods of market stress?
36. How much more costly is it for participants to satisfy margin
calls in periods of market stress than in periods of markets calm? How
does an increase of margin call frequency affect costs for participants
in periods of market stress?
37. How much more costly is it for participants to satisfy margin
calls that are unanticipated than those that are anticipated? To what
extend do participants model when the covered clearing agency is likely
to make margin calls? How will the proposed amendments affect
participants' ability or incentive to model the timing of margin calls?
38. Should the length of time participants takes to satisfy a
margin call influence the decision of the covered clearing agency to
make a margin call? For example, should covered clearing agencies
refrain from issuing a new margin call before the participants have
responded to a prior margin call? Why or why not?
39. Do commenters believe that certain participants of covered
clearing agencies, including, for example, participants with less
capital or using smaller settlement banks, could face operational
challenges or pricing disadvantages, if proposed Rule 17Ad-22(e)(ii)
were to result in more frequent margin calls? If so, please explain
those challenges and disadvantages.
40. How costly is it for covered clearing agencies to secure the
use of
[[Page 34740]]
price data or substantive inputs from an alternate source? Must the
data or substantive inputs subscription be purchased outright, or can
the covered clearing agency, for a lower fee, purchase an option to use
the data and substantive inputs only when its primary sources prove
inadequate?
41. How costly is it for covered clearing agencies to secure the
use of alternate risk-based margin systems? Would covered clearing
agencies create their own alternate risk-based margin systems, or would
they secure access to one from a third party, and, if so, at what cost?
42. Are our estimates of the costs to secure alternate data inputs
reasonable? Why or why not?
43. Proposed Rule 17ad-26(a)(2) requires RWPs to address how the
covered clearing agency would ensure that service providers would
continue to perform in the event of a recovery and during an orderly
wind-down. Would it be better for RWPs to address instead how the
covered clearing agency would continue to provide its critical services
in the event of the non-performance of one or more service providers?
Why or why not?
44. How costly will it be for covered clearing agencies to test
their plans as required in proposed Rule 17ad-26(a)(8)? What costs will
be incurred by the participants and, when practicable, other
stakeholders? Will any of these costs substantively vary based on
whether or not the current RWP includes testing?
V. Paperwork Reduction Act
The proposed amendments to Rule 17Ad-22(e)(6) and Proposed Rule
17ad-26 contain ``collection of information'' requirements within the
PRA.\159\ The Commission is submitting the proposed collections of
information to the Office of Management and Budget (``OMB'') for review
in accordance with the PRA. The title of these information collections
is ``Clearing Agency Standards for Operation and Governance'' (OMB
Control No. 3235-0695). An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number.
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\159\ See 44 U.S.C. 3501 et seq.
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A. Proposed Amendment to Rule 17Ad-22(e)(6)
Respondents under this Rule 17Ad-22(e)(6) are covered clearing
agencies that provide central counterparty services, of which there are
currently six. The Commission anticipates that one additional entity
may seek to register as a clearing agency to provide CCP services in
the next three years, and so for purposes of this proposal the
Commission has assumed seven respondents.
The purpose of this collection of information is to enable a
covered clearing agency to have the authority and operational capacity
to monitor intraday exposures on an ongoing basis and to collect
intraday margin in certain specified circumstances. The collection is
mandatory. To the extent that the Commission receives confidential
information pursuant to this collection of information, such
information would be kept confidential subject to the provisions of
applicable law.\160\
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\160\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of
Information Act provides an exemption for trade secrets and
commercial or financial information obtained from a person and
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of
the Freedom of Information Act provides an exemption for matters
that are contained in or related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of an
agency responsible for the regulation or supervision of financial
institutions. See 5 U.S.C. 552(b)(8).
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The proposed amendments to Rule 17Ad-22(e)(6) would require a
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures. The proposed rule amendment contains
similar provisions to existing covered clearing agency rules (i.e.,
Rule 17Ad-22(e)(6)(ii) and (iv)), but would also impose additional
requirements that do not appear in the existing Rule 17Ad-22. As a
result, the Commission preliminarily believes that a respondent covered
clearing agency would incur burdens of reviewing and updating existing
policies and procedures to consider whether they comply with the
proposed amendment to Rule 17Ad-22(e)(6) and, in some cases, may need
to create new policies and procedures to comply with the proposed
amendments to Rule 17Ad-22(e)(6). For example, a covered clearing
agency likely would need to review its existing margin methodology and
consider whether any additional changes are necessary to ensure that it
can meet the strengthened requirements of the proposed rule.
The Commission preliminarily believes that the estimated PRA
burdens for the proposed amendment to Rule 17Ad-22(e)(6) may require a
respondent covered clearing agency to make fairly substantial changes
to its policies and procedures. Based on the similar policies and
procedures requirements and the corresponding burden estimates
previously made by the Commission for several rules in the Covered
Clearing Agency Standards where the Commission anticipated similar
burdens,\161\ the Commission preliminarily estimates that respondent
covered clearing agencies would incur an aggregate one-time burden of
approximately 903 hours to review existing policies and procedures and
create new policies and procedures.\162\
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\161\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70892 and 70895-97 (discussing Rules 17Ad-22(e)(2) and (13)).
Although the proposed rule amendment is with respect to Rule 17Ad-
22(e)(6), the Commission believes that these Rules present the best
overall comparison to the current proposed rule amendment, in light
of the nature of the changes needed to implement the proposal here
and what was proposed in the Covered Clearing Agency Standards.
\162\ This figure was calculated as follows: (Assistant General
Counsel for 20 hours) + (Compliance Attorney for 40 hours) +
(Computer Operations Manager for 12 hours) + (Senior Programmer for
20 hours) + (Senior Risk Management Specialist for 25 hours) +
(Senior Business Analyst for 12 hours) = 129 hours x 7 respondent
clearing agencies = 903 hours.
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The proposed amendments to Rule 17Ad-22(e)(6) would impose ongoing
burdens on a respondent covered clearing agencies. The proposed rule
would require ongoing monitoring and compliance activities with respect
to the written policies and procedures created in response to the
proposed rule. Based on the similar reporting requirements and the
corresponding burden estimates previously made by the Commission for
several rules in the Covered Clearing Agency Standards where the
Commission anticipated similar burdens,\163\ the Commission
preliminarily estimates that the ongoing activities required by the
proposed amendments to Rule 17Ad-22(e)(6) would impose an aggregate
annual burden on respondent covered clearing agencies of 560
hours.\164\
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\163\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70893 and 70895-96 (discussing Rules 17Ad-22(e)(6) and (13)).
\164\ This figure was calculated as follows: (Compliance
Attorney for 25 hours + Business Risk Analyst for 40 hours + Senior
Risk Management Specialist for 20 hours) = 85 hours x 7 respondent
clearing agencies = 560 hours.
[[Page 34741]]
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Number of Initial burden Aggregate Ongoing burden Aggregate
Name of information collection Type of burden respondents per entity initial burden per entity ongoing burden
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17Ad-22(e)(6).......................... Recordkeeping............. 7 129 903 85 595
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B. Proposed Rule 17Ad-26
Respondents under proposed Rule 17ad-26 are covered clearing
agencies, of which there is currently seven. The Commission anticipates
that one additional entity may seek to register as a covered clearing
agency in the next three years, and so for purposes of this proposal
the Commission has assumed eight respondents.
The purpose of the collections under proposed Rule 17ad-26 is to
ensure that covered clearing agencies include a set of particular items
in the recovery and wind-down plans currently required under Rule 17Ad-
22(e)(3)(ii). The collections are mandatory. To the extent that the
Commission receives confidential information pursuant to this
collection of information, such information would be kept confidential
subject to the provisions of applicable law.\165\
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\165\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the Freedom
of Information Act provides an exemption for trade secrets and
commercial or financial information obtained from a person and
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of
the Freedom of Information Act provides an exemption for matters
that are contained in or related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of an
agency responsible for the regulation or supervision of financial
institutions. See 5 U.S.C. 552(b)(8).
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Because of the existence of current Rule 17Ad-22(e)(3)(ii), which
means that covered clearing agencies are already required to maintain
RWPs, Proposed Rule 17ad-26 would impose on a covered clearing agency
similar burdens as when, for example, Rule 17Ad-22(e)(2) was proposed
and covered clearing agencies generally had governance arrangements in
place at that time.\166\ Based on the Commission's review and
understanding of the covered clearing agencies' existing RWPs,\167\
respondent covered clearing agencies generally have written rules,
policies, and procedures similar to the requirements that would be
imposed under the Proposed Rule 17ad-26. The PRA burden imposed by the
proposed rule would therefore be minimal and would likely be limited to
the review of current policies and procedures and updating existing
policies and procedures where appropriate to ensure compliance with the
proposed rule. Accordingly, the Commission preliminarily believes that
respondent clearing agencies would incur an aggregate one-time burden
of approximately 960 hours to review and update existing policies and
procedures.\168\
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\166\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70892 (discussing Rule 17Ad-22(e)(2)).
\167\ See supra, note 41.
\168\ This figure was calculated as follows: ((Assistant General
Counsel for 20 hours) + (Compliance Attorney for 50 hours) +
(Business Risk Analyst for 35 hours) + (Senior Risk Management
Specialist for 15) = 120 hours x 8 respondent clearing agencies =
960 hours.
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Proposed Rule 17ad-26 would also impose ongoing burdens on a
respondent covered clearing agency. The proposed rule would require
ongoing monitoring and compliance activities with respect to the
written policies and procedures created in response to the proposed
rule. Based on the Commission's previous estimates for ongoing
monitoring and compliance burdens with respect to existing Rule 17Ad-
22(e)(2),\169\ the Commission preliminarily estimates that the ongoing
activities required by proposed Rule 17ad-26 would impose an aggregate
annual burden on respondent covered clearing agencies of 40 hours.\170\
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\169\ See CCA Standards Adopting Release, supra note 7, 81 FR at
70892 (discussing Rule 17Ad-22(e)(2)).
\170\ This figure was calculated as follows: ((Assistant General
Counsel for 10 hours) + Compliance Attorney for 30 hours)) x 8
respondent clearing agencies = 320 hours.
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Number of Initial burden Aggregate Ongoing burden Aggregate
Name of information collection Type of burden respondents per entity initial burden per entity ongoing burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
17ad-26................................ Recordkeeping............. 8 120 960 40 320
--------------------------------------------------------------------------------------------------------------------------------------------------------
C. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
45. Evaluate whether the proposed collections of information are
necessary for the proper performance of the Commission's functions,
including whether the information shall have practical utility;
46. Evaluate the accuracy of the Commission's estimates of the
burdens of the proposed collections of information;
47. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
48. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
49. Evaluate whether the proposed rules and rule amendments would
have any effects on any other collection of information not previously
identified in this section.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with
reference to File Number S7-10-23. Requests for materials submitted to
OMB by the Commission with regard to this collection of information
should be in writing, with reference to File Number S7-10-23 and be
submitted to the Securities and Exchange Commission, Office of FOIA/PA
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.
[[Page 34742]]
VI. Small Business Regulatory Enforcement Fairness Act
Under the Small Business Regulatory Enforcement Fairness Act of
1996,\171\ a rule is ``major'' if it has resulted, or is likely to
result in: an annual effect on the economy of $100 million or more; a
major increase in costs or prices for consumers or individual
industries; or significant adverse effects on competition, investment,
or innovation. The Commission requests comment on whether the proposed
rules and rule amendments would be a ``major'' rule for purposes of the
Small Business Regulatory Enforcement Fairness Act. In addition, the
Commission solicits comment and empirical data on: the potential effect
on the U.S. economy on annual basis; any potential increase in costs or
prices for consumer or individual industries; and any potential effect
on competition, investment, or innovation.
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\171\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
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VII. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\172\ Section 603(a) of the Administrative Procedure Act,\173\
as amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules to determine the
impact of such rulemaking on ``small entities.'' \174\ Section 605(b)
of the RFA states that this requirement shall not apply to any proposed
rule which, if adopted, would not have a significant economic impact on
a substantial number of small entities.\175\
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\172\ See 5 U.S.C. 601 et seq.
\173\ 5 U.S.C. 603(a).
\174\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this proposed rulemaking, are set forth
in Rule 0-10, 17 CFR 240.0-10.
\175\ See 5 U.S.C. 605(b).
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The proposed amendments to Rule 17Ad-22 and new Rule 17ad-26 would
apply to covered clearing agencies, which would include registered
clearing agencies that provide the services of a central counterparty
or central securities depository.\176\ For the purposes of Commission
rulemaking and as applicable to the proposed amendments to Rule 17Ad-22
and the addition of proposed Rule 17ad-26, a small entity includes,
when used with reference to a clearing agency, a clearing agency that
(i) compared, cleared, and settled less than $500 million in securities
transactions during the preceding fiscal year, (ii) had less than $200
million of funds and securities in its custody or control at all times
during the preceding fiscal year (or at any time that it has been in
business, if shorter), and (iii) is not affiliated with any person
(other than a natural person) that is not a small business or small
organization.\177\
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\176\ 17 CFR 240.17AD-22(a)(5).
\177\ See 17 CFR 240.0-10(d).
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Based on the Commission's existing information about the clearing
agencies currently registered with the Commission, the Commission
preliminarily believes that such entities exceed the thresholds
defining ``small entities'' set out above. While other clearing
agencies may emerge and seek to register as clearing agencies, the
Commission preliminarily does not believe that any such entities would
be ``small entities'' as defined in Exchange Act Rule 0-10.\178\ In any
case, clearing agencies can only become subject to the new requirements
under proposed Rule 17Ad-22(e) should they meet the definition of a
covered clearing agency, as described above. Accordingly, the
Commission preliminarily believes that any such registered clearing
agencies will exceed the thresholds for ``small entities'' set forth in
Exchange Act Rule 0-10.
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\178\ See 17 CFR 240.0-10(d). The Commission based this
determination on its review of public sources of financial
information about registered clearing agencies and lifecycle event
service providers for OTC derivatives.
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For the reasons described above, the Commission certifies that the
proposed amendments to Rules 17Ad-22 and proposed new Rule 17ad-26
would not have a significant economic impact on a substantial number of
small entities for purposes of the RFA. The Commission requests comment
regarding this certification. The Commission requests that commenters
describe the nature of any impact on small entities, including clearing
agencies, and provide empirical data to support the extent of the
impact.
VIII. Statutory Authority
The Commission is proposing amendments to 17 CFR 240.17Ad-22 and
proposing 17 CFR 240.17ad-26 under the Commission's rulemaking
authority set forth in section 17A of the Exchange Act, 15 U.S.C. 78q-1
and Section 23(a), 15 U.S.C. 78w(a), and in Section 805 of the Clearing
Supervision Act, 15 U.S.C. 5464.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Amendments
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read, and the
sectional authority for Sec. 240.17Ad-22 is revised to read, as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
Section 240.17ad-22 is also issued under 12 U.S.C. 5461 et seq.
* * * * *
0
2. Amend Sec. 240.17Ad-22 by:
0
a. Redesignating Sec. 240.17Ad-22 as Sec. 240.17ad-22; and
0
b. Revising paragraphs (e)(6)(ii) and (iv) in newly redesignated Sec.
240.17ad-22.
The revisions read as follows:
Sec. 240.17ad-22 Standards for clearing agencies.
* * * * *
(e) * * *
(6) * * *
(ii) Marks participant positions to market and collects margin,
including variation margin or equivalent charges if relevant, at least
daily, monitors intraday exposures on an ongoing basis, and includes
the authority and operational capacity to make intraday margin calls as
frequently as circumstances warrant, including when risk thresholds
specified by the covered clearing agency are breached or when the
products cleared or markets served display elevated volatility;
* * * * *
(iv) Uses reliable sources of timely price data and other
substantive inputs, and uses procedures and, with respect to price
data, sound valuation models, for addressing circumstances in which
price data or other substantive inputs are not readily available or
reliable to ensure that the covered clearing agency
[[Page 34743]]
can continue to meet its obligations under this section. Such
procedures shall include the use of price data or substantive inputs
from an alternate source or, if it does not use an alternate source,
the use of an alternate risk-based margin system that does not
similarly rely on the unavailable or unreliable substantive input;
* * * * *
0
3. Section 240.17ad-26 is added to read as follows:
Sec. 240.17ad-26 Covered Clearing Agency Recovery and Orderly Wind-
Down Plans.
(a) The plans for the recovery and orderly wind-down of the covered
clearing agency referenced in 17 CFR 240.17ad-22(e)(3)(ii) shall:
(1) Identify and describe the covered clearing agency's critical
payment, clearing, and settlement services and address how the covered
clearing agency would continue to provide such critical services in the
event of a recovery and during an orderly wind-down, including the
identification of the staffing necessary to support such critical
services and analysis of how such staffing would continue in the event
of a recovery and during an orderly wind-down;
(2) Identify and describe any service providers upon which the
covered clearing agency relies to provide the services identified in
paragraph (a)(1) of this section, specify to what services such service
providers are relevant, and address how the covered clearing agency
would ensure that such service providers would continue to perform in
the event of a recovery and during an orderly wind-down, including
consideration of contractual obligations with such service providers
and whether those obligations are subject to alteration or termination
as a result of initiation of the recovery and orderly wind-down plan;
(3) Identify and describe scenarios that may potentially prevent
the covered clearing agency from being able to provide its critical
payment, clearing, and settlement services identified in paragraph
(a)(1) of this section as a going concern, including uncovered credit
losses (as described in paragraph (e)(4)(viii) of 17 CFR 240.17ad-22),
uncovered liquidity shortfalls (as described in paragraph (e)(7)(viii)
of 17 CFR 240.17ad-22), and general business losses (as described in
paragraph (e)(15) of 17 CFR 240.17ad-22);
(4) Identify and describe criteria that would trigger the
implementation of the recovery and orderly wind-down plans and the
process that the covered clearing agency uses to monitor and determine
whether the criteria have been met, including the governance
arrangements applicable to such process;
(5) Identify and describe the rules, policies, procedures, and any
other tools or resources the covered clearing agency would rely upon in
a recovery or orderly wind-down;
(6) Address how the rules, policies, procedures, and any other
tools or resources identified in paragraph (a)(5) of this section would
ensure timely implementation of the recovery and orderly wind-down
plan;
(7) Include procedures for informing the Commission as soon as
practicable when the covered clearing agency is considering initiating
a recovery or orderly wind-down;
(8) Include procedures for testing the covered clearing agency's
ability to implement the recovery and wind-down plans at least every
twelve months, including by requiring the covered clearing agency's
participants and, when practicable, other stakeholders to participate
in the testing of its plans, providing for reporting the results of the
testing to the covered clearing agency's board of directors and senior
management, and specifying the procedures for, as appropriate, amending
the plans to address the results of the testing; and
(9) Include procedures requiring review and approval by the board
of directors of the plans at least every twelve months or following
material changes to the covered clearing agency's operations that would
significantly affect the viability or execution of the plans, with such
review informed, as appropriate by the covered clearing agency's
testing of the plans.
(b) Definitions. For the purposes of this section:
Affiliate means a person that directly or indirectly controls, is
controlled by, or is under common control with the covered clearing
agency.
Orderly wind-down means the actions of a covered clearing agency to
effect the permanent cessation, sale, or transfer of one or more of its
critical services in a manner that would not increase the risk of
significant liquidity, credit, or operational problems spreading among
financial institutions or markets and thereby threaten the stability of
the U.S. financial system.
Recovery means the actions of a covered clearing agency, consistent
with its rules, procedures, and other ex ante contractual arrangements,
to address any uncovered loss, liquidity shortfall, or capital
inadequacy, whether arising from participant default or other causes
(such as business, operational, or other structural weaknesses),
including actions to replenish any depleted prefunded financial
resources and liquidity arrangements, as necessary to maintain the
covered clearing agency's viability as a going concern and to continue
its provision of critical services.
Service provider means any person, including an affiliate or a
third party, that is contractually obligated to the covered clearing
agency in any way related to the provision of critical services, as
identified by the covered clearing agency in 17 CFR 240.17ad-26(a)(1).
By the Commission.
Dated: May 17, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-10889 Filed 5-26-23; 8:45 am]
BILLING CODE 8011-01-P
