Derivatives Clearing Organizations Recovery and Orderly Wind-Down Plans; Information for Resolution Planning, 48968-49055 [2023-14457]

Download as PDF 48968 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 39 and 190 RIN 3038–AF16 Derivatives Clearing Organizations Recovery and Orderly Wind-Down Plans; Information for Resolution Planning Commodity Futures Trading Commission. ACTION: Notice of Proposed Rulemaking. AGENCY: The Commodity Futures Trading Commission (Commission or CFTC) is proposing amendments to certain regulations applicable to systemically important derivatives clearing organizations (SIDCOs) and derivatives clearing organizations (DCOs) that elect to be subject to the provisions in the Commission’s regulations (Subpart C DCOs). These proposed amendments would, among other things, address certain risk management obligations, modify definitions, and codify existing staff guidance. The Commission is also proposing to amend certain regulations to require DCOs that are not designated as systemically important, and which have not elected to be covered by our regulations, to submit orderly WindDown plans. In addition, the Commission is proposing to make conforming amendments to certain provisions, revise the Subpart C Election Form and Form DCO, and remove stale provisions. DATES: Comments must be received by September 26, 2023. ADDRESSES: You may submit comments, identified by ‘‘Derivatives Clearing Organizations Recovery and Orderly Wind-Down Plans; Information for Resolution Planning’’ and RIN 3038– AF16, by any of the following methods: • CFTC Comments Portal: https:// comments.cftc.gov. Select the ‘‘Submit Comments’’ link for this rulemaking and follow the instructions on the Public Comment Form. • Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. • Hand Delivery/Courier: Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in lotter on DSK11XQN23PROD with PROPOSALS2 SUMMARY: VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 English, or if not, accompanied by an English translation. Comments will be posted as received to https:// comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission’s regulations.1 The Commission reserves the right, but shall have no obligation, to review, prescreen, filter, redact, refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA. FOR FURTHER INFORMATION CONTACT: Robert Wasserman, Chief Counsel and Senior Advisor, 202–418–5092, rwasserman@cftc.gov; Megan Wallace, Senior Special Counsel, 202–418–5150, mwallace@cftc.gov; Eric Schmelzer, Special Counsel, eschmelzer@cftc.gov, 202–418–5967; Division of Clearing and Risk, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. The CEA and DCO Core Principles B. Regulatory Framework for DCOs C. Recovery and Orderly Wind-Down for SIDCOs and Subpart C DCOs— Regulation 39.39 D. 2014 International Standards and Guidance on Recovery and Resolution of Financial Market Infrastructures E. CFTC Letter No. 16–61 F. Additional International Standards and Guidance G. Requirement To Submit Recovery and Orderly Wind-Down Plans to the Commission—§ 39.19(c)(4)(xxiv) II. Amendments to Regulation 39.39— Recovery and Orderly Wind-Down for SIDCOs and Subpart C DCOs; Information for Resolution Planning A. Definitions—§ 39.39(a), § 39.2 1 17 CFR 145.9. Commission regulations referred to herein are found at 17 CFR chapter I (2020), and are accessible on the Commission’s website at https://www.cftc.gov/LawRegulation/Commodity ExchangeAct/index.htm. PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 B. Recovery Plan and Orderly Wind-Down Plan—§ 39.39(b) C. Recovery Plan and Orderly Wind-Down Plan: Required Elements—§ 39.39(c) D. Information for Resolution Planning— § 39.39(f) E. Renaming Regulation 39.39 III. Orderly Wind-Down Plan for DCOs That Are Not SIDCOs or Subpart C DCOs A. Requirement to Maintain and Submit an Orderly Wind-Down Plan— § 39.13(k)(1)(i) B. Notice of the Initiation of Pending Orderly Wind-Down—§ 39.13(k)(1)(ii) C. Orderly Wind-Down Plan: Required Elements—§ 39.13(k)(2)–(6) D. Conforming Changes to Bankruptcy Provisions—Part 190 IV. Establishment of Time to File Orderly Wind-Down Plan—§ 39.19(c)(4)(xxiv) V. Amendment to Regulation 39.34(d) VI. Amendments to Appendix B to Part 39— Subpart C Election Form VII. Amendments to Appendix A to Part 39— Form DCO VIII. Related Matters A. Regulatory Flexibility Act B. Antitrust Considerations C. Paperwork Reduction Act D. Cost-Benefit Considerations I. Background A. The CEA, Dodd-Frank Act, and DCO Core Principles Section 3(b) of the Commodity Exchange Act (CEA) sets forth the purposes of that Act; among these is to ensure the financial integrity of all transactions subject to this act and the avoidance of systemic risk. Section 5b(c)(2) of the CEA, as amended in 2010 by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),2 sets forth eighteen core principles with which a DCO must comply in order to be registered with the Commission and maintain its registration (DCO Core Principles).3 Together, the DCO Core Principles serve to reduce risk, increase transparency and promote market integrity within the financial system.4 Title VII of the Dodd-Frank Act grants the Commission explicit authority to promulgate rules, pursuant to section 8a(5) of the CEA, regarding the DCO Core Principles that govern the activities of all DCOs in clearing and settling swaps and futures.5 Section 8a(5), in turn, authorizes the Commission to 2 Title VII, Wall Street Transparency and Accountability Act of 2010, Public Law 111–203, 124 Stat. 1376, 1641 (2010). 3 Section 5b(c)(2) of the CEA, 7 U.S.C. 7a–1(c)(2). 4 Derivatives Clearing Organization Gen. Provisions and Core Principles, 76 FR 69334, 69334 (Nov. 8, 2011); Customer Clearing Documentation, Timing of Acceptance for Clearing, & Clearing Member Risk Mgmt., 77 FR 21278, 21279 (Apr. 9, 2012) (further amending § 39.12). 5 Section 725(c) of Title VII of the Dodd-Frank Act, 124 Stat. at 1687 (2010), 7 U.S.C. 7a– 1(c)(2)(A)(i). E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA. For SIDCOs in particular, Title VIII of the Dodd-Frank Act grants the Commission explicit authority to prescribe risk management standards, taking into consideration relevant international standards and existing prudential requirements governing operations related to payment, clearing and settlement activities and the conduct of designated activities by such financial institutions.6 Under Title VIII, the objectives and principles for those risk management standards are to (1) promote risk management; (2) promote safety and soundness; (3) reduce systemic risks; and (4) support the stability of the broader financial system.7 Combined, Titles VII and VIII of the Dodd-Frank Act address one of Dodd-Frank’s fundamental goals: to reduce systemic risk through properly regulated central clearing.8 DCOs are subject to a number of risks that could threaten their viability and financial strength, including risks from the default of one or more clearing members (including credit and liquidity risk) as well as non-default risk (including general business risk, operational risk, custody risk, investment risk, and legal risk). The realization of these risks has the potential to result in the DCO’s financial failure.9 In light of the central role DCOs perform in the markets that they serve, the disorderly failure of a DCO would likely cause significant disruption in such markets. In particular, SIDCOs play an essential role in the financial system, and thus the disorderly failure of such a DCO could lead to severe systemic disruptions if it caused the markets it serves to cease to operate effectively. Ensuring that DCOs can continue to provide critical operations and services as expected, even in times of extreme stress, is therefore central to financial stability. Maintaining provision of the critical operations and services that clearing members and 6 Title VIII, Payment, Clearing, and Settlement Supervision Act of 2010, Section 805, 124 Stat. 1802, 1809, 12 U.S.C. 5464(a)(2)(A), (B). 7 Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations, 78 FR 49663, 49665 (Aug. 15, 2013). 8 See Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management, 77 FR 21278, 21278 (Apr. 9, 2012). 9 CPMI–IOSCO, Recovery of financial market infrastructures (July 5, 2017) (hereinafter CPMI– IOSCO Recovery Guidance) at ¶ 2.1.1. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 others depend upon should allow DCOs to serve as a source of strength and continuity for the financial markets they serve.10 Core Principle D requires each DCO to ensure that it possesses the ability to manage the risks associated with discharging its responsibilities through the use of appropriate tools and procedures.11 Recovery planning is inherently integrated into that risk management, and concerns those aspects of risk management and contingency planning which address the extreme circumstances that could threaten the DCO’s viability and financial strength. To manage these risks as required by Core Principle D, a DCO needs to identify in advance, to the extent possible, such extreme circumstances and maintain an effective plan to enable it to continue to provide its critical operations and services if these circumstances were to occur. The recovery plan needs to address circumstances that may give rise to any default loss, including uncovered credit losses, liquidity shortfalls or capital inadequacy, as well as any structural weaknesses that these circumstances reveal. Similarly, the recovery plan needs to address DCOs’ potential nondefault losses. The recovery plan also needs to address the need to replenish any depleted pre-funded financial resources and liquidity arrangements so that the DCO can remain viable as a going concern and continue to provide its critical operations and services. The existence of the recovery plan further enhances the resilience of the DCO, and will provide market participants with confidence that the DCO will be able to function effectively even in extreme circumstances.12 Given the systemic importance of SIDCOs, each SIDCO must have a comprehensive and effective recovery plan designed to permit the SIDCO to continue to provide its critical operations and services. Subpart C DCOs, being held to similar standards as SIDCOs, also need to have such recovery plans. However, where a recovery plan proves, in a particular circumstance, to be ineffective, it is important that the DCO have a plan to wind down in an orderly manner. A plan for an orderly wind-down is not a substitute for having a comprehensive and effective recovery plan.13 The purpose of a recovery plan is to provide, with the benefit of thorough planning during business-as-usual PO 00000 10 Id. at ¶ 2.1.2. U.S.C. 7a–1(c)(2)(D)(i). 12 CPMI–IOSCO Recovery Guidance, at ¶ 2.2.1. 13 Id. at ¶ 2.2.2. 11 7 Frm 00003 Fmt 4701 Sfmt 4702 48969 operations, such information and procedures that will allow a DCO to effect recovery such that it can continue to provide its critical operations and services when its viability as a going concern is threatened. A recovery plan enables the DCO, its clearing members, their clients, and other relevant stakeholders, to prepare for such extreme circumstances, increases the probability that the most effective tools to deal with a specific stress will be used and reduces the risk that the effectiveness of recovery actions will be hindered by uncertainty about which tools will be used. The recovery plan will also assist the Federal Deposit Insurance Corporation (FDIC) as resolution authority under Dodd-Frank Title II 14 in preparing and executing their resolution plans for a DCO.15 While the implementation of the recovery plan is the responsibility of the DCO itself, which accordingly also has to have the power to make decisions and take action in accordance with its rules, under Title II resolution, that responsibility and power will pass to the FDIC as receiver instead. Many recovery tools will also be relevant to a DCO under Title II resolution, not least because FDIC would ‘‘step into the shoes’’ of the DCO 16 and accordingly would be able to enforce implementation of contractual loss or liquidity shortfall allocation rules, to the extent that any such rules exist, and have not been exhausted before entry into resolution.17 To accomplish these ends, this Notice of Proposed Rulemaking (NPRM) is proposing, among other things: (1) for SIDCOs and Subpart C DCOs, that they should incorporate certain subjects and analyses in their viable plans for recovery and orderly wind-down; and (2) for all other DCOs, that they should maintain viable plans for orderly winddown that incorporate substantially similar subjects and analyses as the proposed requirements for SIDCOs and Subpart C DCOs. B. Regulatory Framework for DCOs Part 39 of the Commission’s regulations implements the DCO Core Principles, including Core Principles D 14 12 U.S.C. 5381 et. seq. (‘‘Orderly Liquidation Authority’’). While orderly wind-down as discussed here proceeds under the authority of the DCO, FDIC would act as receiver in conducting an orderly liquidation under Title II. 15 CPMI–IOSCO Recovery Guidance at ¶ 2.3.1. 16 12 U.S.C. 5390(a)(1)(A)(i) (upon appointment as receiver for a covered financial company, FDIC succeeds to all rights, titles, powers, and privileges of the covered financial company and its assets, and of any stockholder, member, officer, or director of such company). 17 CPMI–IOSCO Recovery Guidance at ¶ 2.2.3. E:\FR\FM\28JYP2.SGM 28JYP2 48970 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 and R, which require that the DCO possesses the ability to manage the risks associated with discharging the responsibilities of the DCO through the use of appropriate tools and procedures,18 and a well-founded, transparent, and enforceable legal framework for each aspect of the DCO.19 Subpart B of part 39 establishes standards for compliance with the DCO Core Principles for all DCOs.20 Subpart C of part 39 establishes additional standards for compliance with the DCO Core Principles for SIDCOs,21 i.e., DCOs designated systemically important by the Financial Stability Oversight Council (FSOC) for which the Commission acts as the Supervisory Agency.22 The Subpart C regulations also apply to DCOs that elect to be subject to the requirements in Subpart C.23 18 Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a– 1(c)(2)(D) (‘‘Core Principle D—Risk Management’’). 19 Section 5b(c)(2)(R) of the CEA, 7 U.S.C. 7a– 1(c)(2)(R) (‘‘Core Principle R—Legal Risk’’). 20 17 CFR 39.9–39.27. 21 17 CFR 39.30–39.42. Subpart C flows from Title VIII of the Dodd-Frank Act, which Congress enacted to mitigate systemic risk in the financial system and to promote financial stability. Section 802(b) of the Dodd-Frank Act. The term ‘‘systemically important’’ means a situation where the failure of or a disruption to the functioning of a financial market utility could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the financial system of the United States. Section 803(9) of the Dodd-Frank Act; see also 12 CFR 1320.2 (Definitions—Systemically important and systemic importance). A ‘‘financial market utility’’ (FMU) includes any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person. Section 803(6)(A) of the Dodd-Frank Act; see also 12 CFR 1320.2 (Definitions—Financial market utility). Section 804 of the Dodd-Frank Act requires the FSOC to designate those FMUs that FSOC determines are, or are likely to become, systemically important. Three CFTC-registered DCOs, Chicago Mercantile Exchange, Inc. (CME), ICE Clear Credit LLC (ICC), and Options Clearing Corporation (OCC), were designated as systemically important by the FSOC in 2012. Press Release, Financial Stability Oversight Council Makes First Designations in Effort to Protect Against Future Financial Crises (Jul. 18, 2012), available at https:// www.treasury.gov/press-center/press-releases/ Pages/tg1645.aspx. The bases for the designations are available at https://home.treasury.gov/policyissues/financial-markets-financial-institutions-andfiscal-service/fsoc/designations. The Commission is the Supervisory Agency for CME and ICC; the U.S. Securities and Exchange Commission is the Supervisory Agency for OCC. See 12 CFR 1320.2 (Definition of Supervisory Agency). 22 17 CFR 39.2. 23 In the Commission’s experience, DCOs based in the United States that have banks as clearing members have elected to be subject to Subpart C in order to achieve status as a qualified central counterparty (QCCP), while U.S.-based DCOs that do not have banks as clearing members have not made that election. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 Section 805 of the Dodd-Frank Act directs the Commission to consider relevant international standards and existing prudential requirements when prescribing risk management standards for SIDCOs.24 In 2013 the Commission determined that, for purposes of meeting the Commission’s statutory obligation pursuant to Section 805(a)(2)(A) of the Dodd-Frank Act, the In July 2012, the Basel Committee on Banking Supervision, the international body that sets standards for the regulation of banks, published the ‘‘Capital Requirements for Bank Exposures to Central Counterparties’’ (Basel CCP Capital Requirements), which describes standards for capital charges arising from bank exposures to central counterparties (CCPs) related to over-thecounter derivatives, exchange-traded derivatives, and securities financing transactions. (DCOs are referred to as CCPs in international standards and guidance.) The Basel CCP Capital Requirements create financial incentives for banks, including their subsidiaries and affiliates, to clear financial derivatives with CCPs that are prudentially supervised in a jurisdiction where the relevant regulator has adopted rules or regulations that are consistent with the standards set forth in the Principles for Financial Market Infrastructures (PFMI), published in April 2012 by the Bank for International Settlements’ (BIS) Committee on Payment and Settlement Systems (renamed the Committee on Payments and Market Infrastructures (CPMI)) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) (collectively referred to as CPMI–IOSCO). The PFMI is available at https:// www.iosco.org/library/pubdocs/pdf/ IOSCOPD377.pdf. A QCCP is defined as an entity that (i) is licensed to operate as a CCP and is permitted by the appropriate regulator to operate as such, and (ii) is prudentially supervised in a jurisdiction where the relevant regulator has established and publicly indicated that it applies to the CCP, on an ongoing basis, domestic rules and regulations that are consistent with the PFMI. See Basel Committee on Banking Supervision, Credit Risk Framework at section 50.3, available at https://www.bis.org/basel_ framework/chapter/CRE/ 50.htm?inforce=20191215&published=20191215. The failure of a CCP to achieve QCCP status could result in significant costs to its bank clearing members (or banks that are customers of its clearing members). The U.S. banking regulators, including the Board of Governors of the Federal Reserve (Federal Reserve), FDIC, and the Office of the Comptroller of the Currency, have adopted capital standards that are consistent with the Basel Committee’s standards. For example, under the FDIC’s regulations, the capital requirement for a clearing member’s prefunded default fund contribution to a qualifying CCP can be as low as 0.16% of that default fund contribution. 12 CFR 324.133(d)(4). By contrast, the capital requirement for a clearing member’s prefunded default fund contribution to a non-qualifying CCP is 100% of that default fund contribution. 12 CFR 324.10(a)(1)(iii), (b)(3) (requiring capital of 8% of risk-weighted asset amount), 12 CFR 324.133(d)(2) (setting riskweighted asset amount for default fund contributions to non-qualifying CCP at 1,250% of the contribution (1,250% * 8% = 100%)). See also 12 CFR 324.133(c)(3) (applying a risk weight of 2% to transactions with a QCCP). The Federal Reserve and Office of the Comptroller of the Currency have similar regulations. 24 Section 805(a)(2) of the Dodd-Frank Act, 12 U.S.C. 5464(a)(2)(A). PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 international standards most relevant to the risk management of SIDCOs are the PFMI.25 C. Recovery and Orderly Wind-Down for SIDCOs and Subpart C DCOs—§ 39.39 The Commission established regulations for the recovery and winddown of a SIDCO and Subpart C DCO in 2013 with the promulgation of § 39.39.26 Regulation 39.39 27 was codified to protect the members of a SIDCO or Subpart C DCO, as well as their customers, and the financial system more broadly, from the consequences of a disorderly failure of a DCO consistent with Principles 3 and 15 of the PFMI.28 Regulation 39.39 also promotes the concepts in Core Principles B (Financial Resources), D (Risk Management), G (Default Rules and Procedures), I (System Safeguards), L (Public Information), O (Governance Fitness Standards), and R (Legal Risk) of Section 5b(c)(2) of the CEA.29 Regulation 39.39(a) defines the terms ‘‘general business risk,’’ ‘‘wind-down,’’ ‘‘recovery,’’ ‘‘operational risk,’’ and ‘‘unencumbered liquid financial assets.’’ 30 Regulation 39.39(b) requires SIDCOs and Subpart C DCOs to maintain viable plans for (1) recovery or orderly winddown, necessitated by uncovered credit losses or liquidity shortfalls; and separately, (2) recovery or orderly winddown necessitated by general business risk, operational risk, or any other risk 25 78 FR 49663 at 49666. The PFMI consist of twenty-four principles addressing the risk management and efficiency of a financial market infrastructure’s (FMI’s) operations. Subpart C reflects the following PFMI principles: Principle 2 (Governance); Principle 3 (Framework for the comprehensive management of risks); Principle 4 (Credit risk); Principle 6 (Margin); Principle 7 (Liquidity risk); Principle 9 (Money settlements); Principle 14 (Segregation and portability); Principle 15 (General business risk); Principle 16 (Custody and investment risks); Principle 17 (Operational risk); Principle 21 (Efficiency and effectiveness); Principle 22 (Communication procedures and standards); and Principle 23 (Disclosure of rules, key procedures, and market data). 26 Derivatives Clearing Organizations and International Standards, 78 FR 72476, 72494 (Dec. 2, 2013). 27 17 CFR 39.39. References in the remainder of this section are to the existing regulations. 28 See 78 FR 72476 at 72494–95. Principle 3 of the PFMI requires an FMI to have a sound risk management framework ‘‘for comprehensively managing legal, credit, liquidity, operational, and other risks.’’ PFMI Principle 3, at 32. Principle 15 of the PFMI requires an FMI to ‘‘identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialize. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.’’ PFMI Principle 15, at 88. 29 See generally 78 FR 72476. 30 17 CFR 39.39(a)(1)–(5). E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules that threatens the DCO’s viability as a going concern.31 Regulation 39.39(c)(1) requires a SIDCO or Subpart C DCO to identify scenarios that may potentially prevent it from being able to meet its obligations, provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery and orderly winddown.32 Regulation 39.39(c)(1) further requires the plans to include procedures for informing the Commission when the recovery plan is initiated or wind-down is pending.33 Regulation 39.39(c)(2) requires a SIDCO or Subpart C DCO to have procedures for providing the Commission and the FDIC with information needed for resolution planning.34 Regulation 39.39(d) requires that the recovery and wind-down plans of SIDCOs and Subpart C DCOs be supported by resources sufficient to implement those recovery or winddown plans. This paragraph is not being amended.35 Regulation 39.39(e) requires SIDCOs and Subpart C DCOs to maintain viable plans, approved by the SIDCO’s or Subpart C DCO’s board of directors and updated regularly, for raising additional financial resources in a scenario in which it is unable to comply with any financial resource requirements set forth in part 39.36 This paragraph is not being amended. Regulation 39.39(f) allows the Commission, upon request, to grant a SIDCO and Subpart C DCO up to one year to comply with any provision of § 39.39 or of § 39.35 (default rules and procedures for uncovered credit losses or liquidity shortfalls).37 For DCOs that neither have been designated systemically important nor elected to become Subpart C DCOs, no regulation currently requires that they maintain viable recovery plans or orderly wind-down plans. This NPRM is proposing that all DCOs be required to 31 17 CFR 39.39(b)(1) and (2). CFR 39.39(c)(1). The identification of scenarios and analysis by the DCO allows the DCO to more effectively and efficiently meet its obligations promptly, and may provide a DCO with a better understanding of its clearing members’ obligations, the extent to which the DCO would have to perform its obligations to its clearing members in times of stress, and the ability to better plan for doing so. The scenarios and analysis in the wind-down plan are necessary in the event that recovery is not possible and resolution is not available. 33 Id. 34 17 CFR 39.39(c)(2). 35 17 CFR 39.39(d). 36 17 CFR 39.39(e). 37 17 CFR 39.39(f). lotter on DSK11XQN23PROD with PROPOSALS2 32 17 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 maintain viable orderly wind-down plans. D. 2014 International Standards and Guidance on Recovery and Resolution of Financial Market Infrastructures In 2014, CPMI–IOSCO published guidance for financial market infrastructures (FMIs) on the recovery planning process and the content of the recovery plans.38 The 2014 CPMI– IOSCO Recovery Guidance interpreted the principles and key considerations under the PFMI relevant to recovery and orderly wind-down plans and planning, in particular PFMI Principles 3 and 15. The guidance also provided a menu of recovery tools separated into five categories: tools to allocate uncovered losses caused by participant default; tools to address uncovered liquidity shortfalls; tools to replenish financial resources; tools for a CCP to re-establish a matched book; and tools to allocate losses not related to participant default.39 The Financial Stability Board (FSB) had, in 2011, published a set of Key Attributes of Effective Resolution Regimes for Financial Institutions,40 and enhanced those standards with, as relevant here, an Annex on Resolution of Financial Market Infrastructures, in 2014.41 The Key Attributes FMI Annex calls for ongoing recovery and resolution planning for systemically important FMIs (a category that includes SIDCOs).42 The Key Attributes FMI Annex also calls for such FMIs ‘‘to maintain information systems and controls that can promptly produce and make available, both in normal times and during resolution, relevant data and information needed by the authorities for the purposes of timely resolution planning and resolution.’’ 43 38 CPMI–IOSCO, Recovery of financial market infrastructures (Oct. 15, 2014) (hereinafter 2014 CPMI–IOSCO Recovery Guidance). FMIs as a category include DCOs, CCPs, central securities depositories, payment systems, and trade repositories. SIDCOs are thus systemically important FMIs. 39 Id. at 12–16. 40 FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions (Oct. 2011). 41 FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions, Appendix II— Annex I: Resolution of Financial Market Infrastructures (FMIs) and FMI Participants (Oct. 15, 2014) (hereinafter Key Attributes FMI Annex). The Key Attributes FMI Annex is ‘‘to be read alongside [the] PFMI which require systemically important FMIs to have a comprehensive and effective recovery plan.’’ Id. at 57. 42 Id. ¶ 11.1, at 68 (stating ‘‘FMIs that are systemically important should be subject to a requirement for ongoing recovery and resolution planning’’). 43 Id. ¶ 12.1, at 70 (listing 7 areas of information that should be made available to authorities, including: FMI rules, default fund, and loss PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 48971 E. CFTC Letter No. 16–61 In July 2016, the staff of the Division of Clearing and Risk (DCR) issued an advisory letter, described therein as ‘‘guidance,’’ regarding the content of a SIDCO’s and Subpart C DCO’s recovery and orderly wind-down plans, consistent with Subpart C, in particular § 39.39, and the accompanying rule submissions designed to effectuate those plans.44 CFTC Letter No. 16–61 highlighted subjects that staff believed these DCOs should analyze in developing a recovery plan and winddown plan, including: the range of scenarios that may prevent the DCO from being able to meet its obligations and to provide its critical operations and services; recovery tools; wind-down scenarios and options; interconnections and interdependencies; agreements to be maintained during recovery and wind-down; financial resources; governance; notifications; assumptions; updates; and testing.45 The advisory letter also recommended questions that a DCO should consider, and the analysis of those questions that a DCO should undertake and provide to the Commission, in instances where a DCO concludes that a rule should be changed.46 F. Additional International Guidance on Standards In July 2017, CPMI–IOSCO issued further guidance on the PFMI related to the development of recovery plans for CCPs.47 The (2017) CPMI–IOSCO allocation rules; stakeholders; data and information for effective and timely risk control during resolution; the status of obligations of participants; links and interoperability arrangements with other FMIs; participant collateral; and netting arrangements). 44 CFTC Letter No. 16–61, Recovery Plans and Wind-down Plans Maintained by Derivatives Clearing Organizations and Tools for the Recovery and Orderly Wind-down of Derivatives Clearing Organizations, (July 16, 2016) (hereinafter CFTC Letter No. 16–61), available at: https:// www.cftc.gov/csl/16-61/download. DCR staff was responding to requests from DCOs for guidance and clarification on the types of information and analysis that should be included in the requisite plans. The advisory letter explains staff’s expectations following its preliminary reviews of submitted recovery plans, wind-down plans, and proposed rule changes, and issues addressed at a DCR-sponsored public roundtable. The transcript of the roundtable is available at https://www.cftc.gov/ PressRoom/Events/opaevent_cftcstaff031915. 45 CFTC Letter No. 16–61, at 4. The guidance was not intended to be an exhaustive checklist of information and analysis, and did not address resolution planning. Id. at 3 n.11. 46 Id. at 15–19. 47 Supra fn. 9. The guidance as revised in 2017 is referred to herein as the CPMI–IOSCO Recovery Guidance. CPMI–IOSCO also issued guidance on the resilience of CCPs. CPMI–IOSCO, Resilience of central counterparties: further guidance on the PFMI (July 5, 2017) (providing guidance on E:\FR\FM\28JYP2.SGM Continued 28JYP2 48972 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules Recovery Guidance updated the 2014 CPMI–IOSCO Recovery Guidance to provide clarification on the implementation of recovery plans, replenishment of financial resources, non-default related losses, and transparency with respect to recovery tools and their application. Similarly, the FSB issued further guidance on CCP resolution and resolution planning.48 The 2017 FSB Resolution Guidance sets out recommended powers for resolution authorities to maintain the continuity of critical CCP functions, details on the use of loss allocation tools, and provides steps that resolution authorities should take to implement crisis management groups and develop resolution plans. In August 2022, CPMI–IOSCO published a discussion paper on CCP practices to address non-default losses in which the paper noted positively, among other things, the practice of testing and reviewing a CCP’s recovery plan at least annually.49 G. Requirement To Submit Recovery and Wind-Down Plans to the Commission—§ 39.19(c)(4)(xxiv) In 2020, the Commission amended its reporting requirements under § 39.19 to require a DCO that is required to maintain recovery and wind-down plans pursuant to § 39.39(b) to submit its plans to the Commission no later than the date on which it is required to have the plans.50 The rule also permits a DCO that is not required to maintain recovery and wind-down plans, but which nonetheless maintains such plans, to submit the plans to the Commission.51 Additionally, if a DCO revises its plans, the DCO must submit the revised plans to the Commission along with a description of the changes and the reason for the changes.52 lotter on DSK11XQN23PROD with PROPOSALS2 II. Amendments to Regulation 39.39— Recovery and Orderly Wind-Down for SIDCOs and Subpart C DCOs; Information for Resolution Planning In 2013, the Commission promulgated broad rules for a SIDCO’s and Subpart C DCO’s recovery and wind-down plans, including a rule that each SIDCO and Subpart C DCO must have governance, stress testing for both credit and liquidity exposures, coverage, margin, and a CCP’s contribution of its financial resources to losses). 48 FSB, Guidance on Central Counterparty Resolution and Resolution Planning (July 5, 2017) (hereinafter 2017 FSB Resolution Guidance). 49 CPMI–IOSCO, A discussion paper on central counterparty practices to address non-default loses (Aug. 4, 2022) (NDL Discussion Paper). 50 Derivatives Clearing Organizations General Provisions and Core Principles, 85 FR 4800, 4822 (Jan. 27, 2020); 17 CFR 39.19(c)(4)(xxiv). 51 Id. 52 Id. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 procedures for providing the Commission and the FDIC with information needed for purposes of resolution planning.53 At that time, practice with respect to recovery and wind-down planning was in a nascent state of development, and the relevant global standard-setting bodies, CPMI– IOSCO and the FSB, had not completed work establishing guidance for implementing international standards addressing recovery and resolution for FMIs.54 The Commission is proposing to further align the rules under § 39.39 with the international standards and guidance promulgated since 2013,55 and to codify certain of the related guidance in CFTC Letter No. 16–61. The proposed amendments to § 39.39 include specifying the required elements of a SIDCO’s or Subpart C DCO’s recovery and orderly wind-down plans, amending the requirement to have procedures to provide information needed for purposes of resolution planning, and specifying the types of information that should be provided to the Commission for resolution planning. Additionally, the Commission proposes to change the title of the regulation, amend and add definitions, and to delete certain provisions. These proposed revisions and amendments to § 39.39 are consistent with the Commission’s obligation under § 805(a) of the Dodd-Frank Act to consider international standards in prescribing risk management standards pursuant to its authority under that provision with respect to SIDCOs.56 Moreover, the Commission views the relevant international standards under the PFMI, as well as the related guidance, including the CPMI–IOSCO Recovery Guidance, as helpful in FR 72476, 72494 (codifying § 39.39(c)(2)). e.g., CPMI–IOSCO, Consultative report, Recovery of financial market infrastructures, at ¶ 1.2.1 (Aug. 2013) (distinguishing recovery planning from resolution planning and noting that ‘‘[a]spects of the consultation report concerning FMI resolution have been included in a new draft annex and will be included in an assessment methodology for the [FSB’s] Key Attributes’’). CPMI–IOSCO, Consultative report, Recovery and resolution of financial market infrastructures, at ¶ 1.4 (July 2012) (outlining the features for effective recovery and resolution regimes for FMIs in accordance with the FSB’s ‘‘Key Attributes for Effective Resolution Regimes for Financial Institutions’’). 55 The Commission actively participated in the development of those standards and guidance in its role as a member of the relevant working groups (the CPMI–IOSCO Policy Standing Group and Steering Group and the Financial Stability Board Financial Market Infrastructure Cross-Border Crisis Management Group and Resolution Steering Group), and of the Board of IOSCO, one of the parent committees of CPMI–IOSCO. 56 See Section 805(a) of the Dodd-Frank Act, 12 U.S.C. 5464(a). PO 00000 53 78 54 See, Frm 00006 Fmt 4701 Sfmt 4702 informing its approach with respect to other DCOs in the context of recovery and orderly wind-down. These proposed revisions and amendments are reasonably necessary to effectuate Core Principle D 57 (Risk Management) and to accomplish the purposes of the CEA, in particular, to ensure the financial integrity of all transactions subject to [the CEA] and the avoidance of systemic risk.58 The proposed changes also respond to comments received from SIDCOs and Subpart C DCOs over time. As set forth in section III, the Commission is additionally proposing to require that all other DCOs maintain and submit to the Commission an orderly wind-down plan that incorporates substantially similar information and procedures. With respect to DCOs broadly, these proposed revisions and amendments should lead to more effective DCO compliance and risk management, provide greater clarity and transparency for registered DCOs and DCO applicants, and increase overall confidence and efficiency in the swaps and futures markets.59 Among the risks associated with discharging the risk management responsibilities of a DCO 60 is the risk that, due to either default losses or non-default losses, the DCO will be unable to meet its obligations or provide its critical functions and will need to wind down. In such an event, an effective orderly wind-down plan should facilitate timely decision-making and the continuation of critical operations and services so that the orderly wind-down may occur in an orderly and expeditious manner. A DCO needs to prepare for circumstances—especially those that are sudden, unexpected, and on too large a scale for the DCO to timely recover—for which a DCO may not have the resources to continue as a going concern. A viable orderly wind-down plan promotes the goal of ensuring, at a minimum, that the DCO has sufficient resources, capabilities and legal authority to implement the tools and procedures for orderly wind-down activities. To the extent that the Commission’s bankruptcy regulations look to a DCO’s orderly wind-down 57 Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a– 1(c)(2)(D)(i). 58 Section 3(b) of the CEA, 7 U.S.C. 5(b). 59 See 76 FR at 69334–35 (a legally enforceable regulatory framework ‘‘provides assurance to market participants and the public that DCOs are meeting minimum risk standards’’ which ‘‘can serve to increase market confidence,’’ free up resources that market participants might otherwise hold,’’ and ‘‘reduce search costs that market participants would otherwise incur). 60 See Core Principle D(i), Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a–1(c)(2)(D)(i). E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules plan,61 an effective orderly wind-down plan will allow for the efficient management of events. To advance the DCO Core Principles’ aims of, among other things, strengthening the risk management practices of DCOs, enhancing legal certainty for DCOs, clearing members and market participants, and safeguarding the public, the Commission is proposing to require that all DCOs maintain and submit orderly wind-down plans with the subjects and analyses included herein. Additionally, the Commission is proposing revised subjects and analyses for the recovery plans that SIDCOs and Subpart C DCOs must maintain. A. Definitions—§ 39.39(a), § 39.2 lotter on DSK11XQN23PROD with PROPOSALS2 Currently, the definitions relevant to recovery and orderly wind-down planning are contained in § 39.39(a). The Commission is proposing to move two of those definitions, ‘‘wind-down’’ and ‘‘recovery,’’ to § 39.2, as orderly wind-down will apply to all DCOs, and recovery is thematically linked to orderly wind-down. Because these definitions would apply to all DCOs, the Commission is proposing technical corrections to eliminate the references to SIDCOs and Subpart C DCOs in both. The Commission is changing the term ‘‘wind-down’’ to ‘‘orderly winddown’’ 62 and is defining it as a DCO’s actions to effect the permanent cessation, sale, or transfer, of one or more of its critical operations or 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.63 The Commission intends the amended definition to focus the attention of DCOs on issues of financial stability in planning for and executing an orderly 61 See, e.g., 17 CFR 190.15(c) (In administering a proceeding under this subpart, the trustee shall, in consultation with the Commission, take actions in accordance with any recovery and wind-down plans maintained by the debtor and filed with the Commission pursuant to § 39.39 of this chapter, to the extent reasonable and practicable, and consistent with the protection of customers.) 62 The definition also provides for the use of the term ‘‘wind-down’’ as a shorter form of ‘‘orderly wind-down.’’ 63 This definition of ‘‘orderly wind-down’’ would align more closely with the corresponding definition in the Federal Reserve’s Regulation HH (Designated Financial Market Utilities), 12 CFR 234.2(g), but would additionally address operational problems spreading among financial institutions or markets, consistent with the U.S. Securities and Exchange Commission’s recent rule proposal. Covered Clearing Agency Resilience and Recovery and Wind-Down Plans, 88 FR 34708, 34717 (May 30, 2023). VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 wind-down.64 Given the financial crisis that preceded and informed DoddFrank’s passage, and the purpose of the CEA to ensure the avoidance of systemic risk, the Commission believes an important goal of an orderly wind-down should be to avoid an increased risk of significant liquidity, credit, or operational problems spreading among financial institutions or markets. The Commission is also proposing to amend the definition of ‘‘recovery’’ by replacing the reference to ‘‘capital inadequacy’’ with ‘‘inadequacy of financial resources’’ in order to tie the definition of ‘‘recovery’’ more closely to the framework of Part 39,65 and to move that definition, as revised, to § 39.2, in alphabetical order. Neither the recovery plan nor the orderly wind-down plan may assume government intervention or support. The Commission is proposing to delete the definitions of ‘‘general business risk’’ and ‘‘operational risk,’’ and instead to import those definitions, as modified, as part of the definition of the term ‘‘non-default losses.’’ The Commission is also proposing to add a definition of the term ‘‘default losses.’’ Recovery plans and orderly wind-down plans are required to address both default losses and non-default losses. The Commission is proposing to define default losses to include both uncovered credit losses or liquidity shortfalls created by the default of a clearing member in respect of its obligations with respect to cleared transactions. In this context, uncovered credit losses arise from the DCO’s holding an insufficient value of resources to meet its obligations. For example, the DCO is obligated to pay, today, variation margin of $10 billion in U.S. dollar cash, but only has $8 billion of resources available. Similarly, in this context, a liquidity shortfalls arise from the DCO holding resources that are not in the correct form to meet its obligations. For example, the DCO is obligated to pay, today, variation margin of $10 billion in U.S. dollar cash, but only has $8 billion of U.S. dollar cash available, even though it may additionally have more than $2 billion (worth, at present market value) of 64 DCOs must already consider issues of financial stability in their governance arrangements. 17 CFR 39.24(a)(1)(iv) (requiring that a DCO’s governance arrangements explicitly support the stability of the broader financial system and other relevant public interest considerations). 65 See, e.g., § 39.11 (enumerating the requirements for financial resources a DCO must maintain to discharge its responsibilities); § 39.39(d) (enumerating the requirements for financial resources a SIDCO and Subpart C DCO must maintain to support its recovery plan and winddown plan). PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 48973 securities that it is unable to convert promptly into U.S. dollar cash.66 The definition also focuses on the clearing member’s obligations with respect to cleared transactions. Thus, if the clearing member defaults on its obligations for facilities rental, or in its obligations in its role as a service provider to the DCO, those would not be ‘‘default losses’’ for this purpose. The Commission is proposing to define non-default losses to mean losses from any cause, other than default losses, that may threaten the DCO’s viability as a going concern. This portion of the definition is derived from former § 39.39(b)(2), which required SIDCOs and Subpart C DCOs to ‘‘maintain viable plans for’’ (1) Recovery or orderly wind-down necessitated by’’ the risks that are currently proposed to be included in ‘‘default losses’’ (i.e., uncovered credit losses or liquidity shortfalls as well as (2) Recovery or orderly wind-down necessitated by general business risk, operational risk, or any other risk that threatens the DCO’s viability as a going concern (emphasis added). The former definition specifically included, as potential sources of loss, ‘‘general business risk’’ and ‘‘operational risk.’’ The definitions in § 39.39 will now apply to all DCOs, and thus are being moved to § 39.2. In order to ensure that DCOs consider, as part of their planning process, the full set of potential non-default losses, the definition of non-default losses is proposed to explicitly include, though not be limited to, losses arising from risks often referred to as (1) general business risk, (2) custody risk, (3) investment risk, (4) legal risk, and (5) operational risk.67 To avoid unnecessary questions of taxonomy, however, these terms are not proposed to be separately defined, rather, the substance of these definitions are being included as instances of non-default losses. Under the first group, losses arising from general business risk, the Commission proposes to import the previous definition of ‘‘general business 66 Another example of a liquidity shortfall is a currency mismatch. For example, assume that the U.S. dollar to Euro exchange rate is $1.10/Ö1.00. The DCO has a variation margin obligation, today, of Ö1 billion, and only has resources available for the purpose of making payment of $1.1 billion. That would also be a liquidity shortfall. 67 See NDL Discussion Paper section 2.1 (‘‘Generally, CCPs consider a range of NDL scenarios that may arise from risks relevant to their business activities, including general business risk, operational risk, investment risk, custody risk and legal risk.’’). See also Guidance on Financial Resources to Support CCP Resolution and on the Treatment of CCP Equity in Resolution (FSB 2020) at section 1.2 (‘‘Hypothetical non-default loss scenarios’’). E:\FR\FM\28JYP2.SGM 28JYP2 48974 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 risk’’ in § 39.39(a)(1), deleting references to SIDCOs or subpart C DCOs as surplusage. This results in (1) any potential impairment of a derivatives clearing organization’s financial position, as a business concern, as a consequence of a decline in its revenues or an increase in its expenses, such that expenses exceed revenues and result in a loss that the derivatives clearing organization must charge against capital. Under the second group, losses arising from custody risk, the Commission proposes to adopt substantially the discussion of custody risk in the CPMI–IOSCO Recovery Guidance.68 This results in (2) losses incurred by the derivatives clearing organization on assets held in custody or on deposit in the event of a custodian’s (or sub-custodian’s or depository’s) insolvency, negligence, fraud, poor administration or inadequate record-keeping. Under the third group, losses arising from investment risk, the Commission proposes to adapt the discussion of investment risk in the CPMI–IOSCO Recovery Guidance.69 This adaptation results in (3) losses incurred by the derivatives clearing organization from diminution of the value of investments of its own or its participants’ resources, including cash or other collateral. Under the fourth group, losses arising from legal risk, the international guidance is less helpful. The CPMI– IOSCO Recovery Guidance does not define ‘‘legal risk;’’ the FSB guidance simply notes that ‘‘legal, regulatory or contractual penalties could lead to significant losses or uncertainty for the CCP and can take a long time to materialise fully.’’ Losses from legal risk can arise from causes other than ‘‘penalties’’: For example, in the realm of contract or tort, a DCO may be responsible for compensating a plaintiff for the DCO’s breach of contract, or for the plaintiff’s damages caused by, e.g., the DCO’s negligence. In the realm of regulatory litigation, there may be remedies other than penalties, including, e.g., restitution or disgorgement. Accordingly, the Commission is proposing to broadly include (4) losses from adverse judgments, or other losses, arising from 68 See CPMI–IOSCO Recovery Guidance ¶ 3.2.5 (‘‘[A]n FMI can be exposed to custody risk and could suffer losses on assets held in custody in the event of a custodian’s (or subcustodian’s) insolvency, negligence, fraud, poor administration or inadequate record-keeping.’’) 69 See id. (‘‘Investment risk is the financial risk faced by an FMI when it invests its own or its participants’ resources, such as cash or other collateral.’’) VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 legal, regulatory, or contractual obligations, including damages or penalties, and the possibility that contracts that the derivatives clearing organization relies upon are wholly or partly unenforceable. Finally, under the fifth group, losses arising from operational risk, the Commission is proposing to draw from the prior definition of operational risk, adding a few additional important categories. Specifically, the Commission is proposing to add references to (1) the actions of malicious actors and (2) the possibility of disruption from internal events. Cyber risk is increasing, and organizations’ operations are exposed to risk from malicious (threat) actors, who might include employees and thirdparty providers, criminals, terrorists, and nation-states. Thus, the Commission proposes to recognize explicitly the peril from what has been described as malicious action by third parties intent on creating systemic harm or disruption, with concomitant financial losses.70 Including a reference to ‘‘malicious actions (whether by internal or external threat actors)’’ should help protect market participants and the public by potentially improving the DCO’s ability to identify vulnerabilities from malicious actors, safeguard its systems from such actors, and address possible losses that might occur if, despite the DCO’s system safeguards, malicious actors detect and act upon any cyber vulnerabilities. The Commission is also proposing to add a reference to the possibility of disruption from internal events (the current definition of operational risk refers only to ‘‘disruptions from external events’’). Examples of these internal events include fire as well as flooding (due to, e.g., malfunctions of sprinkler systems). This expansion to the definition should also help protect market participants and the public, by potentially improving the DCO’s ability to identify vulnerabilities to its systems and operations from internal events, mitigate those vulnerabilities, and address possible losses that might occur if, despite the DCO’s efforts, such vulnerabilities disrupt its systems or operations. Accordingly, the Commission is proposing to refer specifically to nondefault losses (5) as occasioned by 70 CPMI, Cyber resilience in financial market infrastructures, at 7 (Nov. 2014); see also CPMI– IOSCO, Guidance on cyber resilience for financial market infrastructures (June 2016). See generally Executive Order No. 14028, Improving the Nation’s Cybersecurity, 86 FR 26633 (May 12, 2021), available at: https://www.whitehouse.gov/briefingroom/presidential-actions/2021/05/12/executiveorder-on-improving-the-nations-cybersecurity/. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 deficiencies in information systems or internal processes, human errors, management failures, malicious actions (whether by internal or external threat actors), disruptions to services provided by third parties, or disruptions from internal or external events that result in the reduction, deterioration, or breakdown of services provided by the derivatives clearing organization. B. Recovery Plan and Orderly WindDown Plan—§ 39.39(b) Regulation 39.39(b) currently requires each SIDCO and Subpart C DCO to maintain viable plans for (1) recovery or orderly wind-down, necessitated by uncovered credit losses or liquidity shortfalls; and, separately, (2) recovery or orderly wind-down necessitated by general business risk, operational risk, or any other risk that threatens the DCO’s viability as a going concern.71 Regulation 39.19(c)(4)(xxiv) currently requires a SIDCO or Subpart C DCO that is required to maintain recovery and wind-down plans pursuant to § 39.39(b) to submit those plans to the Commission no later than the date on which the DCO is required to have the plans.72 The Commission is proposing amendments to these provisions as set forth below. The Commission is maintaining existing § 39.39(d) and (e).73 Accordingly, the recovery and orderly wind-down plans of SIDCOs and Subpart C DCOs must continue to include evidence and analysis to support the conclusion that they have sufficient financial resources—as set forth in § 39.39(d)(2)—to implement their recovery and wind-down plans. Should this proposed rulemaking be adopted, that analysis would be informed by the analyses SIDCOs and Subpart C DCOs would be required to engage in under proposed § 39.39(c). Consistent with § 39.39(e), moreover, SIDCOs and Subpart C DCOs must continue to maintain viable plans for 71 17 CFR 39.39(b)(1) and (2). CFR 39.19(c)(4)(xxiv). 73 Regulation 39.39(d)(2) provides, in part that each SIDCO and Subpart C DCO shall maintain sufficient unencumbered liquid financial assets, funded by the equity of its owners, to implement its recovery or wind-down plans. The SIDCO or Subpart C DCO shall analyze its particular circumstances and risks and maintain any additional resources that may be necessary to implement the plans. The plan shall include evidence and analysis to support the conclusion that the amount considered necessary is, in fact, sufficient to implement the plans. Regulation 39.39(e) provides, in part that all SIDCOs and Subpart C DCOs shall maintain viable plans for raising additional financial resources, including, where appropriate, capital, in a scenario in which the SIDCO or Subpart C DCO is unable, or virtually unable, to comply with any financial resources requirements set forth in this part. 72 17 E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules raising additional financial resources where they are unable to comply with any financial resources requirements provided in Part 39. lotter on DSK11XQN23PROD with PROPOSALS2 1. Submission of Plans for Recovery and Orderly Wind-Down—§ 39.39(b)(1) The Commission is proposing to amend § 39.39(b)(1) and (2) by combining the paragraphs into one paragraph, § 39.39(b)(1), and crossreferencing the reporting requirement in § 39.19(c)(4)(xxiv). Proposed § 39.39(b)(1) would require each SIDCO and Subpart C DCO to maintain and, consistent with § 39.19(c)(4)(xxiv), submit to the Commission, viable plans for recovery and orderly wind-down, and supporting information, due to, in each case, default losses and nondefault losses.74 The Commission is not proposing to require that the recovery plan and orderly wind-down plan be submitted as separate documents. However, the analysis for the recovery portion and wind-down portion must be set forth clearly. The Commission requests comment on these proposed revisions. 2. Notice of Initiation of the Recovery Plan and of Pending Orderly WindDown—§ 39.39(b)(2), § 39.13(k)(1), and § 39.19(c)(4)(xxv) Current § 39.39(c)(1) includes, in part, the requirement that recovery plans and wind-down plans include procedures for informing the Commission, as soon as practicable, when the recovery plan is initiated or wind-down is pending.75 The Commission proposes to move this requirement to § 39.39(b)(2) and to amend the requirement to state explicitly that in addition to having procedures in place for informing the Commission that the recovery plan is initiated or that orderly wind-down is pending, the SIDCO or Subpart C DCO must notify the Commission, as soon as practicable, when the recovery plan is initiated or orderly wind-down is pending. This is not a substantive change since the requirement to have procedures in place to provide notice necessarily implies that such notice to the Commission will occur; however, the Commission believes that explicitly stating this requirement will ensure that the SIDCO or Subpart C DCO understands this requirement. Additionally, the Commission proposes to require that these DCOs’ notice that the recovery plan is initiated or orderly wind-down is pending also 74 In Section IV below, discussing the reporting requirement in § 39.19(c)(4)(xxiv), the Commission explains the reason for adding the term ‘‘and supporting information.’’ 75 17 CFR 39.39(c)(1). VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 be provided to clearing members.76 Timely notification of events to clearing members is essential to enable them to prepare for a transition by the DCO into recovery or orderly wind-down. The Commission proposes that each SIDCO and Subpart C DCO that files a recovery plan and orderly wind-down plan under this section must notify clearing members (in addition to the Commission) that recovery is initiated or that orderly wind-down is pending as soon as practicable. As discussed below in Section III, the Commission proposes that DCOs that are neither SIDCOs nor Subpart C DCOs notify the Commission and clearing members as soon as practicable when recovery 77 is initiated or orderly wind-down is pending. The Commission proposes to add new § 39.19(c)(4)(xxv) to require that each DCO notify the Commission and clearing members as soon as practicable when the DCO has initiated its recovery plan or orderly wind-down is pending. The Commission requests comment on these proposed changes. 3. Establishment of Time To File Recovery Plan and Orderly Wind-Down Plan—§ 39.39(b)(3) The Commission is proposing to establish the timing of the filing of recovery plans and orderly wind-down plans. In 2013, the Commission acknowledged commenters’ concerns that additional time may be required to comply with § 39.39 because relevant global standards were still in the consultative phase. The Commission promulgated § 39.39(f) to allow a SIDCO or Subpart C DCO to apply for up to one year to comply with § 39.39. Regulation 39.39(f) therefore created various dates for SIDCOs and Subpart C DCOs to file the plans required by § 39.39(b). Commenters again requested a specific date to submit recovery plans and wind-down plans in response to the May 2019 notice of proposed rulemaking codifying § 39.19(c)(4)(xxiv).78 In the January 2020 76 CFTC Letter No. 16–61, at 14 (referencing § 39.21, ‘‘Public information,’’ which requires a DCO to make information concerning the rules and the operating and default procedures governing the clearing and settlement systems of the DCO available to market participants). 77 While, under the proposal, a DCO that is neither a SIDCO nor a subpart C DCO is not required to have a recovery plan, if such a DCO does initiate recovery, it will be required to notify the Commission and clearing members. 78 See, e.g., Comment letter filed by the Futures Industry Association and the International Swaps and Derivatives Association (ISDA), at 21 (Sept. 13, 2019), available at https://comments.cftc.gov/ PublicComments/ CommentList.aspx?id=2985&ctl00_ctl00_ cphContentMain_MainContent_ gvCommentListChangePage=2. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 48975 final rule, the Commission noted the date by which a SIDCO or new Subpart C DCO is required to maintain a recovery plan and wind-down plan depends upon when the DCO is designated as systemically important or elects Subpart C status, whether it requests relief under § 39.39(f), and whether the Commission grants such relief.79 The Commission determined that § 39.39(f) prevented the establishment of a date certain for submitting plans to the Commission.80 This proposal will, if adopted and finalized by the Commission, codify the elements of a recovery plan and winddown plan required under paragraph (b) of § 39.39, and remove the uncertainty concerning the filing deadline. The need to request an extension of time for up to one year to comply with the requirements of § 39.39 (and § 39.35) will be obviated by the fixed deadline for newly designated SIDCOs to develop and maintain a recovery plan and a wind-down plan.81 The Commission is proposing to require a DCO to submit a recovery plan and orderly wind-down plan and supporting information (to the extent it has not already done so) as required by proposed § 39.39(b) within six months of the date the DCO is designated as a SIDCO, or as part of its election to become subject to the provisions of Subpart C set forth in § 39.31, and annually thereafter.82 The Commission has preliminarily determined to require that a newly designated SIDCO should file a complete recovery plan and (to the extent it has not already done so) orderly wind-down plan consistent with part 39 within six months of the date of designation for the following reasons. First, in order to be designated as a SIDCO, the DCO must be a DCO registered with the CFTC. All DCOs must comply with, and demonstrate compliance as requested by the Commission, applicable provisions of the CEA and the Commission’s regulations, including Subparts A and B 79 85 FR at 4822. 80 Id. 81 Regulation 39.35 covers the default rules and procedures for uncovered credit losses or liquidity shortfalls (recovery) for SIDCOs and Subpart C DCOs. 82 As discussed in section III below, it is being proposed that all DCOs will be required to maintain orderly wind-down plans on and after the effective date of this rule with respect to that requirement. As discussed further below, it is proposed that the effective date of that orderly wind-down plan requirement will be six months after this rule may be finalized. To address the possibility that a DCO may be designated a SIDCO or may elect Subpart C status during that intervening period, such a DCO will be required to maintain and file an orderly wind-down plan to the extent it has not already done so. E:\FR\FM\28JYP2.SGM 28JYP2 48976 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 of part 39, in order be registered. Second, the Commission expects that most of the larger DCOs for which future designation may be forthcoming have elected to be subject to Subpart C, and therefore, have recovery plans in place. Among those DCOs that are not currently subject to Subpart C, most are foreign-based DCOs that are subject to standards in their home jurisdictions that are consistent with the PFMI, and thus such foreign-based DCOs are required to have both recovery and orderly wind-down plans.83 Third, upon notification that the FSOC is considering whether to designate a DCO systemically important, the DCO will be aware of the enhanced regulatory requirements for SIDCOs included in subpart C of part 39 of the Commission’s regulations.84 Finally, staff issued CFTC Letter No. 16–61 and its non-binding guidance in 2016. DCOs registered with the Commission and the clearing industry in general are likely familiar with the staff letter and have probably been following developments related to this proposal; hence, the Commission has preliminarily determined not to require a longer delay. The Commission is clarifying that a DCO that elects to be subject to Subpart C of the Commission’s regulations must file a recovery plan and (in the event it has not already done so) an orderly wind-down plan, and supporting information, as part of its election to be subject to the provisions of Subpart C.85 The Commission continues to expect that a DCO will not elect status as a Subpart C DCO before it is in full compliance with the regulations in Subpart C. The Commission is proposing § 39.39(b)(3) to require a SIDCO to file a recovery plan, and supporting information, within six months of its designation as systemically important by the FSOC. The Commission is also proposing to require that a DCO that elects to be subject to the provisions of Subpart C must file a recovery plan and (to the extent it has not already done so) an orderly wind-down plan, and supporting information for these plans, as part of the DCO’s election to be subject to the provisions of Subpart C. The Commission is proposing that such text accompanying fn. 207, infra. CFR 1320.11(a), 1320.12(a); Authority to Designate Financial Market Utilities as Systemically Important, 76 FR 44763 (Jul. 27, 2011). 85 The Commission is proposing to amend Exhibit F–1 to the Subpart C election form to require the submission of the recovery and orderly wind-down plans, and supporting information, as well as a demonstration of how those plans comply with the requirements of Subpart C. plans be updated thereafter on an annual basis. The Commission requests comment on this aspect of the proposal. C. Recovery Plan and Orderly WindDown Plan: Required Elements— § 39.39(c) Regulation 39.39(c)(1) currently requires that a SIDCO and Subpart C DCO develop a recovery plan and orderly wind-down plan that includes scenarios that may potentially prevent it from being able to meet its obligations, provide its critical operations and services as a going concern, and assess the effectiveness of a full range of options for recovery or orderly winddown. At the time the Commission was promulgating current § 39.39(c)(1), commenters had requested specificity regarding the required elements of a recovery plan.86 The Commission declined to provide that specificity because the international guidance relevant to such plans was not final when § 39.39 was adopted in 2013. After the international guidance was finalized, staff issued CFTC Letter No. 16–61, which provides informal guidance from DCR concerning those elements. Supervisory experience shows that the recovery plans and orderly wind-down plans of SIDCOs and Subpart C DCOs are generally consistent with the staff guidance in Letter No. 16– 61; thus, most, if not all, of the requirements described below are already incorporated into the plans submitted by the DCOs currently subject to § 39.39. The Commission has preliminarily determined to codify the staff guidance into the Commission’s part 39 regulations. The Commission has preliminarily determined to specify the required elements that a SIDCO or Subpart C DCO must include in its recovery plan and orderly wind-down plan at this time. The Commission proposes to replace § 39.39(c) in its entirety. Proposed § 39.39(c) would reflect, to the extent the Commission considers appropriate, the guidance on international standards related to recovery plans and orderly wind-down plans adopted by the global standard-setting bodies since 2013,87 and certain of the DCR staff guidance set forth in CFTC Letter No. 16–61.88 83 See 84 12 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 86 See, e.g., Comment letter of ISDA at 2–3 (Sept. 16, 2013), filed in response to the Notice of Proposed Rulemaking, Derivatives Clearing Organizations and International Standards, 78 FR 50260 (Aug. 16, 2013), available at https:// comments.cftc.gov/PublicComments/ CommentList.aspx?id=1391. 87 E.g., CPMI–IOSCO Recovery Guidance. 88 See 17 CFR 39.39(c)(1). PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 As a general matter, the Commission believes that a DCO’s recovery plan and orderly wind-down plan required by § 39.39(b) should include summaries that provide an overview of the plans, and descriptions of how the plans will be implemented, in order to enhance both the understanding of the persons who need to use the plans and the Commission’s ability to evaluate the plans as part of its supervisory program. Proposed § 39.39(c) would also require that the description of each plan include the identification and description of the DCO’s critical operations and services, interconnections and interdependencies, resilient staffing arrangements, obstacles to success, stress scenario analyses, potential triggers for recovery and orderly winddown, available recovery and orderly wind-down tools, analysis of the effect of any tools identified, lists of agreements to be maintained during recovery and orderly wind-down, descriptions of governance arrangements, and testing. These proposed plan requirements are necessary for the plan to be viable, i.e., capable of working successfully, are consistent with the international guidance discussed above, and should be considered the minimum that a SIDCO or Subpart C DCO must include in its recovery plan and orderly winddown plan. The Commission proposes to add these requirements as new proposed § 39.39(c). For clarity and completeness, specific requirements will be set forth in paragraphs (c)(1) through (c)(8), as discussed below. The Commission requests comment on this approach, and on each of the proposed specific requirements. 1. Critical Operations and Services, Interconnections and Interdependencies, and Resilient Staffing—§ 39.39(c)(1) The Commission is proposing to add new § 39.39(c)(1) requiring recovery plans and orderly wind-down plans to identify and describe the SIDCO’s and Subpart C DCO’s critical operations and services, including internal and external service providers; ancillary services providers; financial and operational interconnections and interdependencies; aggregate cost estimates for the continuation of services; plans for resilient staffing arrangements for continuity of operations into recovery or orderly wind-down; plans to address the risks that the failure of each critical operation and service poses to the DCO, and a description of how such failures would be addressed; and a description of how the SIDCO and Subpart C DCO will E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules ensure that the services continue through recovery and orderly winddown. In developing a viable plan, both the CPMI–IOSCO Recovery Guidance and CFTC Letter No. 16–61 stress the importance of identifying the critical operations and services that the DCO provides, and the financial and operational interconnections and interdependencies among the DCO and its relevant affiliates, internal and external service providers, and other relevant stakeholders.89 The Commission agrees that each recovery plan and orderly wind-down plan should identify and describe the critical operations and services that the DCO provides to clearing members and other financial market participants. As CPMI– IOSCO stated in its guidance, ‘‘[t]he purpose of identifying critical services is to focus the recovery plan on the FMI’s ability to continue to provide these services on an ongoing basis, even when it comes under extreme stress.’’ 90 The Commission agrees that for purposes of recovery planning in § 39.39, when determining whether a service is ‘‘critical,’’ the DCO must consider ‘‘the importance of the service to the [DCO]’s participants and other FMIs, and to the smooth functioning of the markets the [DCO] serves and, in particular, the maintenance of financial stability.’’ 91 The Commission anticipates that the DCO’s ability to provide critical services may also be affected by issues relating to certain services that are ancillary to the critical service, and thus issues relating to these ancillary services should be included in the recovery and orderly wind-down plan. The Commission agrees with the analysis in the CPMI–IOSCO Recovery Guidance that, ‘‘even if a specific service is judged not to be critical, a systemically important FMI needs to take account of the possibility that losses or liquidity shortfalls relating to the provision of that noncritical service could threaten its viability and thus necessitate implementation of its recovery plan so that it can continue to provide those services that are judged to be critical. An FMI needs to have a recovery plan that covers all the scenarios that could threaten its viability.’’ 92 The Commission believes that a DCO’s recovery plan and orderly winddown plan should identify and analyze 89 CPMI–IOSCO Recovery Guidance, at section 2.4; CFTC Letter No. 16–61, at 10–11. 90 CPMI–IOSCO Recovery Guidance, at section 2.4.2. 91 Id. 92 Id. at section 2.4.4. n.13. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 a DCO’s financial and operational interconnections and interdependencies. Such an analysis is important to foster, and to provide transparency into, the ability of the DCO to implement each of its recovery plan and orderly wind-down plan. For instance, the recovery plan should account for the possibility that an affiliated entity in the financial sector may fail, resulting in a cascade of failures and resultant defaults on all obligations to the DCO, including with respect to services that the DCO depends upon to complete its operations. A DCO’s recovery plan and orderly wind-down plan should also identify the DCO’s critical internal and external service providers, the risks that the failure of each provider poses to the DCO, how such failures would be addressed, and how the DCO would ensure that the services would continue into recovery and orderly wind-down.93 Similarly, the DCO should consider the impact of any disruption in services or operations it provides to clearing members and financial market participants. In this regard, CFTC Letter No. 16–61 recommended that a DCO’s recovery plan include the identification and analysis of ‘‘the financial and operational interconnections and interdependencies among the DCO and its relevant affiliates, internal and external service providers and other relevant stakeholders.’’ 94 In considering and analyzing the magnitude of the costs that it needs to plan for associated with recovery or orderly wind-down, the DCO should consider the likely increase in certain of its expenses compared to its businessas-usual operating budget, including, for example, legal fees, accounting fees, financial advisor fees, the costs associated with employee retention programs, and other incentives in order to maintain critical staff. Other costs, such as marketing or those associated with the development of new products, may decrease. For purposes of orderly wind-down planning in particular, the DCO shall proceed under the conservative assumption that any resources consumed during recovery will not be available to fund critical operations and services in wind-down. The DCO’s analysis of its critical operations and services should also describe the impact of the multiple roles and relationships that a single financial entity may have with respect to the DCO including affiliated entities and external entities.95 For instance, a single external PO 00000 93 Id. 94 CFTC Letter No. 16–61, at 10. 95 Id. Frm 00011 Fmt 4701 Sfmt 4702 48977 entity (including a set of affiliated entities) may act as a clearing member, a settlement bank, custodian or depository bank, liquidity provider or counterparty. If such a single external entity defaults in one of its roles e.g., as a clearing member, it will likely default in all of them.96 An entity affiliated with the DCO may be relied upon for a variety of services, such as those related to information technology, human resources, or facilities. In order to support the viability of its recovery or orderly wind-down plan, the DCO should address the contingency that its affiliate may not be able to perform those services. Consistent with the CPMI–IOSCO Recovery Guidance, the Commission believes that a DCO’s recovery plan should consider how its design and implementation may affect another FMI, and coordinate the relevant aspects of their plans.97 Given the interconnected nature of the financial services ecosystem, supporting financial stability requires the recovery plan and orderly wind-down plan of each DCO to identify and address contingencies and consequences. Recovery and orderly wind-down planning must also identify potential risks that may arise in recovery and orderly wind-down if financial weakness or failure in one of the DCO’s business lines or affiliated legal entities spreads to others. The recovery and orderly wind-down plans must describe how the DCO has planned for resilient staffing arrangements for continuity of operations since it is not feasible to maintain a critical service without the concomitant personnel. As part of planning for recovery, each SIDCO and Subpart C DCO should also explain how the DCO will retain, and address the potential loss of, the services of personnel filling mission-critical roles during extreme stress. The DCO may additionally be vulnerable to key person risk; accordingly, plans for resilient staffing arrangements should identify, to the extent applicable, key person risk within the DCO or (as relevant) affiliated legal entities that the DCO relies upon to provide its critical 96 A financial conglomerate/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 DCO. Based on past experience with insolvencies of financial firms (e.g., Refco, Lehman, MF Global), once one of these affiliates fails, the others are likely to follow it into bankruptcy or receivership proceedings quickly. 97 CPMI–IOSCO Recovery Guidance, at section 2.4.14. E:\FR\FM\28JYP2.SGM 28JYP2 48978 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 operations and services, and how the DCO has planned for this risk. The Commission requests comment on this aspect of the proposal. 2. Recovery Scenarios and Analysis— § 39.39(c)(2) The Commission is proposing to add new § 39.39(c)(2) to specify scenarios that must be addressed in the SIDCO’s or Subpart C DCO’s recovery plan, to the extent, in each case, that such scenario is possible. The Commission believes that the current requirement that a SIDCO or Subpart C DCO shall identify scenarios that may potentially prevent it from being able to meet its obligations is too broad and allows for planning gaps. To support a systematic planning process that will foster these DCOs’ ability to recover effectively from situations of unprecedented stress, the Commission is proposing to adopt portions of CFTC Letter No. 16–61 describing the analysis that should take place for each scenario considered in the recovery plan; namely: (1) a description of the scenario; (2) the events that are likely to trigger the scenario; (3) the DCO’s process for monitoring events triggering the scenario; (4) the market conditions, operational and financial difficulties and other relevant circumstances that are likely to result from the scenario; (5) the potential financial and operational impact of the scenario on the DCO 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 (6) the specific steps the DCO would anticipate taking when the scenario occurs or appears likely to occur including, without limitation, any governance or other procedures in order 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.98 The Commission believes that this sixpart analysis is integral to viability of a SIDCO’s and Subpart C DCO’s recovery plan and orderly wind-down plan. The Commission expects that each of these DCOs will undertake such analysis for each scenario described in its recovery plan and its orderly wind-down plan. The Commission is proposing in § 39.39(c)(2) that each recovery plan and orderly wind-down plan contain the described analysis. In order to promote the comprehensiveness of these DCOs’ recovery plans, the Commission is also proposing to require that each recovery 98 CFTC Letter No. 16–61, at 6–7. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 plan describe certain ‘‘commonly applicable scenarios,’’ most of which are described in CFTC Letter No. 16–61, to the extent such scenarios are possible in light of the DCO’s activities.99 Those scenarios include: (1) settlement bank failure; (2) custodian or depository bank failure; (3) scenarios resulting from investment risk; (4) poor business results; (5) the financial effects from cybersecurity events; (6) fraud (internal, external, and/or actions of criminals or of public enemies); (7) legal liabilities, including liabilities related to the DCO‘s obligations with respect to cleared transactions and those not specific to its business as a DCO (e.g., tort liability); (8) losses resulting from interconnections and interdependencies among the DCO and its parent, affiliates, and/or internal or external service providers (e.g., the financial effects of the inability of a service provider to provide key systems or services); 100 and (9) any other risks relevant to the DCO’s activities. In addition to these scenarios, the Commission is proposing to require SIDCOs and Subpart C DCOs to include in their recovery plan the following additional scenarios: (1) credit losses or liquidity shortfalls created by single and multiple clearing member defaults in excess of prefunded resources required by law; (2) liquidity shortfall created by a combination of clearing member 99 Id. at 5–6. These scenarios are described as ‘‘commonly applicable’’ because, in the Commission’s judgment, all DCOs will plausibly be vulnerable to most of these scenarios occurring, that is, most scenarios will be possible and, if such a scenario occurs, it may damage the DCO’s financial position sufficiently to require recovery or orderly wind-down. The reference to scenarios that are ‘‘possible’’ should not be confused with a reference to scenarios that are ‘‘likely.’’ Thus, if a DCO deposits all relevant funds as cash with a federally regulated and insured depository institution, and in no circumstances invests them, then a scenario of losses resulting from investment risk would not be possible. On the other hand, while regulation of depository institutions and FDIC insurance makes a loss due to failure of such a depository bank extraordinarily unlikely, it is not impossible, and thus is a scenario that should be addressed in the recovery and orderly wind-down plans. See, e.g., NDL Discussion Paper at section 2.1 (‘‘[L]ow risk is not zero risk, and consequently, CCPs should have a plan to address [non-default losses (NDL)] from these scenarios should they materialize. Some CCPs, however, do not include certain types of NDL scenario[s] in their planning because these CCPs seem to assume that regulated financial institutions or central securities depositories pose zero custody [or depository] risk, or that legal risk cannot cause an NDL (because Principle 1 of the PFMI requires a legal basis with ‘a high degree of certainty’). These approaches appear to be inconsistent with the standards set forth in the PFMI.’’) 100 For loss scenarios resulting from interconnections and interdependencies among the DCO and its parent or affiliates, the DCO should consider, to the extent applicable, how its organizational structure may impact the specific steps it would anticipate taking. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 default and a failure of a liquidity provider to perform; (3) depository bank failure; and (4) losses resulting from interconnections and interdependencies with other CCPs (whether or not those CCPs are registered with the Commission as DCOs). For any of those scenarios enumerated above that the DCO determines are not possible in light of its activities, the DCO should provide its reasoning for not considering it. Finally, the Commission is proposing that a DCO must include at least two 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 DCO, are particularly relevant to the DCO’s business.101 The Commission believes that a DCO should describe how it is prepared for these additional exigencies in order to demonstrate to the market and its clearing members that it is prepared to meet the demands of possible market stresses. The Commission requests comment on this aspect of the proposal. 3. Recovery and Orderly Wind-Down Triggers—§ 39.39(c)(3) Thorough planning also requires that a SIDCO or Subpart C DCO be prepared to determine when recovery or orderly wind-down is necessary, that is, when the recovery plan or orderly wind-down plan should be ‘‘triggered.’’ Some triggers might be automatic (e.g., because the DCO is insolvent) while others may not be obvious, and many will necessarily involve the exercise of judgment and discretion (e.g., the DCO is suffering ongoing business losses that appear likely to lead to insolvency, or an adverse legal judgment that involves large financial liability appears likely). The CPMI–IOSCO Recovery Guidance and CFTC Letter No. 16–61 each advise that a SIDCO’s and Subpart C DCO’s recovery plan and wind-down plan should define the criteria, both quantitative and qualitative, that they would use to determine, or to guide its discretion in determining, when to implement the recovery plan and the wind-down plan, i.e., the trigger(s).102 The Commission believes that defining those criteria (including conducting the 101 The term ‘‘in the judgment of the DCO, are particularly relevant’’ is being used rather than ‘‘are most relevant’’ to avoid the implication that it would be necessary to conduct an analysis ranking with precision the relevance of different combinations. Rather, staff of the DCO should exercise their professional judgement in selecting at least two particularly relevant combination scenarios. It is highly unlikely that no such combinations (or only one) would be possible. 102 See CPMI–IOSCO Recovery Guidance, at sections 2.4.6–2.4.8; CFTC Letter No. 16–61, at 7. E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules analysis necessary to do so) would materially aid these DCOs both in developing effective plans, and in preparing to address events that lead to such triggers. While the CPMI–IOSCO Recovery Guidance references only recovery plans, the Commission believes that a similar analysis should apply to planning for consideration of orderly wind-down. The Commission also believes that the identification of possible triggers would project confidence to the public that these DCOs will continue to function in extreme circumstances (such as recovery), and convey that these DCOs have a plan to consider wind-down in an orderly manner if recovery is ineffective. The CPMI–IOSCO Recovery Guidance states that there may be some triggers that ‘‘should lead to a pre-determined information-sharing and escalation process within the FMI’s senior management and its board of directors and to careful consideration of what action should be taken.’’ 103 The Commission agrees that planning for such an information-sharing and escalation process as part of the DCO’s governance is an important part of ensuring that the DCO is prepared to deal with contingencies. Accordingly, the Commission is proposing new § 39.39(c)(3)(i) to require that a SIDCO’s or Subpart C DCO’s recovery plan discuss the criteria that may trigger both implementation and consideration of implementation of the recovery plan, and the process that these DCOs have in place for monitoring for events that are likely to trigger the recovery plan. With respect to the orderly wind-down plan, the DCO must discuss the criteria that may trigger consideration of implementation of the plan, realizing the importance of discretion in determining whether to implement orderly wind-down (in contrast to recovery, a terminal process), and the process that the DCO has in place for monitoring for events that may trigger consideration of implementation of the orderly wind-down plan. For similar reasons, the Commission is proposing § 39.39(c)(3)(ii) to require the recovery plan and orderly winddown plan each to include a description of the information-sharing and escalation process within the SIDCO’s and Subpart C DCO’s senior management and the board of directors. These DCOs must have a defined process that will include the factors the DCO considers most important in guiding the board of directors’ exercise 103 CPMI–IOSCO Recovery Guidance, at section 2.4.8. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 of judgment and discretion with respect to recovery and orderly wind-down plans in light of the relevant triggers and that process. The Commission requests comment on this aspect of the proposal. 4. Recovery Tools—§ 39.39(c)(4) By the end of 2013, CPMI–IOSCO had not completed their consultative work establishing guidance for use in implementing the PFMI. Their final guidance was published in October 2014 and amended in July 2017. The CPMI–IOSCO Recovery Guidance does not advise authorities to prescribe specific recovery tools; rather the guidance ‘‘provides an overview of some of the tools that an FMI may include in its recovery plan, including a discussion of scenarios that may trigger the use of recovery tools and characteristics of appropriate recovery tools in the context of such scenarios.’’ 104 CFTC Letter No. 16–61 adopts a similar approach in that it does not prescribe the tools that a DCO should use during recovery. Rather, the letter sets forth a detailed analysis that staff expects a DCO should undertake in its recovery plan to meet its obligations or provide its critical operations and services as a going concern.105 The Commission declines to prescribe specific tools that SIDCOs and Subpart C DCOs must include in their recovery plans. Each DCO is different, and a variety of tools may be available to a particular DCO in each specific scenario. Rather, these DCOs should have discretion to decide on which tools to include, so long as the set of tools chosen meets standards designed to protect indirect participants (e.g., clients, end users), direct participants (i.e., clearing members), the DCO itself, and other relevant stakeholders (including, in the case of SIDCOs, the financial system more broadly): (1) the set of tools should comprehensively address how the DCO would continue to provide critical operations and services in all relevant scenarios; (2) each tool should be reliable, timely, and have a strong legal basis; (3) the tools should be transparent and designed to allow those who would bear losses and liquidity shortfalls to measure, manage and control their exposure to losses and liquidity shortfalls; (4) the tools should create appropriate incentives for the DCO’s owners, direct and indirect participants, and other relevant stakeholders; and (5) the tools should be designed to minimize the negative 104 Id. at 1; see also id. at section 4.1 (summarizing specific recovery tools). 105 CFTC Letter No. 16–61, at 7–8. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 48979 impact on direct and indirect participants and the financial system more broadly.106 The Commission expects that each SIDCO and Subpart C DCO will consider in its planning process tools that meet the full scope of financial deficits that the DCO may need to remediate: (1) tools to allocate uncovered losses by a clearing member default: e.g., the DCO’s own capital (sometimes referred to as ‘‘skin-in-thegame’’), cash calls (sometimes referred to as assessments), and gains-based haircutting (sometimes referred to as variation margin gains haircutting); (2) tools to address uncovered liquidity shortfalls: e.g., liquidity from third-party institutions and non-defaulting 107 clearing members; (3) tools to replenish financial resources: e.g., cash calls and recapitalization; 108 (4) tools to establish a matched book: e.g., auctions and tearups; and (5) tools to allocate losses not covered by a clearing member default: e.g., capital, recapitalization, and insurance. To provide these DCOs with some flexibility, the Commission is proposing to require that each DCO’s recovery plan include a complete description and analysis of the tools it proposes to use to cover shortfalls from the stress scenarios identified by the DCO that are not covered by pre-funded financial resources, or where the DCO does not have sufficient liquid resources or liquidity arrangements to meet its obligations in the correct form and in a timely manner. Additionally, the Commission expects each DCO will be prepared to implement tools to deal with other losses or liquidity shortfalls, including those from non-default risks that may materialize more slowly, and tools to increase the DCO’s financial resources where necessary in order to implement its plans. Finally, to support the planning process, the description of recovery tools in the recovery plan should include, at a minimum, any discretion the DCO has in the use of the tool, whether the tool is mandatory or voluntary, and the governance processes and arrangements for determining which tools to use, and to what extent. Accordingly, the Commission is proposing § 39.39(c)(4) to require a SIDCO or Subpart C DCO to have a 106 See CPMI–IOSCO Recovery Guidance, at section 3.3.1. 107 In the context of default losses, the defaulting participants cannot be relied upon to provide any resources. In the context of non-default losses, all participants are, at least in the first instance, nondefaulting participants. 108 Cf. id. at section 2.4.9. While the CPMI–IOSCO Recovery Guidance refers to capital, section 39.11(b) recognizes that financial resources include, but are not limited to, capital. E:\FR\FM\28JYP2.SGM 28JYP2 48980 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 recovery plan that includes the following: (i) a description of the tools that the DCO would expect to use in each scenario required by proposed paragraph (b) of this section that comprehensively addresses how the DCO would continue to provide critical operations and services; (ii) the order in which each such tool would be expected to be used; (iii) the time frame within which each such tool would be expected to be used; (iv) a description of the governance and approval processes and arrangements within the DCO for the use of each tool available, including the exercise of any available discretion; (v) the processes to obtain any approvals external to the DCO (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; 109 (vi) the steps necessary to implement each such tool; (vii) a description of the roles and responsibilities of all parties, including non-defaulting clearing members, in the use of each such tool; (viii) whether the tool is mandatory or voluntary; (ix) an assessment of the likelihood that the tools, individually and taken together, would result in recovery; and (x) an assessment of the associated risks from the use of each such tool to nondefaulting clearing members and those clearing members’ customers with respect to transactions cleared on the DCO, linked financial market infrastructures, and the financial system more broadly. For those scenarios involving non-default losses, all clearing members are non-defaulting. The Commission requests comment on this aspect of the proposal. With respect to the types of recovery tools in particular, the Commission welcomes comment on whether DCOs use, or would anticipate using, any tools not identified above in order to meet the full scope of financial deficits a DCO in recovery may need to remediate. 5. Orderly Wind-Down Scenarios and Tools—§ 39.39(c)(5) As discussed further below, planning for orderly wind-down overlaps significantly, though not totally, with planning for recovery. There may be circumstances where the SIDCO or Subpart C DCO attempts to recover but fails, upon which it should have a plan, as well as sufficient capital, to transition 109 Thus, while (iv) focuses on internal governance and approval processes such as among DCO officers and committees, (v) focuses on external approval processes, if any, such as approvals by a regulator with the legal authority or practical power to require approval of the use of a tool. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 to and execute an orderly wind-down. SIDCOs and Subpart C DCOs must therefore plan for both recovery and orderly wind-down. Proposed § 39.39(c)(5) would require a SIDCO’s or a Subpart C DCO’s orderly wind-down plan to identify scenarios that could prevent it from being able to meet its obligations, and to identify tools which may be used in the orderly wind-down of the DCO. CFTC Letter No. 16–61 states that a DCO’s analysis of its wind-down options ‘‘should contain many of the elements of a DCO’s analysis of its recovery tools.’’ 110 The letter calls for the wind-down plan to identify and analyze in detail, with respect to each scenario, nine required elements as well as ‘‘the manner in which liquidity requirements would be managed during service closure’’ and how essential support services would be maintained during the wind-down period.111 The letter also calls for the wind-down plan to address obstacles to each option, and the viability of the options in light of the obstacles. The Commission recognizes that, to plan effectively for orderly wind-down, considering the scenarios and recovery tools described in the DCO’s recovery plan must precede the DCO’s analysis of the events that would trigger consideration of implementation of the orderly wind-down plan, and the use of the DCO’s orderly wind-down options.112 A DCO’s orderly wind-down plan should therefore include a description of the point or points in the recovery plan, for each scenario, where recovery efforts would likely be deemed to have failed and consideration of implementing the orderly wind-down plan would be triggered. The orderly wind-down plan should then describe at what point the DCO will no longer be able to meet its obligations or provide its critical services as a going concern. Once these scenarios are identified, the plan should describe the tools available to the DCO to effectuate an orderly wind-down. The DCO should, therefore, explain in its wind-down plan how it would plan to accomplish an orderly wind-down, taking into account the time it anticipates it would take to implement the plan. The orderly winddown plan should include a complete analysis of the wind-down tools the DCO would anticipate using, both individually and together. In order to support a thorough planning process that is consistent with the international standards, the Commission has preliminarily determined that for each PO 00000 Letter No. 16–61, at 9. at 10. 112 See id. at 9. wind-down tool, the DCO should describe any discretion it has in the use or sequencing of the wind-down tool for each scenario, any obstacles to the use of a particular tool, the governance and approval processes for the tools available, and how the DCO is planning for the viability of the tools in light of any identified obstacles. To support a systematic planning process that will foster the DCO’s ability to wind-down in an orderly manner in situations of unprecedented stress, where recovery is infeasible, proposed § 39.39(c)(5) incorporates certain of the staff guidance included in CFTC Letter No. 16–61, as well as international standards and guidance issued since the 2013 rulemaking. Proposed § 39.39(c)(5) would require each SIDCO and Subpart C DCO to identify scenarios that may prevent it from meeting its obligations or providing its critical services as a going concern, describe the tools that it would expect to use in an orderly winddown that comprehensively address how the DCO would continue to provide critical operations and services, describe the order in which each such tool would be expected to be used,113 establish the time frame within which each such tool would be expected to be used, describe the governance and approval processes and arrangements within the DCO for the use of each of the tools available, including the exercise of any available discretion, describe the processes to obtain any approvals external to the DCO (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, set forth the steps necessary to implement each such tool, describe the roles and responsibilities of all parties, including non-defaulting clearing members, in the use of each such tool, provide an assessment of the likelihood that the tools, individually and taken together, would result in orderly winddown, and provide an assessment of the associated risks to non-defaulting clearing members and those clearing members’ customers with respect to transactions cleared on the DCO, linked financial market infrastructures, and the financial system more broadly. The Commission requests comment on this aspect of the proposal. The Commission specifically requests comment on whether the scope of clearing member customers that are focused upon (i.e., ‘‘those clearing members’ customers with respect to transactions cleared on the’’ DCO) is 110 CFTC 111 Id. Frm 00014 Fmt 4701 Sfmt 4702 113 It may be the case that certain tools may be used concurrently. E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules appropriately broad, and appropriately framed. lotter on DSK11XQN23PROD with PROPOSALS2 6. Agreements To Be Maintained During Recovery and Orderly Wind-Down— § 39.39(c)(6) A DCO has a variety of contractual arrangements that must be maintained during business as usual, in times of stress, and recovery and orderly winddown, such as those with clearing members, affiliates, linked central counterparties, counterparties, external service providers, and other third parties.114 These contractual arrangements include the DCO’s rules and procedures, agreements to provide operational, administrative and staffing services, intercompany loan agreements, mutual offset agreements or crossmargining agreements, and credit agreements.115 Also, a DCO’s recovery plan and orderly wind-down plan should identify and analyze the implications of the various contractual arrangements that the DCO maintains and describe the actions that the DCO has taken to ensure that its operations can continue during recovery and orderly wind-down despite the termination or alteration of relevant contracts.116 Contracts may contain covenants, material adverse change clauses, or other provisions that could subject such contracts to alteration or termination as a result of the implementation of the recovery plan or orderly wind-down plan, and thus render the continuation of the DCO’s critical operations and services difficult or impracticable. Therefore, the Commission believes that each DCO’s recovery plan and orderly wind-down plan should be supported by the DCO’s review and analysis of the DCO’s contracts associated with the provision of those critical operations or services to determine if those contracts contain such provisions. Where such contractual provisions are present and enforceable against the DCO, it will need to have alternative methods to continue those critical operations and services. The DCO’s recovery plan and orderly wind-down plan should describe the actions that the DCO has taken to ensure that its operations can continue during recovery and orderly wind-down despite these contractual provisions. The orderly wind-down 114 Id. at 11. 115 Id. 116 Id. Note that CFTC Letter No. 16–61 calls for the same, i.e., determine whether any contractual arrangements include covenants, material adverse change clauses or other provisions that would permit a counterparty to alter or terminate the agreement as a result of the implementation of the DCO’s recovery plan or wind-down plan. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 plan should also consider whether the contractual relationships the DCO relies upon to perform its critical operations and services would transfer to a new entity in the event of the creation of a new entity or the sale or transfer of the business to another entity in an orderly wind-down. Furthermore, the Commission believes that a requirement that a DCO have plans in place to ensure that its critical operations and services will continue into recovery and orderly wind-down is consistent with the PFMI and is crucial to providing ‘‘a high degree of confidence’’ that the DCO will continue its operations and ‘‘serve as a source of financial stability even in extreme market conditions.’’ 117 The DCO’s recovery plan and orderly wind-down plan must also identify and describe any licenses, and contracts in which the DCO is the licensee, upon which the DCO may rely to provide its critical operations and services. Such licenses should be included in the DCO’s analysis of its contractual arrangements that must continue into recovery and wind-down. The Commission is proposing § 39.39(c)(6) to provide that a SIDCO or Subpart C DCO must determine which of its contracts, arrangements, agreements, and licenses associated with the provision of its critical operations and services as a DCO are subject to alteration or termination as a result of implementation of the recovery plan or orderly wind-down plan. The recovery plan and orderly wind-down plan must describe the actions that the DCO has taken to ensure that its critical operations and services will continue during recovery and wind-down despite such alteration or termination. The Commission requests comments on this aspect of the proposal. 7. Governance—§ 39.39(c)(7) While current § 39.39 does not explicitly address the need for a DCO to have an effective governance structure to implement its recovery or orderly wind-down plans, the Commission has preliminarily determined to require an effective governance structure in order to enable the DCO to implement such plans effectively. The CPMI–IOSCO Recovery Guidance supports the Commission’s determination, and recommends that the DCO’s board of directors or equivalent governing body formally endorse the recovery plan.118 In addition, the guidance calls for ‘‘an effective governance structure and 117 PFMI at 36 (section on credit and liquidity risk management). 118 CPMI–IOSCO Recovery Guidance, at section 2.3.3. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 48981 sufficient resources to support the recovery planning process and implementation of its recovery plan, including any decision-making processes.’’ 119 According to the CPMI– IOSCO Recovery Guidance, an ‘‘effective governance structure’’ includes ‘‘clearly defining the responsibilities of board members, senior executives and business units, and identifying a senior executive responsible for ensuring that the FMI observes recovery planning requirements and that recovery planning is integrated into the FMI’s overall governance process.’’ 120 The guidance also states that the FMI’s board should consider the interests of all stakeholders who are likely to be affected by the recovery plan when developing and implementing it, and the FMI ‘‘should have clear processes for identifying and appropriately managing the diversity of stakeholder views and any conflicts of interest between stakeholders and the FMI.’’ 121 CFTC Letter No. 16–61 provided guidance to align the regulation promulgated in 2013 with the 2014 CPMI–IOSCO Recovery Guidance. CFTC Letter No. 16–61 advised that a DCO’s recovery plan and wind-down plan should set forth all relevant governance arrangements and recommends that a DCO’s recovery plan and wind-down plan: (1) Identify the persons responsible for the development, review, approval, and ongoing monitoring and updating of the DCO’s recovery plan and wind-down plan; (2) describe the involvement of the DCO’s clearing members in the development, review, and updating of the recovery plan and wind-down plan, and in assessing the effects of the recovery plan on clearing members; (3) describe how the costs and benefits of various recovery tools are taken into account during the decision-making process; (4) describe the recovery plan and winddown plan approval and amendment process; (5) describe the specific roles and responsibilities of the DCO’s Board of Directors, relevant committees, and other employees and clearing members in activating the recovery plan and wind-down plan and in implementing various aspects thereof including, without limitation, the use of recovery tools and wind-down options; and (6) the discretion of such persons and entities in activating the recovery plan and wind-down plan, the parameters for exercise of such discretion, where such discretion may be exercised, and the 119 Id. 120 Id. 121 Id. E:\FR\FM\28JYP2.SGM at section 2.3.4. 28JYP2 48982 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 governance processes for the exercise of such discretion.122 The Commission believes that, in order to develop thorough plans, and to be prepared to implement those plans effectively, a SIDCO or Subpart C DCO must implement and maintain transparent governance arrangements related to recovery and wind-down that are consistent with the above standards and that recognize ‘‘one size does not fit all.’’ DCOs are required to have governance rules and arrangements in place both for business-as-usual operations and in times of extreme stress in order to meet DCO Core Principle O.123 DCO Core Principle O requires a DCO to establish governance arrangements that are transparent to fulfill public interest requirements and to permit the consideration of the views of owners and participants.124 In furtherance of Core Principle O, and to support the effectiveness of these plans and ensure their formal review, the Commission is proposing new § 39.39(c)(7) to require each SIDCO’s and Subpart C DCO’s recovery plan and orderly wind-down plan to be annually reviewed and formally approved by the board of directors, and to describe an effective governance structure that clearly defines the responsibilities of the board of directors, board members, senior executives, and business units. Each plan must also describe the processes that the DCO will use to guide its discretionary decision-making relevant to each plan, including those processes for identifying and managing the diversity of stakeholder views and any conflict of interest between stakeholders and the DCO. The Commission requests comment on this aspect of the proposal. 8. Testing—§ 39.39(c)(8) In CFTC Letter No.16–61, staff recommended that SIDCOs and Subpart C DCOs include in their recovery and wind-down plans procedures for regularly testing the viability of such plans and that testing, where applicable, be conducted with the participation of clearing members.125 Additionally, the recovery plan and wind-down plan should identify the types of testing that will be performed, the frequency with which the plans will be tested, to whom the findings will be reported, and the procedures for updating the recovery plan and wind-down plan in light of the testings’ findings.126 Likewise, the CPMI–IOSCO Recovery Guidance provides that FMIs should, for the purpose of ‘‘ensur[ing] that the recovery plan can be implemented effectively,’’ test and review the recovery plan at least annually as well as following changes materially affecting the recovery plan.127 As an example, it states that testing may be conducted through periodic simulation and scenario exercises.128 The CPMI–IOSCO Recovery Guidance also states that an ‘‘FMI should update its recovery plan as needed following the completion of each test and review.’’ 129 In 2022, CPMI–IOSCO issued a discussion paper building on PFMI Principles 3 (Framework for the Comprehensive Management of Risks) and 15 (General Business Risk), the purpose of which was ‘‘to facilitate the sharing of existing practices to advance industry efforts and foster dialogue on [CCPs’] management of potential losses arising from non-default events . . . in particular in the context of recovery or orderly wind-down.’’ 130 Summarizing the responses of CCPs, the discussion paper observes, ‘‘In general, responding CCPs perform annual reviews of their recovery plans’’ and ‘‘[a]lmost all responding CCPs conduct crisis management drills.’’ 131 The responding CCPs also informed CPMI–IOSCO that they ‘‘use crisis management drills to improve their decision-making capabilities and their capacity to address potential [non-default losses] by improving their understanding of scenarios and tools, and testing assumptions about the effectiveness of specific tools.’’ 132 The discussion paper quotes one CCP’s response in particular explaining that crisis management exercises helped improve its operational readiness and identify the need for higher insurance coverage.133 In addition, the discussion paper highlights that CCPs engage in discussion-based exercises involving the internal governance structure and external partners and stakeholders, which ‘‘appears to facilitate a better understanding of roles and responsibilities before a crisis occurs’’ and ‘‘serve[s] to reduce the likelihood of purely ad hoc decision-making on the allocation of [non-default losses] in a crisis, while still giving decision-makers the flexibility to respond to the unique circumstances of any particular 127 CPMI–IOSCO Recovery Guidance, at ¶ 2.3.8. 128 Id. 122 CFTC Letter No. 16–61, at 13. 5b(c)(2)(O)(i) of the CEA, 7 U.S.C. 7a– 123 Section 1(c)(2)(O). 124 Id. 125 CFTC Letter No. 16–61, at 15. 126 Id. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 crisis.’’ 134 The responding CCPs reported that testing typically involves a wide range of internal stakeholders and, in some cases, external stakeholders as well.135 This greater involvement in testing ‘‘enhances the quality of such exercises by strengthening the tie between the exercise and reality of how stakeholders will react.’’ 136 According to the discussion paper, testing ‘‘may permit CCPs to enhance the tools and resources for identifying, measuring, monitoring and managing [non-default loss] risks’’ and has ‘‘the potential to increase participants’ understanding of the types of scenario[s] that could generate [non-default losses], the range of magnitudes of such losses and their roles and responsibilities in addressing [nondefault losses],’’ 137 which could result in an ‘‘increase [in] the operational effectiveness’’ of the CCPs’ plans.138 The Commission believes that the testing and reviewing practices described in the foregoing paragraphs will materially contribute to the effectiveness of recovery and orderly wind-down plans. Although the CPMI– IOSCO discussion paper focused on existing practices with respect to nondefault losses, the reasoning will also apply to default losses. Periodic testing has the potential to demonstrate whether a SIDCO’s or Subpart C DCO’s tools and resources will sufficiently cover financial losses resulting both from participant defaults and nondefault losses and whether these DCOs’ rules, procedures, and governance facilitate a viable recovery or orderly wind-down. Further, testing the DCO’s infrastructure is an effective means of revealing deficiencies or weaknesses which could hamper recovery or winddown efforts, and providing an opportunity to remediate them in advance. Thus, the Commission is proposing new § 39.39(c)(8) to require that the recovery plan and orderly wind-down plan of each SIDCO and Subpart C DCO include procedures for testing the viability of the plans, including testing of the DCO’s ability to implement the tools that each plan relies upon. The recovery plan and the orderly winddown plan must include the types of testing that will be performed, to whom the findings of such tests are reported, and the procedures for updating the recovery plan and orderly wind-down plan in light of the findings resulting 129 Id. 130 NDL Discussion Paper, at 2 (Executive Summary). 131 Id. at section 4. 132 Id. 133 Id. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 134 Id. 135 Id. 136 Id. 137 Id. 138 Id. E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules from such tests. The testing must be conducted with the participation of clearing members, where the plan depends on their participation, and the DCO must consider including external stakeholders that the plan relies upon, such as service providers, to the extent practicable and appropriate. Testing must occur following any material change to the recovery plan or orderly wind-down plan, but in any event not less than once annually. The plans shall be updated in light of the findings of such tests. The Commission requests comment on this aspect of the proposal. The Commission specifically requests comment as to whether the rule should require that the SIDCO or Subpart C DCO include (rather than simply consider including) external stakeholders that the plan relies upon in the testing. The Commission also specifically requests comment on the proposed requirement that tests be conducted not less than annually: would a different minimum frequency be more appropriate? D. Information for Resolution Planning—§ 39.39(f) As discussed above,139 when the Commission adopted regulations for recovery and wind-down plans in 2013, CPMI–IOSCO and the FSB were in the initial phase of drafting guidance for resolution planning consistent with PFMI Principle 3, Key Consideration 4, which states that ‘‘an FMI should also provide relevant authorities with the information needed for purposes of resolution planning.’’ 140 Consistent with that standard, current § 39.39(c)(2) requires a SIDCO or Subpart C DCO to have procedures for providing the Commission and the FDIC with information needed for purposes of resolution planning.141 The Commission proposes to update its regulations to align § 39.39(c)(2), as new § 39.39(f), with the additional standards and guidance applicable to resolution planning for systemically important FMIs adopted since 2013.142 As stated in the 2017 FSB Resolution 139 See text accompanying fn. 54, supra. Principle 3, Key Consideration 4, at 32. The Commission notes that resolution is distinct from orderly wind-down in that the latter rests within the control of the DCO. 141 17 CFR 39.39(c)(2). 142 See, e.g., 2017 FSB Resolution Guidance, at section 6.4 (noting that ‘‘[a]uthorities should ensure that CCPs have in place adequate processes and information management systems to provide the authorities with the necessary data and information required for undertaking’’ an assessment of the financial resources and tools that the resolution authority can reasonably expect to be available under the resolution regime). lotter on DSK11XQN23PROD with PROPOSALS2 140 PFMI VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 Guidance, ‘‘[a]uthorities should ensure that CCPs have in place adequate processes and information management systems to provide the authorities with the necessary data and information required for undertaking’’ an assessment of the financial resources and tools that the resolution authority can reasonably expect to be available under the resolution regime).143 In the United States, upon the completion of the statutory appointment process set forth in Title II of the Dodd-Frank Act, the FDIC would be appointed the receiver of a failing SIDCO (or other covered financial company) 144 The supervision of a DCO rests with the Commission under the CEA, and, in particular, the supervision of a SIDCO rests with the Commission as the supervisory agency under Title VIII of the Dodd-Frank Act.145 The statutory bifurcation of responsibilities between the FDIC and the Commission creates important challenges. Under Title II of the DoddFrank Act, it is the role of the FDIC to act as receiver for a failed covered financial company if the requirements of Title II have been met. The FDIC’s ability to carry out its responsibilities as receiver would benefit from advance preparation to ensure that, in the unlikely event that resolution becomes necessary, there will be an effective and efficient transition of the SIDCO to the FDIC receivership, thereby fostering the success of a Title II resolution.146 Pursuant to section 8a(5) of the CEA,147 the Commission has authority to make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA. One of those purposes is the avoidance of systemic risk.148 As further described in the following paragraphs, it would appear that a reporting requirement that would enable the FSB Resolution Guidance, at section 6.4. 202(a) of the Dodd-Frank Act; 12 U.S.C. 5382(a). 145 Sections 803(8)(A)(ii) and 807(a) of the DoddFrank Act, 12 U.S.C. 5462(8)(A)(ii) and 5466(a); see also Section 2(12)(C) of the Dodd-Frank Act, 12 U.S.C. 5301(12)(C). 146 This involves coordinated planning and information sharing to enable a smooth transition into resolution. As the supervisory agency for SIDCOs, the Commission provides information for resolution planning to the FDIC under the auspices of a Memorandum of Understanding (MOU). The current MOU is the ‘‘Memorandum of Understanding Between The Federal Deposit Insurance Corporation And The Commodity Futures Trading Commission Concerning The Sharing Of Information In Connection With Resolution Planning For Derivatives Clearing Organizations,’’ dated June 26, 2015. 147 7 U.S.C. 12a(5). 148 Section 3(b) of the CEA, 7 U.S.C. 5(b). PO 00000 143 2017 144 Section Frm 00017 Fmt 4701 Sfmt 4702 48983 Commission to aid the FDIC in its preparations for the resolution under Title II of a DCO—where placing the DCO into resolution requires a finding by the Secretary of the Treasury, in consultation with the President, that, inter alia, the failure of the DCO and its resolution under otherwise applicable Federal or State law would have serious adverse effects on financial stability in the United States 149—is reasonably necessary to foster the avoidance of systemic risk. Moreover, under Title VIII of the Dodd-Frank Act, the Commission may, in consultation with the FSOC and the Board of Governors of the Federal Reserve, prescribe regulations containing risk management standards, taking into consideration relevant international standards and existing prudential requirements, for SIDCOs governing: (i) the operations related to payment, clearing, and settlement activities of SIDCOs; and (ii) the conduct of designated activities by SIDCOs.150 Under Section 805(b) of the Dodd-Frank Act, the objectives and principles for such risk management standards shall be to: (1) promote robust risk management; (2) promote safety and soundness; (3) reduce systemic risks, and (4) support the stability of the broader financial system.151 Additionally, Section 805(c) of the Dodd-Frank Act states that the standards prescribed may address areas such as: (1) risk management policies and procedures; (2) margin and collateral requirements; (3) participant or counterparty default policies and procedures; (4) the ability to complete timely clearing and settlement of financial transactions; (5) capital and financial resources requirements for the SIDCO; and (6) other areas that are necessary to achieve the objectives and principles in Section 805(b).152 Similar to the context of recovery and orderly wind-down planning, thorough preparation ex ante is crucial for successfully managing, on an inherently abbreviated timeline, matters relating to resolution, in aid of mitigating serious adverse effects on financial stability in the United States. This thorough preparation for resolution is also crucial for establishing market confidence, and the confidence of foreign counterparts to the United States agencies. While the Commission remains persuaded that the likelihood of a SIDCO requiring 149 Section 203(b)(2) of the Dodd-Frank Act, 12 U.S.C. 5383(b)(2). 150 Section 805(a)(2)(A) of the Dodd-Frank Act, 12 U.S.C. 5464(a)(2)(A). 151 12 U.S.C. 5464(b). 152 12 U.S.C. 5464(c). E:\FR\FM\28JYP2.SGM 28JYP2 48984 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 resolution under Title II of the DoddFrank Act is ‘‘extraordinarily unlikely,’’ 153 thorough planning for such an exigency is essential.154 While less likely, it remains possible that similar information may also be required from Subpart C DCOs in times of extreme market stress, if it appears at the time that the failure of such a DCO might meet the requirements set forth in section 203(b) of the Dodd-Frank Act.155 Thus, while the Commission anticipates that the intensity of resolution planning for Subpart C DCOs will be significantly less than that for SIDCOs, in order to promote the goal of assuring that Subpart C DCOs will, if necessary, remain capable of effectively being resolved under Title II, including during times of extreme stress, § 39.39(f) would apply equally to SIDCOs and Subpart C DCOs.156 The Commission’s DCR staff has been working with FDIC staff on resolution planning for the two SIDCOs. This joint work has revealed that the Commission does not receive certain information from the SIDCOs that the FDIC may need to plan for resolution. The Commission therefore has determined to update its reporting requirements for SIDCOs and Subpart C DCOs to reflect 153 See Bankruptcy Regulations, 86 FR 19324, 19386 (Apr. 13, 2021). 154 Key Attributes ¶ 11.1, FSB CCP Resolution Planning Guidance at section 7. 155 12 U.S.C. 5383(b). While the determination under Title II is made at the time when the entity (here a DCO) is under stress (see 12 U.S.C. 5383(b)(1) (determination that the financial company is in default or in danger of default, emphasis added), the determination under Title VIII is made during business as usual, after a detailed process including notice to the proposed systemically important financial market utility, and the standards for the determination are different than those for the designation. See generally Section 804 of the Dodd-Frank Act, 12 U.S.C. 5463; 12 CFR Part 1320 (Designation of Financial Market Utilities). Thus, an entity not designated in advance under Title VIII may nonetheless in particular circumstances be determined to meet the standards for resolution under Title II, similarly, an entity designated in advance under Title VIII may not, even in the event of its failure, be determined to meet the standards under Title II. Nonetheless, it would appear that the failure of a DCO that has been determined during business as usual to have met the criteria for designation pursuant to 12 U.S.C. 5463 is more likely to have such adverse effects on financial stability than the failure of a DCO that has not been determined to have met those criteria. 156 The Commission does not at this time believe that it is likely that the failure of a U.S.-based DCO that is neither a SIDCO nor a Subpart C DCO would meet the requirements set forth in Section 203(b) of the Dodd-Frank Act, 12 U.S.C. 5383(b), given the generally smaller size of such DCOs and the fact that such DCOs do not have banks as clearing members (see supra fn. 23). For foreign-based DCOs, the relevant resolution authority would be the resolution authority in the home jurisdiction. Accordingly, the Commission is not proposing to extend this requirement to DCOs that are neither SIDCOs nor Subpart C DCOs. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 additional information that may be used for resolution planning consistent with the international standards set forth in the PFMI and related guidance.157 Most of the global standards and guidance relating to planning for resolution (including for CCPs) apply to resolution authorities, in cooperation with supervisory authorities (where the resolution authority is separate from the supervisory authority).158 Because of the nature of principle-based regulation for DCOs, there may be information in the possession of a DCO that is required for resolution planning but may not ordinarily be reported to the Commission and may not be available publicly. Moreover, while the recovery and orderly wind-down plans described above should be comprehensive in themselves, there may be additional information that the Commission may require to plan for the resolution of a SIDCO or Subpart C DCO. The Commission therefore proposes to specify the types of information a SIDCO or Subpart C DCO may be required to provide for resolution planning in light of international standards and guidance established since 2013. 1. Planning for Resolution Under Title II of the Dodd-Frank Act—§ 39.39(f) Current § 39.39(c)(2) requires SIDCOs and Subpart C DCOs to have procedures in place to provide the Commission and the FDIC with information for purposes of resolution planning. This rule is consistent with the Key Attributes FMI Annex: ‘‘In order to facilitate the implementation of resolution measures, FMIs should be required to maintain information systems and controls that can promptly produce and make available, both in normal times and during resolution, relevant data and information needed by the authorities for purposes of timely resolution planning and resolution . . . .’’ 159 The Commission is proposing in new § 39.39(f) to clarify that the requirement that a DCO have procedures in place to provide information directly to the Commission and the FDIC for resolution planning purposes means that the DCO must provide such information to the Commission. The Commission would no longer be requiring DCOs to provide information related to resolution planning directly to the FDIC. The Commission provides such information 157 See Sections 805(a)(1)(A)–(B) of the DoddFrank Act, 12 U.S.C. 5464(a)(1)(A)–(B). 158 E.g., FSB CCP Resolution Planning Guidance at section 7. 159 Key Attributes FMI Annex, at section 12.1. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 related to resolution planning to the FDIC under the MOU. The Commission is also proposing, consistent with the Key Attributes FMI Annex, to require that SIDCOs and Subpart C DCOs maintain information systems and controls that can promptly produce and make available data and information requested by the Commission for purposes of resolution planning and resolution in the form and manner specified by the Commission. The Commission expects that the form and manner would be designed to facilitate the Commission’s ability to share the information with the FDIC. Such systems and controls are, for the most part, already in place during business as usual between each DCO and the Commission. The explicit requirement that a SIDCO and Subpart C DCO ensure that its systems will continue to be able to provide information to the Commission during resolution is sound public policy, as it will ensure the Commission receives critical information during this transitional period. The requirements of the CEA apply to any DCO as long as it is doing business, and the affirmation that a DCO’s systems will be designed to be able to continue to function should help to provide assurances to stakeholders and market participants that clearing services will continue through all potential exigencies. Accordingly, the Commission is proposing new § 39.39(f) to require that a SIDCO or Subpart C DCO maintain information systems and controls to provide to the Commission any data and information requested for purposes of resolution planning and resolution, and that each must supply such information and data electronically, in the form and manner specified by the Commission. 2. Required Information—§ 39.39(f)(1)– (7) It is sound regulatory policy for the Commission to be transparent about the types of information that a SIDCO or Subpart C DCO might anticipate providing to the Commission, upon request, in order to enable the Commission to aid the FDIC in planning for resolution under Title II of the DoddFrank Act. This transparency is sound public policy because it would help assure stakeholders that, in the extraordinarily unlikely event that resolution of a SIDCO or Subpart C DCO under Title II becomes necessary, there will be an effective and efficient transition of the DCO to the FDIC receivership, and a successful resolution under Title II would be forthcoming. Thorough preparation is also helpful in supporting market confidence, and the E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 confidence of foreign counterparts to the United States agencies.160 Resolution planning necessarily involves assessing a number of types of information: information that is publicly available, information that is otherwise reported to the Commission under part 39, and information that is in the possession of the DCOs but that is not otherwise reported to the Commission. Over past years, Commission staff has worked with staff from the FDIC and the SIDCOs to identify and obtain information for the purpose of planning for the highly unlikely event of a SIDCO entering into resolution.161 Global guidance on standards for resolution planning developed since 2013 have informed these information requests. Under Core Principle J, the Commission may request any information from a DCO that the Commission determines to be necessary to conduct oversight of the DCO.162 The Commission believes that certain information for resolution planning that goes beyond the information usually obtained during business as usual under the Core Principles and associated Part 39 regulations should be available when a DCO is systemically important to the financial system, may be approaching such systemic importance, or has opted into Subpart C.163 As noted above, the FDIC must be ready to step in as receiver of a failing DCO on very short notice and work to achieve a resolution that mitigates risks to financial stability created by the DCO’s failure, including by restoring market confidence and preventing contagion. The information proposed to be requested will assist in planning for resolution, thereby helping the FDIC to fulfill its role and accomplish its objectives, which in turn helps accomplish one of the purposes of the CEA, the avoidance of systemic risk. Proposed subparts (1) through (7) describe seven types of information that are relevant to planning for resolution under Title II of the Dodd-Frank Act. The frequency with which information may be requested may vary over time, with some information requested only once, while other information may be requested multiple times (e.g., annually, or upon significant changes to the structure of the DCO’s business arrangements). The Commission expects that, in the latter case, the frequency of 160 To date, the Commission has requested information for resolution planning only from SIDCOs. 161 This is consistent with section 6.4 of the 2017 FSB Resolution Guidance. 162 Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a– 1(c)(2)(J). See also 17 CFR 39.19(c)(5)(i) (a DCO shall provide upon request any information related to its business as a clearing organization.) VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 the requests may change over time, as the Commission gains more knowledge. i. Structure and Activities—§ 39.39(f)(1) As part of planning for resolution, the FDIC develops resolution options that are underpinned by an understanding of the structure of the SIDCO or Subpart C DCO. Proposed § 39.39(f)(1) would cover information related to the SIDCO’s and Subpart C DCO’s structure and activities and would include, among other things, documents and information about the SIDCO’s and Subpart C DCO’s legal structure and hierarchy. The Commission anticipates that this information would include current comprehensive organizational charts (including all direct and indirect subsidiaries where the SIDCO directly or indirectly owns more than a fifty percent controlling interest), governing documents and arrangements, rights and powers of shareholders, and current organizational documents (including bylaws, articles of incorporation or association/organization, and committees). The Commission acknowledges that some of this information may be publicly available on a SIDCO’s website, may be included in recovery plans, or may otherwise be reported to the Commission under part 39. In the event that information is required that is not readily available through the ordinary course of regulatory oversight, a SIDCO and Subpart C DCO must be prepared to provide current information under the umbrella of ‘‘structure and activities’’ upon request.164 Proposed § 39.39(f)(1) would request information related to the SIDCO’s or Subpart C DCO’s organizational structure and corporate structure, activities, governing documents and arrangements, rights and powers of shareholders, committee members and responsibilities. The Commission requests comment on this aspect of the proposal. ii. Information About Clearing Members—§ 39.39(f)(2) Another aspect of resolution planning is developing an understanding of the risks that may trigger consideration of orderly wind-down and the implications for resolution should that orderly wind-down fail. In order to understand these risks, certain information about a SIDCO’s or Subpart C DCO’s clearing members may be instructive. Generalized or anonymized 164 In some cases, the response may include crossreferences to specific places where the information is already available, or has previously been provided, and assurance that the information remains current. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 48985 information about clearing members such as types and amounts of collateral posted (for both house and customer accounts), variation margin, and contributions to default and guaranty funds may be instructive, both for ex ante planning and in the runway to resolution. Such information may provide insight into the risks that clearing members and the markets would be exposed to in the event of a systemic failure, and of the potential interplay between those risks. The information requested in the category may also include general information regarding exposures or other measures of business risk with respect to all or a subset of clearing members. This type of information may assist in the planning for potential triggers for resolution and for understanding potential challenges in executing a resolution. The Commission recognizes that this type of information changes over time; accordingly, the Commission anticipates that it may request such information on an annual basis or more frequently in the run-up to resolution. Proposed § 39.39(f)(2) would permit requests for information on clearing members generally, including (for both house and customer accounts) information regarding collateral, variation margin, and contributions to default and guaranty funds. The Commission requests comment on this aspect of the proposal. iii. Arrangements With Other Clearing Entities—§ 39.39(f)(3) In order to plan for continuity of operations in resolution, the Commission and FDIC must understand how the SIDCO or Subpart C DCO interacts with the operations of other DCOs and financial market infrastructures.165 In particular, the Commission and FDIC must understand the SIDCO’s or Subpart C DCO’s crossmargining or mutual offset arrangements. These agreements and arrangements may require additional handling in resolution, both because of the exposures and obligations the SIDCO may be subject to, as well as the resources and tools they may provide. The Commission proposes to require that SIDCOs and Subpart C DCOs provide to the Commission upon request copies of the most current versions of mutual offsetting 165 For example, these relationships may be between DCOs registered with the Commission, e.g., Chicago Mercantile Exchange (CME) and Options Clearing Corporation, or between a DCO registered with the Commission and another CCP supervised by an agency other than the CFTC, e.g., CME and the Fixed Income Clearing Corporation. E:\FR\FM\28JYP2.SGM 28JYP2 48986 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 arrangements or agreements for crossmargining arrangements with external entities. Additionally, for each such arrangement or agreement, the SIDCO or Subpart C DCO should be prepared to provide data concerning the recent scope of the relationship, such as information related to amounts of daily initial margin. The Commission proposes to require that SIDCOs and Subpart C DCOs update such information upon request by the Commission. Proposed § 39.39(f)(3) would request information on arrangements and agreements with other clearing entities relating to clearing operations, including offset and cross-margin arrangements. The Commission requests comment on this aspect of the proposal. iv. Financial Schedules and Supporting Details—§ 39.39(f)(4) In order to prepare for receivership operations in resolution, and to develop resolution strategy options, there needs to be a clear understanding of the SIDCO’s or Subpart C DCO’s financial position and capital structure, which may include some combination of assets, liabilities, revenues and expenses, in advance of an extreme event. A DCO’s financial statements and exhibits reported to the Commission contain relevant information that will assist the Commission and FDIC in forming a detailed understanding of the potential resources and financial exposures of the SIDCO or Subpart C DCO that would be important to the success of a Title II receivership. To prepare for resolution, the Commission and FDIC require a detailed understanding of the potential supports for and impediments to potential resolution strategies, including sources and uses of funds in resolution. In order to form this understanding, it would be useful for the DCO to identify potential creditor claims and the potential resources available to satisfy such claims. There may be information in possession of the DCO that may not be available in public filings, on a DCO’s website, or in financial reports and schedules required to be filed under other provisions of part 39, including off-balance sheet obligations or contingent liabilities. The type of information requested under proposed § 39.39(f)(4) would include requests for information on offbalance sheet obligations or contingent liabilities, and obligations to creditors, shareholders, or affiliates not otherwise reported under Part 39. The Commission requests comment on this aspect of the proposal. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 v. Interconnections and Interdependencies With Internal and External Service Providers—§ 39.39(f)(5) The evaluation of possible obstacles to the continuation of essential services provided by internal and external service providers (including affiliates and other third parties), and the use of software, information, and other tools provided under license, is integral to resolution planning. While the recovery plans required under § 39.39(b) should include much of this information, effective planning for receivership may include the need for a more detailed understanding of the requirements to continue making use of identified services (and thus understanding of the steps to meet such requirements). Each SIDCO or Subpart C DCO must provide the Commission, upon request, copies of external or inter-affiliate contracts or agreements that permit the SIDCO or Subpart C DCO to perform its critical functions (including third-party or affiliate service agreements, building or equipment leases, etc.). In the case of inter-affiliate arrangements, the DCO should identify which entity in the group is the contracting party and, where relevant, whether there are any inter-affiliate service agreements that address provision of services. This type of information should inform the resolution plan by revealing any dependencies on affiliates for essential support functions provided to the SIDCO or Subpart C DCO. It may also foster planning for alternatives where required. The Commission may also request copies of inter-affiliate contracts or agreements, where the SIDCO or Subpart C DCO provides essential support to other affiliates. Additionally, where some of the contracts and agreements for services would grant the service provider the option to terminate the contract in the event of assignment to a bridge financial company (i.e., may not be ‘‘resolution resilient’’), the resolution plan may need to identify alternatives. Thus, providing CFTC (and, ultimately, FDIC) with information that could help identify those contracts and agreements for services that are not resolution resilient would assist planning in advance of entry into resolution. Further, because application of the FDIC’s authority under Title II with respect to continuation of prereceivership contracts 166 in the case of a non-U.S. contracting party may be less straightforward than with respect to a U.S.-based contracting party, the vi. Information Concerning Critical Personnel—§ 39.39(f)(6) While the recovery and orderly winddown plans contain information related to critical positions and resilient staffing, in order to plan for resolution, a DCO may have to take steps to ensure that those positions remain filled. This includes steps to ensure that there is an adequate pool of financial resources readily available to ensure that during times of stress, there is staff in place. During times of extreme stress, people in critical positions may have terminated (or may terminate) their association with the DCO, or their association may have been terminated (or may be terminated). Proposed § 39.39(f)(6) would require a SIDCO or Subpart C DCO to provide information for all critical positions described in the recovery and orderly wind-down plans.167 The Commission believes that this information is essential if the FDIC is to succeed in a Title II receivership, 166 See Section 210(c)(13) of the Dodd-Frank Act (‘‘Authority to Enforce Contracts’’), 12 U.S.C. 5390(c)(13). 167 As in all cases, such information would be provided and obtained under security arrangements appropriate to the sensitivity of the information. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 Commission may request that a SIDCO or Subpart C DCO provide a list of critical interconnections or interdependencies that are subject to material contracts/agreements governed in whole or in part by non-U.S. law. Lastly, the resolution plan may need to maintain important tools and capabilities provided under license arrangements. For instance, the resolution plan may need to cover the transfer of licenses to the bridge financial company for products or indices underlying the contracts cleared by the SIDCO or Subpart C DCO. To accomplish this, the Commission may request that a SIDCO or Subpart C DCO provide a copy of such licenses and licensing agreements. The Commission anticipates that the type of information described above would be requested on a one-time basis, with updates to be provided upon significant changes to the structure of the DCO’s business arrangements (including change to the agreements), or when new agreements are executed. Proposed § 39.39(f)(5) would require SIDCOs and Subpart C DCOs to provide information regarding interconnections and interdependencies with internal and external service providers, licensors, and licensees, including information regarding services provided by or to affiliates and other third parties and related agreements, upon request by the Commission. The Commission requests comment on this aspect of the proposal. E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules as they will need qualified personnel to fill these positions in order to manage and operate the entity. The Commission requests comment on this aspect of the proposal. vii. Other Required Information— § 39.39(f)(7) Proposed § 39.39(f)(7) would recognize that resolution planning is a complex, ongoing, and developing process, and that information requirements may change over time as the Commission and the FDIC gain experience with resolution planning for DCOs, and as information needs and business models change. Thus, certain information requirements may not be covered by the specific items listed in proposed § 39.39(f)(1)–(6). In that regard, proposed § 39.39(f)(7) would include a broad provision to encompass information which the Commission requires for this purpose, but not covered by the specific categories of information in proposed § 39.39(f)(1)– (6). The Commission requests comment on this aspect of the proposal. 3. Requested Reporting— § 39.19(c)(5)(iii) The Commission proposes to add a new requested reporting requirement to § 39.19 to reflect updates to the information requested in proposed § 39.39(f)(1)–(7). Proposed § 39.19(c)(5)(iii) would require a SIDCO or Subpart C DCO that submits information pursuant to § 39.39(f) to update the information upon request by the Commission. The Commission needs timely and an accurate information to monitor a SIDCO or Subpart C DCO, especially during stressful times. Depending upon the nature of the change and the information previously submitted, the response may be a confirmation that the information previously submitted remains accurate. The Commission requests comment on this aspect of the proposal. lotter on DSK11XQN23PROD with PROPOSALS2 D. Renaming § 39.39 When codified in 2013, § 39.39 covered the Commission’s expectations regarding a SIDCO’s or Subpart C DCO’s obligations with regard to recovery and orderly wind-down plans. The Commission proposes to change the title of § 39.39 to reflect that the proposed regulations, if adopted by the Commission, will encompass recovery and orderly wind-down planning for SIDCOs and Subpart C DCOs, as well as information required to plan for resolution. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 The Commission requests comment on this aspect of the proposal. III. Orderly Wind-Down Plans for DCOs That Are Not SIDCOs or Subpart C DCOs The Commission is proposing, as reasonably necessary to effectuate Core Principle D(i),168 to require DCOs that are neither SIDCOs nor Subpart C DCOs to maintain and submit to the Commission plans for orderly winddown, with requirements that are substantially similar to the proposed requirements for the orderly wind-down plans to be submitted by SIDCOs and Subpart C DCOs.169 Given that the failure of one of these DCOs is much less likely to have serious adverse effects on financial stability in the United States,170 the Commission is not proposing to require these DCOs to maintain recovery plans.171 A. Requirement To Maintain and Submit an Orderly Wind-Down Plan— § 39.13(k)(1)(i) The Commission is proposing to require that a DCO that is neither a SIDCO nor a Subpart C DCO must nevertheless maintain and submit to the Commission viable plans for orderly wind-down necessitated by default losses and non-default losses. The possibility that such losses may render the DCO unable to meet its obligations or to continue its critical functions to the point it must wind down is inherently one of the risks associated with the discharging of the DCO’s responsibilities.172 Additionally, the point at which a DCO must wind down may arise suddenly, in a manner that does not allow for time to plan. Winddown plans are essential to help facilitate an orderly and expeditious wind-down; moreover, planning for an 168 Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a– 1(c)(2)(D)(i); see Section 8a(5) of the CEA, 7 U.S.C. 12a(5). 169 For orderly wind-down planning involving insolvency or default of a DCO member or participant, the Commission also grounds this proposed rulemaking in Core Principle G(i), which requires that a DCO have ‘‘rules and procedures designed for the efficient, fair, and safe management of events’’ during such scenarios. Section 5b(c)(2)(G)(i) of the CEA, 7 U.S.C. 7a–1(c)(2)(G)(i). 170 Section 203(b)(2) of the Dodd-Frank Act, 12 U.S.C. 5383(b)(2). 171 For U.S.-based DCOs that are neither SIDCOs nor Subpart C DCOs, see discussion at supra fn. 156. Separately, foreign-based central counterparties registered with the Commission as DCOs are required to maintain recovery and winddown plans by their home-country regulators. See infra fn. 207 and accompanying text. Thus, even if one of these were in future to be designated as systemically important under Title VIII, they would already maintain a recovery plan. 172 Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a– 1(c)(2)(D)(i). PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 48987 orderly wind-down—including, for example, considering the circumstances that may trigger a wind-down, the tools the DCO would implement to help ensure an orderly wind-down (along with the likely effects on clearing members and the financial markets from implementing such tools), and the governance arrangements to guide decision-making during an orderly wind-down—can strengthen the risk management practices of the DCO (including by identifying vulnerabilities that can be mitigated), enhance legal certainty for the DCO, its clearing members and market participants, and increase market confidence, three pillars of the DCO Core Principles’ aims. As discussed below, the subjects and analyses the Commission is proposing for inclusion in a DCO’s orderly winddown plan overlap with many of the analyses DCOs must otherwise undertake to ensure compliance with the DCO Core Principles. In order to facilitate accomplishment of these goals, the Commission proposes to add new § 39.13(k)(1)(i) to require that a DCO that is not a SIDCO or Subpart C DCO maintain and, consistent with the proposed revisions to § 39.19(c)(4)(xxiv), submit to the Commission, a viable plan for orderly wind down necessitated by default losses and non-default losses, and supporting information.173 In additional support of these goals, and as discussed further below, the Commission is proposing to add other provisions under § 39.13(k). The Commission requests comment on the proposed changes. In particular, the Commission requests comment on the extent to which the proposed requirements concerning orderly winddown plans for DCOs that are neither SIDCOs nor Subpart C DCOs appropriately balance seeking to ensure that such DCOs are prepared to winddown in an orderly manner and mitigating the costs of preparing plans for such a wind-down. To the extent a better balance can be achieved, please discuss both the requirements that should be deleted or modified and the basis for the conclusion that the regulatory goal of orderly wind-down would reliably be achieved in light of such changes. B. Notice of the Initiation of Pending Wind-Down—§ 39.13(k)(1)(ii) Along the same lines—and consistent with the requirement for SIDCOs and 173 In Section IV below, discussing the reporting requirement in § 39.19(c)(4)(xxiv), the Commission explains the reason for including the term ‘‘and supporting information.’’ E:\FR\FM\28JYP2.SGM 28JYP2 48988 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules Subpart C DCOs—the Commission is proposing to require that a DCO have procedures in place to notify the Commission and clearing members, as soon as practicable, when orderly winddown is pending, and to provide such notification in such circumstances. Timely notification of events is essential for helping the Commission and clearing members effectively to address the issues raised by the DCO’s transition into wind-down and that having the proper procedures in place beforehand will facilitate such timely notification. The requirement that DCOs notify the Commission and clearing members of a pending orderly wind-down is reasonably necessary to effectuate Core Principle J, under which a DCO shall provide to the Commission all information that the Commission determines to be necessary to conduct oversight of the DCO,174 and Core Principle L, under which a DCO shall provide to market participants sufficient information to enable the market participants to identify and evaluate accurately the risks and costs associated with using the services of the DCO and disclose publicly and to the Commission information concerning any other matter relevant to participation in the settlement and clearing activities of the DCO.175 Accordingly, the Commission proposes to add new § 39.13(k)(1)(ii) to require that each DCO shall have procedures for informing the Commission and clearing members, as soon as practicable, when orderly winddown is pending, and shall notify the Commission and clearing members consistent with proposed § 39.19(c)(4)(xxv). The Commission requests comment on these proposed changes. lotter on DSK11XQN23PROD with PROPOSALS2 C. Orderly Wind-Down Plan: Required Elements—§ 39.13(k)(2)–(6) As is the case for SIDCOs and Subpart C DCOs, the Commission believes, as a general matter, that the orderly winddown plan of a DCO that is not a SIDCO or a Subpart C DCO should include a summary providing an overview of the plan followed by a detailed description of how the DCO will implement the plan. The description of how the DCO will implement its plans shall include an identification and description of the critical operations and services the DCO provides to clearing members and financial market participants, the service providers upon which the DCO 174 Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a– 1(c)(2)(J). 175 Section 5b(c)(2)(L) of the CEA, 7 U.S.C. 7a– 1(c)(2)(L). VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 relies to provide these critical operations and services, interconnections and interdependencies, and staffing arrangements (including how they are resilient), obstacles to success of the orderly wind-down plan, aggregate cost estimates for the continuation of services during orderly wind-down, and how the DCO will ensure that its services continue through orderly winddown. The plan shall also include a stress scenario analysis addressing the failure of each critical operation and service, a description of the criteria the DCO would consider in determining whether and when to trigger orderly wind-down and the process for monitoring for events that may trigger the wind-down; a description of the information-sharing and escalation processes within the DCO’s senior management and board of directors following an event triggering consideration of orderly wind-down and identification of the factors the board of directors would consider in exercising judgment or discretion with respect to any decision-making during wind down; an identification of scenarios that may trigger orderly wind-down and analysis of the tools the DCO would use following the occurrence of each scenario; an identification and review of agreements to be maintained during orderly wind-down; a description of the DCO’s governance with respect to planning for orderly wind-down and during the orderly wind-down; and testing. The Commission believes these subjects and analyses are the minimum elements that DCOs should incorporate in their orderly wind-down plans pursuant to their obligation to manage the risks associated with discharging their responsibilities under Core Principle D.176 Accordingly, the Commission is proposing new § 39.13(k)(2) to require a DCO to include in its orderly winddown plans a summary providing an overview of the plan followed by a detailed description of how the DCO will implement the plan. The Commission requests comment on this aspect of the proposal. Each required element of the orderly winddown plan is discussed in more detail below. 176 To the extent foreign CCPs are subject to home jurisdiction regulation with different requirements for the subjects and analyses that must be included in their wind-down plans, the Commission welcomes comments describing those requirements, and including suggestions on how to achieve the goals of this regulation in a manner that appropriately addresses possible inefficiencies. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 1. Critical Operations and Services, Interconnections and Interdependencies, and Resilient Staffing—§ 39.13(k)(2)(i) In Section II, the Commission highlighted the importance of incorporating into recovery and orderly wind-down plans an identification and description of the critical operations and services that the SIDCO or Subpart C DCO provides to clearing members and financial market participants, the service providers upon which the DCO relies upon to provide these critical operations and services, financial and operational interconnections and interdependencies, and resilient staffing arrangements. As set forth below, the same is true for the orderly wind-down plans for DCOs that are not SIDCOs or Subpart C DCOs. i. Critical Operations and Services Provided by and to DCOs Limiting the operational disruption and financial harm to a DCO’s clearing members and other financial market participants during an orderly winddown, turns on the DCO’s understanding of the critical operations and services that the DCO performs for clearing members and other financial market participants, and, in turn, operations and services performed by others that are critical to the DCO performing those critical functions. Thus, the Commission is proposing to require that a DCO’s orderly wind-down plan include an identification and description of the critical operations and services that the DCO provides to clearing members and other financial market participants. For any critical (to the DCO) operations or services that the DCO relies upon that are performed by internal or external service providers, the plan should identify those providers and describe the critical operations or services they perform. Likewise, to the extent the DCO’s ability to discharge its functions may be affected by the performance of ancillary service providers, the plan should identify those ancillary service providers and describe the operations or services they perform. By requiring the identification and description of the DCO’s critical operations and services, including those performed by internal or external service providers, and any ancillary service providers, the Commission seeks to ensure, to the extent practicable, that the DCO’s ability to perform the critical operations and services that others depend upon continues during the orderly wind-down process. In the same vein, the Commission is proposing to require that a DCO’s E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 orderly wind-down plan identify and describe the obstacles to success of the plan, and the DCO’s plan to address the risks associated with the failure of each such critical operation and service. A stress scenario analysis (or similar undertaking) addressing the failure of each critical operation and service while the DCO is still a going concern should highlight whether and how the operation or service can continue in orderly wind-down. The Commission expects the DCO’s orderly wind-down plan to address the full range of options in order to ensure that operations and services critical to the DCO continue in the orderly wind-down process. In considering and analyzing the magnitude of the costs associated with an orderly wind-down, certain of the DCO’s expenses will likely increase, including, for example, legal fees, accounting fees, financial advisor fees, the costs associated with employee retention programs, and other incentives that may be necessary to maintain critical staff. Other costs, such as marketing or those for developing new products, may decrease as a result of wind-down. Further, a DCO shall proceed under the conservative assumption that any resources it may have consumed as part of its recovery efforts, if any, will not be available to fund critical operations and services in an orderly wind-down. ii. Interconnections and Interdependencies The Commission is additionally proposing to require that the orderly wind-down plan identify and describe the DCO’s financial and operational interconnections and interdependencies. Given the web of relationships that may exist among the DCO and its relevant affiliates, internal and external service providers, and other relevant stakeholders, identifying and describing the interconnections and interdependencies could provide muchneeded transparency and clarity for purposes of developing and implementing an orderly wind-down plan. For instance, the financial resources available to a DCO during wind-down may be limited when one financial entity serves multiple roles and relationships with respect to the DCO or when multiple affiliates of the DCO depend upon the same intercompany loan agreement or insurance policy with group coverage limits. Interconnections and interdependencies may also adversely impact the value of the DCO’s assets, which can be crucial in wind-down where a DCO is trying to meet costs associated with preserving critical VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 operations and services and meeting liquidity needs. Accordingly, a DCO’s orderly wind-down plan should identify and describe any interconnections and interdependencies and address the effect such relationships may have on the DCO’s ability to continue performing its functions during the wind-down process. iii. Resilient Staffing and Support Services Arrangements As noted in section II, a DCO in winddown cannot maintain critical operations and services without both essential personnel and support services. Accordingly, the Commission is proposing to require that the orderly wind-down plan identify and describe plans for resilient staffing arrangements under which personnel essential for critical operations and services would be maintained and services supporting the DCO’s critical operations and services would continue. To the extent the DCO relies upon contractors as personnel providing critical operations and services, the DCO should have staffing arrangements and agreements in place for such contracting work to continue in wind-down. Similarly, to the extent the DCO relies upon thirdparty service providers to provide critical operations and services, including facilities, utilities, and communication technologies, the DCO should have arrangements and agreements in place for such third-party services to continue in wind-down. Further, to promote its ability to ensure the success of the plan, the DCO should identify obstacles to that success. Additionally, as part of the DCO’s responsibility to maintain critical operations and services, the Commission is proposing to require that the orderly wind-down plan include aggregate cost estimates for essential personnel and support services, and address the manner in which the DCO will meet the associated costs. Just as the case may be for SIDCOs and Subpart C DCOs, other DCOs may be vulnerable to key person risk; accordingly, plans for resilient staffing arrangements should identify, to the extent applicable, key person risk within the DCO or (as relevant) affiliated legal entities that the DCO relies upon to provide its critical operations and services, and how the DCO has planned to address such risk. Accordingly, the Commission is proposing new § 39.13(k)(2)(i) to require that the DCO’s orderly wind-down plan include the identification and description of the DCO’s critical operations and services, interconnections and interdependencies, and resilient staffing PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 48989 arrangements, obstacles to success of the orderly wind-down plan, as well as a stress scenario analysis addressing the failure of each identified critical operation or service. Additionally, the orderly wind-down plan must include aggregate cost estimates for the continuation of critical operations and services and a description of how the DCO will ensure that such operations and services continue through orderly wind-down. The Commission requests comment on this aspect of the proposal. 2. Triggers for Consideration of Orderly Wind-Down and Processes for Information-Sharing and DecisionMaking—§ 39.13(k)(2)(ii)–(iii) The Commission is proposing to require that orderly wind-down plans for DCOs include a description of the criteria that would guide the DCO in considering whether and when to implement wind-down, and the process for monitoring for events that may trigger consideration of orderly winddown. As noted in section II, any viable orderly wind-down plan must establish and define criteria (which may be in the alternative) that the DCO would consider in triggering consideration of wind-down. The criteria may be quantitative, such as the case where the DCO does not have the financial resources to continue as a going concern, or qualitative, such as the case where judgment may be needed (for instance, in circumstances involving litigation that is proceeding in a manner that suggests that a large, adverse finding is likely). Predefined criteria should help avoid undue delays in deciding whether to wind-down, which, in turn, should help increase the opportunity for an orderly wind-down. By monitoring for events that may trigger the consideration of wind-down, moreover, a DCO will be better situated to make a timely decision regarding wind-down. Further, predefined criteria will provide confidence to market participants and the public that the DCO has proper plans in place to monitor for and manage situations that may require an orderly wind-down. Additionally, the Commission is proposing to require that the orderly wind-down plan include a description of the information-sharing and escalation processes within the DCO’s senior management and board of directors following an event triggering consideration of an orderly wind-down. By establishing automatic procedures under which the relevant decisionmakers may obtain the necessary information, the DCO may avoid undue E:\FR\FM\28JYP2.SGM 28JYP2 48990 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 delays in ultimately deciding whether to wind-down. Similarly, the Commission is proposing to require that orderly winddown plans include the factors that the board of directors anticipates that it would consider in any decision-making regarding wind-down where judgment or discretion is required. The Commission believes that the factors enumerated in the orderly wind-down plan should be those that the DCO considers most important in guiding the discretion of the board of directors. A predefined framework within which the board may exercise judgment and discretion should facilitate a timely decision regarding wind-down. Accordingly, the Commission is proposing new § 39.13(k)(2)(ii)–(iii) to require that the DCO’s orderly winddown plan include a description of the criteria that the DCO would consider in determining whether to implement wind-down and, relatedly, the process for monitoring for events that may trigger consideration of an orderly winddown; a description of the informationsharing and escalation processes within the DCO’s senior management and board of directors following an event triggering consideration of an orderly wind-down; and the identification of the factors that the DCO considers most important in guiding the board of directors’ judgment or discretion with respect to any decision-making during the wind-down. The Commission requests comment on this aspect of the proposal. 3. Orderly Wind-Down Scenarios and Tools—§ 39.13(k)(3) The Commission is proposing to require that a DCO’s orderly wind-down plan (i) identify the scenarios that may lead to an orderly wind-down, i.e., those scenarios that may prevent the DCO from meeting its obligations or providing its critical operations and services as a going concern, and (ii) analyze the tools the DCO would use following the occurrence of each scenario. Specifically, the Commission is proposing to require that the analysis describe the tools the DCO would expect to use in an orderly wind-down that comprehensively address how the derivatives clearing organization would continue to provide critical operations and services; describe the order in which the DCO would expect to implement any identified tools; describe the governance and approval processes and arrangements that will guide the exercise of any available discretion in the use of each tool; describe the processes to obtain any approvals external to derivatives clearing VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 organization (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; establish the time frame within which the DCO may use each tool; set out the steps necessary to implement each tool; describe the roles and responsibilities of all parties in the use of each tool; provide an assessment of the likelihood that the tools, individually and taken together, would result in orderly wind-down; and provide an assessment of the associated risks to non-defaulting clearing members and those clearing members’ customers with respect to transactions cleared on the DCO, and linked financial market infrastructures. As may be the case for SIDCOs and Subpart C DCOs, the scenarios that may trigger consideration for wind-down are typically those where recovery efforts (if any) are deemed to have failed. At that point, the DCO will no longer be able to meet its obligations or provide its critical operations and services as a going concern. For each scenario where the DCO may reach such a point, the Commission is proposing to require that the orderly wind-down plan analyze the tools available to effectuate an orderly wind-down. The DCO’s tools—i.e., the wind-down options available to the DCO in each particular scenario—comprise those actions it may take to effect, in an orderly manner, the sale or transfer, or if necessary in extreme circumstances, permanent cessation, of its clearing and other services. The Commission intends that the proposed analysis will require the DCO to assess the effectiveness of a full range of actions for orderly winddown. Among other things, an effective set of wind-down tools enables the DCO to manage liquidity requirements in a manner in which critical operations and services would be maintained during the orderly wind-down period. Various factors may prevent an action from being effective, including, for instance, the number of steps required to implement the action (e.g., disclosure, risk reduction, trade reduction, transfer or close-out of positions, and liquidation of investments), the time required to complete each step (e.g., contract termination and other relevant requirements following disclosure), the discretion of various parties affecting the use or sequence of the action (including non-defaulting parties), and any legal limits regarding the action (e.g., the relevant DCO rules or rule amendments necessary to support the use of the action and the roles, PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 obligations and responsibilities of the various parties in the use of the action). Additionally, any action involving a proposed transfer may turn out to be difficult to achieve due to the financial and operational capacity that would be required of a transferee or the status of the DCO as a distressed seller. Further, the action may have adverse consequences on clearing members or other financial market participants. The Commission proposes to require this analysis in order to assist the DCO in determining which actions may effectuate an orderly wind-down where critical operations and services would be maintained throughout the orderly wind-down period while minimizing public harm. Accordingly, the Commission is proposing new § 39.13(k)(3) to require that a DCO’s orderly wind-down plan include, following a thorough analysis, the set of scenarios that may trigger consideration of orderly wind-down and an analysis of the tools the DCO would use in each scenario. The Commission is proposing to require that the analysis describe the tools the DCO would expect to use in an orderly wind-down; describe the order in which the DCO would expect to implement any identified tools; describe the governance, approval processes and arrangements that will guide the exercise of any available discretion in the use of each tool; establish the time frame within which the DCO may use each tool; set out the steps necessary to implement each tool; describe the roles and responsibilities of all parties in the use of each tool; provide an assessment of the likelihood that the tool would result in orderly wind-down; and provide an assessment of the associated risks to non-defaulting clearing members and their customers, linked financial market infrastructures, and the financial system more broadly, from the use of each tool. The Commission requests comment on this aspect of the proposal. 4. Agreements To Be Maintained During Orderly Wind-Down—§ 39.13(k)(4) The Commission is proposing to require that a DCO’s orderly wind-down plan identify any agreements associated with the provision of its critical services and operations that are subject to alteration or termination as a result of winding down and describe the actions the DCO has taken to ensure such operations and services will continue during wind-down. Similar to SIDCOs and Subpart C DCOs, the DCO may have a variety of contractual agreements with clearing members, affiliates, linked central counterparties, counterparties, E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules external service providers, and other third parties. The contractual agreements may take the form of contracts, arrangements, agreements, and licenses associated with the provision of its services as a DCO, and may cover the DCO’s rules and procedures, agreements for the provision of operational, administrative and staffing services, intercompany loan agreements, mutual offset agreements or cross-margining agreements, and credit agreements. Under the Commission’s proposed requirement, the DCO’s orderly wind-down plan must review and analyze its agreements to determine if they contain covenants, material adverse change clauses, or other provisions that may render the continuation of the DCO’s critical operations and services difficult or impracticable upon implementation of the orderly wind-down plan. The Commission is proposing to require that the DCO take proactive steps to ensure that its critical operations and services would continue in an orderly winddown, notwithstanding any contractual provision to the contrary. As is the case for SIDCOs and Subpart C DCOs, a requirement ensuring that the DCO’s agreements do not hinder its ability to continue critical operations and services in an orderly wind-down, or, if they do, that the orderly winddown plan provides viable strategies to address the situation, is important to an orderly wind-down. Additionally, this requirement will aid in providing a higher degree of confidence with respect to this group of DCOs in the public markets even in extreme market conditions with the potential to trigger the consideration of implementation of orderly wind-down plans. In addition to Core Principle D(i), this proposed requirement is supported by Core Principle R, requiring that the DCO have an enforceable legal framework for each aspect of its activities.177 To the extent any agreement prohibits the DCO from continuing its critical operations and services in an orderly wind-down, a DCO may not have an enforceable legal framework within which to carry out all of its activities, specifically those associated with an orderly wind-down. Accordingly, the Commission is proposing new § 39.13(k)(4) to require that a DCO’s orderly wind-down plan identify any contracts, arrangements, agreements, and licenses associated with the provision of its critical services and operations that are subject to alteration or termination as a result of the implementation of the orderly wind177 Section 5b(c)(2)(R) of the CEA, 7 U.S.C. 7a– 1(c)(2)(R). VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 48991 down plan. The orderly wind-down plan shall describe the actions the DCO has taken to ensure such operations and services can continue during orderly wind-down, despite such potential alteration or termination. proposing to require that a DCO’s board of directors formally approve and annually review the orderly wind-down plan. The Commission requests comment on this aspect of the proposal. 5. Governance—§ 39.13(k)(5) The Commission is proposing to require that a DCO’s orderly wind-down plan include predefined governance arrangements with respect to winddown planning and orderly wind-down that set forth the responsibilities of the board of directors, board members, senior executives and business units, describe the processes that the DCO will use to guide its discretionary decisionmaking relevant to the orderly winddown plan, and describe the DCO’s process for identifying and managing the diversity of stakeholder views and any conflict of interest between stakeholders and the DCO. Additionally, the Commission is proposing to require that the DCO’s board of directors formally approve and annually review the orderly wind-down plan. An effective governance arrangement will assist DCOs in reacting quickly to adverse scenarios, provide transparency to the orderly wind-down process, and help ensure that DCOs properly vet wind-down decisions with consideration of the interests of all relevant parties. Further, the proposed requirements with respect to governance are supported by Core Principle O, which requires that DCOs establish transparent governance arrangements to fulfill public interest requirements and permit the consideration of the views of owners and participants,178 and Core Principle P, which requires that DCOs establish both rules to minimize conflicts of interest in the decision making-process and a process for resolving conflicts of interest.179 Accordingly, the Commission is proposing new § 39.13(k)(5) to require that a DCO’s orderly wind-down plan describe an effective governance structure that clearly defines the responsibilities of the board of directors, board members, senior executives and business units, describe the processes that the DCO will use to guide its discretionary decision-making relevant to the orderly wind-down plan, and describe the DCO’s process for identifying and managing the diversity of stakeholder views and any conflict of interest between stakeholders and the DCO. Additionally, the Commission is 6. Testing—§ 39.13(k)(6) For DCOs that are neither SIDCOs nor Subpart C DCOs, the Commission is proposing a testing requirement as part of the orderly wind-down plan that is similar, but not identical, to proposed new § 39.39(c)(8). Specifically, the Commission is proposing new § 39.13(k)(6) to require that the orderly wind-down plan for these DCOs include procedures for testing the DCO’s ability to implement the tools upon which the orderly wind-down plan relies. The orderly wind-down plan must include the types of testing that will be performed, to whom the findings of such tests will be reported, and the procedures for updating the plan in light of the findings resulting from such tests. Such testing must occur following any material change to the orderly wind-down plan, but in any event not less frequently than once annually. The testing requirement for DCOs that are neither SIDCOs nor Subpart C DCOs should emphasize the reliable operability of the tools that potentially would be implemented in a wind-down; as such, the Commission is not proposing to require these DCOs to conduct crisis management drills or similar exercises as part of the testing requirement. Moreover, because of the wide range of possible types of clearing members, the Commission is not proposing to require these DCOs to conduct testing with the participation of clearing members.180 Nonetheless, where the plan relies upon the performance of clearing members and other internal stakeholders, or external stakeholders such as service providers, such DCOs should consider whether involving such parties is practical. As discussed above, however, testing the orderly wind-down plan—through assessing the operation and sufficiency of tools and resources to address losses—and updating the plan accordingly is a critical part of a DCO’s risk management practice. Testing can reveal deficiencies in the effectiveness of specific tools. It can also enhance the tools and resources for identifying, measuring, monitoring, and managing risk in general. Periodic testing, moreover may reveal any deficiencies or 178 Section 5b(c)(2)(O) of the CEA, 7 U.S.C. 7a– 1(c)(2)(O). 179 Section 5b(c)(2)(P) of the CEA, 7 U.S.C. 7a– 1(c)(2)(P). 180 Such DCOs that are subject to regulation by other authorities may be subject to more stringent requirements with respect to testing by those authorities. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 E:\FR\FM\28JYP2.SGM 28JYP2 48992 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules weaknesses in a DCO’s infrastructure which may hamper wind-down efforts. The Commission requests comment on this aspect of the proposal. The Commission specifically requests comment on the proposed requirement that tests be conducted not less than annually: would a different minimum frequency be more appropriate for DCOs other than SIDCOs or Subpart C DCOs? lotter on DSK11XQN23PROD with PROPOSALS2 D. Conforming Changes to Bankruptcy Provisions—Part 190 The Commission is proposing several conforming changes to Part 190’s bankruptcy provisions that follow from the proposed requirement that all DCOs maintain viable plans for orderly winddown. First, current § 190.12(b)(1) requires that a DCO in a Chapter 7 proceeding provide to the trustee copies of, among other things, the wind-down plan it must maintain pursuant to § 39.39(b).181 The Commission is proposing that the regulation be amended to include orderly wind-down plans that DCOs must maintain pursuant to proposed new § 39.13(k) in addition to § 39.39(b). Second, current § 190.15(a) requires that the trustee not avoid or prohibit certain actions taken by the DCO either reasonably within the scope of, or provided for in, any wind-down plan maintained by the DCO and filed with the Commission pursuant to § 39.39.182 The Commission is proposing that the regulation be amended to include orderly wind-downs plans maintained by DCOs and filed with the Commission pursuant to proposed new § 39.13(k) in addition to § 39.39. Third, current § 190.15(c) requires that the trustee act in accordance with any wind-down plan maintained by the debtor and filed with the Commission pursuant to § 39.39 in administering the bankruptcy proceeding.183 The Commission is proposing that the regulation be amended to include orderly wind-downs plans maintained by DCOs and filed with the Commission pursuant to proposed new § 39.13(k) in addition to § 39.39. Last, current § 190.19(b)(1) requires that a shortfall in certain funds be supplemented in accordance with the wind-down plan maintained by the DCO pursuant to § 39.39 and submitted pursuant to § 39.19.184 The Commission is proposing that the paragraph be amended to include orderly winddowns plans maintained by DCOs 181 17 CFR 190.12(b)(1). CFR 190.15(a). 183 17 CFR 190.15(c). 184 17 CFR 190.19(b)(1). 182 17 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 pursuant to proposed new § 39.13(k) in addition to § 39.39. The Commission requests comment on this aspect of the proposal. IV. Establishment of Time To File Orderly Wind-Down Plan— § 39.19(c)(4)(xxiv) In light of the proposed requirement that all DCOs maintain and submit to the Commission viable plans for orderly wind down and supporting information, the Commission is proposing to establish the timing for submitting orderly wind-down plans and supporting information for DCOs currently registered with the Commission. As the Commission is proposing to amend § 39.19(c)(4)(xxiv) to establish the time for SIDCOs and Subpart C DCOs to file a recovery plan and an orderly wind-down plan, the Commission proposes to amend the same section to establish a fixed deadline for DCOs currently registered with the Commission to file orderly wind-down plans. Under the proposed rule, DCOs currently registered with the Commission must complete and submit orderly wind-down plans and supporting information within six months from the effective date of the rule (if it is adopted). Pursuant to Core Principle D(i), all DCOs must already ensure they possess the ability to manage the risks associated with discharging their responsibilities through the use of appropriate tools and procedures. A potential wind down, due either to default or non-default losses, is always a latent risk for any DCO engaged in clearing and settlement activities; accordingly, DCOs should already have some plans in place for implementing tools and procedures to manage an orderly wind-down. The Commission proposes to require that any DCO that submits an application for registration with the Commission six months or more after the effective date of this rulemaking (if it is adopted), must submit its orderly wind-down plans and supporting information at the time it submits an application for registration with the Commission under § 39.3.185 The Commission is also requiring that all DCOs, upon revising their plans, but in any event no less frequently than annually, submit the current plan(s) and 185 For any DCO that submits (or has submitted) an application for registration with the Commission before the date that is six months after the effective date of this rulemaking, if it is adopted, the Commission is proposing to require that the DCO have until the date that is six months after the effective date of this rulemaking to submit its orderly wind-down plan and supporting information. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 supporting information to the Commission, along with a description of any changes and the reason(s) for such changes.186 In § 39.19(c)(4)(xxiv), as well as in § 39.13(k) and § 39.39(b), the Commission is proposing to add the words ‘‘and supporting information’’ to references to submitting recovery and/or orderly wind-down plans. DCOs may, in some instances, include supporting information within their plans, or may organize the documentation with supporting information kept separately, e.g., as an appendix or annex. To avoid confusion as to whether such separately kept information is required to be submitted to the Commission, and to ensure that the Commission has timely access to such supporting information, the Commission is proposing to amend §§ 39.19(c)(4)(xxiv), 39.13(k) and 39.39(b) to require its submission explicitly. Accordingly, the Commission proposes to amend § 39.19(c)(4)(xxiv). Specifically, the Commission proposes to require that any DCO not currently registered with the Commission submit its viable plans for orderly wind-down and supporting information at the time it files its application for registration with the Commission under § 39.3. Because the Commission is proposing to require that all DCOs must maintain and submit plans for orderly-wind down and supporting information, the Commission proposes to remove the current language from § 39.19(c)(4)(xxiv) suggesting or providing that DCOs that are not SIDCOs or Subpart C DCOs may maintain and submit orderly winddown plans to the Commission. For DCOs that are currently registered with the Commission and are not SIDCOs or Subpart C DCOs, the Commission is proposing to require that they submit their viable plans for orderly winddown and supporting information no later than six months after this rulemaking, if finalized, is published. Upon revising their plans, moreover, but in any event no less frequently than annually, all DCOs shall submit the current plan(s) and supporting information to the Commission, along with a description of any changes and the reason(s) for such changes. The Commission requests comment on this aspect of the proposal. The Commission specifically requests comment concerning whether a DCO should additionally be required to update its recovery and orderly wind186 See Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a– 1(c)(2)(J) (‘‘Core Principle J—Reporting’’) (requiring that DCOs provide to the Commission all information that the Commission determines to be necessary to conduct oversight of the DCO). E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules down plans upon changes to the DCO’s business model, operations, or the environment in which it operates, to the extent such changes significantly affect the viability or execution of the recovery and orderly wind-down plans. The Commission also specifically requests comment concerning whether six months is sufficient time to develop these plans, or if a longer time (e.g., one year) would be more appropriate. V. Amendment to § 39.34(d) As discussed in the context of recovery plans and orderly wind-down plans, the Commission proposes to discontinue the process by which the Commission could grant, upon request of a SIDCO or DCO that is electing to become subject to subpart C, up to one year to comply with §§ 39.39 and 39.35.187 The Commission is proposing to remove a similar provision in § 39.34(d) wherein a SIDCO or Subpart C DCO could request, and the Commission may grant, up to one year to comply with any provision of § 39.34 (System safeguards for SIDCOs and Subpart C DCOs) because granting such requests would be inconsistent with the system safeguard rules for SIDCOs and Subpart C DCOs that have been in effect for years.188 The Commission is therefore proposing to remove § 39.34(d) in its entirety. The Commission requests comment on this aspect of the proposal. lotter on DSK11XQN23PROD with PROPOSALS2 VI. Amendments to Appendix B to Part 39—Subpart C Election Form The Commission is proposing to amend the Subpart C Election Form to reflect the above proposed changes to Part 39. One of these amendments will reflect the elimination of the request for an extension of up to one year to comply with any of the provisions of §§ 39.34, 39.35, or 39.39. The ‘‘General Instructions’’ and ‘‘Elections and Certifications’’ portions of the Subpart C Election Form are proposed to be amended to delete the references to requests for relief of up to one year for those sections of part 39. Another amendment will modify Exhibit F–1 to include the DCO’s recovery plan, orderly wind-down plan, supporting information for these plans, and a demonstration that the plans comply with the requirements of § 39.39(c). The Commission requests comment on this aspect of the proposal. 187 See 17 CFR 39.39(f). System Safeguards Testing Requirements for Derivatives Clearing Organizations, 81 FR 64322 (Sept. 19, 2016). 188 See VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 VII. Amendments to Appendix A to Part 39—Form DCO The Commission is proposing to amend Form DCO, in particular, Exhibit D—Risk Management to reflect the above proposed changes to Part 39. The amendment will add an Exhibit D–5 to include the DCO’s orderly wind-down plan, and a demonstration that the plan complies with the requirements of proposed § 39.13(k). The Commission requests comment on this aspect of the proposal. VIII. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) requires that agencies consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis on the impact.189 The regulations proposed by the Commission will affect only DCOs. The Commission has previously established certain definitions of ‘‘small entities’’ to be used by the Commission in evaluating the impact of its regulations on small entities in accordance with the RFA.190 The Commission has previously determined that DCOs are not small entities for the purposes of the RFA.191 Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations will not have a significant impact on a substantial number of small entities. B. Antitrust Considerations Section 15(b) of the CEA requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA, in issuing any order or adopting any Commission rule or regulation.192 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission requests comment on whether the proposed rules implicate any other specific public interest to be protected by the antitrust laws. The Commission has considered the proposed rulemaking to determine whether it is anticompetitive and has U.S.C. 601–612. Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618 (Apr. 30, 1982). 191 See A New Regulatory Framework for Clearing Organizations, 66 FR 45604, 45609 (Aug. 29, 2001). 192 Section 15(b) of the CEA, 7 U.S.C. 19(b). PO 00000 189 5 190 Policy Frm 00027 Fmt 4701 Sfmt 4702 48993 identified no anticompetitive effects. The Commission requests comment on whether the proposed rulemaking is anticompetitive and, if it is, what the anticompetitive effects are. Because the Commission has preliminarily determined that the proposed rules are not anticompetitive and have no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the CEA. The Commission requests comment on whether there are less anticompetitive means of achieving the relevant purposes of the CEA that would otherwise be served by adopting the proposed rules. C. Paperwork Reduction Act The Paperwork Reduction Act (PRA) 193 provides that Federal agencies, including the Commission, may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number from the Officer of Management and Budget (OMB). The PRA is intended, in part, to minimize the paperwork burden created for individuals, businesses, and other persons as a result of the collection of information by federal agencies, and to ensure the greatest possible benefit and utility of information created, collected, maintained, used, shared, and disseminated by or for the Federal Government.194 The PRA applies to all information, regardless of form or format, whenever the Federal Government is obtaining, causing to be obtained, or soliciting information, and includes required disclosure to third parties or the public, of facts or opinion, when the information collection calls for answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, ten or more persons.195 This proposed rulemaking contains reporting and recordkeeping requirements that are collections of information within the meaning of the PRA. This section addresses the impact of the proposal on existing information collection requirements associated with part 39 of the Commission’s regulations. Changes to the existing information requirements as a result of this proposal are set forth below. OMB has assigned Control No 3038–006, ‘‘Requirements for Derivatives Clearing Organizations,’’ to the information collections associated 193 44 U.S.C. 3501 et seq. U.S.C. 3501. 195 44 U.S.C. 3502(3). 194 44 E:\FR\FM\28JYP2.SGM 28JYP2 48994 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules with these regulations.196 The Commission is revising its total burden estimates for this clearance to reflect the proposed amendments. The Commission therefore is submitting this proposal to the OMB for its review in accordance with the PRA.197 Responses to this collection of information would be mandatory. The Commission will protect any proprietary information according to the Freedom of Information Act and part 145 of the Commission’s regulations.198 In addition, section 8(a)(1) of the CEA strictly prohibits the Commission, unless specifically authorized by the CEA, from making public any ‘‘data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.’’ 199 Finally, the Commission is also required to protect certain information contained in a government system of records according to the Privacy Act of 1974.200 lotter on DSK11XQN23PROD with PROPOSALS2 1. Event-Specific Reporting— § 39.19(c)(4) Proposed § 39.39(b) would require a SIDCO or Subpart C DCO to submit written recovery plans and orderly wind-down plans within six months of designation as a SIDCO or upon a DCO’s election as a Subpart C DCO (in each case, if this happens subsequent to the effective date), consistent with current § 39.19(c)(4)(xxiv). This reporting requirement is already included in the information collection burden associated with the collection of information titled ‘‘Requirements for Derivatives Clearing Organizations, OMB Control No. 3038–0076.’’ The Commission has previously estimated that this requirement entails an estimated 4,320 burden hours for all covered DCOs along with an associated annual cost burden of $341,280.201 While the timing for this reporting requirement has changed, there is no change in frequency, and the Commission does not anticipate any other change to this reporting requirement caused by this change to 196 For the previously approved estimates, see ICR Reference No. 202303–3038–001, available at https://www.reginfo.gov/public/do/ PRAViewICR?ref_nbr=202303-3038-001. 197 44 U.S.C. 3507(d); 5 CFR 1320.11. 198 5 U.S.C. 552; 17 CFR part 145 (Commission Records and Information). 199 7 U.S.C. 12(a)(1). 200 5 U.S.C. 552a. 201 This is based on the Commission’s estimate that nine covered DCOs will be required to submit one written recovery plan and wind-down plan annually. The Commission had estimated that covered DCOs will require 480 hours on average to draft the required plans at a previously estimated $79 per hour. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 the timing for the report to be submitted. However, because of enhancements to the requirements for these plans, the Commission anticipates an increase in the reporting burden from the proposed subjects and analyses that SIDCOs and Subpart C DCOs would be required to include in their recovery and orderly wind-down plans from 480 hours to 600 hours. The Commission will use a blended rate of 50% financial examiners ($237/hour) and 50% lawyers ($499/hour) resulting in $368/hour.202 The Commission specifically invites public comment on the accuracy of its estimates that the proposed regulations will not impose a new reporting burden but increase the reporting burden estimate to 600 hours. The Commission’s burden estimate for § 39.19(b), including drafting or updating, approving, and testing the wind-plan, is as follows: Estimated number of respondents: 6. Estimated number of reports per respondent: 1. Average number of hours per report: 600. Estimated annual hours burden: 3,600. Estimated gross annual reporting burden: $1,324,800. Proposed § 39.13(k)(1)(i) would require a DCO that is neither a SIDCO nor a Subpart C DCO to submit, pursuant to § 39.19(c)(4)(xxiv), a written orderly wind-down plan. Given the similarities between the recovery plan and orderly wind-down plan, and the consequent efficiencies in preparing both plans, the Commission estimates that the orderly wind-down plan would require 400 hours to develop for nonSIDCO and non-Subpart C DCOs and 100 hours/year to update. The estimated 400 hours represents a reduction of onethird the amount of time that the Commission estimates is required for SIDCOs and Subpart C DCOs to develop both the recovery plan and orderly wind-down plan. This proposed 202 According to the May 2021 National Occupational Employment and Wage Estimates Report produced by the U.S. Bureau of Labor Statistics, available at https://www.bls.gov/oes/ current/oes_nat.htm, the mean salary for category 23–1011, ‘‘Lawyers,’’ is $198,900. This number is (a) divided by 1800 work hours in a year to account for sick leave and vacations, (b) multiplied by 4.0 to account for retirement, health, and other benefits or compensation, as well as for office space, computer equipment support, and human resources support, and (c) in light of recent high inflation, further multiplied by 1.1294 to account for the change in the Consumer Price Index for Urban Wage-Earners and Clerical Workers from 263.612 in May of 2021 to 297.730 in April of 2023, all of which yields an hourly rate of $499. Using a similar analysis, category 13–2061, ‘‘Financial Examiners,’’ under business and financial services occupations, has a mean annual salary of $94,270, yielding an hourly rate of $237. PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 amendment, if adopted, would increase the existing annual burden for this clearance by 3,600 hours.203 The Commission will use the same blended rate of $368/hour. The Commission specifically invites public comment on the accuracy of its estimates. The Commission’s burden estimate for § 39.19(c)(4)(xxiv), including drafting or updating, approving, and testing the wind-plan, is as follows: Estimated number of respondents: 9. Estimated number of reports per respondent: 1. Average number of hours per report: 400. Estimated annual hours burden: 3,600. Estimated gross annual reporting burden: $1,324,800. The Commission is proposing to add new § 39.19(c)(4)(xxv) to require that each SIDCO or Subpart C DCO that is required to have a procedure for informing the Commission when the recovery plan is initiated or that orderly wind-down is pending pursuant to either § 39.39(b)(2) or § 39.13(k)(1) shall notify the Commission and clearing members as soon as practicable when the DCO has initiated its recovery plan or that orderly wind-down is pending. SIDCOs and Subpart C DCOs are currently required under § 39.39(c)(1) to have procedures in place to notify the Commission when a recovery plan or orderly wind-down was initiated and the Commission is now proposing to codify this as a formal notification requirement, thus, the Commission does not view this aspect of the proposed regulation as a new reporting requirement under OMB Control No. 3038–0076. However, the requirement to notify clearing members was set out in CFTC Letter No. 16–61 but was not codified, and may therefore be considered a new event-specific reporting requirement. The Commission anticipates that, if adopted, the notification to the Commission and to clearing members will be drafted by a lawyer (and thus involve a cost/hour of $308) and will be an electronic notification. The current regulation requires procedures be in place to notify the Commission, and the proposed regulation requires that the notification be sent to the Commission and to clearing members. The Commission anticipates that proposed §§ 39.39(b)(2), 39.13(k)(1)(ii), and 39.19(c)(4)(xxv) 203 In an effort to adequately estimate the potential burden, the Commission will ignore the fact that, as discussed elsewhere in this NPRM, some DCOs have developed, and regularly update, their orderly wind-down plans pursuant to regulations imposed by non-U.S. regulators. E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 would increase the event-specific reporting burden estimate marginally. Since notifications of this type are accomplished by electronic means, the existing procedure will have to be updated to include notice to the DCO’s clearing members. Since this can be accomplished using methods and tools that the DCO currently uses to provide notices to members of, e.g., changes in DCO rules or procedures, it is unlikely that the DCO will need to design and implement new tools. While no DCO (and no CFTCregulated clearinghouse prior to the amendments to the CEA that provided for regulation of DCOs) has ever initiated recovery, several have (due to a paucity of business) made the decision to wind-down operations. The Commission conservatively estimates that one notification (total) under § 39.19(c)(4)(xxv) would occur every four years. The Commission’s burden estimate for § 39.19(c)(4)(xxv) is as follows: Estimated number of respondents: 1. Estimated number of reports per respondent: 0.25. Average number of hours per report: 1. Estimated annual hours burden: 0.25. Estimated gross annual reporting burden: $125. 2. Requested Reporting—§ 39.19(c)(5) The Commission is proposing to add a new requested reporting requirement for SIDCOs and Subpart C DCOs that submit information to the Commission pursuant to § 39.39(f)(2). Proposed § 39.19(c)(5)(iii) would require a SIDCO or Subpart C DCO that submits information for resolution planning purposes to update the information upon request of the Commission. The Commission believes this is a new requested reporting requirement, which will be performed by lawyers at a cost of $499/hour. This proposed amendment, if adopted, would increase the existing annual burden for this clearance by an estimated 600 hours. The Commission’s burden estimate for this new reporting requirement under § 39.39(c)(5) is as follows: Estimated number of respondents: 6. Estimated number of reports per respondent: 1. Average number of hours per report: 100. Estimated annual hours burden: 600. Estimated gross annual reporting burden: $299,400. These proposed information collection requirements would result in an incremental increase in the annual hours burden associated with OMB Clearance No. 3038–0076. The VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 Commission estimates the proposed amendments, if adopted, would yield the following incremental totals: Estimated number of annual responses for all respondents: 15.25. Estimated total annual burden hours for all respondents: 4,920.25. Estimated gross annual reporting burden: $1,889,285. Request for comment The Commission invites the public and other Federal agencies to comment on any aspect of the proposed information collection requirements discussion above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission will consider public comments on this proposed collection of information in: (1) Evaluating whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have a practical use; (2) Evaluating the accuracy of the estimated burden of the proposed collection of information, including the degree to which the methodology and the assumptions that the Commission employed were valid; (3) Enhancing the quality, utility, and clarity of the information proposed to be collected; and (4) Minimizing the burden of the proposed information collection requirements on registered entities, including through the use of appropriate automated, electronic, mechanical, or other technological information collection techniques, e.g., permitting electronic submission of responses. Organizations and individuals desiring to submit comments on the proposed information collection requirements should send those comments to: • The Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Desk Officer of the Commodity Futures Trading Commission; • (202)395–6566 (fax); or • OIRAsubmissions@omb.eop.gov (email). Please provide the Commission with a copy of submitted comments so that, if the Commission determined to promulgate a final rule, all comments can be summarized and addressed in the final rule preamble. Please refer to the ADDRESSES section of this rulemaking for instructions on submitting comments to the Commission. A copy of the supporting statements for the collections of information discussed above may be obtained by vising RegInfo.gov. OMB is PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 48995 required to make a decision concerning the proposed information collection requirements between thirty (30) and sixty (60) days after the publication of the Notice of Proposed Rulemaking in the Federal Register. Therefore, a comment to OMB is best assured of receiving full consideration if OMB receives it within 30 calendar days of publication of this NPRM. Nothing in the foregoing affects the deadline enumerated above for public comments to the Commission on the proposed rules. D. Cost-Benefit Considerations 1. Introduction Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders.204 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five specific considerations identified in section 15(a) of the CEA (collectively referred to as section 15(a) factors) addressed below. The Commission recognizes that the proposed amendments may impose costs. The Commission has endeavored to assess the expected costs and benefits of the proposed amendments in quantitative terms, including PRArelated costs, where possible. In situations where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of the applicable proposed amendments in qualitative terms. The lack of data and information to estimate those costs is attributable in part to the nature of the proposed amendments, in that they will require DCOs to undertake analyses that are specific to the characteristics of each DCO, including the specifics of the DCO’s business model, services and operations provided by the DCO to clearing members and other financial market participants, products cleared (and the DCO’s role in the financial sector), services and operations provided by others that the DCO relies upon to provide its services and operations to others, infrastructure, and governance arrangements. Both the initial costs, and any initial and recurring compliance costs, will also depend on the size, existing infrastructure, practices, and cost structure of each DCO. The Commission generally requests comment on all aspects of its costbenefit considerations, including the identification and assessment of any 204 Section E:\FR\FM\28JYP2.SGM 15(a) of the CEA, 7 U.S.C. 19(a). 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 48996 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules costs and benefits not discussed herein; data and any other information to assist or otherwise inform the Commission’s ability to quantify or qualitatively describe the costs and benefits of the proposed amendments; and substantiating data, statistics, and any other information to support positions posited by commenters with respect to the Commission’s discussion. The Commission welcomes comment on such costs, particularly from existing SIDCOs and Subpart C DCOs that can provide quantitative cost data based on their respective experiences. Commenters may also suggest other alternatives to the proposed approach. 2. Baseline The baseline for the Commission’s consideration of the costs and benefits of this proposed rulemaking are: (1) the DCO Core Principles set forth in section 5b(c)(2) of the CEA; (2) the Commission’s regulations in Subpart C of part 39, which establish additional standards for compliance with the core principles for those DCOs that are designated as SIDCOs or have elected to opt-in to the Subpart C requirements in order to achieve status as a QCCP; and (3) the subpart C Election Form in appendix B to part 39. Some of the proposed revisions and amendments to § 39.39 would codify staff guidance and international standards. To the extent that market participants have relied upon the staff guidance that is proposed to be codified, the actual costs and benefits of the proposed rules, as discussed in this section of the proposal, may not be as significant. Additionally, the proposed changes to § 39.39 would not apply to all fifteen DCOs currently registered with the Commission. Rather, the proposed amendments to § 39.39 apply to SIDCOs and Subpart C DCOs. There are currently two SIDCOs,205 and four Subpart C DCOs.206 All SIDCOs and Subpart C DCOs have recovery plans and orderly wind-down plans on file with the Commission which may generally be consistent with the staff guidance issued in CFTC Letter No. 16– 61 and current § 39.39(b). Additionally, the SIDCOs have already provided information related to resolution planning which may fulfill requests for information under current § 39.39(c)(2), which is proposed to be revised as § 39.39(f). As discussed further below, the Commission is proposing to require that DCOs that are neither SIDCOs nor electors into Subpart C to develop and 205 CME and ICC. Clear US, Inc.; Minneapolis Grain Exchange, LLC; Nodal Clear, LLC; and OCC. 206 ICE VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 maintain plans for orderly wind-down. This would be a new requirement. However, of the nine such DCOs that are currently registered, five are based in jurisdictions that implement regulatory requirements that are consistent with the PFMI.207 These include standards that require both recovery and orderly wind-down plans. Accordingly, to the extent that these five DCOs have already designed and maintain plans for orderly wind-down that are consistent with the proposed rules, the actual costs and benefits of the proposed rules, as discussed in this section of the proposal, may be reduced.208 These standards will be new, however, for the remaining four non-Subpart C DCOs (and for any new DCOs that are similarly situated).209 The Commission’s analysis below compares the proposed amendments to the regulations in effect today; however, it then takes into account current industry practices that may mitigate some of the costs and benefits set out in each section. The Commission seeks comment on all aspects of the baseline. 3. Recovery Plan and Orderly WindDown Plan—§ 39.39(b) The Commission is clarifying that each SIDCO and Subpart C DCO must submit its recovery plan and orderly wind-down plan to the Commission consistent with existing § 39.19(c)(4)(xxiv). The Commission is further proposing in § 39.39(b)(2) to require that a SIDCO or Subpart C DCO notify the Commission and clearing members when the recovery plan is initiated or orderly wind-down is pending, and to add a corresponding event-specific reporting requirement in § 39.19(c)(4)(xxv). Proposed § 39.39(b)(3) would also establish that a SIDCO must file its recovery plan and (to the extent it has not already filed one) orderly wind-down plan within six months of designation as a SIDCO, and a DCO electing to be subject to Subpart C of the Commission’s regulations must file its recovery plan and (to the extent it has not already filed one) orderly 207 These are ICE NGX Canada, Inc. (Canada), LCH SA (France), Eurex Clearing AG (Germany), as well as ICE Clear Europe and LCH Ltd (United Kingdom). Each of these jurisdictions has reported that they have fully implemented the standards in the PFMI. See https://www.bis.org/cpmi/level1_ status_report.htm. 208 To the extent foreign CCPs are subject to home jurisdiction regulation with different requirements for the subjects and analyses that must be included in their orderly wind-down plans, the Commission welcomes comments describing those requirements, and including suggestions on how to achieve the goals of this regulation in a manner that appropriately addresses possible inefficiencies. 209 CBOE Clear Digital, LLC, CX Clearinghouse, L.P., LedgerX LLC, and North American Derivatives Exchange, Inc. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 wind-down plan on the effective date of its election. i. Benefits Proposed § 39.39(b)(1) explicitly requires that a SIDCO and a Subpart C DCO must have plans for recovery and orderly wind-down, and that these plans must each cover both default losses and non-default losses. This has the benefit of enhancing the resilience of these DCOs, and reducing the risk that they pose to clearing members and other financial market participants (and, in some cases, to the financial system), by requiring these plans to cover the full range of risks. Proposed § 39.39(b)(2) requires that SIDCOs and Subpart C DCOs have procedures to notify the Commission and clearing members that recovery is initiated or orderly wind-down is pending as soon as practicable, and that such notice is provided to the Commission and clearing members. The requirement to notify the Commission is not a new requirement, and the requirement to notify clearing members, which was explicit in the staff guidance, will aid clearing members in protecting their interests. Finally, establishing a date for the filing of recovery plans and orderly wind-down plans in proposed § 39.39(b)(3),210 is responsive to commenters’ requests made over time for date certainty, and choosing six months as that certain date takes into account both resilience and practicality. Requiring that a newly-designated SIDCO submit its plans no later than six months after designation and that a DCO submit its plans at the time of making the election to become subject to Subpart C (if it has not already done so) fosters the objectives of promoting resiliency and prepares SIDCOs and Subpart C DCOs to meet the challenges of recovery or orderly wind-down in the event that they are necessary. Further, allowing newly designated SIDCOs six months to submit their plans should provide enough time to develop the plans. The Commission believes that these regulations will benefit registrants and market participants. ii. Costs The current regulations require a SIDCO or Subpart C DCO to maintain viable plans for recovery and orderly wind-down, and to submit such plans to the Commission. DCOs already have systems in place to notify clearing 210 With respect to orderly wind-down plans, the Commission notes that this requirement would be applicable only to the extent the DCO does not have an orderly wind-down plan on file at the Commission. E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules members when specific actions are taken, and the Commission believes that these existing systems can be used to notify clearing members when the recovery plan is initiated or orderly wind-down is pending. Thus, the costs involved would be the effort involved in preparing to use these existing systems to notify clearing members when the recovery plan is initiated or orderly wind-down is pending (including testing), and, if and when necessary, using them to make such notifications. Moreover, it does not appear that establishing the specified periods for filing the will cause additional costs above those involved in developing the recovery and orderly wind-down plans. lotter on DSK11XQN23PROD with PROPOSALS2 iii. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of sections 15(a)(2)(A), (B), (D), and (E) of the CEA, the proposed amendments will protect market participants, enhance the financial integrity of futures markets, reflect sound risk management practices, and enhance the public interest, by ensuring that the Commission and clearing members are notified when the recovery plan is initiated or orderly wind-down is pending, thereby aiding the Commission in taking action to protect markets and the broader financial system, and enabling clearing members to protect their own interests. Section 15(a)(2)(C), price discovery, is not implicated by the proposed amendments. 4. Recovery Plan and Orderly WindDown Plan: Required Elements— § 39.39(c) Proposed § 39.39(c) would establish the required content of a SIDCO’s or Subpart C DCO’s recovery plan and orderly wind-down plan consistent with the guidance set forth in CFTC Letter No. 16–61. Proposed § 39.39(c)(1)–(8) would require that each plan’s description include the identification and description of the critical operations and services the DCO provides to clearing members and other financial market participants, the service providers the DCO relies upon to provide these critical operations and services, interconnections and interdependencies, resilient staffing arrangements, obstacles to success of the plan, stress scenario analyses, potential triggers for recovery and orderly winddown, available recovery and orderly wind-down tools, analyses of the effect of the tools on each scenario, lists of VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 agreements to be maintained during recovery and orderly wind-down, and governance arrangements. i. Benefits Current § 39.39 does not provide explicit regulations governing the required elements of a SIDCO’s or Subpart C DCO’s recovery plan and orderly wind-down plan. At the time the 2013 rule was promulgated, the international standards and guidance covering such elements (with which a SIDCO and Subpart C DCO must comply) were consultative and not finalized. CFTC Letter No. 16–61 provided SIDCOs and Subpart C DCOs with comprehensive guidance related to the elements of acceptable recovery plans and orderly wind-down plans. Proposed § 39.39(c) would codify elements for a recovery plan and orderly wind-down plan that are, in general, drawn from the guidance on international standards related to recovery plans and orderly wind-down plans adopted by international standards-setting bodies since 2013, and described in detail in CFTC Letter No. 16–61. Codifying the guidance set out in CFTC Letter No. 16–61, and enhancing the set of elements discussed in that guidance through proposed § 39.39(c)(1)–(8) should benefit market participants, including both DCOs and their members, by establishing specific regulatory requirements for welldesigned and effective recovery and orderly wind-down plans. The requirements of proposed § 39.39(c)(1)– (8) should contribute to DCOs achieving a better ex ante understanding of, the critical services and operations that it provides clearing members and other financial market participants, the services and operations provided by others (including internal staff) upon which it depends to provide those services and operations (and contractual arrangements with such others that might be altered or terminated as a result of the circumstances that lead to the need for recovery or orderly winddown), the scenarios that might lead to recovery or orderly wind-down, of the challenges a DCO would face in a recovery or wind-down scenario, the tools that the DCO would rely upon to meet those challenges, and the challenges and complexities in using those tools, and the DCO’s governance arrangements for recovery and orderly wind-down. This understanding will be significantly enhanced if the DCO engages in annual testing of its plans, and modifies those plans in light of the results of such testing. PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 48997 Thus, the DCOs, clearing members, and other financial market participants will benefit through the DCO being better prepared to meet those challenges successfully (and thus being more likely to continue to provide those critical services and operations upon which clearing members and other financial market participants depend, and to avoid the potential harms to clearing members, other financial market participants, and the financial system more broadly, from a disorderly cessation of those services and operations). Including these explicit and specific requirements for recovery plans and orderly wind-down plans should significantly enhance the DCO’s ability to implement its recovery plan (or, if necessary, orderly wind-down plan) promptly and effectively. Additionally, the information will better enable a newly designated SIDCO, or a DCO that is electing subpart C status, to understand the requirements for welldeveloped and effective plans, and to consider relevant issues including the tools it intends to activate, its process for monitoring for triggers, the sequencing of tools, impediments to the timely or successful use of its tools, its governance arrangements, internal and external approval processes, and whether contractual agreements will continue during recovery and orderly wind-down; moreover, it will have a plan in place to handle exigencies in a manner that mitigates the risk of financial instability or contagion. ii. Costs The specific requirements for a recovery plan’s and orderly wind-down plan’s description, analysis, and testing set forth in this regulation will require substantial time to be spent on analytical effort by DCO staff, including attorneys, compliance staff, and other subject matter experts. DCO staff will spend time to review existing plans and supporting arrangements, compare them to the proposed rules (to the extent that they are ultimately adopted), and make modifications or additions to those plans, in light of, inter alia, the specifics of each DCO’s business model, services and operations provided by the DCO to clearing members and other financial market participants, products cleared (and the DCO’s role in the financial sector), services and operations provided by others that the DCO relies upon to provide its services and operations to others, infrastructure, and governance arrangements. The revised plans will then need to be reviewed, first by senior management and then by the board of directors, at the cost of the E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 48998 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules time of those persons, and potentially further amended in light of the results of such reviews (resulting in the further expenditure of time). All of these DCOs will need to incur the cost of staff time to undertake additional analysis to (a) ensure that their recovery and orderly wind-down plans meet those portions of the proposed requirements that represent codification of staff guidance, and (b) meet those portions of the proposed requirements that represent enhancements to the staff guidance (this includes enhancements resulting from changes to definitions, e.g., calling for considerations of non-default losses due to the actions of malicious actors, including internal, external, and nationstates). This additional analysis includes developing an overview of each plan and describing how the plan will be implemented, ensuring that each plan identifies and describes (i) the critical operations and services that the DCO provides to clearing members and other financial market participants, (ii) the service providers upon which the DCO relies to provide these operations and services, (iii) plans for resilient staffing arrangements for continuity of operations, (iv) obstacles to success of the plans, (v) plans to address the risks associated with the failure of each critical operation and service, (vi) how the DCO will ensure that the identified operations and services continue thorough recovery and orderly winddown. Further, the DCO will need to ensure that the analysis of scenarios for its recovery plan includes each of the scenarios specified in § 39.39(c)(2)(ii)(A)–(K) and (iii), or that the analysis documents why such scenario is not possible in light of the DCO’s structure and activities, and that, for each possible scenario, the analysis includes the elements specified in § 39.39(c)(2)(i)(A)–(F). The DCO will need to ensure that the analysis establishes triggers for recovery or consideration of orderly wind-down, and the information-sharing and governance process within senior management and board of directors. The DCO will also need to ensure that the plans describe the tools that it would use to meet the full scope of financial deficits that the DCO might need to remediate, and, for each set of tools, provides the additional analysis described in § 39.39(c)(4)(ii)–(ix) (for the recovery plan) and § 39.39(c)(5)(iii)–(x) (for the orderly wind-down plan). Additionally, the DCO will need to ensure that its plans include determinations of which of the VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 contracts, etc. associated with the provision of its services as a DCO are subject to alteration or termination as a result of the implementation of recovery or orderly wind-down, and the actions that the DCO has taken to ensure that its critical operations and services will continue during recovery and orderly wind-down despite such alteration or termination. The DCO will also need to ensure that the plans are formally approved, and annually reviewed, by the board of directors, describe effective governance structures and processes to guide discretionary decision-making relevant to each plan, and describe the DCO’s process for identifying and managing the diversity of stakeholder views and any conflict of interest between stakeholders and the DCO. Moreover, the DCO will need to ensure that its plans include procedures for testing their viability, including the DCO’s ability to implement the tools that each plan relies upon. This also includes the types of testing to be performed, to whom the results are reported, and procedures for updating the plans in light of the findings resulting from such tests. The tests need to include the participation of clearing members, where the plans rely upon their participation. The tests must be repeated following any material change to the recovery plan or orderly winddown plan, but in any event not less than once annually. If the foregoing recovery or orderly wind-down planning identifies vulnerabilities that need to be improved upon, the DCO will incur the cost of remediating such vulnerabilities. As noted earlier in this section, plans revised in light of the foregoing analysis will then need to be reviewed, first by senior management and then by the board of directors, at the cost of the time of those persons, and potentially further amended in light of the results of such reviews (resulting in the further expenditure of time). It is impracticable to quantify these costs, because they depend on the specific design and other circumstances of each DCO. including the specific services and operations that the DCO provides to clearing members and other financial participants, the services and operations provided by others that the DCO relies upon to provide those services, the contractual arrangements between and those service providers, and the DCO’s current recovery and orderly wind-down plans., It seems likely that these requirements will require hundreds of hours of the effort of skilled professionals, at a cost of tens of (perhaps more than a hundred) thousands of dollars. PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 For DCOs that are currently SIDCOs or Subpart C DCOs, or other DCOs that may currently maintain recovery and orderly wind-down plans, the amount of time required for each DCO to initially amend its recovery plan and orderly wind-down plan may vary depending on the extent to which the DCO already addressed the foregoing requirements in its existing plans. The analysis and plan preparation that a SIDCO or Subpart C DCO will undertake to comply with this regulation, including designing and implementing changes to existing plans, was, to a significant extent, established in the 2016 staff guidance, and, based on staff’s experience, SIDCOs and Subpart C DCOs generally already follow those standards. To that extent, for these DCOs, those costs may be reduced. The Commission requests comment from existing SIDCOs and Subpart C DCOs concerning their estimates of the time, and corresponding costs, they would expect to incur in ensuring that their existing plans meet the requirements of the proposed rule, along with supporting data concerning the amount of effort expended on preparing existing plans, and the extent to which additional time may need to be spent to conform such plans to the proposed rules. The Commission also seeks comment from the public more generally as to estimates, along with supporting data, of the time, and corresponding costs that might be incurred in developing recovery and orderly wind-down plans that meet those requirements. Additionally, to what extent are existing SIDCOs and Subpart C DCOs following the staff guidance in CFTC Letter No. 16–61? What is the impact of current practice among existing SIDCOs and Subpart C DCOs with respect to that staff guidance on the costs and benefits that would result from implementation of the proposed rules? iii. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the section 15(a) factors. In consideration of sections 15(a)(2)(A), (B), (D), and (E) of the CEA, the Commission believes the proposed amendments to § 39.39(c)(1)–(8) would enhance existing protection of market participants and the public and the financial integrity of futures markets, and the regulations should aid in sound risk management practices by ensuring that the DCO considers in advance the impact that recovery and orderly winddown would have on its operations and customers. Moreover, specifying the contents of the plans in the regulation E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules should increase the possibility that a DCO could continue to provide the critical services and operations upon which its clearing members and other financial market participants depend, and reduce the possibility that a DCO would fail in a disorganized fashion. The proposed rule should reduce the likelihood of a DCO’s failure to meet its obligations to its members, thereby enhancing protection for a DCO’s members and their customers, and should help to avoid the systemic effects of a DCO failure. Having the requisite plans in place, moreover, should allow DCOs to handle exigencies in a manner that mitigates the risk of financial instability or contagion. These benefits favor the public interest. Section 15(a)(2)(C), price discovery, does not appear to be implicated by the proposed amendments. lotter on DSK11XQN23PROD with PROPOSALS2 5. Information for Resolution Planning—§ 39.39(f) The Commission is proposing in § 39.39(f) to require that a SIDCO and Subpart C DCO maintain information systems and controls to provide data and information necessary for the purposes of resolution planning to the Commission, and upon request provide such data and information to the Commission, electronically, in the form and manner specified by the Commission. Proposed § 39.39(f)(1)–(7) describes the types of information deemed pertinent to planning for resolution of a SIDCO or Subpart C DCO under Title II of the Dodd-Frank Act. Much of this information may already be provided to the Commission, and thus may not be requested. The proposed regulation expands on current § 39.39(c)(2) and lists explicitly the types of information that SIDCOs and Subpart C DCOs may be required to provide upon request because they are relevant to resolution planning, but which may not ordinarily be required to be provided under other sections of part 39. i. Benefits Proposed § 39.39(f)(1)–(7) describes the types of information that the Commission proposes to require for resolution planning under Title II of the Dodd-Frank Act. Thorough preparation ex ante is crucial for successfully managing matters relating to the resolution of a SIDCO or Subpart C DCO, as well as for establishing market confidence and the confidence of foreign counterparts to the Commission and to the United States agencies responsible for resolution of a SIDCO or Subpart C DCO. Because of the nature of principles-based regulation, there is VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 some information in the possession of the DCO that, while important for resolution planning purposes, may not ordinarily be reported to the Commission and may not be publicly available. Thus, the primary benefit from this regulation is that the type of information to be requested will be available to the DCO, and upon request, the Commission may obtain the information in order to assist the Commission in planning and preparing for the resolution of a distressed DCO. There is also considerable public benefit in enhancing preparedness for resolution by making available to FDIC, as the resolution authority, information relevant to planning for the resolution of a SIDCO or Subpart C DCO. ii. Costs The proposal assumes that there is information relevant to resolution planning that is not ordinarily reported to the Commission under § 39.19, but which is in the possession of the DCO. As such, SIDCOs and Subpart C DCOs will face certain incremental costs (from gathering the information, reviewing it for accuracy, and transmitting it to the Commission) to produce this information upon request as required by proposed § 39.39(f)(1)–(7). Gathering the information and transmitting it would likely be accomplished by paraprofessionals, while review may require the work of paraprofessionals or professionals. The time that would be required to accomplish these tasks would depend on the information requested and the DCO’s information system architecture. A crude estimate of the time required might be 10–20 hours, at a cost of $3,000–$6,000, once or twice a year for a SIDCO, and once every five years for a Subpart C DCO. To the extent that some of this information requires analyses by the DCO that are not currently conducted, such incremental costs may be more significant. Here, the DCO would need to develop tools to analyze its information (which may involve new uses for existing tools, or may in some cases require the development of new tools), gather the underlying data, use the tools, review the results, and then transmit those results to the Commission. This may also involve effort in working with Commission staff to clarify and/or to sharpen the request. While some of this effort might be accomplished by paraprofessionals, the proportion that would need the effort of professionals would likely be greater than in the previous paragraph. A crude estimate of the time required might be 30–60 hours, at a cost of $12,000– $24,000, once a year for a SIDCO, and PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 48999 once every ten years for a Subpart C DCO. It should be noted that the Commission does not anticipate asking Subpart C DCOs for information for resolution planning in the near term. This is because, even in the highly unlikely event that a Subpart C DCO would enter recovery, and that such recovery would fail, the likelihood of such a DCO qualifying for resolution under Title II is fairly low. The Commission seeks comments, in particular from SIDCOs and Subpart C DCOs, on the accuracy of these estimates (with respect to both time required and cost), and on how they may be improved. In particular, SIDCOs that have responded to similar requests in the past are invited to discuss the costs that they incurred in doing so (both in building tools where necessary and in gathering and reviewing the information), and to provide insight into expected costs to do so in the future. iii. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specified considerations identified in section 15(a) of the CEA. In consideration of sections 15(a)(2)(A), (B), (D), and (E) of the CEA, the Commission preliminarily believes that proposed § 39.39(f)(1)–(7) would protect market participants and the public, and support the financial integrity of futures markets, by enhancing preparation for resolution of DCO in advance of systemic failure, and thus increasing the likelihood that resolution would be successful. Furthermore, advance planning may identify issues that should and can be corrected in advance of market failure, thereby providing an opportunity to improve DCO risk management practices and further enhance the protection of market participants and the public, and the financial integrity of the derivatives markets. Finally, there is a strong public interest in holding CFTC-registered SIDCOs and Subpart C DCOs to regulations that incorporate international standards and guidance. Section 15(a)(2)(C), price discovery, does not appear to be implicated by this proposal. 6. Requested Reporting— § 39.19(c)(5)(iii) Proposed § 39.39(f)(1)–(7) requires a corresponding amendment to § 39.19(c)(5) regarding requested reporting. Proposed § 39.19(c)(5)(iii) would require that a SIDCO or Subpart C DCO that submits information related to resolution planning to the Commission pursuant to § 39.39(f)(1)– E:\FR\FM\28JYP2.SGM 28JYP2 49000 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules (7), shall update the information upon request. i. Benefits The Commission is proposing an additional requirement to clarify that the information for resolution planning requested under proposed § 39.39(f) would be updated upon request. By requesting (and then providing to the FDIC) current, accurate, and pertinent information for resolution planning, the Commission may be able to assist in resolution planning more effectively. The financial system benefits as a whole when the FDIC can obtain, with the aid of the Commission, current, accurate, and pertinent information for resolution planning related to a SIDCO’s or Subpart C DCO’s structure and activities (§ 39.39(f)(1)), clearing members (§ 39.39(f)(2)), arrangements with other DCOs (§ 39.39(f)(3)), financial schedules and supporting details (§ 39.39(f)(4)), interconnections and interdependencies with internal and external service providers (§ 39.39(f)(5)), information concerning critical personnel (§ 39.39(f)(6)), and other necessary information (§ 39.39(f)(7)). lotter on DSK11XQN23PROD with PROPOSALS2 ii. Costs The Commission anticipates that proposed § 39.19(c)(5) would add incremental costs to the business-asusual activities of the DCOs. For information that is regularly maintained by the DCO, this would involve repeating the efforts described above in Section VIII.D.5(ii) of gathering, reviewing, and transmitting the information. For information that requires analyses that are not currently conducted by the DCO, the corresponding efforts described above in Section VIII.D.5(ii) would be called for, but some may be reduced or eliminated: the DCO would once again need to gather the information, but would presumably be able to use the tools that it repurposed (or newly developed) when it responded to the information request for the first time. Moreover, there may not be a need to clarify or sharpen the request, to the extent that the request is identical (except for timeperiod) to the first request. The DCO would still need to review the results, and transmit them to the Commission. iii. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specified considerations identified in section 15(a) of the CEA. In consideration of sections 15(a)(2)(A), (B), (D), and (E) of the CEA, the Commission believes that § 39.39(f)(1)–(7) protects market VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 participants and the public, and promotes the financial integrity of futures markets, by ensuring that resolution plans are based on current, accurate, and pertinent information. Further, planning for resolution is a pillar of sound risk management principles, and supports the public interest. Section 15(a)(2)(C), price discovery, does not appear to be implicated by this proposal. 7. Viable Plans for Orderly Wind-Down for DCOs That Are Neither SIDCOs Nor Subpart C DCOs—§ 39.13(k) Proposed § 39.19(k)(1)(a) would require that DCOs that are neither SIDCOs nor Subpart C DCOs maintain and submit to the Commission viable plans for orderly wind down necessitated by default losses and nondefault losses. As discussed above, proposed § 39.19(k)(2)–(6) would enumerate the information required to be incorporated in an orderly winddown plan. i. Benefits Requiring DCOs that are neither SIDCOs nor Subpart C DCOs to maintain viable plans for orderly wind-down should contribute to a better ex ante understanding by such DCOs of the critical services and operations that clearing members and other financial market participants depend upon them to provide, and of the challenges the DCO would face in doing so. DCOs will benefit through better preparation to meet those challenges; moreover, by enumerating certain subjects, analyses, and testing that all DCOs must include in their orderly wind-down plans, a DCO’s ability to wind-down promptly and in an orderly manner during any exigency should be significantly enhanced. To the extent that this analysis identifies vulnerabilities, the DCO will have the opportunity to remediate them.211 Importantly, an orderly and expeditious wind-down will help mitigate the damage to the DCO’s participants (and their customers, if any) by facilitating either the continuation of the DCO’s services (potentially through another DCO) or the prompt return of their participants’ collateral. ii. Costs The Commission anticipates that some DCOs may bear a significant cost burden, as described further below, due 211 To the extent that a foreign-based DCO already maintains an orderly wind-down plan, pursuant to the regulations of its home-country regulator, that meets the standards set in the proposed regulation, these benefits would be reduced or eliminated. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 to the proposed regulation, because of the various analyses and testing these DCOs would be required to conduct. The specific requirements for an orderly wind-down plan’s description, analysis, and testing set forth in this regulation will require substantial time to be spent on analytical effort by DCO staff, including attorneys, compliance staff, and other subject matter experts. DCO staff will need to draft plans and supporting arrangements that meet the standards set in the proposed rules (to the extent that they are ultimately adopted) in light of, inter alia, the specifics of each DCO’s business model, services and operations provided by the DCO to clearing members and other financial market participants, products cleared (and the DCO’s role in the financial sector), services and operations provided by others that the DCO relies upon to provide its services and operations to others, infrastructure, and governance arrangements. The plans will then need to be reviewed, first by senior management and then by the board of directors, at the cost of the time of those persons, and potentially further amended in light of the results of such reviews (resulting in the further expenditure of time). These analyses include developing an overview of the orderly wind-down plan and describing how the plan will be implemented, ensuring that the orderly wind-down plan identifies and describes (i) the critical operations and services that the DCO provides to clearing members and other financial market participants, (ii) the service providers upon which the DCO relies to provide these operations and services, (iii) plans for resilient staffing arrangements for continuity of operation, (iv) obstacles to success of the plan, (v) plans to address the risks associated with the failure of each critical operation and service, (vi) how the DCO will ensure that the identified operations and services continue thorough orderly wind-down. Further, the DCO will need to ensure that the analysis of scenarios for its orderly wind-down plan identifies scenarios that may prevent the DCO from meeting its obligations or providing critical operations and services as a going concern. The DCO will need to ensure that the analysis establishes triggers for consideration of orderly wind-down, and the information-sharing and governance process within senior management and board of directors. The DCO will also need to ensure that the plan describes the tools that it would use in an orderly wind-down that comprehensively address how the DCO would continue to E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules provide critical services, the governance and approval processes and arrangements that will guide the exercise of any available discretion, the steps necessary to implement each tool, the roles and responsibilities of all parties in the use of each tool, an assessment of the likelihood that the tools, individually and taken together, would result in an orderly wind-down, and an assessment of the risks to nondefaulting clearing members and their customers, and linked financial market infrastructures. Additionally, the DCO will need to ensure that its plan includes determinations of which of the contracts, etc. associated with the provision of its services as a DCO are subject to alteration or termination as a result of the implementation of the orderly wind-down plan, and the actions that the DCO has taken to ensure that its critical operations and services will continue during orderly winddown despite such alteration or termination. The DCO will also need to ensure that the plans are formally approved, and annually reviewed, by the board of directors, describe effective governance structures and processes to guide discretionary decision-making relevant to the plan, and describe the DCO’s process for identifying and managing the diversity of stakeholder views and any conflict of interest between stakeholders and the DCO. Moreover, the DCO will need to ensure that its plan includes procedures for testing the DCO’s ability to implement the tools that the orderly wind-down plan relies upon. This also includes describing the types of testing to be performed, to whom the results are reported, and procedures for updating the plans in light of the findings resulting from such tests. The tests must be repeated following any material change to the orderly wind-down plan, but in any event not less than once annually. If the foregoing wind-down planning identifies vulnerabilities that need to be improved upon, the DCO will incur the cost of remediating such vulnerabilities. As noted earlier in this section, plans revised in light of the foregoing analysis will then need to be reviewed, first by senior management and then by the board of directors, at the cost of the time of those persons, and potentially further amended in light of the results of such reviews. While it is impracticable to quantify these costs, because they depend on the specific design and other circumstances of each DCO. it seems likely that these requirements will require less effort than the corresponding requirements for VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 both recovery plans and orderly winddown plans for SIDCOs and Subpart C DCOs, because these DCOs are required only to prepare, and meet the standards for, an orderly wind-down plan. Moreover, in many cases, the business structure and operations of these DCOs may be less complex than those of SIDCOs or Subpart C DCOs. Nonetheless, the Commission estimates that an orderly wind-down plan will require hundreds of hours of the effort of skilled professionals, at a cost of tens of thousands of dollars. For those DCOs that are based in jurisdictions that, pursuant to a legal framework that is consistent with the PFMI, already require them to maintain orderly wind-down plans, the cost should be substantially less, as the requirements for orderly wind-down plans are likely to be comparable to the requirements applicable in those other jurisdictions (and thus these DCOs would, for the most part, be able to rely upon their existing plans).212 For other DCOs that are not required to have orderly wind-down plans pursuant to regulations of either the CFTC or other regulators, these costs would be larger while the orderly wind-down plans are first being developed, although there will be additional (albeit reduced) costs in reviewing, testing, and updating these plans on an ongoing basis. The initial costs may be mitigated to the extent that such DCOs may already have some form of a wind-down plan in place as part of their general risk management strategy. Additionally, DCOs may already have performed some of the proposed analyses as part of their existing regulatory compliance programs. iii. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) of the CEA, the Commission believes that the proposed regulations should protect market participants and the public. At the outset, a viable plan for orderly wind down reduces uncertainty in times of market stress, since its existence enhances legal certainty for the DCO’s clearing members and market 212 To the extent that this assumption is incorrect, and the proposal would require foreign-based DCOs to comply with overly burdensome additional requirements, the Commission seeks comments that set forth inconsistencies between the proposed requirements and the requirements in the relevant foreign jurisdictions, and recommendations as to how those inconsistencies can and should be mitigated through amendments to the proposed requirements. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 49001 participants, and increases the likelihood of an orderly and expeditious wind-down that will mitigate the harm to their interests from the closing of the DCO. Further, a viable plan for orderly wind-down should increase market confidence, because clearing members and their customers would know beforehand that the DCO is well prepared to undertake an orderly winddown, if necessary. Importantly, the proposed regulations should enhance protection for a DCO’s members and their customers by reducing the likelihood that a DCO would fail to meet certain obligations to its members and other market participants in orderly wind-down. In consideration of section 15(a)(2)(B) of the CEA, with respect to the efficiency, competitiveness, and financial integrity of markets, plans for orderly wind-down (and for determining when orderly wind-down might be necessary) would enhance financial integrity of markets, by enhancing the likelihood that any winddown would be orderly, and the existence of these standards might enhance market participants confidence in (and thus the competitiveness of) DCOs. In consideration of section 15(a)(2)(D) of the CEA, the proposed regulations would aid in sound risk management practices. The requirement to maintain and submit to the Commission viable plans for orderly wind-down provides greater clarity and transparency before wind-down and facilitates timely decision-making and the continuation of critical operations and services during orderly wind-down. Wind-down planning—including, for example, considering the circumstances that may trigger an orderly wind-down, the tools the DCO would implement to help ensure an orderly wind-down (along with the likely effects on clearing members and the financial markets from implementing such tools), and the governance arrangements to guide decision-making during a wind-down— also would strengthen the risk management practices of the DCO by, among other things, identifying vulnerabilities that can be mitigated and preparing for multiple exigencies. Having an orderly wind-down plan in place, moreover, should allow the DCO to handle exigencies in a manner that mitigates the risk of financial instability or contagion. Moreover, in consideration of section 15(a)(2)(E), having an orderly wind-down plan in place would promote the public interest. However, section 15(a)(2)(C), price discovery, is not implicated by the proposed amendments. E:\FR\FM\28JYP2.SGM 28JYP2 49002 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 8. Notification Requirement for DCOs That Are Neither SIDCOs Nor Subpart C DCOs of Pending Orderly Wind-Down— §§ 39.19(k)(1)(b) and 39.19(c)(4)(xxv) The Commission is proposing in new § 39.19(k)(1)(b) that DCOs that are neither SIDCOs nor Subpart C DCOs have procedures in place for informing the Commission and clearing members, as soon as practicable, when orderly wind-down is pending, consistent with the requirements of proposed new paragraph § 39.19(c)(4)(xxv).213 i. Benefit A DCO should notify the Commission as soon as practicable of a pending orderly wind-down so that the Commission may promptly take appropriate steps to monitor the winddown process, and to protect the interests of clearing members and other market participants. Likewise, a DCO should notify its clearing members as soon as practicable as well, so that they may promptly take steps to protect themselves (including, e.g., by seeking to replace hedge positions). Such information-sharing fosters market transparency, which can serve to increase confidence and enhance market participants’ abilities to protect their own interests. lotter on DSK11XQN23PROD with PROPOSALS2 ii. Costs DCOs should already have tools and procedures in place for notifying the Commission and clearing members of other circumstances or events triggering notification; Thus, the only costs involved would be the effort involved in preparing to use these existing tools and procedures to notify the Commission and clearing members when orderly wind-down is pending (including testing), and, if and when necessary, using them to make such notifications. iii. Section 15(a) Factors The proposed regulations should protect market participants and the public under section 15(a)(2)(A) of the CEA, enhance efficiency, competitiveness, and financial integrity of futures markets under section 15(a)(2)(B) of the CEA, aid in sound risk management practices under section 15(a)(2)(D) of the CEA, and promote the public interest under section 15(a)(2)(E) of the CEA. Clearing members and their customers cannot accurately evaluate the risks and costs associated with using a DCO’s services if they do not have sufficient information, including when 213 Proposed new § 39.19(c)(4)(xxv) would provide that each DCO shall notify the Commission and clearing members as soon as practicable when, among other things, orderly wind-down is pending. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 the DCO is no longer a going concern. A requirement that clearing members be notified as soon as practicable of a pending winding-down also allows market participants time to take action to protect their own interests. Likewise, market participants can use a DCO’s services with the confidence that the DCO will not delay in notifying them of a pending orderly wind-down, which should enhance competitiveness. The requirement also reduces risk by providing DCO’s stakeholders sufficient notice to help ensure an orderly winddown. However, section 15(a)(2)(C), price discovery, is not implicated by the proposed amendments. 9. Timing for DCOs’ Submission of Recovery and Orderly Wind-Down Plans—§ 39.19(c)(4)(xxiv) Proposed § 39.19(c)(4)(xxiv) would continue to require that a DCO that is required to maintain recovery and orderly wind-down plans pursuant to § 39.39(b) shall submit its plans to the Commission no later than the date the DCO is required to have the plans. It would add an explicit requirement that those plans be accompanied by supporting information, and would newly require that a DCO that is required to maintain orderly wind-down plans pursuant to § 39.13(k) shall submit its plans and supporting information at the time it files its application for registration under § 39.3.214 The Commission is proposing a deadline of six months from the effective date of the rule (if adopted) for those DCOs currently registered with the Commission to complete and submit the orderly wind-down plans and supporting information. Moreover, this proposed rule would continue to require that a SIDCO or Subpart C DCO, upon revising the plan(s), submit the current (formerly, ‘‘revised’’) plan(s) to the Commission, along with a description of any changes and the reason(s) for such changes. This requirement would be new for other DCOs. The proposal would add requirements that the plans, including any supporting information, must be submitted at least annually. i. Benefits DCOs seeking registration with the Commission will promptly have orderly wind-down plans and supporting information available upon registration. 214 As previously noted, for any DCO that submits (or has submitted) an application for registration with the Commission before the date that is six months after the effective date of this rulemaking, if it is adopted, the Commission is proposing to require that the DCO have until the date that is six months after the effective date of this rulemaking to submit its orderly wind-down plans. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 Clearing members and potential customers, moreover, will immediately benefit from orderly wind-down planning that has already taken place. For those DCOs currently registered with the Commission, the Commission believes six months is sufficient with respect to both the time and resources necessary for orderly wind-down planning, and takes into account the need to prepare promptly viable plans for orderly wind-down, given that a disorderly wind-down poses risks to clearing members and other financial market participants, and potentially, in some cases, risk to the financial system, especially in turbulent and uncertain market environments. Requiring that current plans be submitted at least annually would help to ensure that the plans available to the Commission for review remain reasonably current (given the possibility that some minor changes or updates to the plans may be considered as not meeting the threshold of ‘‘revisions’’), thereby aiding the Commission’s exercise of its supervisory responsibilities both in its ongoing riskbased examination program and in case of financial distress at the DCO. As discussed above in Section IV, DCOs may, in some instances, include supporting information within their plans, or may organize the documentation with supporting information kept separately, e.g., as an appendix or annex. Adding the term ‘‘and supporting information’’ would have the benefit of ensuring that the Commission has timely access to such supporting information. ii. Costs The Commission anticipates that the costs for DCOs to submit the viable plans for orderly wind-down that they are otherwise required to maintain would be limited to the cost of transmission using DCOs’ already established systems and procedures to submit documents to the Commission. Similarly, re-submitting current plans with supporting information should involve only the costs of gathering that information together and transmitting it, as the information must be at hand in order to plan adequately. As discussed above, some DCOs will already have orderly wind-down plans in place; others may already have considered at least some of the subjects and analyses as part of their efforts to comply with the DCO Core Principles. iii. Section 15(a) Factors For the same reasons as previously noted above, the Commission believes the proposed regulations would protect E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 market participants and the public under section 15(a)(2)(A) of the CEA, enhance competitiveness of futures markets under section 15(a)(2)(B) of the CEA, and aid in sound risk management practices under section 15(a)(2)(D) of the CEA. Ensuring the prompt availability of viable plans for orderly wind down would reduce uncertainty in times of market stress, increase market confidence, and provide assurance to market participants and the public that DCOs are meeting minimum risk standards. Likewise, orderly wind-down plans enhance protection for a DCO’s members and their customers. Having viable plans for orderly wind-down already in place additionally provides greater clarity and transparency before wind-down, assists the DCO in identifying vulnerabilities and preparing for multiple exigencies, and facilitates timely decision-making and the continuation of critical operations and services during orderly wind-down. Given its benefits, the Commission believes that new DCOs should have viable plans for orderly wind-down in place at the time they seek registration and before market participants come to rely upon them. The Commission has considered the other section 15(a) factors and believes they are not implicated by the proposed amendments. 10. Conforming Changes to Bankruptcy Provisions—Part 190. Based upon the proposed requirement that all DCOs maintain viable plans for orderly wind-down, the Commission is proposing several conforming changes to Part 190’s bankruptcy provisions. Specifically, current § 190.12(b)(1) would be amended so that a DCO in a Chapter 7 proceeding provide to the trustee copies of, among other things, orderly wind-down plans it must maintain pursuant to new § 39.13(k) in addition to § 39.39(b). Current § 190.15(a) would be amended so that the trustee not avoid or prohibit certain actions taken by the DCO either reasonably within the scope of, or provided for in, any orderly wind-down plains maintained by the DCO and filed with the Commission pursuant to new § 39.13(k) in addition to § 39.39. Current § 190.15(c) would be amended so that the trustee act in accordance with any orderly wind-down plans maintained by the debtor and filed with the Commission pursuant to new § 39.13(k) in addition to § 39.39 in administering the bankruptcy proceeding. Current § 190.19(b)(1) would be amended so that a shortfall in certain funds be supplemented in accordance with orderly wind-down plans maintained by VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 the DCO pursuant to new § 39.19(k) in addition to § 39.39. i. Benefits In promulgating the current Part 190 bankruptcy rules for DCOs in 2021, the Commission found that ‘‘directing a trustee to implement the DCO’s own default rules and procedures, and recovery and orderly wind-down plans, would benefit the estate by providing the trustee with a menu of purpose-built rules, procedures and plans to liquidate a DCO, which rules, procedures and plans the DCO has developed subject to the requirements of the Commission’s regulations and supervision of the Commission. Adding concepts of reasonability and practicability will give the trustee the discretion to modify those rules, procedures, and plans where and to the extent appropriate.’’ 215 Adding the orderly wind-down plans required under proposed § 39.13(k) for DCOs other than SIDCOs and Subpart C DCOs should further achieve these benefits, by providing such a menu in an additional context, namely the bankruptcy of these DCOs. ii. Costs The Commission does not anticipate additional costs from the proposed regulations. The amendments are conforming changes so that the orderly wind-down plan of a DCO that is neither a SIDCO nor a Subpart C DCO is given the same weight as a SIDCO’s or Subpart C DCO’s orderly wind-down plan would be given in bankruptcy. iii. Section 15(a) Factors The proposed regulations should enhance protection for market participants and the public under section 15(a)(2)(A) of the CEA, enhance the competitiveness and financial integrity of futures markets under section 15(a)(2)(B) of the CEA, aid in sound risk management practices under section 15(a)(2)(D) of the CEA, and promote the public interest under section 15(a)(2)(E) of the CEA. The assurance that the orderly wind-down plan, to the extent reasonable and practicable, and consistent with the protection of customers, will be followed in a bankruptcy proceeding should instill confidence in a DCO’s clearing members and customers, who can make certain decisions without fear that a trustee will inappropriately diverge from the orderly wind-down plan in bankruptcy. Moreover, market participants in general can be assured 215 Bankruptcy Regulations, 86 FR 19324, 19412 (Apr. 13, 2021). PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 49003 that the DCO’s pre-bankruptcy actions will not be voided by the trustee; likewise, the DCO’s clearing members and customers can anticipate that a shortfall will be supplemented in the manner provided for in the orderly wind-down plan. The Commission also believes that a viable plan for orderly wind-down should also reduce the risk of disorderly events in bankruptcy. All of these factors would also promote the public interest. However, section 15(a)(2)(C), price discovery, is not implicated by the proposed amendments. 11. Requests for Up to One Year To Comply With §§ 39.34(d), 39.35, and 39.39(f) Conforming to the approach of setting a six-month deadline discussed in section VIII(D)(4) above, the Commission is proposing to discontinue the process currently provided in subpart C pursuant to which the Commission may grant, upon request of a SIDCO or DCO that is electing to become subject to Subpart C, up to one year to comply with §§ 39.34, 39.35, and 39.39. The costs and benefits, and the application of the CEA Section 15(a) factors, for this approach were discussed there. 12. Amendments to Appendix A and Appendix B to Part 39 The Commission is proposing to amend Exhibit D to Form DCO. The proposal would add a requirement to provide as Exhibit D–5, the DCO’s orderly wind-down plan, and a demonstration that the plan complies with the requirements of § 39.13(k). This proposed change would implement the proposal to require the submission of the orderly wind-down plan. The Commission has considered the section 15(a) of the CEA factors and believes that they are not implicated by the proposed change to Form DCO. The Commission is also proposing to amend the ‘‘General Instructions’’ and ‘‘Elections and Certifications’’ portions of the Subpart C Election Form. The proposal would remove the sections of the forms that reference requests for an extension of time to comply with any of the provisions of §§ 39.34, 39.35, and 39.39. Similarly, the Commission is proposing to amend the requirements for Exhibit F–1 to call for the attachment of the applicant’s recovery plan and orderly wind-down plan, supporting information for these plans, and a demonstration that the plans comply with § 39.39(c). These proposed changes would implement the proposal to delete the provision for making such requests for E:\FR\FM\28JYP2.SGM 28JYP2 49004 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules an extension of time, and the proposal to require the submission of the plans. The Commission does not anticipate that these proposed changes would impose any costs on SIDCOs or Subpart C DCOs. The Commission has considered the factors called for in section 15(a) of the CEA and believes that they are not implicated by the proposed changes to the Subpart C Election Form. List of Subjects 17 CFR Part 39 Default rules and procedures, Definitions, Reporting requirements, Risk management, Recovery and Orderly wind-down, System safeguards. 17 CFR Part 190 Bankruptcy, Brokers, Reporting and recordkeeping requirements. For the reasons stated in the preamble the Commodity Futures Trading Commission proposes to amend 17 CFR Chapter I as follows: PART 39—DERIVATIVES CLEARING ORGANIZATIONS 1. The authority citation for part 39 continues to read as follows: ■ Authority: 7 U.S.C. 2, 6(c), 7a–1, and 12a(5); 12 U.S.C. 5464; 15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, title VII, sec. 752, July 21, 2010, 124 Stat. 1749. 2. Amend § 39.2 by adding the definitions of ‘‘Default losses,’’ ‘‘Nondefault losses,’’ ‘‘Orderly winddown or wind-down,’’ and ‘‘Recovery’’ in alphabetical order to read as follows: ■ § 39.2 Definitions. lotter on DSK11XQN23PROD with PROPOSALS2 * * * * * Default losses means credit losses or liquidity shortfalls created by the default of a clearing member in respect of its obligations with respect to cleared transactions. * * * * * Non-default losses means losses from any cause, other than default losses, that may threaten the derivative clearing organization’s viability as a going concern. These include, but are not limited to, (1) any potential impairment of a derivatives clearing organization’s financial position, as a business concern, as a consequence of a decline in its revenues or an increase in its expenses, such that expenses exceed revenues and result in a loss that the derivatives clearing organization must charge against capital, (2) losses incurred by the derivatives clearing organization on assets held in VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 custody or on deposit in the event of a custodian’s (or subcustodian’s or depository’s) insolvency, negligence, fraud, poor administration or inadequate record-keeping, (3) losses incurred by the derivatives clearing organization from diminution of the value of investments of its own or its participants’ resources, including cash or other collateral, (4) losses from adverse judgments, or other losses, arising from legal, regulatory, or contractual obligations, including damages or penalties, and the possibility that contracts that the derivatives clearing organization relies upon are wholly or partly unenforceable, and (5) losses occasioned by deficiencies in information systems or internal processes, human errors, management failures, malicious actions (whether by internal or external threat actors), disruptions to services provided by third parties, or disruptions from internal or external events that result in the reduction, deterioration, or breakdown of services provided by the derivatives clearing organization. * * * * * Orderly wind-down or wind-down means the actions of a derivatives clearing organization to effect the permanent cessation, sale, or transfer, of one or more of its critical operations or 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 derivatives clearing organization, consistent with its rules, procedures, and other ex-ante contractual arrangements, to address any uncovered credit loss, liquidity shortfall, inadequacy of financial resources, or business, operational or other structural weakness, including the replenishment of any depleted pre-funded financial resources and liquidity arrangements, as necessary to maintain the derivatives clearing organization’s viability as a going concern. * * * * * ■ 3. In 39.13, add and reserve paragraph (j), and add paragraph (k) to read as follows: § 39.13 Risk management. * * * * * (j) [Reserved]. (k) Orderly wind-down plan. (1) Orderly wind-down plan required. Each derivative clearing organization that is not a systemically important derivatives PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 clearing organization or a subpart C derivatives clearing organization shall: (i) Maintain and, consistent § 39.19(c)(4)(xxiv), submit to the Commission, a viable plan for orderly wind-down that may be necessitated by default losses and by non-default losses, including supporting information for that plan. (ii) Have procedures for informing the Commission and clearing members, as soon as practicable, when orderly winddown is pending, and shall notify the Commission and clearing members consistent with § 39.19(c)(4)(xxv). (2) Orderly wind-down plan description. The orderly wind-down plan required by paragraph (k)(1) of this section shall include an overview of the plan and a description of how the plan will be implemented. The description of the plan shall include the identification and description of the derivatives clearing organization’s critical operations and services, interconnections and interdependencies, resilient staffing arrangements, stress scenario analyses, potential triggers for consideration of implementing the orderly wind-down plan, available wind-down tools, analyses of the effect of the tools on each scenario, lists of agreements to be maintained during orderly wind-down, and governance arrangements. (i) Critical operations and services, interconnections and interdependencies, and resilient staffing arrangements. The orderly wind-down plan shall identify and describe the critical operations and services the derivatives clearing organization provides to clearing members and other financial market participants, the service providers upon which the derivatives clearing organization relies to provide these critical operations and services, including internal and external service providers and ancillary services providers, financial and operational interconnections and interdependencies, aggregate cost estimates for the continuation of services during orderly wind-down, plans for resilient staffing arrangements for continuity of operations, obstacles to success of the orderly wind-down plan, plans to address the risks associated with the failure of each critical operation and service, and how the derivatives clearing organization will ensure that each identified operation and service continues through orderly wind-down. (ii) Orderly wind-down triggers. The orderly wind-down plan shall establish the criteria that may trigger consideration of implementation of that plan, and the process the derivatives E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules clearing organization has in place for monitoring for events that may trigger implementation of the plan. (iii) Governance description. The orderly wind-down plan shall include a description of the pre-determined information-sharing and escalation process within the derivatives clearing organization’s senior management and the board of directors. The derivatives clearing organization must have a defined process that will be used that will include the factors the derivatives clearing organization considers most important in guiding the board of directors’ exercise of judgment and discretion with respect to its orderly wind-down plan in light of those triggers and that process. (3) Orderly wind-down scenarios and tools. The orderly wind-down plan shall: (i) identify scenarios that may prevent the derivatives clearing organization from meeting its obligations or providing critical operations and services as a going concern; (ii) describe the tools that the derivatives clearing organization would expect to use in an orderly wind-down that comprehensively address how the derivatives clearing organization would continue to provide critical operations and services; (iii) describe the order in which each such tool would be expected to be used; (iv) describe the governance and approval processes and arrangements within the derivatives clearing organization for the use of each of the tools available, including the exercise of any available discretion; (v) describe the processes to obtain any approvals external to derivatives clearing organization (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) establish the time frame within which each such tool could be used; (vii) set out the steps necessary to implement each such tool; (viii) describe the roles and responsibilities of all parties in the use of each such tool; (ix) provide an assessment of the likelihood that the tools, individually and taken together, would result in orderly wind-down; and (x) provide an assessment of the associated risks from the use of each such tool to non-defaulting clearing members and those clearing members’ customers with respect to transactions cleared on the derivatives clearing organization, and linked financial market infrastructures. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 (4) Agreements to be maintained during orderly wind-down. The derivatives clearing organization shall determine which of its contracts, arrangements, agreements, and licenses associated with the provision of its critical operations and services as a derivatives clearing organization are subject to alteration or termination as a result of implementation of the orderly wind-down plan. The orderly winddown plan shall describe the actions that the derivatives clearing organization has taken to ensure that its critical operations and services will continue during orderly wind-down, despite such potential alteration or termination. (5) Governance. The derivatives clearing organization’s orderly winddown plan shall: (i) Be formally approved, and annually reviewed, by the board of directors; (ii) Describe an effective governance structure that clearly defines the responsibilities of the board of directors, board members, senior executives and business units; (iii) Describe the processes that the derivatives clearing organization will use to guide its discretionary decisionmaking relevant to the orderly winddown plan; and (iv) Describe the derivatives clearing organization’s process for identifying and managing the diversity of stakeholder views and any conflict of interest between stakeholders and the derivatives clearing organization. (6) Testing. Each derivatives clearing organization’s orderly wind-down plan shall include procedures for testing the derivatives clearing organization’s ability to implement the tools that the orderly wind-down plan relies upon. The orderly wind-down plan shall include the types of testing that will be performed, to whom the findings of such tests are reported, and the procedures for updating the orderly wind-down plan in light of the findings resulting from such tests. Such testing shall occur following any material change to the orderly wind-down plan, but in any event not less than once annually, and the plan shall be promptly updated in light of the findings resulting from such testing. * * * * * ■ 4. In § 39.19, revise paragraph (c)(4)(xxiv) and add paragraphs (xxv) and (c)(5)(iii) to read as follows: § 39.19 * PO 00000 Reporting. * * (c) * * * (4) * * * Frm 00039 * Fmt 4701 * Sfmt 4702 49005 (xxiv) A derivatives clearing organization that is required to maintain recovery and orderly wind-down plans pursuant to § 39.39(b) shall submit its plans and supporting information to the Commission no later than the date on which the derivatives clearing organization is required to have the plans. A derivatives clearing organization that is required to maintain an orderly wind-down plan pursuant to § 39.13(k) shall submit its plan and supporting information to the Commission at the time it files its application for registration under § 39.3. A derivatives clearing organization shall, upon revising its recovery plan or orderly wind-down plan, but in any event no less frequently than annually, submit the current plan(s) and supporting information to the Commission, along with a description of any changes and the reason(s) for such changes. (xxv) Each derivatives clearing organization shall notify the Commission and clearing members as soon as practicable when the derivatives clearing organization has initiated its recovery or when orderly wind-down is pending. * * * * * (5) * * * (iii) Information for resolution planning. A systemically important derivatives clearing organization or subpart C derivatives clearing organization that submits information to the Commission pursuant to § 39.39(f)(2) shall update such information upon request. * * * * * ■ 5. In § 39.34, remove and reserve paragraph (d) to read as follows: § 39.34 System safeguards for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations. * * * * * (d) [Reserved]. * * * * * ■ 6. In § 39.39, revise the section heading and paragraphs (a), (b), (c), and (f) to read as follows: § 39.39 Recovery and orderly wind-down for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations; Information for resolution planning. * * * * * (a) Definitions. For the purposes of this section: Unencumbered liquid financial assets include cash and highly liquid securities. * * * * * (b) Recovery plan and orderly winddown plan. (1) Each systemically E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 49006 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules important derivatives clearing organization and subpart C derivatives clearing organization shall maintain and, consistent with § 39.19(c)(4)(xxiv), submit to the Commission, viable plans for recovery and orderly wind-down that may be necessitated, in each case, by default losses and by non-default losses, including supporting information for such plans. (2) Each systemically important derivatives clearing organization and subpart C derivatives clearing organization shall have procedures for informing the Commission and clearing members, as soon as practicable, when the recovery plan is initiated or orderly wind-down is pending, and shall notify the Commission and clearing members consistent with § 39.19(c)(4)(xxv). (3) Each systemically important derivatives clearing organization shall file a recovery plan and (to the extent it has not already done so) an orderly wind-down plan, and supporting information for these plans, within 6 months of designation as systemically important by the Financial Stability Oversight Council. Each derivatives clearing organization electing to become subject to the provisions of Subpart C of this chapter shall file a recovery plan and (to the extent it has not already done so) an orderly wind-down plan, and supporting information for these plans, as part of its election. Each recovery plan and orderly wind-down plan shall be updated annually. (c) Requirements for recovery plan and orderly wind-down plan. The recovery plan and orderly wind-down plan required by paragraph (b) of this section shall include an overview of each plan and a description of how each plan will be implemented. The description of each plan shall include the identification and description of the derivatives clearing organization’s critical operations and services, interconnections and interdependencies, resilient staffing arrangements, stress scenario analyses, potential triggers for recovery and orderly wind-down, available recovery and wind-down tools, analyses of the effect of the tools on each scenario, lists of agreements to be maintained during recovery and orderly wind-down, and governance arrangements. (1) Critical operations and services, interconnections and interdependencies, and resilient staffing arrangements. The recovery plan and orderly wind-down plan shall identify and describe the critical operations and services the derivatives clearing organization provides to clearing members and other financial market participants, the service providers upon VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 which the derivatives clearing organization relies to provide these critical operations and services, including internal and external service providers and ancillary services providers, financial and operational interconnections and interdependencies, aggregate cost estimates for the continuation of services during recovery and orderly wind-down, plans for resilient staffing arrangements for continuity of operations, obstacles to success of the recovery plan and orderly wind-down plan, plans to address the risks associated with the failure of each critical operation or service, and how the derivatives clearing organization will ensure that each identified operation or service continues through recovery and orderly wind-down. (2) Recovery scenarios and analysis. Each systemically important derivatives clearing organization and subpart C derivatives clearing organization shall identify scenarios that may prevent it from meeting its obligations or providing its critical services as a going concern. (i) For each scenario, the recovery plan shall provide an analysis that includes: (A) a description of the scenario; (B) the events that are likely to trigger the scenario; (C) the derivatives clearing organization’s process for monitoring for such events; (D) the market conditions and other relevant circumstances that are likely to result from the scenario; (E) the potential financial and operational impact of the scenario on the derivatives clearing organization 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 derivatives clearing organization 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. (ii) The derivatives clearing organization’s recovery plan scenarios should also address the default risks and non-default risks to which the derivatives clearing organization is exposed, and shall include at least the scenarios listed in paragraphs (c)(2)(ii)(A) through (K) of this section, to the extent such a scenario is possible in light of the derivatives clearing PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 organization’s structure and activities. For any scenario enumerated in paragraphs (c)(2)(ii)(A) through (K) of this section that the derivatives clearing organization determines is not possible in light of its structure and activities, the derivatives clearing organization should document its reasoning. (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 liabilities related to the derivatives clearing organization’s obligations with respect to cleared transactions and those not specific to the derivatives clearing organization’s business as a derivatives clearing organization; (J) Losses resulting from interconnections and interdependencies among the derivatives clearing organization and its parent, affiliates, and/or internal or third-party service providers; and (K) Losses resulting from interconnections and interdependencies with other derivatives clearing organizations. (iii) The recovery plan shall also consider any combination of at least two 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 derivatives clearing organization, are particularly relevant to the derivatives clearing organization’s business. The derivatives clearing organization shall document the reasons why the selected scenarios are particularly relevant. (3) Recovery and orderly wind-down triggers. (i) A systemically important derivatives clearing organization’s or subpart C derivatives clearing organization’s: (A) recovery plan shall establish the criteria that may trigger implementation or consideration of implementation of that plan, and the process the derivatives clearing organization has in place for monitoring for events that are E:\FR\FM\28JYP2.SGM 28JYP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules likely to trigger the scenarios identified in paragraph (c)(2) of this section; and (B) orderly wind-down plan shall establish the criteria that may trigger consideration of implementation of that plan, and the process the derivatives clearing organization has in place for monitoring for events that may trigger implementation of the plan. (ii) The recovery plan and orderly wind-down plan shall include a description of the pre-determined information-sharing and escalation process within the derivatives clearing organization’s senior management and the board of directors. The derivatives clearing organization must have a defined governance process that will be used that will include the factors the derivatives clearing organization considers most important in guiding the board of directors’ exercise of judgment and discretion with respect to recovery and orderly wind-down plans in light of those triggers and that process. (4) Recovery tools. A derivatives clearing organization or subpart C derivatives clearing organization shall have a recovery plan that includes the following: (i) a description of the tools that the derivatives clearing organization would expect to use in each scenario required by paragraph (b) of this section that meet the full scope of financial deficits the derivatives clearing organization may need to remediate and comprehensively address how the derivatives clearing organization would continue to provide critical operations and services; (ii) the order in which each such tool would be expected to be used; (iii) the time frame within which each such tool would be expected to used; (iv) a description of the governance and approval processes and arrangements within the derivatives clearing organization 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 derivatives clearing organization (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 each such tool; (vii) a description of the roles and responsibilities of all parties, including non-defaulting clearing members, in the use of each such tool; (viii) whether the tool is mandatory or voluntary; (ix) an assessment of the likelihood that the tools, individually and taken together, would result in recovery; and VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 (x) an assessment of the associated risks from the use of each such tool to non-defaulting clearing members and those clearing members’ customers with respect to transactions cleared on the derivatives clearing organization, linked financial market infrastructures, and the financial system more broadly. (5) Orderly wind-down scenarios and tools. Each systemically important derivatives clearing organization and Subpart C derivatives clearing organization shall: (i) identify scenarios that may prevent it from meeting its obligations or providing critical operations and services as a going concern; (ii) describe the tools that it would expect to use in an orderly wind-down that comprehensively address how the derivatives clearing organization would continue to provide critical operations and services; (iii) describe the order in which each such tool would be expected to be used; (iv) establish the time frame within which each such tool would be expected to be used; (v) describe the governance and approval processes and arrangements within the derivatives clearing organization for the use of each of the tools available, including the exercise of any available discretion; (vi) describe the processes to obtain any approvals external to the derivatives clearing organization (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; (vii) set out the steps necessary to implement each such tool; (viii) describe the roles and responsibilities of all parties, including non-defaulting clearing members, in the use of each such tool; (ix) provide an assessment of the likelihood that the tools, individually and taken together, would result in orderly wind-down; and (x) provide an assessment of the associated risks from the use of each such tool to non-defaulting clearing members and those clearing members’ customers with respect to transactions cleared on the derivatives clearing organization, linked financial market infrastructures, and the financial system more broadly. (6) Agreements to be maintained during recovery and orderly wind-down. A systemically important derivatives clearing organization and subpart C derivatives clearing organization shall determine which of its contracts, arrangements, agreements, and licenses associated with the provision of its critical operations and services as a PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 49007 derivatives clearing organization are subject to alteration or termination as a result of implementation of the recovery plan or orderly wind-down plan. The recovery plan and orderly wind-down plan shall describe the actions that the derivatives clearing organization has taken to ensure that its critical operations and services will continue during recovery and orderly wind-down despite such alteration or termination. (7) Governance. Each systemically important derivatives clearing organization and Subpart C derivatives clearing organization’s recovery plan and orderly wind-down plan shall, in each case, (i) Be formally approved, and annually reviewed, by the board of directors; (ii) Describe an effective governance structure that clearly defines the responsibilities of the board of directors, board members, senior executives, and business units; (iii) Describe the processes that the derivatives clearing organization will use to guide its discretionary decisionmaking relevant to each plan; and (iv) Describe the derivatives clearing organization’s process for identifying and managing the diversity of stakeholder views and any conflict of interest between stakeholders and the derivatives clearing organization. (8) Testing. The recovery plan and orderly wind-down plan of each systemically important derivatives clearing organization and Subpart C derivatives clearing organization shall include procedures for testing the viability of the recovery plan and orderly wind-down plan, including testing of the derivatives clearing organization’s ability to implement the tools that each plan relies upon. The recovery plan and the orderly winddown plan shall include the types of testing that will be performed, to whom the findings of such tests are reported, and the procedures for updating the recovery plan and orderly wind-down plan in light of the findings resulting from such tests. A systemically important derivatives clearing organization and Subpart C derivatives clearing organization shall conduct the testing described in this paragraph with the participation of their clearing members, where the plan depends on their participation, and the derivatives clearing organization shall consider including external stakeholders that the plan relies upon, such as service providers, to the extent practicable and appropriate. Such testing shall occur following any material change to the recovery plan or orderly wind-down plan, but in any event not less than once E:\FR\FM\28JYP2.SGM 28JYP2 49008 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 annually, and the plan shall be promptly updated in light of the findings resulting from such testing. * * * * * (f) Information for resolution planning. To the extent not already provided pursuant to paragraph (b) of this section, or required by § 39.19, a systemically important derivatives clearing organization or subpart C derivatives clearing organization shall maintain information systems and controls that are designed to enable the derivatives clearing organization to provide data and information electronically, as requested by the Commission for purposes of resolution planning and during resolution under Title II of the Dodd-Frank Act, and shall provide such information and data in the form and manner specified by the VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 Commission. This includes the following: (1) Information regarding the derivatives clearing organization’s organizational structure and corporate structure, activities, governing documents and arrangements, rights and powers of shareholders, and committee members and their responsibilities. (2) Information concerning clearing members, including (for both house and customer accounts) information regarding collateral, variation margin, and contributions to default and guaranty funds. (3) Arrangements and agreements with other derivatives clearing organizations, including offset and cross-margin arrangements. (4) Off-balance sheet obligations or contingent liabilities, and obligations to PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 creditors, shareholders, or affiliates not otherwise reported under part 39. (5) Information regarding interconnections and interdependencies with internal and external service providers, licensors, and licensees, including information regarding services provided by or to affiliates and other third parties and related agreements. (6) Information concerning critical personnel. (7) Any other information deemed appropriate to plan for resolution under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. ■ 7. Revise Appendix A to Part 39— Form DCO Derivatives Clearing Organization Application for Registration to read as follows: BILLING CODE 6351–01–P E:\FR\FM\28JYP2.SGM 28JYP2 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49009 EP28JY23.000</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.001</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49010 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49011 EP28JY23.002</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.003</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49012 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49013 EP28JY23.004</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.005</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49014 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49015 EP28JY23.006</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.007</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49016 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49017 EP28JY23.008</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.009</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49018 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49019 EP28JY23.010</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.011</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49020 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00055 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49021 EP28JY23.012</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.013</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49022 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49023 EP28JY23.014</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.015</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49024 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49025 EP28JY23.016</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.017</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49026 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00061 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49027 EP28JY23.018</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.019</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49028 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49029 EP28JY23.020</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.021</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49030 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49031 EP28JY23.022</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.023</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49032 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49033 EP28JY23.024</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00068 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.025</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49034 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49035 EP28JY23.026</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.027</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49036 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00071 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49037 EP28JY23.028</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 8. Revise Appendix B to part 39— Subpart C Election Form to read as ■ VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 follows: PO 00000 Frm 00072 Fmt 4701 Sfmt 4702 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.029</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49038 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00073 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49039 EP28JY23.030</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.031</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49040 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49041 EP28JY23.032</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00076 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.033</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49042 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00077 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49043 EP28JY23.034</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.035</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 49044 VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4725 E:\FR\FM\28JYP2.SGM 28JYP2 49045 EP28JY23.036</GPH> lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules 49046 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules PART 190—BANKRUPTCY RULES 9. The authority citation for part 190 continues to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 6c, 6d, 6g, 7a– 1, 12, 12a, 19 and 24; 11 U.S.C. 362, 546, 548, 556, and 761–767, unless otherwise noted. 10. In § 190.12, revise paragraph (b)(1) to read as follows: ■ § 190.12 Required reports and records. lotter on DSK11XQN23PROD with PROPOSALS2 * * * * * (b) * * * (1) As soon as practicable following the commencement of a proceeding that is subject to this subpart and in any event no later than three hours following the later of the commencement of such proceeding or the appointment of the trustee, the debtor shall provide to the trustee copies of each of the most recent reports that the debtor was required to file with the Commission under § 39.19(c) of this chapter, including copies of any reports required under §§ 39.19(c)(2), (3), and (4) of this chapter (including the most up-to-date version of any recovery and orderly wind-down plans of the debtor VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 maintained pursuant to § 39.13(k) or § 39.39(b) of this chapter) that the debtor filed with the Commission during the preceding 12 months. * * * * * ■ 11. In § 190.15, revise paragraphs (a) and (c) to read as follows: § 190.15 Recovery and wind-down plans; default rules and procedures. (a) Prohibition on avoidance of actions taken pursuant to recovery and orderly wind-down plans. Subject to the provisions of section 766 of the Bankruptcy Code and §§ 190.13 and 190.18, the trustee shall not avoid or prohibit any action taken by a debtor subject to this subpart that was reasonably within the scope of, and was provided for, in any recovery and orderly wind-down plans maintained by the debtor pursuant to § 39.13(k) or § 39.39(b) of this chapter and filed with the Commission pursuant to § 39.19 of this chapter. * * * * * (c) Implementation of recovery and orderly wind-down plans. In administering a proceeding under this subpart, the trustee shall, in PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 consultation with the Commission, take actions in accordance with any recovery and orderly wind-down plans maintained by the debtor pursuant to § 39.13(k) or § 39.39(b) of this chapter and filed with the Commission pursuant to § 39.19 of this chapter, to the extent reasonable and practicable, and consistent with the protection of customers. * * * * * ■ 12. In § 190.19, revise paragraph (b)(1) to read as follows: § 190.19 Support of daily settlement. * * * * * (b) * * * (1) Such funds shall be supplemented with the property described in paragraphs (b)(1)(i) through (iv) of this section, as applicable, to the extent necessary to meet the shortfall, in accordance with the derivatives clearing organization’s default rules and procedures adopted pursuant to § 39.16 and, as applicable, § 39.35 of this chapter, and (with respect to paragraph (b)(1)(ii) of this section) any recovery and orderly wind-down plans maintained pursuant to § 39.13(k) or E:\FR\FM\28JYP2.SGM 28JYP2 EP28JY23.037</GPH> BILLING CODE 6351–01–C Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules § 39.39(b) of this chapter and submitted pursuant to § 39.19 of this chapter. Such funds shall be included as member property and customer property other than member property in the proportion described in paragraph (a) of this section, and shall be distributed promptly to members’ house accounts and members’ customer accounts which accounts are entitled to payment of such funds as part of that daily settlement. * * * * * Issued in Washington, DC, on July 3, 2023 by the Commission. Christopher Kirkpatrick, Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. Appendices to Derivatives Clearing Organizations Recovery and Orderly Wind-Down Plans; Information for Resolution Planning—Voting Summary and Chairman’s and Commissioners’ Statements Appendix 1—Voting Summary On this matter, Chairman Behnam and Commissioners Johnson and Goldsmith Romero voted in the affirmative. Commissioner Pham voted to concur. Commissioner Mersinger voted in the negative. lotter on DSK11XQN23PROD with PROPOSALS2 Appendix 2—Statement of Support of Chairman Rostin Behnam As a fundamental pillar of global financial reform efforts and our most universally effective tool in the box, central clearing reduces risks, fosters resiliency, and builds continuity and confidence in financial markets. The global implementation of the central clearing mandate has produced a significant demand for clearing services and a substantial increase in overall clearing volumes in the swaps market. However, clearing is not without risk. Policymakers, both bank and market regulators, must take the necessary steps to ensure that clearinghouses are not simply commercially viable, but can continue to operate and provide critical services as expected, even in times of extreme market stress. Today, the Commission considered a proposed rule to amend the requirements related to recovery and orderly wind-down and resolution planning for Derivatives Clearing Organizations (DCOs) that have been designated as systemically important (SIDCOs) as well as other DCOs that elect to comply with DCO core principles by satisfying the higher standards for SIDCOs— referred to as ‘‘Subpart C DCOs.’’ At a high level, the proposal would codify and expand existing staff guidance,1 as well as propose to 1 See CFTC Letter No. 16–61, Recovery Plans and Wind-down Plans Maintained by Derivatives Clearing Organizations and Tools for the Recovery and Orderly Wind-down of Derivatives Clearing Organizations (July 21, 2016), available at https:// www.cftc.gov/LawRegulation/CFTCStaffLetters/ VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 specify the types of information that a SIDCO or Subpart C DCO may be required to provide to the Commission to share with the FDIC for resolution planning. Building on the themes of risk management, resilience and contingency planning, this proposal aims to build consistency, awareness, and preparedness across SIDCOs and Subpart C DCOs by providing greater predictability should an unlikely event occur that prevents a DCO from being able to meet its obligations, provide critical services to its members, or if a DCO ultimately needs to wind-down operations in an orderly manner. That is why I fully support the proposal. Today’s proposal would set forth in Commission regulation an expectation that SIDCOs and Subpart C DCOs, as financial market infrastructures, have comprehensive and effective recovery plans and orderly wind-down plans. These plans would analyze the services that clearing members and others rely upon the DCOs to provide, as well as the necessary services that others provide to the DCOs. DCOs would also be required to consider, as part of their planning process, a thorough set of scenarios that might potentially create losses that challenge their ability to provide their critical operations and services. Some scenarios that we specify may not be applicable to every DCO, and the proposal notes scenarios are to be considered to the extent they are possible in light of the DCO’s structure and activities. However, the proposal, reiterating existing guidance, cautions DCOs considering whether a scenario is possible to avoid confusing ‘‘low risk’’ with ‘‘zero risk.’’ There is a difference. A low risk scenario, which is remotely possible, must be addressed by the plans whereas a scenario that is not possible would not. It is critical that scenario analyses and, in turn, the preparation of recovery and orderly wind-down plans occur during business-as-usual operations, and not during times of stress, in order to ensure thorough preparation and planning. I have remarked before, among the many lessons learned from the 2008 financial crisis, the interconnectedness of our global financial system is one of, if not the single, most important. All risk analyses must include a holistic examination of the systemic relationships throughout all of our financial markets. The proposal would require a SIDCO and Subpart C DCO to identify its financial and operational interconnections and interdependencies, plans for resilient staffing arrangements, governance structure, and any contracts or agreements subject to alteration in the event of orderly wind-down. The proposal also requires each SIDCO and Subpart C DCO to assess the full range of options for recovery and orderly wind-down, to test the plans, and to notify clearing members when recovery or wind-down is initiated. In light of recent market events, the proposal approved by the Commission would require all DCOs, not just SIDCOs and Subpart C DCOs, to submit viable plans for orderly wind-down. The wind-down plan letters.htm?title=16-61&field_csl_letter_types_ target_id%5B%5D=711&field_csl_letter_year_ value=. PO 00000 Frm 00081 Fmt 4701 Sfmt 4702 49047 requirements for non-SIDCOs that are not Subpart C DCOs are similar in that the plan must identify scenarios, triggers, and available tools. Finally, the proposal expands on existing regulation requiring SIDCOs and Subpart C DCOs to have procedures in place for providing the Commission with information needed for resolution planning. In the spirit of regulatory transparency, this proposal identifies categories of information that a SIDCO or Subpart C DCO would be required to provide to the Commission for such planning. I look forward to the public’s submission of comments and feedback on this proposed rulemaking. Appendix 3—Statement of Commissioner Kristin N. Johnson Derivatives clearing organizations (DCOs) play a significant role in our markets by providing essential clearing and settlement market infrastructure. As intermediaries, these firms serve a fundamental role in creating stability. DCOs face substantial risks including custody, credit, and liquidity risk; general business, operational, and legal risks; as well as the risk of clearing member defaults. Such risks may pose a threat to a DCO’s continuity of operations, as well as its clearing members and the broader financial system. During periods of stress, DCOs provide services that are crucial for continuity in the financial markets they serve. Given the significance of DCOs in our markets, a liquidity or solvency crisis event at a DCO may trigger effects that have far-reaching consequences throughout the entire financial system. Recovery and wind-down plans are critical to prevent losses across our markets and any knock-on effects or spill over into other markets. It is essential that DCOs have recovery and orderly wind-down plans to prevent significant market disruption throughout our financial system. I support the Commission’s consideration of the proposed regulations on recovery and orderly wind-down plans for DCOs. The proposed rule addresses the longstanding need for DCOs to have wind-down plans. While the Commission has previously taken appropriate steps to introduce recovery and orderly wind-down plans for DCOs deemed systemically important in the aftermath of the 2008 Financial Crisis, evidence suggests the need to ensure the integrity of not only the largest DCOs, but all DCOs. In addition, the proposal provides for an important update to Commission regulations for DCOs including codification of staff guidance 16– 61 and incorporation of international guidance on recovery and resolution planning issued since 2013.1 The implementation of these proposed regulations would operate to support the strength and continuity of all DCOs as 1 Commodity Futures Trading Commission, Notice of Proposed Rulemaking on Derivatives Clearing Organizations Recovery and Orderly Winddown Plans; Information for Resolution Planning, p. 5–6 (Jun. 7, 2023), https://www.cftc.gov/media/ 8711/votingdraft060723_17CFRPart39b/download (hereinafter ‘‘NPRM on DCO Recovery and Orderly Wind-down Plans’’). E:\FR\FM\28JYP2.SGM 28JYP2 49048 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules instructed by the reforms established in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).2 The History and Development of § 39.39 Recovery and Wind-Down Regulations lotter on DSK11XQN23PROD with PROPOSALS2 I. Legislative and Regulatory History In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd Frank Act’’) establishing a clearing framework for over-the-counter derivatives, including swaps.3 The Dodd Frank Act introduced statutory authority for the Commission to promulgate regulations governing DCOs. Title VII of the Dodd-Frank Act sets out eighteen core principles for DCOs (DCO Core Principles), with which DCOs must comply in order to register and maintain registration with the Commission.4 The DCO Core Principles ‘‘serve to reduce risk, increase transparency, and promote market integrity within the financial system.’’ 5 In conjunction with section 8a(5) of the Commodity Exchange Act (CEA), Title VII grants the Commission authority to promulgate regulation as necessary to implement and enforce the DCO Core Principles.6 In 2011, the Commission adopted regulations to implement Title VII of Dodd-Frank.7 These regulations created regulatory standards for compliance with DCO Core Principles.8 Among the many regulations adopted was Part 39, including DCO Core Principle D—Risk Management.9 Core Principle D requires DCOs to have policies and procedures in place that ensure the DCO will be able to manage the risks associated with discharging its responsibilities.10 Title VIII of the Dodd-Frank Act introduced a collaborative, multi-agency framework for regulating systemically important financial market utilities (FMUs) providing payment, clearing, and settlement activities.11 Specifically, section 804 of the Dodd-Frank Act provides the Financial Stability Oversight Council (FSOC) with the authority to designate certain FMUs as systemically important.12 This includes the ability to designate DCOs as systemically important (SIDCOs). In 2012, FSOC designated two CFTC-registered DCOs as SIDCOs.13 2 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). 3 Derivatives Clearing Organizations and International Standards, 78 FR 72,475, 72,476 (Dec. 12, 2013) (codified in 17 CFR pt. 39) (hereinafter ‘‘2013 DCOs Rule Release’’). 4 7 U.S.C. 7a–1(c)(2). 5 NPRM on DCO Recovery and Orderly Winddown Plans, p. 4. 6 7 U.S.C. 7a–1(c)(2)(A)(i); 7 U.S.C. 12a(5). 7 Derivatives Clearing Organizations General Provisions and Core Principles, 76 FR 69,333 (Nov. 8, 2011) (codified in 17 CFR pts. 1, 21, 29, and 140) (hereinafter ‘‘2011 DCOs Core Principles Release’’). 8 2011 DCOs Core Principles Release at 69,335. 9 Id. at 69,362. 10 7 U.S.C. 7a–1(c)(2)(D). 11 Section 805 of the Dodd-Frank Act, 12 U.S.C. 5464. 12 Section 804 of the Dodd-Frank Act, 12 U.S.C. 5463. 13 2013 DCOs Final Rule Release at 72,477. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 In addition to establishing a multi-agency regulatory framework, Title VIII created standards for SIDCOs for risk mitigation.14 The objectives and principles for risk management at SIDCOs include (1) promoting risk management; (2) promoting safety and soundness; (3) reducing systemic risks; and (4) supporting the stability of the broader financial system.15 The risks that DCOs face may not only threaten the viability and strength of a DCOs operations, but also may threaten clearing members of DCOs and the broader financial system. Such risks include credit and liquidity risk by both the DCO itself and its clearing members as well as other general business, operational, custody, investment, and legal risks.16 All of these risks could result in financial failures of DCOs. Disorderly failure 17 of DCOs—in particular SIDCOs—would likely cause significant disruption to our financial markets.18 This systemic risk results in a necessity for DCOs to have viable plans for recovery and orderly wind-down during times of significant stress or in the event of failure. Title VIII of the Dodd-Frank Act also directs the Commission to consider prudential requirements and international standards when promulgating risk management regulations that govern operations relating to payment, clearing, and settlement activities for SIDCOs.19 In 2013, the Commission considered international standards relevant to risk management of SIDCOs as required under section 805(a)(2)(A).20 At that time, the Commission determined the most relevant international standards were the Principles for Financial Market Infrastructure (PFMIs) established by the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO).21 The PFMIs are a ‘‘unified set of international risk management standards for central 14 Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations, 78 FR 49,663, 49,665 (Aug. 15, 2023) (codified in 17 CFR pt. 39) (hereinafter ‘‘2013 SIDCOs Final Rule Release’’). 15 Section 805 of the Dodd-Frank Act, 12 U.S.C. 5464(b). As outlined in section 805(c), these standards may address such areas as: (1) Risk management policies and procedures; (2) margin and collateral requirements; (3) participant or counterparty default policies and procedures; (4) the ability to complete timely clearing and settlement of financial transactions; (5) capital and financial resources requirements for designated [FMUs]; and (6) other areas that are necessary to achieve the objectives and principles in [section 805](b). 2013 SIDCO Final Rule Release at 49,665 (quoting 12 U.S.C. 5464(C)). 16 NPRM on DCO Recovery and Orderly Winddown Plans, p. 5. 17 While not formally defined in Dodd-Frank, ‘‘disorderly failure’’ typically refers to a significant disruption to a financial institution without a plan for recovery or wind-down that results in the inability of the institution to maintain ongoing viability that cause detrimental impacts to customers, clients, related entities, and the broader financial system. 18 NPRM on DCO Recovery and Orderly Winddown Plans, p. 5. 19 2013 SIDCO Final Rule Release at 49,665. 20 See 2013 SIDCO Final Rule Release. 21 2013 SIDCO Final Rule Release at 49,666. PO 00000 Frm 00082 Fmt 4701 Sfmt 4702 counterparties’’ (CCPs) that facilitate clearing and settlement.22 They set out a list of twenty-four principles that seek to address the numerous risks faced by CCPs.23 Later in 2013, the Commission implemented the Part 39 regulations setting out broad rules for recovery, wind-down, and resolution planning for SIDCOs and Subpart C DCOs.24 In adopting these wind-down and recovery regulations, the Commission considered PFMI Principles 3 and 15.25 PFMI Principle 3 calls for a framework for the comprehensive management of risks including legal, credit, liquidity, business, and operational risks.26 PFMI Principle 15 covers general business risk and calls for a CCPs to identify, monitor, and manage general business risk.27 The Commission determined that although there is no DCO Core Principle that directly calls for DCOs to establish recovery and wind-down plans, DCO Core Principles B (financial resources), D (risk management), G (default rules and procedures), and I (system safeguards), as well as PFMI Principles 3 and 15, collectively support the need for DCOs to create policies and procedures that identify scenarios that may prevent a SIDCO or Subpart C DCO ‘‘from providing critical operations and services as a going concern and would assess the effectiveness of a full range of options for recovery and winddown.’’ 28 In light of this determination, the Commission adopted Regulation 39.39 which requires SIDCOs and Subpart C DCOs ‘‘to maintain viable plans for recovery and orderly wind-down.’’ 29 II. CFTC Letter 16–61 and International Standards At the time the Commission adopted Regulation 39.39, there was no specific international guidance on wind-down and recovery planning. In 2014, the Committee on Payments and Market Infrastructures (CPMI) with IOSCO issued guidance for FMIs and governing authorities on development of recovery plans (2014 CPMI–IOSCO Recovery Guidance).30 The guidance considered and interpreted key principles relevant to recovery planning, including PFMI Principles 3 and 15.31 Further, the report provided guidance on the recovery planning 22 Id. 23 Id. 24 2013 DCOs Final Rule Release at 72,494. In 2013, the Commission also adopted regulations to allow registered DCOs that are not designated as SIDCOs to elect to become subject to the provisions of Subpart C of part 39 of the Commission’s regulations. Those DCOs that make the election are referred to as Subpart C DCOs. In making this election, Subpart C DCOs voluntarily agree to operate in compliance with and be subject to review for compliance with PFMIs and other heightened standards for SIDCOs. See 2013 DCOs Final Rule Release at 72,479. 25 2013 DCOs Final Rule Release at 72,495. 26 Id. at 72,478. 27 Id. at 72,495. 28 Id. 29 Id. 30 CPMI–IOSCO, Recovery of financial market infrastructures (Oct. 15, 2014) (hereinafter ‘‘2014 CPMI–IOSCO Recovery Guidance’’). 31 2014 CPMI–IOSCO Recovery Guidance. E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules process, contents of recovery plans, and recovery tools to be used by FMIs.32 In 2016, in light of 2014 CPMI–IOSCO Recovery Guidance, the staff of the Commission’s Division of Clearing and Risk (DCR) issued Letter 16–61 to provide additional details on the subjects and analyses that SIDCOs and Subpart C DCOs should include in their wind-down plans.33 The letter provided a list of subjects DCR believed SIDCOs and Subpart C DCOs should analyze and include in their recovery and wind-down plans including such as inclusion of particular tools to be used in recovery and wind-down.34 Specifically, the guidance provided a list of specific scenarios to be evaluated and set out a framework for how to identify, monitor for, and analyze the scenario and include such information in recovery plans.35 Further, the guidance suggested a framework for how to identify, implement, and analyze recovery tools in such scenarios and how to incorporate it into recovery plans.36 Finally, the guidance also provided a framework for including processes for wind-down options in the event of a failure or inability to successfully implement a recovery plan.37 In 2017, CPMI and IOSCO issued further guidance that updated the 2014 CPMI– IOSCO Recovery Guidance.38 The guidance sought to clarify, among other things, how to implement recovery plans, replenish financial resources, and transparency in recovery tools.39 Further, in 2017, the Financial Stability Board issued guidance regarding CCP resolution planning that included recommendations for resolution authorities about continuity of critical functions and implementation of crisis management groups, and development of resolution plans.40 Most recently, in August 2022, CPMI and IOSCO published a discussion paper on CCP practices to address non-default loses which included a discussion of annual testing and review of a CCP’s recovery plan.41 Recovery and Orderly Wind-Down Planning Recovery planning is essential to DCO risk management and provides a mechanism to consider risk scenarios and their potential scope of impact, as well as evaluate specific tools, steps, and contingency plans. Recovery plans provide well-established and welltested actionable steps that may address exigent and extreme circumstances that may threaten the viability of DCOs. An 32 2014 CPMI–IOSCO Recovery Guidance. Letter No. 16–61 (July 21, 2016). 33 CFTC 34 Id. 35 Id. at 5. at 7. 37 Id. at 9. 38 CPMI–IOSCO, Recovery of financial market infrastructures (July 5, 2017) (hereinafter ‘‘2017 CPMI–IOSCO Recovery Guidance’’). 39 NPRM on DCO Recovery and Orderly Winddown Plans, p. 15. 40 Id. (citing FSB, Guidance on Central Counterparty Resolution and Resolution Planning (July 5, 2017) (hereinafter ‘‘2017 FSB Resolution Guidance’’)). 41 Id. at 16 (citing CPMI–IOSCO, A discussion paper on central counterparty practices to address non-default loses (Aug. 4, 2022)). lotter on DSK11XQN23PROD with PROPOSALS2 36 Id. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 anticipated scenario with a thoughtful corresponding recovery plan provides for a DCO to have an efficient and effective recovery ‘‘such that it can continue to provide its critical services’’ even while its viability may be threatened.42 Additionally, recovery plans provides stability, certainty, and clarity for a DCO’s clearing members and clients and may reduce the potential for panic and contagion. The reduction of stress and uncertainty as a result of advance recovery planning results in optimized, efficient, and effective recovery actions. Recovery planning is globally recognized as essential for market stability, and postfinancial crisis reforms emphasize this understanding. As stated by CMPI–IOSCO in 2014: ‘Recovery’ concerns the ability of an FMI to recover from a threat to its viability and financial strength so that it can continue to provide its critical services without requiring the use of resolution powers by authorities. Recovery therefore takes place in the shadow of resolution.43 When recovery is not a viable option or where the execution of a recovery plan is ineffective, it is critical to financial stability for FMIs to have orderly resolution plans. Title II of the Dodd-Frank Act established the Orderly Liquidation Authority, an alternative framework and process to bankruptcy to efficiently and expeditiously wind-down financial institutions.44 Title II establishes the Federal Deposit Insurance Corporation (FDIC) as the receiver for failing financial institutions designated as systematically important, like SIDCOs.45 Effective winddown plans provide the benefit of wellconsidered strategic planning for wind-down in advance of any viability threatening event that can be shared with the FDIC in an instance of insolvency. Wind-down plans facilitate the efficient transition of a SIDCO into FDIC receivership. Orderly wind-down procedures enhance financial market stability by minimizing the fallout of financial instability and ultimately minimize systemic risk. Amendments to Part 39 Today, the Commission—in consultation with the FDIC, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission (SEC)—takes the next step in recovery and wind-down planning for DCOs by proposing amendments that encompass all DCOs and provide clarity and specificity on the quality of such plans. We recognize that the failure of any DCO, not just those deemed systemically important, might result in significant market disruption. As such, the proposed regulations seek to provide important clarity and consistency for not only SIDCOs and Subpart C DCOs, but all DCOs. This NPRM codifies and expands upon DCR’s 16–61 Letter and incorporates international guidance on recovery and resolution planning issued since 2013. The DCR staff has thoughtfully crafted proposed at 17. CPMI–IOSCO Recovery Guidance. 44 Section 204(b) of the Dodd-Frank Act (codified at 12 U.S.C. 5384(b)). 45 See 12 U.S.C. 5384(b). PO 00000 42 Id. 43 2014 Frm 00083 Fmt 4701 Sfmt 4702 49049 rules which will guide SIDCOs, Subpart C DCOs, and all other DCOs in updating or crafting wind-down plans and, in some instances, recovery plans. Currently, Regulation 39.39 only applies to SIDCOs and Subpart C DCOs. It requires these DCOs ‘‘to maintain viable plans for recovery and orderly wind-down.’’ 46 The regulation specifies that in developing such plans, SIDCOs and Subpart C DCOs must identify scenarios which may prevent the DCO from meeting its obligations, providing its critical operations and services, and assess options for recovery and wind-down.47 The wind-down plan must include procedures to timely notify the Commission when a recovery plan is initiated or a wind-down plan is pending as well as procedures for providing both the Commission and FDIC with necessary information for resolution planning.48 Section 39 also requires the plans to be supported with financial resources sufficient to implement such plans.49 SIDCOs and Subpart C DCOs must also maintain viable plans for raising additional financial resources, including capital, which must be approved by the DCO’s board of directors and regularly updated.50 For non-SIDCOs and non-Subpart C DCOs, no regulation currently requires them create and maintain recovery or wind-down plans.51 To align part 39 with CFTC Letter No. 16– 61 and international standards, the Commission proposes to require all DCOs to create, maintain, and submit to the Commission plans for orderly wind-down substantially similar to those currently required for SIDCOs and Subpart C DCOs.52 Additionally, the Commission proposes to amend Regulation 39.39 for SIDCOs and Subpart C DCOs to include eight specific sections in their wind-down and recovery plans: 1. Identify and describe critical operations and services, interconnections and interdependencies, and agreements and plans to address the risks associated with each.53 2. Conduct a six-part analysis for each recovery scenario, including for commonly applicable scenarios like settlement or custodian bank failure and scenarios resulting from investment risk, poor business results, fraud, legal liabilities, and losses resulting from interconnectedness and interdependencies.54 3. Discuss criteria that may trigger consideration or implementation of the recovery plan, describes a plan for monitoring events that are likely trigger the recovery plan, and includes a description of information-sharing and escalation processes 46 2013 DCOs Final Rule Release at 72,495; 17 CFR 39.39(b). 47 17 CFR 39.39(c)(1). 48 17 CFR 39.39(c)(2). 49 17 CFR 39.39(d). 50 17 CFR 39.39(e). 51 NPRM on DCO Recovery and Orderly Winddown Plans, p. 13. 52 Proposed § 39.13(k); NPRM on DCO Recovery and Orderly Wind-down Plans, p. 18–19. 53 Proposed § 39.39(c)(1). 54 Proposed § 39.39(c)(2). E:\FR\FM\28JYP2.SGM 28JYP2 49050 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules with the DCO’s senior management and board.55 4. Describe recovery tools, the order in which they will be used, the time frame for use of each tool, governance and approvals to execute the tools, necessary steps to implement the tools, whether a tool is mandatory or voluntary, and an assessment of the risks associated with each tool.56 5. Identify and describe scenarios that would prevent the DCO from meeting its obligations and tools that may be used in the orderly wind-down.57 6. Determine the agreements, arrangements, and licenses that are subject to change or termination as a result of activation of a recovery or wind-down plan and describe actions the DCO will take to ensure continuity of operations and services during recovery and wind-down despite alteration or termination.58 7. Include a requirement for an annual review and formal approval by the board of directors and describe the governance structure that defines the responsibilities of board members, senior executives, and business units. Must also include description of the decision-making process.59 8. Describe procedures for testing of viability plans and tools. The description must describe the types of testing and the procedures for updating the plans in light of findings from test results. The testing must be conducted with participation of clearing members.60 The other proposed amendments for Part 39 include updates to definitions to apply generally to all DCOs, establishing a fixed deadline to develop and file recovery and wind-down plans, requiring DCOs to provide certain information directly to the Commission to be shared with the FDIC 61 as well as information upon request, and updating the Subpart C election forms. Conclusion Prior to Dodd-Frank, there were limited means to facilitate orderly resolution. The lack of planning for financial distress proved tremendously harmful to our economy in a period of severe disruption. I believe the proposed rules, as currently drafted, would effectively facilitate transparency as well as provide a foundation for quick, efficient, and effective action in instances of market instability and risk to DCOs operations. Greater transparency and thoughtfully developed risk plans will result in increased confidence in our derivatives markets. I want to thank the staff of the Division of Clearing and Risk—Robert Wasserman, Megan Wallace, and Eric Schmelzer—for lotter on DSK11XQN23PROD with PROPOSALS2 55 Proposed § 39.39(c)(3). 56 Proposed § 39.39(c)(4). 57 Proposed § 39.39(c)(5). 58 Proposed § 39.39(c)(6). 59 Proposed § 39.39(c)(7). 60 Proposed § 39.39(c)(8). 61 This includes information about organization structure, activities, and governance; information about clearing members; arrangements with other clearing entities (including offset and cross-margin arrangements); financial schedules and supporting details (off balance sheet obligations, contingent liabilities, obligations to creditors, shareholders, and affiliates). Proposed § 39.39(f). VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 their diligent and thoughtful work on these proposed regulations. While I support the proposal, I look forward to carefully considering the comments we receive to determine the best path forward to protect our markets through the stability of DCOs. I am hopeful the comments submitted in response to the proposal will offer thoughtful guidance on the questions offered in the release of the notice of proposed rule-making. Appendix 4—Statement of Commissioner Christy Goldsmith Romero No one expects to fail. But the lessons from the 2008 financial crisis highlight how quickly contagion can spread between highly interconnected institutions, threatening the viability of firms. As the Special Inspector General for TARP (‘‘SIGTARP’’), I reported to Congress on the decisions made by the Government to save ‘‘too big to fail’’ Wall Street institutions. The theme that ran through our findings was a massive failure in planning, and shock from institutions and regulators caught unaware by dangerous interconnections across the financial system. The Government intervened with bailouts to avoid the chaos from disorderly bank failures that would hurt Main Street. Fast forward to 2023, where the financial industry and regulators were once again shocked by bank failures—regional bank failures that required government intervention, although not a bailout. These failures seemed to happen at lightning speed as online banking and other technology as well as social media played a role in snowballing customer redemptions.1 Once again, the lack of planning was apparent, and the government intervention was intended to help Main Street. That government intervention 15 years after Congress authorized TARP only reinforces the importance of Dodd-Frank Act provisions designed to protect our financial system from systemic risk. I have reported to, and testified before, Congress on lessons learned from the 2008 financial crisis, on how to manage systemic risk, and on efforts to prevent future government intervention, such as requirements for living wills from the largest banks. I testified before the Senate in 2014 that I strongly supported the DoddFrank Act’s ‘‘dual approach: front line measures aimed at keeping the largest financial institutions safe and sound, and a last line defense aimed at letting a company fail without damaging the economy.’’ 2 1 An unfortunate consequence of these regional bank failures was large numbers of depositors withdrawing their funds only to deposit them in the largest banks. See, e.g., Edward Harrison, The Fed Is Helping Too-Big-to-Fail Banks Become Bigger, Bloomberg (May 2, 2023) available at https:// www.bloomberg.com/news/newsletters/2023-05-02/ the-fed-is-helping-too-big-to-fail-banks-becomebigger. 2 Written Testimony Submitted by The Honorable Christy L. Romero, Special Inspector General for the Troubled Asset Relief Program Before the U.S. Senate Banking, Housing and Urban Affairs Committee Subcommittee on Financial Institutions and Consumer Protection, available at https:// www.sigtarp.gov/sites/sigtarp/files/Testimony/ PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 I support the proposed rule today because it does just that. It strengthens both front line measures and the last line of defense by laying out specific requirements for all clearinghouses to have orderly wind-down plans. This expands our requirements for wind-down plans from a handful of clearinghouses to the full range of clearinghouses—ranging from those deemed systemically important to new or future entrants, such as those who are digital assetfocused. The rule today codifies and strengthens the provisions in Commission guidance from 2016, and is designed in consideration of international standards. I support the proposed rule because it has two major benefits. First, just as with bank living wills, the requirement for orderly wind-down plans decreases the likelihood that any failure will be disorderly, chaotic, or require government intervention, thereby protecting financial stability—in other words, the last line of defense. Second, the exercise of creating and maintaining the plans with the specific requirements contained in the rule could help to prevent the failure of clearinghouses by shoring up areas of potential existential risk and giving the Commission insight into risk exposure for our own oversight responsibilities—in other words, front line measures. I want to thank the staff for these efforts to implement the goals of the Dodd-Frank Act and protect the financial system. I thank them for working with my office on changes to improve the proposal in ways that will promote greater transparency into interconnections in our financial system and improve accountability for clearinghouses as they develop and test their plans. Last Line Defense: The Proposal Will Help Protect Financial Stability in the Face of New Kinds of Market Stress by Reducing the Likelihood of Disorderly and Chaotic Failures As I testified to Congress in 2014, it is crucial for regulators and institutions to make use of ‘‘what was missing in the crisis— time—time to understand the interconnections and the risk they pose, and limit any dangerous risk so they are not caught unaware again.’’ 3 While we already require systemically significant clearinghouses and a small handful of other clearinghouses to maintain orderly winddown plans,4 we do not require it for all. In supporting the expansion of the requirement for orderly wind-down plans to all clearinghouses, I am reminded of one of my interviews with Treasury Secretary Timothy Geithner. Secretary Geithner told me, ‘‘What size and mix of business do you classify as systemic?. . . . It depends too much on the state of the world at the time. You won’t be able to make a judgment about SIGTARP_testimony_TBTF_and_SIFI_regulation_ July_16_2014.pdf (July 16, 2014) (2014 Goldsmith Romero Testimony). 3 2014 Goldsmith Romero Testimony. 4 Derivatives Clearing Organizations and International Standards, 78 FR 72476, 72494 (Dec. 2, 2013). E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules what’s systemic and what’s not until you know the nature of the shock.’’ 5 Although the Financial Stability Oversight Council makes systemic designations, the fact that the Government intervened in regional bank failures this year emphasizes that disorderly failures of even non-systemic financial players can cause chaos and harm regular people. Additionally, this month our nation faced challenges with the debt ceiling, which would have had substantial impacts, which may not be planned for by all institutions. By requiring orderly wind-down plans for all, and adopting the proposed standardized requirements before a crisis hits, we can better understand which market stresses might cause severe disruptions across clearinghouses, and how a failure may spread across derivatives markets, the financial system, and even the economy. We can then engage in supervision to ensure that clearinghouses effectively manage risk. Front Line Measures: The Best Use of Orderly Wind-Down Plans Is Helping To Ensure We Never Need To Rely on Them It has been said that those who fail to plan, plan to fail. But when it comes to financial stability, planning to fail is actually one of the best ways to avoid failing. A handful of clearinghouses already have wind-down plans pursuant to Commission guidance from 2016.6 I support the proposed rule with its specific requirements of what these winddown plans should include because it can help mitigate the risk of failure, and prevent the need to ever rely on them. I testified before Congress in 2014 saying, that I encouraged regulators to use living wills to ‘‘build a comprehensive roadmap of interconnections to capture the common risks, linkages and interdependencies in the financial system.’’ 7 I support that the proposed rule contains those same requirements—the inclusion of a clearinghouse’s interconnections and interdependences. In addition to the wellestablished clearinghouses, our registrants include clearing houses (as well as applicants) that are focused largely on digital assets. This includes some clearinghouses where the clearing members are retail lotter on DSK11XQN23PROD with PROPOSALS2 5 See Statement of Christy Romero, Acting Special Inspector General, Troubled Asset Relief Program Before the House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit, available at https:// www.sigtarp.gov/sites/sigtarp/files/Testimony/Citi_ Too_Big_To_Fail_June_14_2011_Testimony.pdf (June 14, 2011). 6 Staff have provided guidance on what clearing houses should consider when developing recovery and wind-down plans, much of which is codified in this rule. CFTC Letter No. 16–61, Recovery Plans and Wind-down Plans Maintained by Derivatives Clearing Organizations and Tools for the Recovery and Orderly Wind-down of Derivatives Clearing Organizations, (July 16, 2016) (hereinafter CFTC Letter No. 16–61), available at: https:// www.cftc.gov/csl/16-61/download. The 2016 guidance was intended to be consistent with international standards. I note that this guidance has not been updated in seven years—seven years that included disruption and substantial market stresses. 7 2014 Goldsmith Romero Testimony. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 customers. Given the highly interconnected nature of the digital asset industry, and our lack of visibility into unregulated affiliates, we could find ourselves without the information needed to identify affiliate risk and supervise the management of that risk. This was most notably experienced with registered clearinghouse Ledger X, an affiliate of FTX. Additionally, an increase in cyberattacks, including the one on ION Markets, show how increasing reliance on third party services and providers can create new avenues for disruption. When those disruptions hit multiple firms at once, the damage can compound, creating cascading failures that threaten financial stability. By requiring clearinghouses to identify these kinds of interdependencies and interconnections before they become a problem, as well as to identify potential triggering events, document how they will monitor these triggers, and conduct stress scenario analysis, this proposal encourages a systemic perspective that would help clearinghouses and the Commission steer away from trigger events, and more comprehensively manage what would otherwise be existential risk.8 The proposal also requires clearinghouses to test wind-down plans annually, or when they are updated. This is an opportunity for a regular robust assessment of the risks that a clearinghouse faces. The proposal recognizes that testing may be enhanced by participation by other stakeholders. I look forward to hearing comments about whether there are situations or scenarios where the participation of stakeholders other than clearing members should be required, instead of simply considered. Clearinghouses can only identify failures caused by risks that they consider and review. The scenarios prescribed by the proposal would require assessing a broad range of relevant risks. I look forward to hearing from commenters about whether there are any other areas that might help us promote the resilience of clearinghouses and protect against chaotic failures. This Proposal Will Only Protect the Financial System if We Have the Courage To Apply It Unlike living wills for systemically important banks, there is no formal review or acceptance requirement for these wind-down plans. But that does not excuse us from a responsibility to carefully scrutinize the plans to ensure that they are comprehensive, appropriate, and rigorously tested. In 2011, I testified before Congress that rules designed to prevent systemic risk that would require government intervention ‘‘are only as effective as their application’’ and that ultimately, we ‘‘rely on the courage of the 8 It would require clearinghouses to identify scenarios that may prevent them from fulfilling their critical role, including not just due to adverse market outcomes, but also financial effects from cybersecurity events and other losses from interconnections with third party services and providers. And it requires a clearinghouse to consider how a combination of failures, like the sort that crop up in a financial crisis, might affect its ability to operate. PO 00000 Frm 00085 Fmt 4701 Sfmt 4702 49051 regulators to protect our nation’s broader financial system.’’ 9 We should have the courage to use these plans as a roadmap for our own vigilant oversight of derivatives markets and a guide for where we should focus efforts to bolster resilience to market stresses. I welcome comment on all aspects of the proposal, but especially those recommending additional ways we can promote financial stability. For these reasons, I support the proposed rule. Appendix 5—Dissenting Statement of Commissioner Summer K. Mersinger I cannot support the proposed amendments to Part 39 of the Commodity Futures Trading Commission’s 1 regulations before us today. The proposed amendments would: (1) make substantial changes to the current recovery and orderly wind-down plan regulations applicable to systemically important derivatives clearing organizations (SIDCOs) and Subpart C derivatives clearing organizations (Subpart C DCOs); 2 (2) require for the first time that all other CFTCregistered derivatives clearing organizations (DCOs) have orderly wind-down plans; (3) revise the CFTC’s bankruptcy regulations that the CFTC just recently amended to now require a bankruptcy trustee to act in accordance with a DCO’s recovery and orderly wind-down plans; and (4) require SIDCOs and Subpart C DCOs to provide copious amounts of information to the Federal Deposit Insurance Corporation (FDIC) through the CFTC for the purpose of planning the potential resolution of the entity (the Proposal). To be clear, in considering the Proposal, the Commission is not debating whether SIDCOs and Subpart C DCOs should be required to engage in thoughtful planning for recovery and orderly wind-down. That has already been decided.3 They are required to do so.4 In fact, they have been required to do so since December 2013.5 9 Statement of Christy Romero, Acting Special Inspector General, Troubled Asset Relief Program Before the House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit, available at https:// www.sigtarp.gov/sites/sigtarp/files/Testimony/Citi_ Too_Big_To_Fail_June_14_2011_Testimony.pdf, (June 14, 2011). 1 This statement uses the terms CFTC or Commission to refer to the Commodity Futures Trading Commission. 2 As used herein, the term Subpart C DCO refers to a derivatives clearing organization that elects to be subject to the provisions in Subpart C of Part 39 of the Commission’s regulations. 3 See Derivatives Clearing Organizations and International Standards, 78 FR 72476 (Dec. 2, 2013). 4 CFTC Rule 39.39(b), 17 CFR 39.39(b) (‘‘Each [SIDCO] and [Subpart C DCO] shall maintain viable plans for: (1) recovery or orderly wind-down, necessitated by uncovered credit losses or liquidity shortfalls; and, separately, (2) recovery or orderly wind-down necessitated by general business risk, operational risk, or any other risk that threatens the [DCO’s] viability as a going concern.’’). 5 See 78 FR at 72476 (stating ‘‘the rule is effective December 31, 2013’’). However, the Commission may, upon request, grant a SIDCO or a Subpart C DCO up to one year to comply with any provision E:\FR\FM\28JYP2.SGM Continued 28JYP2 49052 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules Instead, through a set of prescriptive requirements, the Proposal takes a ‘‘government knows best’’ approach to recovery and orderly wind-down plans and the events that might trigger them. Furthermore, the Proposal’s obligation to have an orderly wind-down plan, and many of the Commission’s prescriptive directives attendant thereto, would extend to all DCOs, not just the SIDCOs and Subpart C DCOs that tend to be the largest and most complex derivatives clearinghouses. lotter on DSK11XQN23PROD with PROPOSALS2 Ignoring the Work of SIDCOs and Subpart C DCOs Over the Past Decade Over the past decade, SIDCOs and Subpart C DCOs have spent considerable time and resources developing viable plans for recovery and orderly wind-down. Adoption of those plans was not a one-time event, and those plans have not been allowed to grow stale. Indeed, current CFTC regulations require SIDCOs and Subpart C DCOs to maintain those plans.6 In accordance with Commission regulations, SIDCOs and Subpart C DCOs have been revising and updating those plans and taking steps to develop their strategies and tools, including adopting changes to their rulebooks that explicitly set forth tools they would use and when they would use them. Furthermore, the CFTC has engaged with SIDCOs and Subpart C DCOs on the contents of those plans and associated rules, including through approving rule changes and conducting examinations. The Proposal would make significant changes to the CFTC’s current regulations addressing recovery and orderly wind-down plans. With respect to SIDCOs and Subpart C DCOs, I do not believe that the benefits of the rule changes in this Proposal outweigh the costs of implementing them. Worse, I believe that the Proposal’s prescriptive requirements would undermine the ability of SIDCOs and Subpart C DCOs to manage risks during business as usual and appropriately plan for recovery and orderly wind-down. The Proposal Is Too Prescriptive I am further concerned that the Proposal would require every DCO to consider as a potential trigger for recovery or orderly winddown, as applicable,7 a scenario that some DCOs might be able to manage during business as usual—a much preferred outcome in my opinion. This is not just a difference of semantics. The distinction between whether a DCO can manage a specific factual circumstance during business as usual or whether that fact pattern would trigger recovery or orderly wind-down has significant financial and governance implications. In fact, if the CFTC requires a DCO to have tools and resources in its recovery plan to address a scenario that the DCO has determined it can manage during business as usual, then those resources and tools are required to be set aside for recovery and, by of CFTC regulations 39.39 or 39.35. See CFTC Rule 39.39(f), 17 CFR 39.39(f). 6 CFTC Rule 39.39(b), 17 CFR 39.39(b). 7 The Proposal would require all DCOs to have orderly wind-down plans, and only SIDCOs and Subpart C DCOs to have recovery plans. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 definition, are not available to manage the situation during business as usual. Not only is that inefficient and counterproductive, it undermines the focus on the DCO’s risk management during business as usual. It is the DCO, not the Commission, that is in the best position to determine what risks it can manage during business as usual, and what risks would trigger use of its recovery plan and/or orderly wind-down plan, and to allocate its resources accordingly. Furthermore, the Proposal would require recovery and orderly wind-down plans to consider a potentially limitless set of scenarios. The Proposal states, ‘‘The [DCO’s] recovery plan scenarios should also address the default risks and non-default risks to which the [DCO] is exposed.’’ While the preamble spends a significant amount of time pontificating on a variety of risk-inducing scenarios, the Proposal does not define the terms ‘‘default risks’’ or ‘‘non-default risks’’ that are used in the rule text, and the requirement contains no limiting language. Without clear definitions or limitations, this phrase requires a DCO to consider every risk to which it might possibly be exposed in its recovery and orderly wind-down plans. The Proposal goes on to require each SIDCO and Subpart C DCO to ‘‘identify scenarios that may prevent it from meeting its obligations or providing its critical services as a going concern’’ 8 (emphasis added) in its recovery and orderly winddown plans. I am concerned that this extremely low threshold could capture anything—and everything. As if considering the aforementioned ‘‘risks’’ and ‘‘scenarios’’ were not enough, the Proposal requires a SIDCO’s or Subpart C DCO’s recovery plan to ‘‘establish the criteria that may trigger implementation or consideration of implementation of that plan,’’ and its orderly wind-down plan to ‘‘establish the criteria that may trigger consideration of implementation of that plan.’’ I am not sure there is a clear distinction between ‘‘risks,’’ ‘‘scenarios,’’ and ‘‘triggers’’ in the Proposal. A Faulty Premise and Unnecessary Requirements for All DCOs Based on the Proposal’s definition of ‘‘orderly wind-down,’’ 9 one purpose of having an orderly wind-down plan is to effect the permanent cessation of one or more of a DCO’s critical operations or 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. We already have such a process—the bankruptcy Proposal uses the term ‘‘critical services’’ with respect to recovery scenarios and the term ‘‘critical operations and services’’ with respect to orderly wind-down scenarios. 9 The Proposal defines ‘‘orderly wind-down’’ as ‘‘the actions of a derivatives clearing organization to effect the permanent cessation, sale, or transfer, of one or more of its critical operations or 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.’’ PO 00000 8 The Frm 00086 Fmt 4701 Sfmt 4702 of a DCO pursuant to chapter 7 of the U.S. Bankruptcy Code and Part 190 of the Commission’s regulations. Indeed, the Commission engaged in an extensive effort just a few years ago to update Part 190 of the Commission’s regulations so that they specifically address the bankruptcy of a DCO.10 By imposing on every DCO costly and burdensome requirements designed to prevent the DCO from ever going through the bankruptcy process, or to control that process by attempting to tell a bankruptcy trustee that it must follow the DCO’s orderly wind-down plan, the Proposal assumes that bankruptcy proceedings are so fraught with the peril of disorder that any DCO going through bankruptcy pursuant to chapter 7 of the U.S. Bankruptcy Code and Part 190 of the Commission’s regulations would threaten the stability of the U.S. financial system. I question the fundamental premise of the Proposal that every DCO offers one or more services that is so critical that the sale, transfer, or permanent cessation of that service would threaten the stability of the U.S. financial system, thereby justifying the requirement that every DCO develop an orderly wind-down plan to avoid that. The preamble of the Proposal acknowledges that ‘‘the failure of [a DCO that is neither a SIDCO nor a Subpart C DCO] is much less likely to have ‘serious adverse effects on financial stability in the United States,’ ’’ and states that, as a result of that conclusion, ‘‘the Commission is not proposing to require these DCOs to maintain recovery plans.’’ And yet, the Proposal would require those DCOs to expend significant time and resources to maintain and submit to the Commission a plan to ‘‘effect the permanent cessation, sale, or transfer, of one or more of its critical operations or 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.’’ Just as I do not believe that it is necessary for every DCO to have an orderly wind-down plan, I certainly do not see the purpose of a DCO applicant submitting an orderly winddown plan to the CFTC as part of its application for registration as a DCO. Not only does a DCO applicant lack a magic ball to foresee its future level of success, the applicant might not even be approved by the Commission. We are asking applicants to plan for going-out-of-business before they even have permission to go into business. Unbridled Access to Information I also am very concerned by the unbridled scope of information the Commission could 10 See Part 190 Bankruptcy Regulations, 86 FR 19324, 19325 (Apr. 13, 2021) (stating that one of the ‘‘major themes in the revisions to part 190’’ is that ‘‘[t]he Commission is promulgating a new subpart C to part 190, governing the bankruptcy of a clearing organization. In doing so, the Commission is establishing ex ante the approach to be taken in addressing such a bankruptcy, in order to foster prompt action in the event such a bankruptcy occurs, and in order to establish a more clear counterfactual (i.e., ‘what would creditors receive in a liquidation in bankruptcy?’) in the event of a resolution of a clearing organization pursuant to Title II of Dodd-Frank.’’) (footnote omitted). E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules demand from SIDCOs and Subpart C DCOs under the Proposal with the goal of the Commission providing said information to the FDIC for purposes of resolution planning. As the primary regulator of SIDCOs and Subpart C DCOs, the CFTC can already request and receive information necessary to appropriately oversee these entities.11 Additionally, pursuant to CFTC Regulation 39.39(c)(2), each SIDCO and Subpart C DCO already must have ‘‘procedures for providing the Commission and the [FDIC] with information needed for purposes of resolution planning.’’ 12 The Proposal would specify six types of information that each SIDCO and Subpart C DCO would be required to provide upon request. It then includes an all-encompassing catch-all category of ‘‘any other information deemed appropriate to plan for resolution under Title II of the Dodd-Frank Act.’’ I do not support giving a government regulator, let alone two federal regulators, unlimited access to information, especially when that information is being collected for the purpose of providing it to a federal regulator that is not the entity’s primary regulator. I am unmoved, and certainly not comforted, by the assertion that someone (though it is unclear who) must ‘‘deem the information appropriate’’ before it is requested by the CFTC or shared with the FDIC. What’s more, in light of today’s cybersecurity risks, government agencies must take care in determining what information they collect and store. We must only collect information we need to do our job as regulators, not information we may want at some point for some event that may or may not materialize. Conclusion I have great respect for the Commission’s long history of implementing principlesbased regulation and allowing our regulated entities the flexibility to build the appropriate policies and procedures—best suited for their unique business—to satisfy those principles. Unfortunately, this Proposal supplants prescriptions for principles and regulatory constraints for flexibility. Appendix 6—Concurring Statement of Commissioner Caroline D. Pham lotter on DSK11XQN23PROD with PROPOSALS2 I respectfully concur regarding the Notice of Proposed Rulemaking for Derivatives Clearing Organizations Recovery and Orderly Wind-down Plans; Information for Resolution Planning. While I generally support and appreciate the diligent efforts on this proposal, I do have several significant concerns regarding the proposal’s breadth and prescriptiveness, as well as foundational questions on accountability and the role of the government in resolution planning. 11 The preamble to the Proposal notes that ‘‘Under Core Principle J, the Commission may request any information from a DCO that the Commission determines to be necessary to conduct oversight of the DCO’’ and concedes that its aim is to obtain and provide to the FDIC ‘‘certain information for resolution planning that goes beyond the information usually obtained during business as usual under the Core Principles and associated Part 39 regulations.’’ 12 CFTC Rule 39.39(c)(2), 17 CFR 39.39(c)(2) VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 Strengthening the Financial System Through Global Standards It has been almost 14 years since the G20 met in Pittsburgh to address the financial stability risks that emerged during the 2008 global financial crisis. One pivotal outcome of that meeting was the agreement to improve the over-the-counter (OTC) derivatives markets by agreeing that all standardized OTC contracts should be exchange-traded and cleared through regulated central counterparties (CCPs) by 2012, aiming to diminish counterparty credit risk and enhance transparency.13 This important decision resulted in a stronger and more resilient financial system by aiming to prevent a recurrence of the crisis from inadequate risk management. At that meeting, the G20 leaders pledged to implement this central clearing mandate in a coordinated and consistent manner across jurisdictions. In 2012, the Committee on Payments and Market Infrastructures 14 and the International Organization of Securities Commissions (CPMI–IOSCO) established the Principles for Financial Market Infrastructures (PFMIs).15 The PFMIs are a set of international standards that provide guidance for the operation and oversight of certain financial market utilities (FMUs), including CCPs (such as CFTC-regulated derivatives clearing organizations (DCOs) or SEC-regulated clearing agencies), trade repositories, payment systems, and central securities depositories (CSDs), that the international community has determined to be an essential component to preserving financial stability in the global financial markets.16 U.S. Approach to Implementation of the PFMIs Pursuant to Title VIII of the Dodd-Frank Act, the U.S. has implemented the PFMIs through multiple regulators overseeing different FMUs, including DCOs, clearing agencies, payment systems, and CSDs.17 The Financial Stability Oversight Council (FSOC) designates certain FMUs as systemically important if they pose a risk to the stability of the U.S. financial system (designated FMUs or DFMUs).18 To date, the FSOC has designated eight FMUs as systemically important, including two systemically 13 See Leaders’ Statement: The Pittsburgh Summit (2009), available at https://www.oecd.org/g20/ summits/pittsburgh/G20-Pittsburgh-LeadersDeclaration.pdf. 14 The Committee on Payments and Market Infrastructures was renamed the Committee on Payment and Settlement Systems. See History of the CPMI, Bank for International Settlements, available at https://www.bis.org/cpmi/history.htm. 15 See Principles for Financial Market Infrastructures, Bank for International Settlements, available at https://www.bis.org/cpmi/info_ pfmi.htm. 16 Id. 17 See Designated Financial Market Utilities, Board of Governors of the Federal Reserve System, available at www.federalreserve.gov/ paymentsystems/designated_fmu_about.htm. 18 Id. PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 49053 important derivatives clearing organizations (SIDCOs) regulated by the CFTC.19 The CFTC, the SEC, and the Federal Reserve have all taken steps to implement Title VIII and the PFMIs, and to promote the stability and efficiency of FMUs subject to their oversight. All three U.S. regulators have to achieve the same outcomes, because each is implementing the same standards from Title VIII and the PFMIs. In reviewing each agency’s approach—the Fed’s Regulation HH and the SEC’s recent proposal for recovery and wind-down plans for clearing agencies— it seems that there is an opportunity for greater alignment and consistency across the CFTC, SEC, and the Fed to implementing these same requirements. I believe the U.S. should take an outcomes-based approach to oversight of DFMUs because we all have to get to the same destination in the end. CFTC’s 2013 Recovery and Wind-Down Rule for SIDCOs and Subpart C DCOs In 2013, the CFTC determined that the PFMIs were the most relevant international standards for the risk management of SIDCOs, for purposes of meeting its obligations under Title VIII, and began implementing rules fully consistent with the PFMIs.20 Specifically, the CFTC promulgated its recovery and wind-down rules for SIDCOs and Subpart C DCOs in 2013.21 Since then, we have been fortunate enough to receive valuable guidance from CPMI–IOSCO and the Financial Stability Board regarding resolution frameworks for FMUs, the recovery planning process, and the content of recovery plans. These guidelines were initially published in 2014 and subsequently updated in 2017 (‘‘CPMI–IOSCO Recovery Guidance’’), providing us with invaluable insights.22 I support keeping the CFTC’s rules up-to-date and upholding international standards under Title VIII and the PFMIs established by CPMI–IOSCO. In our derivatives markets, DCOs provide central clearing and serve as intermediaries who effectively mitigate risk for hundreds of thousands of transactions every day through the settlement and central clearing of contracts. A significant portion of settlement and clearing in the derivatives market is carried out by two CFTC-registered DCOs 19 The Federal agency that has primary jurisdiction over one of the eight designated FMUs is indicated in parentheses: The Clearing House Payments Company, L.L.C. (Federal Reserve); CLS Bank International (Federal Reserve); Chicago Mercantile Exchange, Inc. (CFTC); The Depository Trust Company (Securities and Exchange Commission (SEC)); Fixed Income Clearing Corporation (SEC); ICE Clear Credit L.L.C. (CFTC); National Securities Clearing Corporation (SEC); and The Options Clearing Corporation (SEC). See id. 20 See Derivatives Clearing Organizations and International Standards, 78 FR 72475, 72478 (Dec. 2, 2013) and Derivatives Clearing Organizations General Provisions and Core Principles, 85 FR 4800, 4822 (Jan. 27, 2020). 21 Id. 22 See CPMI–IOSCO, Recovery of financial market infrastructures (Oct. 15, 2014), available at https:// www.bis.org/cpmi/publ/d121.pdf and CPMI– IOSCO, Resilience of central counterparties: further guidance on the PFMI (July 5, 2017), available at https://www.bis.org/cpmi/publ/d163.htm. E:\FR\FM\28JYP2.SGM 28JYP2 49054 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules designated as SIDCOs by the FSOC in 2012.23 It is no secret that if one of these SIDCOs were to experience a failure or collapse that it could have far-reaching and detrimental effects on the broader financial system. As ‘‘giant warehouses of risk’’, SIDCOs play a crucial role in mitigating risks for the entire global financial system. However, in the event of any DCO’s financial distress or potential failure, effective regulations are necessary to ensure an orderly wind-down and recovery process. And that is why I believe it is so important that our DCOs are efficiently-regulated and well-managed at every level, and why the CFTC has long had the preeminent regulatory framework for the oversight of CCPs and led many international initiatives to strengthen financial stability. While the prospect of a DCO collapse may appear to be beyond the realm of possibility, it is crucial for regulators to avoid succumbing to a failure of imagination. In instances where existing regulations prove inadequate, it is our responsibility through rulemakings to devise contingency plans for such worst-case scenarios. lotter on DSK11XQN23PROD with PROPOSALS2 Striking a Balance in Our Rulemaking— More Is Not Always Better I thank the staff of the Division of Clearing and Risk and the Office of General Counsel for their work on this proposal. I would also like to particularly thank Bob Wasserman and Eric Schmelzer for their hard work and for the time they spent with my office on this proposal. Generally, it is important that the CFTC continues to periodically review our regulations to see that they remain fit-forpurpose and to update them as necessary to reflect developments in international standards as well as in our markets. But as I mentioned earlier, while I support today’s proposed rulemaking, I do have some significant concerns. Definitions First, regarding the definitions in this proposal. I appreciate that we attempt to align our definition for ‘‘orderly wind-down’’ with the definition in Regulation HH, as well as considered the definition in the recent SEC proposal. I thank the staff for making the revisions that I requested and welcome comments. Another definition of particular focus to me was ‘‘legal risk.’’ Given my experience implementing governance, risk, and control frameworks—including legal risk management—I took particular care to evaluate the proposal’s definition of legal risk and worked with the staff to try to ensure that the CFTC’s definition was consistent with both international standards as well as best practices. I drew upon my own experience with risk governance frameworks for legal risk. I also looked at other aspects of the CFTC rules where we address legal risk for swap dealers and FCMs, as well as the Basel Committee publications on operational risk (since legal risk is a subset of operational risk), as well as the aforementioned CPMI– IOSCO Recovery Guidance, and the Fed’s definition of legal risk (although that is for 23 See note 7, supra. VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 banking organizations). I then suggested, and my language is incorporated into the proposal, that the definition of legal risk includes ‘‘losses arising from legal, regulatory, or contractual obligations.’’ I encourage commenters to take a look at this proposed definition for legal risk, which builds upon some statements in the Recovery Guidance, and to weigh in if this is an appropriate definition, or if there’s a better or alternate formulation. Recovery Scenarios Second, I believe it would be helpful to have commenters provide feedback on the likelihood of the stress scenarios and whether each of these scenarios are events or types of risk that should be included in all DCOs’ recovery plans. I also believe that there should be a materiality threshold in connection with determining the recovery scenarios that need to be addressed. One example of a materiality threshold is that the applicable recovery scenarios would need to have a ‘‘significant likelihood’’ of being triggered, or to evaluate whether multiple scenarios happening at the same time would pose a material risk to the DCO. I would like to have commenters weigh in on potential approaches to tailoring the type and number of required recovery scenarios. Information for Resolution Planning Third, turning to resolution planning, I believe that it is important to consider the respective roles and responsibilities of the CFTC as the primary regulator over our DCOs, and the FDIC as the resolution authority under Title II. Based on my own experience engaging with the FDIC, I understand and support the need for the FDIC to be able to carefully engage in resolution planning to address the financial stability risk posed by SIDCOs. However, I believe that the accountability for sound financial and risk management should lie squarely with CCPs, including for stress, disruption, and even the unlikely event of resolution. Instead, it seems that our proposal shifts accountability from CCP management to the CFTC as regulator, and the FDIC as the primary responsible party for resolution planning, making it the government’s job, not CCP management’s job, to plan ahead. I believe this oversteps the appropriate role of government, and even interferes with day-to-day business operations by diverting limited resources from critical risk areas to burdensome document production. I will highlight a few examples. Our proposal requires that SIDCOs produce voluminous information and documentation directly to the CFTC on an ex ante basis, so that the CFTC can then, in turn, review the information and documentation and then produce it to the FDIC to maintain. This raises several concerns. From one perspective, I am concerned that we are shifting accountability and responsibility from the management of the SIDCOs where it should be, to the CFTC. One example is the proposal’s requirements with respect to producing legal contracts for internal and external service providers, so that the CFTC and the FDIC can identify PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 which contracts or agreements for services are not resolution resilient. It does not make sense to me why the burden-shifting is first on the CFTC and the FDIC. It is critical that the management of the SIDCOs identify and mitigate their legal risks, and in the first instance, review their own legal contracts and make their own determination. I am not familiar with any other circumstance, for any other regulator, in which that type of legal documentation is comprehensively produced to the regulator on an ongoing basis to maintain. I believe that it is more common for regulated entities to be required to maintain an inventory of such legal documentation in addition to recordkeeping and retention requirements, and to mitigate the legal risks associated with those legal contracts or contractual obligations. Then, the regulator would periodically inspect or examine the framework for legal risk management and any specific regulatory requirements associated with the specific type of legal documentation, including the review of a sample or multiple samples of those legal contracts as appropriate. I would like to hear from commenters if this approach, which is standard practice for inspections and examinations, would make sense here. Another example of this burden-shifting from business management to the regulators is with respect to producing copies of licenses and licensing agreements to the CFTC so that the CFTC can then produce them to the FDIC. I am not aware of any other regulator that keeps its own document repository of business licenses and licensing agreements for regulated entities. Regarding information about clearing members that is requested for resolution planning, I do wonder if the CFTC already has this information because we directly regulate clearing members such as futures commission merchants (FCMs) and swap dealers. I would like to ensure that we are collecting any information from SIDCOs in the most efficient way possible, in order to make the best use of the CFTC’s limited resources and to limit the administrative burden. And, it goes without saying that I hope the CFTC will request only information that is truly necessary, and is not information that the CFTC already collects, in order to minimize duplication. And more generally, because the SEC and the Fed are the other regulators with primary jurisdiction over their respective DFMUs, I would like to know if the SEC and the Fed will be taking the same approach as the CFTC to the production of information for resolution planning to the FDIC. Again, there should be alignment across all three agencies if we are all subject to the same Dodd-Frank statutory requirements. Orderly Wind-Down Plans Fourth, moving to orderly wind-down plans, there are a number of detailed technical requirements set forth in the proposal. I will address a few of particular concern. Ancillary service providers. The proposal includes a requirement to identify ancillary service providers in connection with critical operations and services provided by and to E:\FR\FM\28JYP2.SGM 28JYP2 Federal Register / Vol. 88, No. 144 / Friday, July 28, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 DCOs. To be clear, this requirement is referring to fourth parties, which is the next frontier after third party risk management. I encourage commenters to address whether this requirement is an appropriate way to approach the risk from fourth parties, or if it the proposal is overbroad. Annual testing. Regarding annual testing of tools for wind-down plans, I wonder if there is a more appropriate frequency for testing that would make sense for smaller DCOs that present a more limited risk profile. I believe that testing frequency should be risk-based, and I appreciate that the staff added this question into the proposal at my request. I also noted that it is possible that more than one tool can be used concurrently, and the staff have added a question regarding listing the order in which DCOs would use tools for wind-down plans. Wind-down scenarios. On a technical point regarding wind-down scenarios, the proposal includes a requirement to assess the associated risks to non-defaulting clearing members and their customers and linked FMIs. I appreciate that the staff made some adjustments to that language in order to reflect my concern that because there are clearing members that are not FCMs that clear on an agency basis for their customers, that the proposal more accurately contemplates different types of clearing members and clearing models or market structure. For example, there are clearing members of a DCO that are swap dealers and do selfclearing of their principal trading activities. Without clarification, the rule text could have been construed to encompass all of the clients, counterparties, and customers of a swap dealer that is a clearing member, even VerDate Sep<11>2014 17:52 Jul 27, 2023 Jkt 259001 if unrelated to the swap dealer’s self-clearing of swap dealing activity—such as the retail banking customers of a commercial bank, where the federally-chartered banking entity subject to regulation by the Office of the Comptroller of the Currency, is also registered with the CFTC as a swap dealer. I believe it would be overreaching for a DCO to be required to assess the associated risks of a DCO wind-down scenario to the retail banking customers of that legal entity. Scope and lack of tailoring. I believe the proposal takes a one-size-fits-all approach to DCO wind-down plans by requiring all DCOs, regardless of size or risk profile, to adhere to the same extensive requirements. As one example, I imagine that for fullycollateralized DCOs which present a lesser risk profile, the cost of the legal and consulting fees to draft such wind-down plans could easily exceed their total annual operating budget, and a much simpler or straightforward plan would be sufficient. Accordingly, I believe the Commission should consider whether to allow risk-based tailoring of wind-down plans, and I appreciate that the staff has included a question in the proposal to reflect my concern. Implementation of Plans Finally, regarding implementation period, I am concerned that the mere six months for implementation that is permitted in the proposal is not sufficient for the incredibly thorough and detailed plans that the proposal requires. I appreciate that the staff has added a question on the appropriate amount of time to implement these new requirements for DCO recovery and orderly wind-down plans. PO 00000 Frm 00089 Fmt 4701 Sfmt 9990 49055 Conclusion The world has come a long way since the 2008 global financial crisis to address systemic risk and financial stability in connection with FMIs such as CCPs, and I commend the leadership of the CFTC’s efforts, alongside the G20, Financial Stability Board, IOSCO, the Bank for International Settlements (BIS) CPMI, and both U.S. and non-U.S. authorities. Though much work has been done, I believe in the adage that one’s work is never done. That is why I support, and continue to support, the Commission and staff in periodically reviewing and updating our rules to reflect developments in international standards as well as in markets. It is evident that the staff has invested significant time and effort in their drafting of this proposal for DCO recovery and orderly wind-down plans, and information for resolution planning, and I appreciate the staff’s thoughtfulness. Nonetheless, I respectfully concur because I have several significant concerns regarding the proposal’s breadth and prescriptiveness, as well as foundational questions on accountability and the role of the government in resolution planning. Further, I believe there could be important benefits to enhancing the clarity of this proposal. The sheer length of the proposed rule itself makes it challenging to discern and address specific issues effectively. I believe that a more direct and concise rule would be prudent, and I look forward to receiving public comment. [FR Doc. 2023–14457 Filed 7–27–23; 8:45 am] BILLING CODE 6351–01–P E:\FR\FM\28JYP2.SGM 28JYP2

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 88, Number 144 (Friday, July 28, 2023)]
[Proposed Rules]
[Pages 48968-49055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14457]



[[Page 48967]]

Vol. 88

Friday,

No. 144

July 28, 2023

Part II





Commodity Futures Trading Commission





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17 CFR Parts 39 and 190





Derivatives Clearing Organizations Recovery and Orderly Wind-Down 
Plans; Information for Resolution Planning; Proposed Rule

Federal Register / Vol. 88 , No. 144 / Friday, July 28, 2023 / 
Proposed Rules

[[Page 48968]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 190

RIN 3038-AF16


Derivatives Clearing Organizations Recovery and Orderly Wind-Down 
Plans; Information for Resolution Planning

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing amendments to certain regulations applicable to 
systemically important derivatives clearing organizations (SIDCOs) and 
derivatives clearing organizations (DCOs) that elect to be subject to 
the provisions in the Commission's regulations (Subpart C DCOs). These 
proposed amendments would, among other things, address certain risk 
management obligations, modify definitions, and codify existing staff 
guidance. The Commission is also proposing to amend certain regulations 
to require DCOs that are not designated as systemically important, and 
which have not elected to be covered by our regulations, to submit 
orderly Wind-Down plans. In addition, the Commission is proposing to 
make conforming amendments to certain provisions, revise the Subpart C 
Election Form and Form DCO, and remove stale provisions.

DATES: Comments must be received by September 26, 2023.

ADDRESSES: You may submit comments, identified by ``Derivatives 
Clearing Organizations Recovery and Orderly Wind-Down Plans; 
Information for Resolution Planning'' and RIN 3038-AF16, by any of the 
following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged. All comments must be 
submitted in English, or if not, accompanied by an English translation. 
Comments will be posted as received to https://comments.cftc.gov. You 
should submit only information that you wish to make available 
publicly. If you wish the Commission to consider information that you 
believe is exempt from disclosure under the Freedom of Information Act 
(FOIA), a petition for confidential treatment of the exempt information 
may be submitted according to the procedures established in Sec.  145.9 
of the Commission's regulations.\1\ The Commission reserves the right, 
but shall have no obligation, to review, pre-screen, filter, redact, 
refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, 
such as obscene language. All submissions that have been redacted or 
removed that contain comments on the merits of the rulemaking will be 
retained in the public comment file and will be considered as required 
under the Administrative Procedure Act and other applicable laws, and 
may be accessible under the FOIA.
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I (2020), and are accessible on the 
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.

FOR FURTHER INFORMATION CONTACT: Robert Wasserman, Chief Counsel and 
Senior Advisor, 202-418-5092, [email protected]; Megan Wallace, 
Senior Special Counsel, 202-418-5150, [email protected]; Eric 
Schmelzer, Special Counsel, [email protected], 202-418-5967; Division 
of Clearing and Risk, Commodity Futures Trading Commission, Three 
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Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. The CEA and DCO Core Principles
    B. Regulatory Framework for DCOs
    C. Recovery and Orderly Wind-Down for SIDCOs and Subpart C 
DCOs--Regulation 39.39
    D. 2014 International Standards and Guidance on Recovery and 
Resolution of Financial Market Infrastructures
    E. CFTC Letter No. 16-61
    F. Additional International Standards and Guidance
    G. Requirement To Submit Recovery and Orderly Wind-Down Plans to 
the Commission--Sec.  39.19(c)(4)(xxiv)
II. Amendments to Regulation 39.39--Recovery and Orderly Wind-Down 
for SIDCOs and Subpart C DCOs; Information for Resolution Planning
    A. Definitions--Sec.  39.39(a), Sec.  39.2
    B. Recovery Plan and Orderly Wind-Down Plan--Sec.  39.39(b)
    C. Recovery Plan and Orderly Wind-Down Plan: Required Elements--
Sec.  39.39(c)
    D. Information for Resolution Planning--Sec.  39.39(f)
    E. Renaming Regulation 39.39
III. Orderly Wind-Down Plan for DCOs That Are Not SIDCOs or Subpart 
C DCOs
    A. Requirement to Maintain and Submit an Orderly Wind-Down 
Plan--Sec.  39.13(k)(1)(i)
    B. Notice of the Initiation of Pending Orderly Wind-Down--Sec.  
39.13(k)(1)(ii)
    C. Orderly Wind-Down Plan: Required Elements--Sec.  39.13(k)(2)-
(6)
    D. Conforming Changes to Bankruptcy Provisions--Part 190
IV. Establishment of Time to File Orderly Wind-Down Plan--Sec.  
39.19(c)(4)(xxiv)
V. Amendment to Regulation 39.34(d)
VI. Amendments to Appendix B to Part 39--Subpart C Election Form
VII. Amendments to Appendix A to Part 39--Form DCO
VIII. Related Matters
    A. Regulatory Flexibility Act
    B. Antitrust Considerations
    C. Paperwork Reduction Act
    D. Cost-Benefit Considerations

I. Background

A. The CEA, Dodd-Frank Act, and DCO Core Principles

    Section 3(b) of the Commodity Exchange Act (CEA) sets forth the 
purposes of that Act; among these is to ensure the financial integrity 
of all transactions subject to this act and the avoidance of systemic 
risk. Section 5b(c)(2) of the CEA, as amended in 2010 by Title VII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act),\2\ sets forth eighteen core principles with which a DCO 
must comply in order to be registered with the Commission and maintain 
its registration (DCO Core Principles).\3\ Together, the DCO Core 
Principles serve to reduce risk, increase transparency and promote 
market integrity within the financial system.\4\
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    \2\ Title VII, Wall Street Transparency and Accountability Act 
of 2010, Public Law 111-203, 124 Stat. 1376, 1641 (2010).
    \3\ Section 5b(c)(2) of the CEA, 7 U.S.C. 7a-1(c)(2).
    \4\ Derivatives Clearing Organization Gen. Provisions and Core 
Principles, 76 FR 69334, 69334 (Nov. 8, 2011); Customer Clearing 
Documentation, Timing of Acceptance for Clearing, & Clearing Member 
Risk Mgmt., 77 FR 21278, 21279 (Apr. 9, 2012) (further amending 
Sec.  39.12).
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    Title VII of the Dodd-Frank Act grants the Commission explicit 
authority to promulgate rules, pursuant to section 8a(5) of the CEA, 
regarding the DCO Core Principles that govern the activities of all 
DCOs in clearing and settling swaps and futures.\5\ Section 8a(5), in 
turn, authorizes the Commission to

[[Page 48969]]

make and promulgate such rules and regulations as, in the judgment of 
the Commission, are reasonably necessary to effectuate any of the 
provisions or to accomplish any of the purposes of the CEA.
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    \5\ Section 725(c) of Title VII of the Dodd-Frank Act, 124 Stat. 
at 1687 (2010), 7 U.S.C. 7a-1(c)(2)(A)(i).
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    For SIDCOs in particular, Title VIII of the Dodd-Frank Act grants 
the Commission explicit authority to prescribe risk management 
standards, taking into consideration relevant international standards 
and existing prudential requirements governing operations related to 
payment, clearing and settlement activities and the conduct of 
designated activities by such financial institutions.\6\ Under Title 
VIII, the objectives and principles for those risk management standards 
are to (1) promote risk management; (2) promote safety and soundness; 
(3) reduce systemic risks; and (4) support the stability of the broader 
financial system.\7\ Combined, Titles VII and VIII of the Dodd-Frank 
Act address one of Dodd-Frank's fundamental goals: to reduce systemic 
risk through properly regulated central clearing.\8\
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    \6\ Title VIII, Payment, Clearing, and Settlement Supervision 
Act of 2010, Section 805, 124 Stat. 1802, 1809, 12 U.S.C. 
5464(a)(2)(A), (B).
    \7\ Enhanced Risk Management Standards for Systemically 
Important Derivatives Clearing Organizations, 78 FR 49663, 49665 
(Aug. 15, 2013).
    \8\ See Customer Clearing Documentation, Timing of Acceptance 
for Clearing, and Clearing Member Risk Management, 77 FR 21278, 
21278 (Apr. 9, 2012).
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    DCOs are subject to a number of risks that could threaten their 
viability and financial strength, including risks from the default of 
one or more clearing members (including credit and liquidity risk) as 
well as non-default risk (including general business risk, operational 
risk, custody risk, investment risk, and legal risk). The realization 
of these risks has the potential to result in the DCO's financial 
failure.\9\
---------------------------------------------------------------------------

    \9\ CPMI-IOSCO, Recovery of financial market infrastructures 
(July 5, 2017) (hereinafter CPMI-IOSCO Recovery Guidance) at ] 
2.1.1.
---------------------------------------------------------------------------

    In light of the central role DCOs perform in the markets that they 
serve, the disorderly failure of a DCO would likely cause significant 
disruption in such markets. In particular, SIDCOs play an essential 
role in the financial system, and thus the disorderly failure of such a 
DCO could lead to severe systemic disruptions if it caused the markets 
it serves to cease to operate effectively. Ensuring that DCOs can 
continue to provide critical operations and services as expected, even 
in times of extreme stress, is therefore central to financial 
stability. Maintaining provision of the critical operations and 
services that clearing members and others depend upon should allow DCOs 
to serve as a source of strength and continuity for the financial 
markets they serve.\10\
---------------------------------------------------------------------------

    \10\ Id. at ] 2.1.2.
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    Core Principle D requires each DCO to ensure that it possesses the 
ability to manage the risks associated with discharging its 
responsibilities through the use of appropriate tools and 
procedures.\11\ Recovery planning is inherently integrated into that 
risk management, and concerns those aspects of risk management and 
contingency planning which address the extreme circumstances that could 
threaten the DCO's viability and financial strength. To manage these 
risks as required by Core Principle D, a DCO needs to identify in 
advance, to the extent possible, such extreme circumstances and 
maintain an effective plan to enable it to continue to provide its 
critical operations and services if these circumstances were to occur. 
The recovery plan needs to address circumstances that may give rise to 
any default loss, including uncovered credit losses, liquidity 
shortfalls or capital inadequacy, as well as any structural weaknesses 
that these circumstances reveal. Similarly, the recovery plan needs to 
address DCOs' potential non-default losses. The recovery plan also 
needs to address the need to replenish any depleted pre-funded 
financial resources and liquidity arrangements so that the DCO can 
remain viable as a going concern and continue to provide its critical 
operations and services. The existence of the recovery plan further 
enhances the resilience of the DCO, and will provide market 
participants with confidence that the DCO will be able to function 
effectively even in extreme circumstances.\12\
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    \11\ 7 U.S.C. 7a-1(c)(2)(D)(i).
    \12\ CPMI-IOSCO Recovery Guidance, at ] 2.2.1.
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    Given the systemic importance of SIDCOs, each SIDCO must have a 
comprehensive and effective recovery plan designed to permit the SIDCO 
to continue to provide its critical operations and services. Subpart C 
DCOs, being held to similar standards as SIDCOs, also need to have such 
recovery plans. However, where a recovery plan proves, in a particular 
circumstance, to be ineffective, it is important that the DCO have a 
plan to wind down in an orderly manner. A plan for an orderly wind-down 
is not a substitute for having a comprehensive and effective recovery 
plan.\13\
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    \13\ Id. at ] 2.2.2.
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    The purpose of a recovery plan is to provide, with the benefit of 
thorough planning during business-as-usual operations, such information 
and procedures that will allow a DCO to effect recovery such that it 
can continue to provide its critical operations and services when its 
viability as a going concern is threatened. A recovery plan enables the 
DCO, its clearing members, their clients, and other relevant 
stakeholders, to prepare for such extreme circumstances, increases the 
probability that the most effective tools to deal with a specific 
stress will be used and reduces the risk that the effectiveness of 
recovery actions will be hindered by uncertainty about which tools will 
be used. The recovery plan will also assist the Federal Deposit 
Insurance Corporation (FDIC) as resolution authority under Dodd-Frank 
Title II \14\ in preparing and executing their resolution plans for a 
DCO.\15\
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    \14\ 12 U.S.C. 5381 et. seq. (``Orderly Liquidation 
Authority''). While orderly wind-down as discussed here proceeds 
under the authority of the DCO, FDIC would act as receiver in 
conducting an orderly liquidation under Title II.
    \15\ CPMI-IOSCO Recovery Guidance at ] 2.3.1.
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    While the implementation of the recovery plan is the responsibility 
of the DCO itself, which accordingly also has to have the power to make 
decisions and take action in accordance with its rules, under Title II 
resolution, that responsibility and power will pass to the FDIC as 
receiver instead. Many recovery tools will also be relevant to a DCO 
under Title II resolution, not least because FDIC would ``step into the 
shoes'' of the DCO \16\ and accordingly would be able to enforce 
implementation of contractual loss or liquidity shortfall allocation 
rules, to the extent that any such rules exist, and have not been 
exhausted before entry into resolution.\17\
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    \16\ 12 U.S.C. 5390(a)(1)(A)(i) (upon appointment as receiver 
for a covered financial company, FDIC succeeds to all rights, 
titles, powers, and privileges of the covered financial company and 
its assets, and of any stockholder, member, officer, or director of 
such company).
    \17\ CPMI-IOSCO Recovery Guidance at ] 2.2.3.
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    To accomplish these ends, this Notice of Proposed Rulemaking (NPRM) 
is proposing, among other things: (1) for SIDCOs and Subpart C DCOs, 
that they should incorporate certain subjects and analyses in their 
viable plans for recovery and orderly wind-down; and (2) for all other 
DCOs, that they should maintain viable plans for orderly wind-down that 
incorporate substantially similar subjects and analyses as the proposed 
requirements for SIDCOs and Subpart C DCOs.

B. Regulatory Framework for DCOs

    Part 39 of the Commission's regulations implements the DCO Core 
Principles, including Core Principles D

[[Page 48970]]

and R, which require that the DCO possesses the ability to manage the 
risks associated with discharging the responsibilities of the DCO 
through the use of appropriate tools and procedures,\18\ and a well-
founded, transparent, and enforceable legal framework for each aspect 
of the DCO.\19\ Subpart B of part 39 establishes standards for 
compliance with the DCO Core Principles for all DCOs.\20\ Subpart C of 
part 39 establishes additional standards for compliance with the DCO 
Core Principles for SIDCOs,\21\ i.e., DCOs designated systemically 
important by the Financial Stability Oversight Council (FSOC) for which 
the Commission acts as the Supervisory Agency.\22\ The Subpart C 
regulations also apply to DCOs that elect to be subject to the 
requirements in Subpart C.\23\
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    \18\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D) 
(``Core Principle D--Risk Management'').
    \19\ Section 5b(c)(2)(R) of the CEA, 7 U.S.C. 7a-1(c)(2)(R) 
(``Core Principle R--Legal Risk'').
    \20\ 17 CFR 39.9-39.27.
    \21\ 17 CFR 39.30-39.42. Subpart C flows from Title VIII of the 
Dodd-Frank Act, which Congress enacted to mitigate systemic risk in 
the financial system and to promote financial stability. Section 
802(b) of the Dodd-Frank Act.
    The term ``systemically important'' means a situation where the 
failure of or a disruption to the functioning of a financial market 
utility could create, or increase, the risk of significant liquidity 
or credit problems spreading among financial institutions or markets 
and thereby threaten the stability of the financial system of the 
United States. Section 803(9) of the Dodd-Frank Act; see also 12 CFR 
1320.2 (Definitions--Systemically important and systemic 
importance). A ``financial market utility'' (FMU) includes any 
person that manages or operates a multilateral system for the 
purpose of transferring, clearing, or settling payments, securities, 
or other financial transactions among financial institutions or 
between financial institutions and the person. Section 803(6)(A) of 
the Dodd-Frank Act; see also 12 CFR 1320.2 (Definitions--Financial 
market utility).
    Section 804 of the Dodd-Frank Act requires the FSOC to designate 
those FMUs that FSOC determines are, or are likely to become, 
systemically important. Three CFTC-registered DCOs, Chicago 
Mercantile Exchange, Inc. (CME), ICE Clear Credit LLC (ICC), and 
Options Clearing Corporation (OCC), were designated as systemically 
important by the FSOC in 2012. Press Release, Financial Stability 
Oversight Council Makes First Designations in Effort to Protect 
Against Future Financial Crises (Jul. 18, 2012), available at 
https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. The bases for the designations are available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations. The Commission is 
the Supervisory Agency for CME and ICC; the U.S. Securities and 
Exchange Commission is the Supervisory Agency for OCC. See 12 CFR 
1320.2 (Definition of Supervisory Agency).
    \22\ 17 CFR 39.2.
    \23\ In the Commission's experience, DCOs based in the United 
States that have banks as clearing members have elected to be 
subject to Subpart C in order to achieve status as a qualified 
central counterparty (QCCP), while U.S.-based DCOs that do not have 
banks as clearing members have not made that election.
    In July 2012, the Basel Committee on Banking Supervision, the 
international body that sets standards for the regulation of banks, 
published the ``Capital Requirements for Bank Exposures to Central 
Counterparties'' (Basel CCP Capital Requirements), which describes 
standards for capital charges arising from bank exposures to central 
counterparties (CCPs) related to over-the-counter derivatives, 
exchange-traded derivatives, and securities financing transactions. 
(DCOs are referred to as CCPs in international standards and 
guidance.) The Basel CCP Capital Requirements create financial 
incentives for banks, including their subsidiaries and affiliates, 
to clear financial derivatives with CCPs that are prudentially 
supervised in a jurisdiction where the relevant regulator has 
adopted rules or regulations that are consistent with the standards 
set forth in the Principles for Financial Market Infrastructures 
(PFMI), published in April 2012 by the Bank for International 
Settlements' (BIS) Committee on Payment and Settlement Systems 
(renamed the Committee on Payments and Market Infrastructures 
(CPMI)) and the Technical Committee of the International 
Organization of Securities Commissions (IOSCO) (collectively 
referred to as CPMI-IOSCO). The PFMI is available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
    A QCCP is defined as an entity that (i) is licensed to operate 
as a CCP and is permitted by the appropriate regulator to operate as 
such, and (ii) is prudentially supervised in a jurisdiction where 
the relevant regulator has established and publicly indicated that 
it applies to the CCP, on an ongoing basis, domestic rules and 
regulations that are consistent with the PFMI. See Basel Committee 
on Banking Supervision, Credit Risk Framework at section 50.3, 
available at https://www.bis.org/basel_framework/chapter/CRE/50.htm?inforce=20191215&published=20191215. The failure of a CCP to 
achieve QCCP status could result in significant costs to its bank 
clearing members (or banks that are customers of its clearing 
members).
    The U.S. banking regulators, including the Board of Governors of 
the Federal Reserve (Federal Reserve), FDIC, and the Office of the 
Comptroller of the Currency, have adopted capital standards that are 
consistent with the Basel Committee's standards. For example, under 
the FDIC's regulations, the capital requirement for a clearing 
member's prefunded default fund contribution to a qualifying CCP can 
be as low as 0.16% of that default fund contribution. 12 CFR 
324.133(d)(4). By contrast, the capital requirement for a clearing 
member's prefunded default fund contribution to a non-qualifying CCP 
is 100% of that default fund contribution. 12 CFR 324.10(a)(1)(iii), 
(b)(3) (requiring capital of 8% of risk-weighted asset amount), 12 
CFR 324.133(d)(2) (setting risk-weighted asset amount for default 
fund contributions to non-qualifying CCP at 1,250% of the 
contribution (1,250% * 8% = 100%)). See also 12 CFR 324.133(c)(3) 
(applying a risk weight of 2% to transactions with a QCCP).
    The Federal Reserve and Office of the Comptroller of the 
Currency have similar regulations.
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    Section 805 of the Dodd-Frank Act directs the Commission to 
consider relevant international standards and existing prudential 
requirements when prescribing risk management standards for SIDCOs.\24\ 
In 2013 the Commission determined that, for purposes of meeting the 
Commission's statutory obligation pursuant to Section 805(a)(2)(A) of 
the Dodd-Frank Act, the international standards most relevant to the 
risk management of SIDCOs are the PFMI.\25\
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    \24\ Section 805(a)(2) of the Dodd-Frank Act, 12 U.S.C. 
5464(a)(2)(A).
    \25\ 78 FR 49663 at 49666. The PFMI consist of twenty-four 
principles addressing the risk management and efficiency of a 
financial market infrastructure's (FMI's) operations. Subpart C 
reflects the following PFMI principles: Principle 2 (Governance); 
Principle 3 (Framework for the comprehensive management of risks); 
Principle 4 (Credit risk); Principle 6 (Margin); Principle 7 
(Liquidity risk); Principle 9 (Money settlements); Principle 14 
(Segregation and portability); Principle 15 (General business risk); 
Principle 16 (Custody and investment risks); Principle 17 
(Operational risk); Principle 21 (Efficiency and effectiveness); 
Principle 22 (Communication procedures and standards); and Principle 
23 (Disclosure of rules, key procedures, and market data).
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C. Recovery and Orderly Wind-Down for SIDCOs and Subpart C DCOs--Sec.  
39.39

    The Commission established regulations for the recovery and wind-
down of a SIDCO and Subpart C DCO in 2013 with the promulgation of 
Sec.  39.39.\26\ Regulation 39.39 \27\ was codified to protect the 
members of a SIDCO or Subpart C DCO, as well as their customers, and 
the financial system more broadly, from the consequences of a 
disorderly failure of a DCO consistent with Principles 3 and 15 of the 
PFMI.\28\ Regulation 39.39 also promotes the concepts in Core 
Principles B (Financial Resources), D (Risk Management), G (Default 
Rules and Procedures), I (System Safeguards), L (Public Information), O 
(Governance Fitness Standards), and R (Legal Risk) of Section 5b(c)(2) 
of the CEA.\29\
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    \26\ Derivatives Clearing Organizations and International 
Standards, 78 FR 72476, 72494 (Dec. 2, 2013).
    \27\ 17 CFR 39.39. References in the remainder of this section 
are to the existing regulations.
    \28\ See 78 FR 72476 at 72494-95. Principle 3 of the PFMI 
requires an FMI to have a sound risk management framework ``for 
comprehensively managing legal, credit, liquidity, operational, and 
other risks.'' PFMI Principle 3, at 32. Principle 15 of the PFMI 
requires an FMI to ``identify, monitor, and manage its general 
business risk and hold sufficient liquid net assets funded by equity 
to cover potential general business losses so that it can continue 
operations and services as a going concern if those losses 
materialize. Further, liquid net assets should at all times be 
sufficient to ensure a recovery or orderly wind-down of critical 
operations and services.'' PFMI Principle 15, at 88.
    \29\ See generally 78 FR 72476.
---------------------------------------------------------------------------

    Regulation 39.39(a) defines the terms ``general business risk,'' 
``wind-down,'' ``recovery,'' ``operational risk,'' and ``unencumbered 
liquid financial assets.'' \30\
---------------------------------------------------------------------------

    \30\ 17 CFR 39.39(a)(1)-(5).
---------------------------------------------------------------------------

    Regulation 39.39(b) requires SIDCOs and Subpart C DCOs to maintain 
viable plans for (1) recovery or orderly wind-down, necessitated by 
uncovered credit losses or liquidity shortfalls; and separately, (2) 
recovery or orderly wind-down necessitated by general business risk, 
operational risk, or any other risk

[[Page 48971]]

that threatens the DCO's viability as a going concern.\31\
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    \31\ 17 CFR 39.39(b)(1) and (2).
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    Regulation 39.39(c)(1) requires a SIDCO or Subpart C DCO to 
identify scenarios that may potentially prevent it from being able to 
meet its obligations, provide its critical operations and services as a 
going concern and assess the effectiveness of a full range of options 
for recovery and orderly wind-down.\32\ Regulation 39.39(c)(1) further 
requires the plans to include procedures for informing the Commission 
when the recovery plan is initiated or wind-down is pending.\33\
---------------------------------------------------------------------------

    \32\ 17 CFR 39.39(c)(1). The identification of scenarios and 
analysis by the DCO allows the DCO to more effectively and 
efficiently meet its obligations promptly, and may provide a DCO 
with a better understanding of its clearing members' obligations, 
the extent to which the DCO would have to perform its obligations to 
its clearing members in times of stress, and the ability to better 
plan for doing so. The scenarios and analysis in the wind-down plan 
are necessary in the event that recovery is not possible and 
resolution is not available.
    \33\ Id.
---------------------------------------------------------------------------

    Regulation 39.39(c)(2) requires a SIDCO or Subpart C DCO to have 
procedures for providing the Commission and the FDIC with information 
needed for resolution planning.\34\
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    \34\ 17 CFR 39.39(c)(2).
---------------------------------------------------------------------------

    Regulation 39.39(d) requires that the recovery and wind-down plans 
of SIDCOs and Subpart C DCOs be supported by resources sufficient to 
implement those recovery or wind-down plans. This paragraph is not 
being amended.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 39.39(d).
---------------------------------------------------------------------------

    Regulation 39.39(e) requires SIDCOs and Subpart C DCOs to maintain 
viable plans, approved by the SIDCO's or Subpart C DCO's board of 
directors and updated regularly, for raising additional financial 
resources in a scenario in which it is unable to comply with any 
financial resource requirements set forth in part 39.\36\ This 
paragraph is not being amended.
---------------------------------------------------------------------------

    \36\ 17 CFR 39.39(e).
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    Regulation 39.39(f) allows the Commission, upon request, to grant a 
SIDCO and Subpart C DCO up to one year to comply with any provision of 
Sec.  39.39 or of Sec.  39.35 (default rules and procedures for 
uncovered credit losses or liquidity shortfalls).\37\
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    \37\ 17 CFR 39.39(f).
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    For DCOs that neither have been designated systemically important 
nor elected to become Subpart C DCOs, no regulation currently requires 
that they maintain viable recovery plans or orderly wind-down plans. 
This NPRM is proposing that all DCOs be required to maintain viable 
orderly wind-down plans.

D. 2014 International Standards and Guidance on Recovery and Resolution 
of Financial Market Infrastructures

    In 2014, CPMI-IOSCO published guidance for financial market 
infrastructures (FMIs) on the recovery planning process and the content 
of the recovery plans.\38\ The 2014 CPMI-IOSCO Recovery Guidance 
interpreted the principles and key considerations under the PFMI 
relevant to recovery and orderly wind-down plans and planning, in 
particular PFMI Principles 3 and 15. The guidance also provided a menu 
of recovery tools separated into five categories: tools to allocate 
uncovered losses caused by participant default; tools to address 
uncovered liquidity shortfalls; tools to replenish financial resources; 
tools for a CCP to re-establish a matched book; and tools to allocate 
losses not related to participant default.\39\
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    \38\ CPMI-IOSCO, Recovery of financial market infrastructures 
(Oct. 15, 2014) (hereinafter 2014 CPMI-IOSCO Recovery Guidance). 
FMIs as a category include DCOs, CCPs, central securities 
depositories, payment systems, and trade repositories. SIDCOs are 
thus systemically important FMIs.
    \39\ Id. at 12-16.
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    The Financial Stability Board (FSB) had, in 2011, published a set 
of Key Attributes of Effective Resolution Regimes for Financial 
Institutions,\40\ and enhanced those standards with, as relevant here, 
an Annex on Resolution of Financial Market Infrastructures, in 
2014.\41\ The Key Attributes FMI Annex calls for ongoing recovery and 
resolution planning for systemically important FMIs (a category that 
includes SIDCOs).\42\ The Key Attributes FMI Annex also calls for such 
FMIs ``to maintain information systems and controls that can promptly 
produce and make available, both in normal times and during resolution, 
relevant data and information needed by the authorities for the 
purposes of timely resolution planning and resolution.'' \43\
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    \40\ FSB, Key Attributes of Effective Resolution Regimes for 
Financial Institutions (Oct. 2011).
    \41\ FSB, Key Attributes of Effective Resolution Regimes for 
Financial Institutions, Appendix II--Annex I: Resolution of 
Financial Market Infrastructures (FMIs) and FMI Participants (Oct. 
15, 2014) (hereinafter Key Attributes FMI Annex). The Key Attributes 
FMI Annex is ``to be read alongside [the] PFMI which require 
systemically important FMIs to have a comprehensive and effective 
recovery plan.'' Id. at 57.
    \42\ Id. ] 11.1, at 68 (stating ``FMIs that are systemically 
important should be subject to a requirement for ongoing recovery 
and resolution planning'').
    \43\ Id. ] 12.1, at 70 (listing 7 areas of information that 
should be made available to authorities, including: FMI rules, 
default fund, and loss allocation rules; stakeholders; data and 
information for effective and timely risk control during resolution; 
the status of obligations of participants; links and 
interoperability arrangements with other FMIs; participant 
collateral; and netting arrangements).
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E. CFTC Letter No. 16-61

    In July 2016, the staff of the Division of Clearing and Risk (DCR) 
issued an advisory letter, described therein as ``guidance,'' regarding 
the content of a SIDCO's and Subpart C DCO's recovery and orderly wind-
down plans, consistent with Subpart C, in particular Sec.  39.39, and 
the accompanying rule submissions designed to effectuate those 
plans.\44\ CFTC Letter No. 16-61 highlighted subjects that staff 
believed these DCOs should analyze in developing a recovery plan and 
wind-down plan, including: the range of scenarios that may prevent the 
DCO from being able to meet its obligations and to provide its critical 
operations and services; recovery tools; wind-down scenarios and 
options; interconnections and interdependencies; agreements to be 
maintained during recovery and wind-down; financial resources; 
governance; notifications; assumptions; updates; and testing.\45\ The 
advisory letter also recommended questions that a DCO should consider, 
and the analysis of those questions that a DCO should undertake and 
provide to the Commission, in instances where a DCO concludes that a 
rule should be changed.\46\
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    \44\ CFTC Letter No. 16-61, Recovery Plans and Wind-down Plans 
Maintained by Derivatives Clearing Organizations and Tools for the 
Recovery and Orderly Wind-down of Derivatives Clearing 
Organizations, (July 16, 2016) (hereinafter CFTC Letter No. 16-61), 
available at: https://www.cftc.gov/csl/16-61/download. DCR staff was 
responding to requests from DCOs for guidance and clarification on 
the types of information and analysis that should be included in the 
requisite plans. The advisory letter explains staff's expectations 
following its preliminary reviews of submitted recovery plans, wind-
down plans, and proposed rule changes, and issues addressed at a 
DCR-sponsored public roundtable. The transcript of the roundtable is 
available at https://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff031915.
    \45\ CFTC Letter No. 16-61, at 4. The guidance was not intended 
to be an exhaustive checklist of information and analysis, and did 
not address resolution planning. Id. at 3 n.11.
    \46\ Id. at 15-19.
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F. Additional International Guidance on Standards

    In July 2017, CPMI-IOSCO issued further guidance on the PFMI 
related to the development of recovery plans for CCPs.\47\ The (2017) 
CPMI-IOSCO

[[Page 48972]]

Recovery Guidance updated the 2014 CPMI-IOSCO Recovery Guidance to 
provide clarification on the implementation of recovery plans, 
replenishment of financial resources, non-default related losses, and 
transparency with respect to recovery tools and their application. 
Similarly, the FSB issued further guidance on CCP resolution and 
resolution planning.\48\ The 2017 FSB Resolution Guidance sets out 
recommended powers for resolution authorities to maintain the 
continuity of critical CCP functions, details on the use of loss 
allocation tools, and provides steps that resolution authorities should 
take to implement crisis management groups and develop resolution 
plans. In August 2022, CPMI-IOSCO published a discussion paper on CCP 
practices to address non-default losses in which the paper noted 
positively, among other things, the practice of testing and reviewing a 
CCP's recovery plan at least annually.\49\
---------------------------------------------------------------------------

    \47\ Supra fn. 9. The guidance as revised in 2017 is referred to 
herein as the CPMI-IOSCO Recovery Guidance. CPMI-IOSCO also issued 
guidance on the resilience of CCPs. CPMI-IOSCO, Resilience of 
central counterparties: further guidance on the PFMI (July 5, 2017) 
(providing guidance on governance, stress testing for both credit 
and liquidity exposures, coverage, margin, and a CCP's contribution 
of its financial resources to losses).
    \48\ FSB, Guidance on Central Counterparty Resolution and 
Resolution Planning (July 5, 2017) (hereinafter 2017 FSB Resolution 
Guidance).
    \49\ CPMI-IOSCO, A discussion paper on central counterparty 
practices to address non-default loses (Aug. 4, 2022) (NDL 
Discussion Paper).
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G. Requirement To Submit Recovery and Wind-Down Plans to the 
Commission--Sec.  39.19(c)(4)(xxiv)

    In 2020, the Commission amended its reporting requirements under 
Sec.  39.19 to require a DCO that is required to maintain recovery and 
wind-down plans pursuant to Sec.  39.39(b) to submit its plans to the 
Commission no later than the date on which it is required to have the 
plans.\50\ The rule also permits a DCO that is not required to maintain 
recovery and wind-down plans, but which nonetheless maintains such 
plans, to submit the plans to the Commission.\51\ Additionally, if a 
DCO revises its plans, the DCO must submit the revised plans to the 
Commission along with a description of the changes and the reason for 
the changes.\52\
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    \50\ Derivatives Clearing Organizations General Provisions and 
Core Principles, 85 FR 4800, 4822 (Jan. 27, 2020); 17 CFR 
39.19(c)(4)(xxiv).
    \51\ Id.
    \52\ Id.
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II. Amendments to Regulation 39.39--Recovery and Orderly Wind-Down for 
SIDCOs and Subpart C DCOs; Information for Resolution Planning

    In 2013, the Commission promulgated broad rules for a SIDCO's and 
Subpart C DCO's recovery and wind-down plans, including a rule that 
each SIDCO and Subpart C DCO must have procedures for providing the 
Commission and the FDIC with information needed for purposes of 
resolution planning.\53\ At that time, practice with respect to 
recovery and wind-down planning was in a nascent state of development, 
and the relevant global standard-setting bodies, CPMI-IOSCO and the 
FSB, had not completed work establishing guidance for implementing 
international standards addressing recovery and resolution for 
FMIs.\54\
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    \53\ 78 FR 72476, 72494 (codifying Sec.  39.39(c)(2)).
    \54\ See, e.g., CPMI-IOSCO, Consultative report, Recovery of 
financial market infrastructures, at ] 1.2.1 (Aug. 2013) 
(distinguishing recovery planning from resolution planning and 
noting that ``[a]spects of the consultation report concerning FMI 
resolution have been included in a new draft annex and will be 
included in an assessment methodology for the [FSB's] Key 
Attributes''). CPMI-IOSCO, Consultative report, Recovery and 
resolution of financial market infrastructures, at ] 1.4 (July 2012) 
(outlining the features for effective recovery and resolution 
regimes for FMIs in accordance with the FSB's ``Key Attributes for 
Effective Resolution Regimes for Financial Institutions'').
---------------------------------------------------------------------------

    The Commission is proposing to further align the rules under Sec.  
39.39 with the international standards and guidance promulgated since 
2013,\55\ and to codify certain of the related guidance in CFTC Letter 
No. 16-61. The proposed amendments to Sec.  39.39 include specifying 
the required elements of a SIDCO's or Subpart C DCO's recovery and 
orderly wind-down plans, amending the requirement to have procedures to 
provide information needed for purposes of resolution planning, and 
specifying the types of information that should be provided to the 
Commission for resolution planning. Additionally, the Commission 
proposes to change the title of the regulation, amend and add 
definitions, and to delete certain provisions.
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    \55\ The Commission actively participated in the development of 
those standards and guidance in its role as a member of the relevant 
working groups (the CPMI-IOSCO Policy Standing Group and Steering 
Group and the Financial Stability Board Financial Market 
Infrastructure Cross-Border Crisis Management Group and Resolution 
Steering Group), and of the Board of IOSCO, one of the parent 
committees of CPMI-IOSCO.
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    These proposed revisions and amendments to Sec.  39.39 are 
consistent with the Commission's obligation under Sec.  805(a) of the 
Dodd-Frank Act to consider international standards in prescribing risk 
management standards pursuant to its authority under that provision 
with respect to SIDCOs.\56\ Moreover, the Commission views the relevant 
international standards under the PFMI, as well as the related 
guidance, including the CPMI-IOSCO Recovery Guidance, as helpful in 
informing its approach with respect to other DCOs in the context of 
recovery and orderly wind-down. These proposed revisions and amendments 
are reasonably necessary to effectuate Core Principle D \57\ (Risk 
Management) and to accomplish the purposes of the CEA, in particular, 
to ensure the financial integrity of all transactions subject to [the 
CEA] and the avoidance of systemic risk.\58\ The proposed changes also 
respond to comments received from SIDCOs and Subpart C DCOs over time.
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    \56\ See Section 805(a) of the Dodd-Frank Act, 12 U.S.C. 
5464(a).
    \57\ Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(i).
    \58\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
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    As set forth in section III, the Commission is additionally 
proposing to require that all other DCOs maintain and submit to the 
Commission an orderly wind-down plan that incorporates substantially 
similar information and procedures. With respect to DCOs broadly, these 
proposed revisions and amendments should lead to more effective DCO 
compliance and risk management, provide greater clarity and 
transparency for registered DCOs and DCO applicants, and increase 
overall confidence and efficiency in the swaps and futures markets.\59\ 
Among the risks associated with discharging the risk management 
responsibilities of a DCO \60\ is the risk that, due to either default 
losses or non-default losses, the DCO will be unable to meet its 
obligations or provide its critical functions and will need to wind 
down. In such an event, an effective orderly wind-down plan should 
facilitate timely decision-making and the continuation of critical 
operations and services so that the orderly wind-down may occur in an 
orderly and expeditious manner.
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    \59\ See 76 FR at 69334-35 (a legally enforceable regulatory 
framework ``provides assurance to market participants and the public 
that DCOs are meeting minimum risk standards'' which ``can serve to 
increase market confidence,'' free up resources that market 
participants might otherwise hold,'' and ``reduce search costs that 
market participants would otherwise incur).
    \60\ See Core Principle D(i), Section 5b(c)(2)(D)(i) of the CEA, 
7 U.S.C. 7a-1(c)(2)(D)(i).
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    A DCO needs to prepare for circumstances--especially those that are 
sudden, unexpected, and on too large a scale for the DCO to timely 
recover--for which a DCO may not have the resources to continue as a 
going concern. A viable orderly wind-down plan promotes the goal of 
ensuring, at a minimum, that the DCO has sufficient resources, 
capabilities and legal authority to implement the tools and procedures 
for orderly wind-down activities. To the extent that the Commission's 
bankruptcy regulations look to a DCO's orderly wind-down

[[Page 48973]]

plan,\61\ an effective orderly wind-down plan will allow for the 
efficient management of events.
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    \61\ See, e.g., 17 CFR 190.15(c) (In administering a proceeding 
under this subpart, the trustee shall, in consultation with the 
Commission, take actions in accordance with any recovery and wind-
down plans maintained by the debtor and filed with the Commission 
pursuant to Sec.  39.39 of this chapter, to the extent reasonable 
and practicable, and consistent with the protection of customers.)
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    To advance the DCO Core Principles' aims of, among other things, 
strengthening the risk management practices of DCOs, enhancing legal 
certainty for DCOs, clearing members and market participants, and 
safeguarding the public, the Commission is proposing to require that 
all DCOs maintain and submit orderly wind-down plans with the subjects 
and analyses included herein. Additionally, the Commission is proposing 
revised subjects and analyses for the recovery plans that SIDCOs and 
Subpart C DCOs must maintain.

A. Definitions--Sec.  39.39(a), Sec.  39.2

    Currently, the definitions relevant to recovery and orderly wind-
down planning are contained in Sec.  39.39(a). The Commission is 
proposing to move two of those definitions, ``wind-down'' and 
``recovery,'' to Sec.  39.2, as orderly wind-down will apply to all 
DCOs, and recovery is thematically linked to orderly wind-down. Because 
these definitions would apply to all DCOs, the Commission is proposing 
technical corrections to eliminate the references to SIDCOs and Subpart 
C DCOs in both.
    The Commission is changing the term ``wind-down'' to ``orderly 
wind-down'' \62\ and is defining it as a DCO's actions to effect the 
permanent cessation, sale, or transfer, of one or more of its critical 
operations or 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.\63\ The Commission intends the amended 
definition to focus the attention of DCOs on issues of financial 
stability in planning for and executing an orderly wind-down.\64\ Given 
the financial crisis that preceded and informed Dodd-Frank's passage, 
and the purpose of the CEA to ensure the avoidance of systemic risk, 
the Commission believes an important goal of an orderly wind-down 
should be to avoid an increased risk of significant liquidity, credit, 
or operational problems spreading among financial institutions or 
markets.
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    \62\ The definition also provides for the use of the term 
``wind-down'' as a shorter form of ``orderly wind-down.''
    \63\ This definition of ``orderly wind-down'' would align more 
closely with the corresponding definition in the Federal Reserve's 
Regulation HH (Designated Financial Market Utilities), 12 CFR 
234.2(g), but would additionally address operational problems 
spreading among financial institutions or markets, consistent with 
the U.S. Securities and Exchange Commission's recent rule proposal. 
Covered Clearing Agency Resilience and Recovery and Wind-Down Plans, 
88 FR 34708, 34717 (May 30, 2023).
    \64\ DCOs must already consider issues of financial stability in 
their governance arrangements. 17 CFR 39.24(a)(1)(iv) (requiring 
that a DCO's governance arrangements explicitly support the 
stability of the broader financial system and other relevant public 
interest considerations).
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    The Commission is also proposing to amend the definition of 
``recovery'' by replacing the reference to ``capital inadequacy'' with 
``inadequacy of financial resources'' in order to tie the definition of 
``recovery'' more closely to the framework of Part 39,\65\ and to move 
that definition, as revised, to Sec.  39.2, in alphabetical order. 
Neither the recovery plan nor the orderly wind-down plan may assume 
government intervention or support.
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    \65\ See, e.g., Sec.  39.11 (enumerating the requirements for 
financial resources a DCO must maintain to discharge its 
responsibilities); Sec.  39.39(d) (enumerating the requirements for 
financial resources a SIDCO and Subpart C DCO must maintain to 
support its recovery plan and wind-down plan).
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    The Commission is proposing to delete the definitions of ``general 
business risk'' and ``operational risk,'' and instead to import those 
definitions, as modified, as part of the definition of the term ``non-
default losses.'' The Commission is also proposing to add a definition 
of the term ``default losses.'' Recovery plans and orderly wind-down 
plans are required to address both default losses and non-default 
losses.
    The Commission is proposing to define default losses to include 
both uncovered credit losses or liquidity shortfalls created by the 
default of a clearing member in respect of its obligations with respect 
to cleared transactions. In this context, uncovered credit losses arise 
from the DCO's holding an insufficient value of resources to meet its 
obligations. For example, the DCO is obligated to pay, today, variation 
margin of $10 billion in U.S. dollar cash, but only has $8 billion of 
resources available. Similarly, in this context, a liquidity shortfalls 
arise from the DCO holding resources that are not in the correct form 
to meet its obligations. For example, the DCO is obligated to pay, 
today, variation margin of $10 billion in U.S. dollar cash, but only 
has $8 billion of U.S. dollar cash available, even though it may 
additionally have more than $2 billion (worth, at present market value) 
of securities that it is unable to convert promptly into U.S. dollar 
cash.\66\ The definition also focuses on the clearing member's 
obligations with respect to cleared transactions. Thus, if the clearing 
member defaults on its obligations for facilities rental, or in its 
obligations in its role as a service provider to the DCO, those would 
not be ``default losses'' for this purpose.
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    \66\ Another example of a liquidity shortfall is a currency 
mismatch. For example, assume that the U.S. dollar to Euro exchange 
rate is $1.10/[euro]1.00. The DCO has a variation margin obligation, 
today, of [euro]1 billion, and only has resources available for the 
purpose of making payment of $1.1 billion. That would also be a 
liquidity shortfall.
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    The Commission is proposing to define non-default losses to mean 
losses from any cause, other than default losses, that may threaten the 
DCO's viability as a going concern. This portion of the definition is 
derived from former Sec.  39.39(b)(2), which required SIDCOs and 
Subpart C DCOs to ``maintain viable plans for'' (1) Recovery or orderly 
wind-down necessitated by'' the risks that are currently proposed to be 
included in ``default losses'' (i.e., uncovered credit losses or 
liquidity shortfalls as well as (2) Recovery or orderly wind-down 
necessitated by general business risk, operational risk, or any other 
risk that threatens the DCO's viability as a going concern (emphasis 
added).
    The former definition specifically included, as potential sources 
of loss, ``general business risk'' and ``operational risk.'' The 
definitions in Sec.  39.39 will now apply to all DCOs, and thus are 
being moved to Sec.  39.2. In order to ensure that DCOs consider, as 
part of their planning process, the full set of potential non-default 
losses, the definition of non-default losses is proposed to explicitly 
include, though not be limited to, losses arising from risks often 
referred to as (1) general business risk, (2) custody risk, (3) 
investment risk, (4) legal risk, and (5) operational risk.\67\ To avoid 
unnecessary questions of taxonomy, however, these terms are not 
proposed to be separately defined, rather, the substance of these 
definitions are being included as instances of non-default losses.
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    \67\ See NDL Discussion Paper section 2.1 (``Generally, CCPs 
consider a range of NDL scenarios that may arise from risks relevant 
to their business activities, including general business risk, 
operational risk, investment risk, custody risk and legal risk.''). 
See also Guidance on Financial Resources to Support CCP Resolution 
and on the Treatment of CCP Equity in Resolution (FSB 2020) at 
section 1.2 (``Hypothetical non-default loss scenarios'').
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    Under the first group, losses arising from general business risk, 
the Commission proposes to import the previous definition of ``general 
business

[[Page 48974]]

risk'' in Sec.  39.39(a)(1), deleting references to SIDCOs or subpart C 
DCOs as surplusage. This results in (1) any potential impairment of a 
derivatives clearing organization's financial position, as a business 
concern, as a consequence of a decline in its revenues or an increase 
in its expenses, such that expenses exceed revenues and result in a 
loss that the derivatives clearing organization must charge against 
capital.
    Under the second group, losses arising from custody risk, the 
Commission proposes to adopt substantially the discussion of custody 
risk in the CPMI-IOSCO Recovery Guidance.\68\ This results in (2) 
losses incurred by the derivatives clearing organization on assets held 
in custody or on deposit in the event of a custodian's (or sub-
custodian's or depository's) insolvency, negligence, fraud, poor 
administration or inadequate record-keeping.
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    \68\ See CPMI-IOSCO Recovery Guidance ] 3.2.5 (``[A]n FMI can be 
exposed to custody risk and could suffer losses on assets held in 
custody in the event of a custodian's (or subcustodian's) 
insolvency, negligence, fraud, poor administration or inadequate 
record-keeping.'')
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    Under the third group, losses arising from investment risk, the 
Commission proposes to adapt the discussion of investment risk in the 
CPMI-IOSCO Recovery Guidance.\69\ This adaptation results in (3) losses 
incurred by the derivatives clearing organization from diminution of 
the value of investments of its own or its participants' resources, 
including cash or other collateral.
---------------------------------------------------------------------------

    \69\ See id. (``Investment risk is the financial risk faced by 
an FMI when it invests its own or its participants' resources, such 
as cash or other collateral.'')
---------------------------------------------------------------------------

    Under the fourth group, losses arising from legal risk, the 
international guidance is less helpful. The CPMI-IOSCO Recovery 
Guidance does not define ``legal risk;'' the FSB guidance simply notes 
that ``legal, regulatory or contractual penalties could lead to 
significant losses or uncertainty for the CCP and can take a long time 
to materialise fully.'' Losses from legal risk can arise from causes 
other than ``penalties'': For example, in the realm of contract or 
tort, a DCO may be responsible for compensating a plaintiff for the 
DCO's breach of contract, or for the plaintiff's damages caused by, 
e.g., the DCO's negligence. In the realm of regulatory litigation, 
there may be remedies other than penalties, including, e.g., 
restitution or disgorgement. Accordingly, the Commission is proposing 
to broadly include (4) losses from adverse judgments, or other losses, 
arising from legal, regulatory, or contractual obligations, including 
damages or penalties, and the possibility that contracts that the 
derivatives clearing organization relies upon are wholly or partly 
unenforceable.
    Finally, under the fifth group, losses arising from operational 
risk, the Commission is proposing to draw from the prior definition of 
operational risk, adding a few additional important categories. 
Specifically, the Commission is proposing to add references to (1) the 
actions of malicious actors and (2) the possibility of disruption from 
internal events. Cyber risk is increasing, and organizations' 
operations are exposed to risk from malicious (threat) actors, who 
might include employees and third-party providers, criminals, 
terrorists, and nation-states. Thus, the Commission proposes to 
recognize explicitly the peril from what has been described as 
malicious action by third parties intent on creating systemic harm or 
disruption, with concomitant financial losses.\70\ Including a 
reference to ``malicious actions (whether by internal or external 
threat actors)'' should help protect market participants and the public 
by potentially improving the DCO's ability to identify vulnerabilities 
from malicious actors, safeguard its systems from such actors, and 
address possible losses that might occur if, despite the DCO's system 
safeguards, malicious actors detect and act upon any cyber 
vulnerabilities.
---------------------------------------------------------------------------

    \70\ CPMI, Cyber resilience in financial market infrastructures, 
at 7 (Nov. 2014); see also CPMI-IOSCO, Guidance on cyber resilience 
for financial market infrastructures (June 2016). See generally 
Executive Order No. 14028, Improving the Nation's Cybersecurity, 86 
FR 26633 (May 12, 2021), available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/12/executive-order-on-improving-the-nations-cybersecurity/.
---------------------------------------------------------------------------

    The Commission is also proposing to add a reference to the 
possibility of disruption from internal events (the current definition 
of operational risk refers only to ``disruptions from external 
events''). Examples of these internal events include fire as well as 
flooding (due to, e.g., malfunctions of sprinkler systems). This 
expansion to the definition should also help protect market 
participants and the public, by potentially improving the DCO's ability 
to identify vulnerabilities to its systems and operations from internal 
events, mitigate those vulnerabilities, and address possible losses 
that might occur if, despite the DCO's efforts, such vulnerabilities 
disrupt its systems or operations.
    Accordingly, the Commission is proposing to refer specifically to 
non-default losses (5) as occasioned by deficiencies in information 
systems or internal processes, human errors, management failures, 
malicious actions (whether by internal or external threat actors), 
disruptions to services provided by third parties, or disruptions from 
internal or external events that result in the reduction, 
deterioration, or breakdown of services provided by the derivatives 
clearing organization.

B. Recovery Plan and Orderly Wind-Down Plan--Sec.  39.39(b)

    Regulation 39.39(b) currently requires each SIDCO and Subpart C DCO 
to maintain viable plans for (1) recovery or orderly wind-down, 
necessitated by uncovered credit losses or liquidity shortfalls; and, 
separately, (2) recovery or orderly wind-down necessitated by general 
business risk, operational risk, or any other risk that threatens the 
DCO's viability as a going concern.\71\ Regulation 39.19(c)(4)(xxiv) 
currently requires a SIDCO or Subpart C DCO that is required to 
maintain recovery and wind-down plans pursuant to Sec.  39.39(b) to 
submit those plans to the Commission no later than the date on which 
the DCO is required to have the plans.\72\ The Commission is proposing 
amendments to these provisions as set forth below.
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    \71\ 17 CFR 39.39(b)(1) and (2).
    \72\ 17 CFR 39.19(c)(4)(xxiv).
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    The Commission is maintaining existing Sec.  39.39(d) and (e).\73\ 
Accordingly, the recovery and orderly wind-down plans of SIDCOs and 
Subpart C DCOs must continue to include evidence and analysis to 
support the conclusion that they have sufficient financial resources--
as set forth in Sec.  39.39(d)(2)--to implement their recovery and 
wind-down plans. Should this proposed rulemaking be adopted, that 
analysis would be informed by the analyses SIDCOs and Subpart C DCOs 
would be required to engage in under proposed Sec.  39.39(c). 
Consistent with Sec.  39.39(e), moreover, SIDCOs and Subpart C DCOs 
must continue to maintain viable plans for

[[Page 48975]]

raising additional financial resources where they are unable to comply 
with any financial resources requirements provided in Part 39.
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    \73\ Regulation 39.39(d)(2) provides, in part that each SIDCO 
and Subpart C DCO shall maintain sufficient unencumbered liquid 
financial assets, funded by the equity of its owners, to implement 
its recovery or wind-down plans. The SIDCO or Subpart C DCO shall 
analyze its particular circumstances and risks and maintain any 
additional resources that may be necessary to implement the plans. 
The plan shall include evidence and analysis to support the 
conclusion that the amount considered necessary is, in fact, 
sufficient to implement the plans.
    Regulation 39.39(e) provides, in part that all SIDCOs and 
Subpart C DCOs shall maintain viable plans for raising additional 
financial resources, including, where appropriate, capital, in a 
scenario in which the SIDCO or Subpart C DCO is unable, or virtually 
unable, to comply with any financial resources requirements set 
forth in this part.
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1. Submission of Plans for Recovery and Orderly Wind-Down--Sec.  
39.39(b)(1)
    The Commission is proposing to amend Sec.  39.39(b)(1) and (2) by 
combining the paragraphs into one paragraph, Sec.  39.39(b)(1), and 
cross-referencing the reporting requirement in Sec.  39.19(c)(4)(xxiv). 
Proposed Sec.  39.39(b)(1) would require each SIDCO and Subpart C DCO 
to maintain and, consistent with Sec.  39.19(c)(4)(xxiv), submit to the 
Commission, viable plans for recovery and orderly wind-down, and 
supporting information, due to, in each case, default losses and non-
default losses.\74\ The Commission is not proposing to require that the 
recovery plan and orderly wind-down plan be submitted as separate 
documents. However, the analysis for the recovery portion and wind-down 
portion must be set forth clearly.
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    \74\ In Section IV below, discussing the reporting requirement 
in Sec.  39.19(c)(4)(xxiv), the Commission explains the reason for 
adding the term ``and supporting information.''
---------------------------------------------------------------------------

    The Commission requests comment on these proposed revisions.
2. Notice of Initiation of the Recovery Plan and of Pending Orderly 
Wind-Down--Sec.  39.39(b)(2), Sec.  39.13(k)(1), and Sec.  
39.19(c)(4)(xxv)
    Current Sec.  39.39(c)(1) includes, in part, the requirement that 
recovery plans and wind-down plans include procedures for informing the 
Commission, as soon as practicable, when the recovery plan is initiated 
or wind-down is pending.\75\ The Commission proposes to move this 
requirement to Sec.  39.39(b)(2) and to amend the requirement to state 
explicitly that in addition to having procedures in place for informing 
the Commission that the recovery plan is initiated or that orderly 
wind-down is pending, the SIDCO or Subpart C DCO must notify the 
Commission, as soon as practicable, when the recovery plan is initiated 
or orderly wind-down is pending. This is not a substantive change since 
the requirement to have procedures in place to provide notice 
necessarily implies that such notice to the Commission will occur; 
however, the Commission believes that explicitly stating this 
requirement will ensure that the SIDCO or Subpart C DCO understands 
this requirement.
---------------------------------------------------------------------------

    \75\ 17 CFR 39.39(c)(1).
---------------------------------------------------------------------------

    Additionally, the Commission proposes to require that these DCOs' 
notice that the recovery plan is initiated or orderly wind-down is 
pending also be provided to clearing members.\76\ Timely notification 
of events to clearing members is essential to enable them to prepare 
for a transition by the DCO into recovery or orderly wind-down. The 
Commission proposes that each SIDCO and Subpart C DCO that files a 
recovery plan and orderly wind-down plan under this section must notify 
clearing members (in addition to the Commission) that recovery is 
initiated or that orderly wind-down is pending as soon as practicable. 
As discussed below in Section III, the Commission proposes that DCOs 
that are neither SIDCOs nor Subpart C DCOs notify the Commission and 
clearing members as soon as practicable when recovery \77\ is initiated 
or orderly wind-down is pending.
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    \76\ CFTC Letter No. 16-61, at 14 (referencing Sec.  39.21, 
``Public information,'' which requires a DCO to make information 
concerning the rules and the operating and default procedures 
governing the clearing and settlement systems of the DCO available 
to market participants).
    \77\ While, under the proposal, a DCO that is neither a SIDCO 
nor a subpart C DCO is not required to have a recovery plan, if such 
a DCO does initiate recovery, it will be required to notify the 
Commission and clearing members.
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    The Commission proposes to add new Sec.  39.19(c)(4)(xxv) to 
require that each DCO notify the Commission and clearing members as 
soon as practicable when the DCO has initiated its recovery plan or 
orderly wind-down is pending.
    The Commission requests comment on these proposed changes.
3. Establishment of Time To File Recovery Plan and Orderly Wind-Down 
Plan--Sec.  39.39(b)(3)
    The Commission is proposing to establish the timing of the filing 
of recovery plans and orderly wind-down plans. In 2013, the Commission 
acknowledged commenters' concerns that additional time may be required 
to comply with Sec.  39.39 because relevant global standards were still 
in the consultative phase. The Commission promulgated Sec.  39.39(f) to 
allow a SIDCO or Subpart C DCO to apply for up to one year to comply 
with Sec.  39.39. Regulation 39.39(f) therefore created various dates 
for SIDCOs and Subpart C DCOs to file the plans required by Sec.  
39.39(b).
    Commenters again requested a specific date to submit recovery plans 
and wind-down plans in response to the May 2019 notice of proposed 
rulemaking codifying Sec.  39.19(c)(4)(xxiv).\78\ In the January 2020 
final rule, the Commission noted the date by which a SIDCO or new 
Subpart C DCO is required to maintain a recovery plan and wind-down 
plan depends upon when the DCO is designated as systemically important 
or elects Subpart C status, whether it requests relief under Sec.  
39.39(f), and whether the Commission grants such relief.\79\ The 
Commission determined that Sec.  39.39(f) prevented the establishment 
of a date certain for submitting plans to the Commission.\80\ This 
proposal will, if adopted and finalized by the Commission, codify the 
elements of a recovery plan and wind-down plan required under paragraph 
(b) of Sec.  39.39, and remove the uncertainty concerning the filing 
deadline. The need to request an extension of time for up to one year 
to comply with the requirements of Sec.  39.39 (and Sec.  39.35) will 
be obviated by the fixed deadline for newly designated SIDCOs to 
develop and maintain a recovery plan and a wind-down plan.\81\ The 
Commission is proposing to require a DCO to submit a recovery plan and 
orderly wind-down plan and supporting information (to the extent it has 
not already done so) as required by proposed Sec.  39.39(b) within six 
months of the date the DCO is designated as a SIDCO, or as part of its 
election to become subject to the provisions of Subpart C set forth in 
Sec.  39.31, and annually thereafter.\82\
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    \78\ See, e.g., Comment letter filed by the Futures Industry 
Association and the International Swaps and Derivatives Association 
(ISDA), at 21 (Sept. 13, 2019), available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2985&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=2.
    \79\ 85 FR at 4822.
    \80\ Id.
    \81\ Regulation 39.35 covers the default rules and procedures 
for uncovered credit losses or liquidity shortfalls (recovery) for 
SIDCOs and Subpart C DCOs.
    \82\ As discussed in section III below, it is being proposed 
that all DCOs will be required to maintain orderly wind-down plans 
on and after the effective date of this rule with respect to that 
requirement. As discussed further below, it is proposed that the 
effective date of that orderly wind-down plan requirement will be 
six months after this rule may be finalized. To address the 
possibility that a DCO may be designated a SIDCO or may elect 
Subpart C status during that intervening period, such a DCO will be 
required to maintain and file an orderly wind-down plan to the 
extent it has not already done so.
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    The Commission has preliminarily determined to require that a newly 
designated SIDCO should file a complete recovery plan and (to the 
extent it has not already done so) orderly wind-down plan consistent 
with part 39 within six months of the date of designation for the 
following reasons. First, in order to be designated as a SIDCO, the DCO 
must be a DCO registered with the CFTC. All DCOs must comply with, and 
demonstrate compliance as requested by the Commission, applicable 
provisions of the CEA and the Commission's regulations, including 
Subparts A and B

[[Page 48976]]

of part 39, in order be registered. Second, the Commission expects that 
most of the larger DCOs for which future designation may be forthcoming 
have elected to be subject to Subpart C, and therefore, have recovery 
plans in place. Among those DCOs that are not currently subject to 
Subpart C, most are foreign-based DCOs that are subject to standards in 
their home jurisdictions that are consistent with the PFMI, and thus 
such foreign-based DCOs are required to have both recovery and orderly 
wind-down plans.\83\ Third, upon notification that the FSOC is 
considering whether to designate a DCO systemically important, the DCO 
will be aware of the enhanced regulatory requirements for SIDCOs 
included in subpart C of part 39 of the Commission's regulations.\84\ 
Finally, staff issued CFTC Letter No. 16-61 and its non-binding 
guidance in 2016. DCOs registered with the Commission and the clearing 
industry in general are likely familiar with the staff letter and have 
probably been following developments related to this proposal; hence, 
the Commission has preliminarily determined not to require a longer 
delay.
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    \83\ See text accompanying fn. 207, infra.
    \84\ 12 CFR 1320.11(a), 1320.12(a); Authority to Designate 
Financial Market Utilities as Systemically Important, 76 FR 44763 
(Jul. 27, 2011).
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    The Commission is clarifying that a DCO that elects to be subject 
to Subpart C of the Commission's regulations must file a recovery plan 
and (in the event it has not already done so) an orderly wind-down 
plan, and supporting information, as part of its election to be subject 
to the provisions of Subpart C.\85\ The Commission continues to expect 
that a DCO will not elect status as a Subpart C DCO before it is in 
full compliance with the regulations in Subpart C.
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    \85\ The Commission is proposing to amend Exhibit F-1 to the 
Subpart C election form to require the submission of the recovery 
and orderly wind-down plans, and supporting information, as well as 
a demonstration of how those plans comply with the requirements of 
Subpart C.
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    The Commission is proposing Sec.  39.39(b)(3) to require a SIDCO to 
file a recovery plan, and supporting information, within six months of 
its designation as systemically important by the FSOC. The Commission 
is also proposing to require that a DCO that elects to be subject to 
the provisions of Subpart C must file a recovery plan and (to the 
extent it has not already done so) an orderly wind-down plan, and 
supporting information for these plans, as part of the DCO's election 
to be subject to the provisions of Subpart C. The Commission is 
proposing that such plans be updated thereafter on an annual basis.
    The Commission requests comment on this aspect of the proposal.

C. Recovery Plan and Orderly Wind-Down Plan: Required Elements--Sec.  
39.39(c)

    Regulation 39.39(c)(1) currently requires that a SIDCO and Subpart 
C DCO develop a recovery plan and orderly wind-down plan that includes 
scenarios that may potentially prevent it from being able to meet its 
obligations, provide its critical operations and services as a going 
concern, and assess the effectiveness of a full range of options for 
recovery or orderly wind-down. At the time the Commission was 
promulgating current Sec.  39.39(c)(1), commenters had requested 
specificity regarding the required elements of a recovery plan.\86\ The 
Commission declined to provide that specificity because the 
international guidance relevant to such plans was not final when Sec.  
39.39 was adopted in 2013. After the international guidance was 
finalized, staff issued CFTC Letter No. 16-61, which provides informal 
guidance from DCR concerning those elements. Supervisory experience 
shows that the recovery plans and orderly wind-down plans of SIDCOs and 
Subpart C DCOs are generally consistent with the staff guidance in 
Letter No. 16-61; thus, most, if not all, of the requirements described 
below are already incorporated into the plans submitted by the DCOs 
currently subject to Sec.  39.39. The Commission has preliminarily 
determined to codify the staff guidance into the Commission's part 39 
regulations. The Commission has preliminarily determined to specify the 
required elements that a SIDCO or Subpart C DCO must include in its 
recovery plan and orderly wind-down plan at this time.
---------------------------------------------------------------------------

    \86\ See, e.g., Comment letter of ISDA at 2-3 (Sept. 16, 2013), 
filed in response to the Notice of Proposed Rulemaking, Derivatives 
Clearing Organizations and International Standards, 78 FR 50260 
(Aug. 16, 2013), available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391.
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    The Commission proposes to replace Sec.  39.39(c) in its entirety. 
Proposed Sec.  39.39(c) would reflect, to the extent the Commission 
considers appropriate, the guidance on international standards related 
to recovery plans and orderly wind-down plans adopted by the global 
standard-setting bodies since 2013,\87\ and certain of the DCR staff 
guidance set forth in CFTC Letter No. 16-61.\88\
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    \87\ E.g., CPMI-IOSCO Recovery Guidance.
    \88\ See 17 CFR 39.39(c)(1).
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    As a general matter, the Commission believes that a DCO's recovery 
plan and orderly wind-down plan required by Sec.  39.39(b) should 
include summaries that provide an overview of the plans, and 
descriptions of how the plans will be implemented, in order to enhance 
both the understanding of the persons who need to use the plans and the 
Commission's ability to evaluate the plans as part of its supervisory 
program. Proposed Sec.  39.39(c) would also require that the 
description of each plan include the identification and description of 
the DCO's critical operations and services, interconnections and 
interdependencies, resilient staffing arrangements, obstacles to 
success, stress scenario analyses, potential triggers for recovery and 
orderly wind-down, available recovery and orderly wind-down tools, 
analysis of the effect of any tools identified, lists of agreements to 
be maintained during recovery and orderly wind-down, descriptions of 
governance arrangements, and testing. These proposed plan requirements 
are necessary for the plan to be viable, i.e., capable of working 
successfully, are consistent with the international guidance discussed 
above, and should be considered the minimum that a SIDCO or Subpart C 
DCO must include in its recovery plan and orderly wind-down plan. The 
Commission proposes to add these requirements as new proposed Sec.  
39.39(c). For clarity and completeness, specific requirements will be 
set forth in paragraphs (c)(1) through (c)(8), as discussed below.
    The Commission requests comment on this approach, and on each of 
the proposed specific requirements.
1. Critical Operations and Services, Interconnections and 
Interdependencies, and Resilient Staffing--Sec.  39.39(c)(1)
    The Commission is proposing to add new Sec.  39.39(c)(1) requiring 
recovery plans and orderly wind-down plans to identify and describe the 
SIDCO's and Subpart C DCO's critical operations and services, including 
internal and external service providers; ancillary services providers; 
financial and operational interconnections and interdependencies; 
aggregate cost estimates for the continuation of services; plans for 
resilient staffing arrangements for continuity of operations into 
recovery or orderly wind-down; plans to address the risks that the 
failure of each critical operation and service poses to the DCO, and a 
description of how such failures would be addressed; and a description 
of how the SIDCO and Subpart C DCO will

[[Page 48977]]

ensure that the services continue through recovery and orderly wind-
down.
    In developing a viable plan, both the CPMI-IOSCO Recovery Guidance 
and CFTC Letter No. 16-61 stress the importance of identifying the 
critical operations and services that the DCO provides, and the 
financial and operational interconnections and interdependencies among 
the DCO and its relevant affiliates, internal and external service 
providers, and other relevant stakeholders.\89\ The Commission agrees 
that each recovery plan and orderly wind-down plan should identify and 
describe the critical operations and services that the DCO provides to 
clearing members and other financial market participants. As CPMI-IOSCO 
stated in its guidance, ``[t]he purpose of identifying critical 
services is to focus the recovery plan on the FMI's ability to continue 
to provide these services on an ongoing basis, even when it comes under 
extreme stress.'' \90\ The Commission agrees that for purposes of 
recovery planning in Sec.  39.39, when determining whether a service is 
``critical,'' the DCO must consider ``the importance of the service to 
the [DCO]'s participants and other FMIs, and to the smooth functioning 
of the markets the [DCO] serves and, in particular, the maintenance of 
financial stability.'' \91\
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    \89\ CPMI-IOSCO Recovery Guidance, at section 2.4; CFTC Letter 
No. 16-61, at 10-11.
    \90\ CPMI-IOSCO Recovery Guidance, at section 2.4.2.
    \91\ Id.
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    The Commission anticipates that the DCO's ability to provide 
critical services may also be affected by issues relating to certain 
services that are ancillary to the critical service, and thus issues 
relating to these ancillary services should be included in the recovery 
and orderly wind-down plan. The Commission agrees with the analysis in 
the CPMI-IOSCO Recovery Guidance that, ``even if a specific service is 
judged not to be critical, a systemically important FMI needs to take 
account of the possibility that losses or liquidity shortfalls relating 
to the provision of that noncritical service could threaten its 
viability and thus necessitate implementation of its recovery plan so 
that it can continue to provide those services that are judged to be 
critical. An FMI needs to have a recovery plan that covers all the 
scenarios that could threaten its viability.'' \92\
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    \92\ Id. at section 2.4.4. n.13.
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    The Commission believes that a DCO's recovery plan and orderly 
wind-down plan should identify and analyze a DCO's financial and 
operational interconnections and interdependencies. Such an analysis is 
important to foster, and to provide transparency into, the ability of 
the DCO to implement each of its recovery plan and orderly wind-down 
plan. For instance, the recovery plan should account for the 
possibility that an affiliated entity in the financial sector may fail, 
resulting in a cascade of failures and resultant defaults on all 
obligations to the DCO, including with respect to services that the DCO 
depends upon to complete its operations. A DCO's recovery plan and 
orderly wind-down plan should also identify the DCO's critical internal 
and external service providers, the risks that the failure of each 
provider poses to the DCO, how such failures would be addressed, and 
how the DCO would ensure that the services would continue into recovery 
and orderly wind-down.\93\ Similarly, the DCO should consider the 
impact of any disruption in services or operations it provides to 
clearing members and financial market participants. In this regard, 
CFTC Letter No. 16-61 recommended that a DCO's recovery plan include 
the identification and analysis of ``the financial and operational 
interconnections and interdependencies among the DCO and its relevant 
affiliates, internal and external service providers and other relevant 
stakeholders.'' \94\
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    \93\ Id.
    \94\ CFTC Letter No. 16-61, at 10.
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    In considering and analyzing the magnitude of the costs that it 
needs to plan for associated with recovery or orderly wind-down, the 
DCO should consider the likely increase in certain of its expenses 
compared to its business-as-usual operating budget, including, for 
example, legal fees, accounting fees, financial advisor fees, the costs 
associated with employee retention programs, and other incentives in 
order to maintain critical staff. Other costs, such as marketing or 
those associated with the development of new products, may decrease. 
For purposes of orderly wind-down planning in particular, the DCO shall 
proceed under the conservative assumption that any resources consumed 
during recovery will not be available to fund critical operations and 
services in wind-down.
    The DCO's analysis of its critical operations and services should 
also describe the impact of the multiple roles and relationships that a 
single financial entity may have with respect to the DCO including 
affiliated entities and external entities.\95\ For instance, a single 
external entity (including a set of affiliated entities) may act as a 
clearing member, a settlement bank, custodian or depository bank, 
liquidity provider or counterparty. If such a single external entity 
defaults in one of its roles e.g., as a clearing member, it will likely 
default in all of them.\96\ An entity affiliated with the DCO may be 
relied upon for a variety of services, such as those related to 
information technology, human resources, or facilities. In order to 
support the viability of its recovery or orderly wind-down plan, the 
DCO should address the contingency that its affiliate may not be able 
to perform those services.
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    \95\ Id.
    \96\ A financial conglomerate/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 DCO. Based on past experience with 
insolvencies of financial firms (e.g., Refco, Lehman, MF Global), 
once one of these affiliates fails, the others are likely to follow 
it into bankruptcy or receivership proceedings quickly.
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    Consistent with the CPMI-IOSCO Recovery Guidance, the Commission 
believes that a DCO's recovery plan should consider how its design and 
implementation may affect another FMI, and coordinate the relevant 
aspects of their plans.\97\ Given the interconnected nature of the 
financial services ecosystem, supporting financial stability requires 
the recovery plan and orderly wind-down plan of each DCO to identify 
and address contingencies and consequences.
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    \97\ CPMI-IOSCO Recovery Guidance, at section 2.4.14.
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    Recovery and orderly wind-down planning must also identify 
potential risks that may arise in recovery and orderly wind-down if 
financial weakness or failure in one of the DCO's business lines or 
affiliated legal entities spreads to others. The recovery and orderly 
wind-down plans must describe how the DCO has planned for resilient 
staffing arrangements for continuity of operations since it is not 
feasible to maintain a critical service without the concomitant 
personnel. As part of planning for recovery, each SIDCO and Subpart C 
DCO should also explain how the DCO will retain, and address the 
potential loss of, the services of personnel filling mission-critical 
roles during extreme stress. The DCO may additionally be vulnerable to 
key person risk; accordingly, plans for resilient staffing arrangements 
should identify, to the extent applicable, key person risk within the 
DCO or (as relevant) affiliated legal entities that the DCO relies upon 
to provide its critical

[[Page 48978]]

operations and services, and how the DCO has planned for this risk.
    The Commission requests comment on this aspect of the proposal.
2. Recovery Scenarios and Analysis--Sec.  39.39(c)(2)
    The Commission is proposing to add new Sec.  39.39(c)(2) to specify 
scenarios that must be addressed in the SIDCO's or Subpart C DCO's 
recovery plan, to the extent, in each case, that such scenario is 
possible. The Commission believes that the current requirement that a 
SIDCO or Subpart C DCO shall identify scenarios that may potentially 
prevent it from being able to meet its obligations is too broad and 
allows for planning gaps.
    To support a systematic planning process that will foster these 
DCOs' ability to recover effectively from situations of unprecedented 
stress, the Commission is proposing to adopt portions of CFTC Letter 
No. 16-61 describing the analysis that should take place for each 
scenario considered in the recovery plan; namely: (1) a description of 
the scenario; (2) the events that are likely to trigger the scenario; 
(3) the DCO's process for monitoring events triggering the scenario; 
(4) the market conditions, operational and financial difficulties and 
other relevant circumstances that are likely to result from the 
scenario; (5) the potential financial and operational impact of the 
scenario on the DCO 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 (6) the specific steps the DCO 
would anticipate taking when the scenario occurs or appears likely to 
occur including, without limitation, any governance or other procedures 
in order 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.\98\ The Commission believes that this 
six-part analysis is integral to viability of a SIDCO's and Subpart C 
DCO's recovery plan and orderly wind-down plan. The Commission expects 
that each of these DCOs will undertake such analysis for each scenario 
described in its recovery plan and its orderly wind-down plan. The 
Commission is proposing in Sec.  39.39(c)(2) that each recovery plan 
and orderly wind-down plan contain the described analysis.
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    \98\ CFTC Letter No. 16-61, at 6-7.
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    In order to promote the comprehensiveness of these DCOs' recovery 
plans, the Commission is also proposing to require that each recovery 
plan describe certain ``commonly applicable scenarios,'' most of which 
are described in CFTC Letter No. 16-61, to the extent such scenarios 
are possible in light of the DCO's activities.\99\ Those scenarios 
include: (1) settlement bank failure; (2) custodian or depository bank 
failure; (3) scenarios resulting from investment risk; (4) poor 
business results; (5) the financial effects from cybersecurity events; 
(6) fraud (internal, external, and/or actions of criminals or of public 
enemies); (7) legal liabilities, including liabilities related to the 
DCO`s obligations with respect to cleared transactions and those not 
specific to its business as a DCO (e.g., tort liability); (8) losses 
resulting from interconnections and interdependencies among the DCO and 
its parent, affiliates, and/or internal or external service providers 
(e.g., the financial effects of the inability of a service provider to 
provide key systems or services); \100\ and (9) any other risks 
relevant to the DCO's activities. In addition to these scenarios, the 
Commission is proposing to require SIDCOs and Subpart C DCOs to include 
in their recovery plan the following additional scenarios: (1) credit 
losses or liquidity shortfalls created by single and multiple clearing 
member defaults in excess of prefunded resources required by law; (2) 
liquidity shortfall created by a combination of clearing member default 
and a failure of a liquidity provider to perform; (3) depository bank 
failure; and (4) losses resulting from interconnections and 
interdependencies with other CCPs (whether or not those CCPs are 
registered with the Commission as DCOs). For any of those scenarios 
enumerated above that the DCO determines are not possible in light of 
its activities, the DCO should provide its reasoning for not 
considering it. Finally, the Commission is proposing that a DCO must 
include at least two 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 DCO, are 
particularly relevant to the DCO's business.\101\ The Commission 
believes that a DCO should describe how it is prepared for these 
additional exigencies in order to demonstrate to the market and its 
clearing members that it is prepared to meet the demands of possible 
market stresses.
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    \99\ Id. at 5-6. These scenarios are described as ``commonly 
applicable'' because, in the Commission's judgment, all DCOs will 
plausibly be vulnerable to most of these scenarios occurring, that 
is, most scenarios will be possible and, if such a scenario occurs, 
it may damage the DCO's financial position sufficiently to require 
recovery or orderly wind-down.
    The reference to scenarios that are ``possible'' should not be 
confused with a reference to scenarios that are ``likely.'' Thus, if 
a DCO deposits all relevant funds as cash with a federally regulated 
and insured depository institution, and in no circumstances invests 
them, then a scenario of losses resulting from investment risk would 
not be possible. On the other hand, while regulation of depository 
institutions and FDIC insurance makes a loss due to failure of such 
a depository bank extraordinarily unlikely, it is not impossible, 
and thus is a scenario that should be addressed in the recovery and 
orderly wind-down plans. See, e.g., NDL Discussion Paper at section 
2.1 (``[L]ow risk is not zero risk, and consequently, CCPs should 
have a plan to address [non-default losses (NDL)] from these 
scenarios should they materialize. Some CCPs, however, do not 
include certain types of NDL scenario[s] in their planning because 
these CCPs seem to assume that regulated financial institutions or 
central securities depositories pose zero custody [or depository] 
risk, or that legal risk cannot cause an NDL (because Principle 1 of 
the PFMI requires a legal basis with `a high degree of certainty'). 
These approaches appear to be inconsistent with the standards set 
forth in the PFMI.'')
    \100\ For loss scenarios resulting from interconnections and 
interdependencies among the DCO and its parent or affiliates, the 
DCO should consider, to the extent applicable, how its 
organizational structure may impact the specific steps it would 
anticipate taking.
    \101\ The term ``in the judgment of the DCO, are particularly 
relevant'' is being used rather than ``are most relevant'' to avoid 
the implication that it would be necessary to conduct an analysis 
ranking with precision the relevance of different combinations. 
Rather, staff of the DCO should exercise their professional 
judgement in selecting at least two particularly relevant 
combination scenarios. It is highly unlikely that no such 
combinations (or only one) would be possible.
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    The Commission requests comment on this aspect of the proposal.
3. Recovery and Orderly Wind-Down Triggers--Sec.  39.39(c)(3)
    Thorough planning also requires that a SIDCO or Subpart C DCO be 
prepared to determine when recovery or orderly wind-down is necessary, 
that is, when the recovery plan or orderly wind-down plan should be 
``triggered.'' Some triggers might be automatic (e.g., because the DCO 
is insolvent) while others may not be obvious, and many will 
necessarily involve the exercise of judgment and discretion (e.g., the 
DCO is suffering ongoing business losses that appear likely to lead to 
insolvency, or an adverse legal judgment that involves large financial 
liability appears likely).
    The CPMI-IOSCO Recovery Guidance and CFTC Letter No. 16-61 each 
advise that a SIDCO's and Subpart C DCO's recovery plan and wind-down 
plan should define the criteria, both quantitative and qualitative, 
that they would use to determine, or to guide its discretion in 
determining, when to implement the recovery plan and the wind-down 
plan, i.e., the trigger(s).\102\ The Commission believes that defining 
those criteria (including conducting the

[[Page 48979]]

analysis necessary to do so) would materially aid these DCOs both in 
developing effective plans, and in preparing to address events that 
lead to such triggers. While the CPMI-IOSCO Recovery Guidance 
references only recovery plans, the Commission believes that a similar 
analysis should apply to planning for consideration of orderly wind-
down. The Commission also believes that the identification of possible 
triggers would project confidence to the public that these DCOs will 
continue to function in extreme circumstances (such as recovery), and 
convey that these DCOs have a plan to consider wind-down in an orderly 
manner if recovery is ineffective.
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    \102\ See CPMI-IOSCO Recovery Guidance, at sections 2.4.6-2.4.8; 
CFTC Letter No. 16-61, at 7.
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    The CPMI-IOSCO Recovery Guidance states that there may be some 
triggers that ``should lead to a pre-determined information-sharing and 
escalation process within the FMI's senior management and its board of 
directors and to careful consideration of what action should be 
taken.'' \103\ The Commission agrees that planning for such an 
information-sharing and escalation process as part of the DCO's 
governance is an important part of ensuring that the DCO is prepared to 
deal with contingencies. Accordingly, the Commission is proposing new 
Sec.  39.39(c)(3)(i) to require that a SIDCO's or Subpart C DCO's 
recovery plan discuss the criteria that may trigger both implementation 
and consideration of implementation of the recovery plan, and the 
process that these DCOs have in place for monitoring for events that 
are likely to trigger the recovery plan. With respect to the orderly 
wind-down plan, the DCO must discuss the criteria that may trigger 
consideration of implementation of the plan, realizing the importance 
of discretion in determining whether to implement orderly wind-down (in 
contrast to recovery, a terminal process), and the process that the DCO 
has in place for monitoring for events that may trigger consideration 
of implementation of the orderly wind-down plan.
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    \103\ CPMI-IOSCO Recovery Guidance, at section 2.4.8.
---------------------------------------------------------------------------

    For similar reasons, the Commission is proposing Sec.  
39.39(c)(3)(ii) to require the recovery plan and orderly wind-down plan 
each to include a description of the information-sharing and escalation 
process within the SIDCO's and Subpart C DCO's senior management and 
the board of directors. These DCOs must have a defined process that 
will include the factors the DCO considers most important in guiding 
the board of directors' exercise of judgment and discretion with 
respect to recovery and orderly wind-down plans in light of the 
relevant triggers and that process.
    The Commission requests comment on this aspect of the proposal.
4. Recovery Tools--Sec.  39.39(c)(4)
    By the end of 2013, CPMI-IOSCO had not completed their consultative 
work establishing guidance for use in implementing the PFMI. Their 
final guidance was published in October 2014 and amended in July 2017. 
The CPMI-IOSCO Recovery Guidance does not advise authorities to 
prescribe specific recovery tools; rather the guidance ``provides an 
overview of some of the tools that an FMI may include in its recovery 
plan, including a discussion of scenarios that may trigger the use of 
recovery tools and characteristics of appropriate recovery tools in the 
context of such scenarios.'' \104\ CFTC Letter No. 16-61 adopts a 
similar approach in that it does not prescribe the tools that a DCO 
should use during recovery. Rather, the letter sets forth a detailed 
analysis that staff expects a DCO should undertake in its recovery plan 
to meet its obligations or provide its critical operations and services 
as a going concern.\105\
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    \104\ Id. at 1; see also id. at section 4.1 (summarizing 
specific recovery tools).
    \105\ CFTC Letter No. 16-61, at 7-8.
---------------------------------------------------------------------------

    The Commission declines to prescribe specific tools that SIDCOs and 
Subpart C DCOs must include in their recovery plans. Each DCO is 
different, and a variety of tools may be available to a particular DCO 
in each specific scenario. Rather, these DCOs should have discretion to 
decide on which tools to include, so long as the set of tools chosen 
meets standards designed to protect indirect participants (e.g., 
clients, end users), direct participants (i.e., clearing members), the 
DCO itself, and other relevant stakeholders (including, in the case of 
SIDCOs, the financial system more broadly): (1) the set of tools should 
comprehensively address how the DCO would continue to provide critical 
operations and services in all relevant scenarios; (2) each tool should 
be reliable, timely, and have a strong legal basis; (3) the tools 
should be transparent and designed to allow those who would bear losses 
and liquidity shortfalls to measure, manage and control their exposure 
to losses and liquidity shortfalls; (4) the tools should create 
appropriate incentives for the DCO's owners, direct and indirect 
participants, and other relevant stakeholders; and (5) the tools should 
be designed to minimize the negative impact on direct and indirect 
participants and the financial system more broadly.\106\
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    \106\ See CPMI-IOSCO Recovery Guidance, at section 3.3.1.
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    The Commission expects that each SIDCO and Subpart C DCO will 
consider in its planning process tools that meet the full scope of 
financial deficits that the DCO may need to remediate: (1) tools to 
allocate uncovered losses by a clearing member default: e.g., the DCO's 
own capital (sometimes referred to as ``skin-in-the-game''), cash calls 
(sometimes referred to as assessments), and gains-based haircutting 
(sometimes referred to as variation margin gains haircutting); (2) 
tools to address uncovered liquidity shortfalls: e.g., liquidity from 
third-party institutions and non-defaulting \107\ clearing members; (3) 
tools to replenish financial resources: e.g., cash calls and 
recapitalization; \108\ (4) tools to establish a matched book: e.g., 
auctions and tear-ups; and (5) tools to allocate losses not covered by 
a clearing member default: e.g., capital, recapitalization, and 
insurance.
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    \107\ In the context of default losses, the defaulting 
participants cannot be relied upon to provide any resources. In the 
context of non-default losses, all participants are, at least in the 
first instance, non-defaulting participants.
    \108\ Cf. id. at section 2.4.9. While the CPMI-IOSCO Recovery 
Guidance refers to capital, section 39.11(b) recognizes that 
financial resources include, but are not limited to, capital.
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    To provide these DCOs with some flexibility, the Commission is 
proposing to require that each DCO's recovery plan include a complete 
description and analysis of the tools it proposes to use to cover 
shortfalls from the stress scenarios identified by the DCO that are not 
covered by pre-funded financial resources, or where the DCO does not 
have sufficient liquid resources or liquidity arrangements to meet its 
obligations in the correct form and in a timely manner. Additionally, 
the Commission expects each DCO will be prepared to implement tools to 
deal with other losses or liquidity shortfalls, including those from 
non-default risks that may materialize more slowly, and tools to 
increase the DCO's financial resources where necessary in order to 
implement its plans. Finally, to support the planning process, the 
description of recovery tools in the recovery plan should include, at a 
minimum, any discretion the DCO has in the use of the tool, whether the 
tool is mandatory or voluntary, and the governance processes and 
arrangements for determining which tools to use, and to what extent.
    Accordingly, the Commission is proposing Sec.  39.39(c)(4) to 
require a SIDCO or Subpart C DCO to have a

[[Page 48980]]

recovery plan that includes the following: (i) a description of the 
tools that the DCO would expect to use in each scenario required by 
proposed paragraph (b) of this section that comprehensively addresses 
how the DCO would continue to provide critical operations and services; 
(ii) the order in which each such tool would be expected to be used; 
(iii) the time frame within which each such tool would be expected to 
be used; (iv) a description of the governance and approval processes 
and arrangements within the DCO for the use of each tool available, 
including the exercise of any available discretion; (v) the processes 
to obtain any approvals external to the DCO (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; 
\109\ (vi) the steps necessary to implement each such tool; (vii) a 
description of the roles and responsibilities of all parties, including 
non-defaulting clearing members, in the use of each such tool; (viii) 
whether the tool is mandatory or voluntary; (ix) an assessment of the 
likelihood that the tools, individually and taken together, would 
result in recovery; and (x) an assessment of the associated risks from 
the use of each such tool to non-defaulting clearing members and those 
clearing members' customers with respect to transactions cleared on the 
DCO, linked financial market infrastructures, and the financial system 
more broadly. For those scenarios involving non-default losses, all 
clearing members are non-defaulting.
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    \109\ Thus, while (iv) focuses on internal governance and 
approval processes such as among DCO officers and committees, (v) 
focuses on external approval processes, if any, such as approvals by 
a regulator with the legal authority or practical power to require 
approval of the use of a tool.
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    The Commission requests comment on this aspect of the proposal. 
With respect to the types of recovery tools in particular, the 
Commission welcomes comment on whether DCOs use, or would anticipate 
using, any tools not identified above in order to meet the full scope 
of financial deficits a DCO in recovery may need to remediate.
5. Orderly Wind-Down Scenarios and Tools--Sec.  39.39(c)(5)
    As discussed further below, planning for orderly wind-down overlaps 
significantly, though not totally, with planning for recovery. There 
may be circumstances where the SIDCO or Subpart C DCO attempts to 
recover but fails, upon which it should have a plan, as well as 
sufficient capital, to transition to and execute an orderly wind-down. 
SIDCOs and Subpart C DCOs must therefore plan for both recovery and 
orderly wind-down.
    Proposed Sec.  39.39(c)(5) would require a SIDCO's or a Subpart C 
DCO's orderly wind-down plan to identify scenarios that could prevent 
it from being able to meet its obligations, and to identify tools which 
may be used in the orderly wind-down of the DCO. CFTC Letter No. 16-61 
states that a DCO's analysis of its wind-down options ``should contain 
many of the elements of a DCO's analysis of its recovery tools.'' \110\ 
The letter calls for the wind-down plan to identify and analyze in 
detail, with respect to each scenario, nine required elements as well 
as ``the manner in which liquidity requirements would be managed during 
service closure'' and how essential support services would be 
maintained during the wind-down period.\111\ The letter also calls for 
the wind-down plan to address obstacles to each option, and the 
viability of the options in light of the obstacles.
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    \110\ CFTC Letter No. 16-61, at 9.
    \111\ Id. at 10.
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    The Commission recognizes that, to plan effectively for orderly 
wind-down, considering the scenarios and recovery tools described in 
the DCO's recovery plan must precede the DCO's analysis of the events 
that would trigger consideration of implementation of the orderly wind-
down plan, and the use of the DCO's orderly wind-down options.\112\ A 
DCO's orderly wind-down plan should therefore include a description of 
the point or points in the recovery plan, for each scenario, where 
recovery efforts would likely be deemed to have failed and 
consideration of implementing the orderly wind-down plan would be 
triggered. The orderly wind-down plan should then describe at what 
point the DCO will no longer be able to meet its obligations or provide 
its critical services as a going concern. Once these scenarios are 
identified, the plan should describe the tools available to the DCO to 
effectuate an orderly wind-down. The DCO should, therefore, explain in 
its wind-down plan how it would plan to accomplish an orderly wind-
down, taking into account the time it anticipates it would take to 
implement the plan. The orderly wind-down plan should include a 
complete analysis of the wind-down tools the DCO would anticipate 
using, both individually and together. In order to support a thorough 
planning process that is consistent with the international standards, 
the Commission has preliminarily determined that for each wind-down 
tool, the DCO should describe any discretion it has in the use or 
sequencing of the wind-down tool for each scenario, any obstacles to 
the use of a particular tool, the governance and approval processes for 
the tools available, and how the DCO is planning for the viability of 
the tools in light of any identified obstacles.
---------------------------------------------------------------------------

    \112\ See id. at 9.
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    To support a systematic planning process that will foster the DCO's 
ability to wind-down in an orderly manner in situations of 
unprecedented stress, where recovery is infeasible, proposed Sec.  
39.39(c)(5) incorporates certain of the staff guidance included in CFTC 
Letter No. 16-61, as well as international standards and guidance 
issued since the 2013 rulemaking. Proposed Sec.  39.39(c)(5) would 
require each SIDCO and Subpart C DCO to identify scenarios that may 
prevent it from meeting its obligations or providing its critical 
services as a going concern, describe the tools that it would expect to 
use in an orderly wind-down that comprehensively address how the DCO 
would continue to provide critical operations and services, describe 
the order in which each such tool would be expected to be used,\113\ 
establish the time frame within which each such tool would be expected 
to be used, describe the governance and approval processes and 
arrangements within the DCO for the use of each of the tools available, 
including the exercise of any available discretion, describe the 
processes to obtain any approvals external to the DCO (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, set forth the steps necessary to implement each such tool, 
describe the roles and responsibilities of all parties, including non-
defaulting clearing members, in the use of each such tool, provide an 
assessment of the likelihood that the tools, individually and taken 
together, would result in orderly wind-down, and provide an assessment 
of the associated risks to non-defaulting clearing members and those 
clearing members' customers with respect to transactions cleared on the 
DCO, linked financial market infrastructures, and the financial system 
more broadly.
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    \113\ It may be the case that certain tools may be used 
concurrently.
---------------------------------------------------------------------------

    The Commission requests comment on this aspect of the proposal. The 
Commission specifically requests comment on whether the scope of 
clearing member customers that are focused upon (i.e., ``those clearing 
members' customers with respect to transactions cleared on the'' DCO) 
is

[[Page 48981]]

appropriately broad, and appropriately framed.
6. Agreements To Be Maintained During Recovery and Orderly Wind-Down--
Sec.  39.39(c)(6)
    A DCO has a variety of contractual arrangements that must be 
maintained during business as usual, in times of stress, and recovery 
and orderly wind-down, such as those with clearing members, affiliates, 
linked central counterparties, counterparties, external service 
providers, and other third parties.\114\ These contractual arrangements 
include the DCO's rules and procedures, agreements to provide 
operational, administrative and staffing services, intercompany loan 
agreements, mutual offset agreements or cross-margining agreements, and 
credit agreements.\115\ Also, a DCO's recovery plan and orderly wind-
down plan should identify and analyze the implications of the various 
contractual arrangements that the DCO maintains and describe the 
actions that the DCO has taken to ensure that its operations can 
continue during recovery and orderly wind-down despite the termination 
or alteration of relevant contracts.\116\
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    \114\ Id. at 11.
    \115\ Id.
    \116\ Id. Note that CFTC Letter No. 16-61 calls for the same, 
i.e., determine whether any contractual arrangements include 
covenants, material adverse change clauses or other provisions that 
would permit a counterparty to alter or terminate the agreement as a 
result of the implementation of the DCO's recovery plan or wind-down 
plan.
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    Contracts may contain covenants, material adverse change clauses, 
or other provisions that could subject such contracts to alteration or 
termination as a result of the implementation of the recovery plan or 
orderly wind-down plan, and thus render the continuation of the DCO's 
critical operations and services difficult or impracticable. Therefore, 
the Commission believes that each DCO's recovery plan and orderly wind-
down plan should be supported by the DCO's review and analysis of the 
DCO's contracts associated with the provision of those critical 
operations or services to determine if those contracts contain such 
provisions. Where such contractual provisions are present and 
enforceable against the DCO, it will need to have alternative methods 
to continue those critical operations and services. The DCO's recovery 
plan and orderly wind-down plan should describe the actions that the 
DCO has taken to ensure that its operations can continue during 
recovery and orderly wind-down despite these contractual provisions. 
The orderly wind-down plan should also consider whether the contractual 
relationships the DCO relies upon to perform its critical operations 
and services would transfer to a new entity in the event of the 
creation of a new entity or the sale or transfer of the business to 
another entity in an orderly wind-down. Furthermore, the Commission 
believes that a requirement that a DCO have plans in place to ensure 
that its critical operations and services will continue into recovery 
and orderly wind-down is consistent with the PFMI and is crucial to 
providing ``a high degree of confidence'' that the DCO will continue 
its operations and ``serve as a source of financial stability even in 
extreme market conditions.'' \117\
---------------------------------------------------------------------------

    \117\ PFMI at 36 (section on credit and liquidity risk 
management).
---------------------------------------------------------------------------

    The DCO's recovery plan and orderly wind-down plan must also 
identify and describe any licenses, and contracts in which the DCO is 
the licensee, upon which the DCO may rely to provide its critical 
operations and services. Such licenses should be included in the DCO's 
analysis of its contractual arrangements that must continue into 
recovery and wind-down.
    The Commission is proposing Sec.  39.39(c)(6) to provide that a 
SIDCO or Subpart C DCO must determine which of its contracts, 
arrangements, agreements, and licenses associated with the provision of 
its critical operations and services as a DCO are subject to alteration 
or termination as a result of implementation of the recovery plan or 
orderly wind-down plan. The recovery plan and orderly wind-down plan 
must describe the actions that the DCO has taken to ensure that its 
critical operations and services will continue during recovery and 
wind-down despite such alteration or termination.
    The Commission requests comments on this aspect of the proposal.
7. Governance--Sec.  39.39(c)(7)
    While current Sec.  39.39 does not explicitly address the need for 
a DCO to have an effective governance structure to implement its 
recovery or orderly wind-down plans, the Commission has preliminarily 
determined to require an effective governance structure in order to 
enable the DCO to implement such plans effectively. The CPMI-IOSCO 
Recovery Guidance supports the Commission's determination, and 
recommends that the DCO's board of directors or equivalent governing 
body formally endorse the recovery plan.\118\ In addition, the guidance 
calls for ``an effective governance structure and sufficient resources 
to support the recovery planning process and implementation of its 
recovery plan, including any decision-making processes.'' \119\ 
According to the CPMI-IOSCO Recovery Guidance, an ``effective 
governance structure'' includes ``clearly defining the responsibilities 
of board members, senior executives and business units, and identifying 
a senior executive responsible for ensuring that the FMI observes 
recovery planning requirements and that recovery planning is integrated 
into the FMI's overall governance process.'' \120\ The guidance also 
states that the FMI's board should consider the interests of all 
stakeholders who are likely to be affected by the recovery plan when 
developing and implementing it, and the FMI ``should have clear 
processes for identifying and appropriately managing the diversity of 
stakeholder views and any conflicts of interest between stakeholders 
and the FMI.'' \121\
---------------------------------------------------------------------------

    \118\ CPMI-IOSCO Recovery Guidance, at section 2.3.3.
    \119\ Id.
    \120\ Id.
    \121\ Id. at section 2.3.4.
---------------------------------------------------------------------------

    CFTC Letter No. 16-61 provided guidance to align the regulation 
promulgated in 2013 with the 2014 CPMI-IOSCO Recovery Guidance. CFTC 
Letter No. 16-61 advised that a DCO's recovery plan and wind-down plan 
should set forth all relevant governance arrangements and recommends 
that a DCO's recovery plan and wind-down plan: (1) Identify the persons 
responsible for the development, review, approval, and ongoing 
monitoring and updating of the DCO's recovery plan and wind-down plan; 
(2) describe the involvement of the DCO's clearing members in the 
development, review, and updating of the recovery plan and wind-down 
plan, and in assessing the effects of the recovery plan on clearing 
members; (3) describe how the costs and benefits of various recovery 
tools are taken into account during the decision-making process; (4) 
describe the recovery plan and wind-down plan approval and amendment 
process; (5) describe the specific roles and responsibilities of the 
DCO's Board of Directors, relevant committees, and other employees and 
clearing members in activating the recovery plan and wind-down plan and 
in implementing various aspects thereof including, without limitation, 
the use of recovery tools and wind-down options; and (6) the discretion 
of such persons and entities in activating the recovery plan and wind-
down plan, the parameters for exercise of such discretion, where such 
discretion may be exercised, and the

[[Page 48982]]

governance processes for the exercise of such discretion.\122\
---------------------------------------------------------------------------

    \122\ CFTC Letter No. 16-61, at 13.
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    The Commission believes that, in order to develop thorough plans, 
and to be prepared to implement those plans effectively, a SIDCO or 
Subpart C DCO must implement and maintain transparent governance 
arrangements related to recovery and wind-down that are consistent with 
the above standards and that recognize ``one size does not fit all.'' 
DCOs are required to have governance rules and arrangements in place 
both for business-as-usual operations and in times of extreme stress in 
order to meet DCO Core Principle O.\123\ DCO Core Principle O requires 
a DCO to establish governance arrangements that are transparent to 
fulfill public interest requirements and to permit the consideration of 
the views of owners and participants.\124\
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    \123\ Section 5b(c)(2)(O)(i) of the CEA, 7 U.S.C. 7a-1(c)(2)(O).
    \124\ Id.
---------------------------------------------------------------------------

    In furtherance of Core Principle O, and to support the 
effectiveness of these plans and ensure their formal review, the 
Commission is proposing new Sec.  39.39(c)(7) to require each SIDCO's 
and Subpart C DCO's recovery plan and orderly wind-down plan to be 
annually reviewed and formally approved by the board of directors, and 
to describe an effective governance structure that clearly defines the 
responsibilities of the board of directors, board members, senior 
executives, and business units. Each plan must also describe the 
processes that the DCO will use to guide its discretionary decision-
making relevant to each plan, including those processes for identifying 
and managing the diversity of stakeholder views and any conflict of 
interest between stakeholders and the DCO.
    The Commission requests comment on this aspect of the proposal.
8. Testing--Sec.  39.39(c)(8)
    In CFTC Letter No.16-61, staff recommended that SIDCOs and Subpart 
C DCOs include in their recovery and wind-down plans procedures for 
regularly testing the viability of such plans and that testing, where 
applicable, be conducted with the participation of clearing 
members.\125\ Additionally, the recovery plan and wind-down plan should 
identify the types of testing that will be performed, the frequency 
with which the plans will be tested, to whom the findings will be 
reported, and the procedures for updating the recovery plan and wind-
down plan in light of the testings' findings.\126\ Likewise, the CPMI-
IOSCO Recovery Guidance provides that FMIs should, for the purpose of 
``ensur[ing] that the recovery plan can be implemented effectively,'' 
test and review the recovery plan at least annually as well as 
following changes materially affecting the recovery plan.\127\ As an 
example, it states that testing may be conducted through periodic 
simulation and scenario exercises.\128\ The CPMI-IOSCO Recovery 
Guidance also states that an ``FMI should update its recovery plan as 
needed following the completion of each test and review.'' \129\
---------------------------------------------------------------------------

    \125\ CFTC Letter No. 16-61, at 15.
    \126\ Id.
    \127\ CPMI-IOSCO Recovery Guidance, at ] 2.3.8.
    \128\ Id.
    \129\ Id.
---------------------------------------------------------------------------

    In 2022, CPMI-IOSCO issued a discussion paper building on PFMI 
Principles 3 (Framework for the Comprehensive Management of Risks) and 
15 (General Business Risk), the purpose of which was ``to facilitate 
the sharing of existing practices to advance industry efforts and 
foster dialogue on [CCPs'] management of potential losses arising from 
non-default events . . . in particular in the context of recovery or 
orderly wind-down.'' \130\ Summarizing the responses of CCPs, the 
discussion paper observes, ``In general, responding CCPs perform annual 
reviews of their recovery plans'' and ``[a]lmost all responding CCPs 
conduct crisis management drills.'' \131\ The responding CCPs also 
informed CPMI-IOSCO that they ``use crisis management drills to improve 
their decision-making capabilities and their capacity to address 
potential [non-default losses] by improving their understanding of 
scenarios and tools, and testing assumptions about the effectiveness of 
specific tools.'' \132\ The discussion paper quotes one CCP's response 
in particular explaining that crisis management exercises helped 
improve its operational readiness and identify the need for higher 
insurance coverage.\133\
---------------------------------------------------------------------------

    \130\ NDL Discussion Paper, at 2 (Executive Summary).
    \131\ Id. at section 4.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    In addition, the discussion paper highlights that CCPs engage in 
discussion-based exercises involving the internal governance structure 
and external partners and stakeholders, which ``appears to facilitate a 
better understanding of roles and responsibilities before a crisis 
occurs'' and ``serve[s] to reduce the likelihood of purely ad hoc 
decision-making on the allocation of [non-default losses] in a crisis, 
while still giving decision-makers the flexibility to respond to the 
unique circumstances of any particular crisis.'' \134\ The responding 
CCPs reported that testing typically involves a wide range of internal 
stakeholders and, in some cases, external stakeholders as well.\135\ 
This greater involvement in testing ``enhances the quality of such 
exercises by strengthening the tie between the exercise and reality of 
how stakeholders will react.'' \136\
---------------------------------------------------------------------------

    \134\ Id.
    \135\ Id.
    \136\ Id.
---------------------------------------------------------------------------

    According to the discussion paper, testing ``may permit CCPs to 
enhance the tools and resources for identifying, measuring, monitoring 
and managing [non-default loss] risks'' and has ``the potential to 
increase participants' understanding of the types of scenario[s] that 
could generate [non-default losses], the range of magnitudes of such 
losses and their roles and responsibilities in addressing [nondefault 
losses],'' \137\ which could result in an ``increase [in] the 
operational effectiveness'' of the CCPs' plans.\138\
---------------------------------------------------------------------------

    \137\ Id.
    \138\ Id.
---------------------------------------------------------------------------

    The Commission believes that the testing and reviewing practices 
described in the foregoing paragraphs will materially contribute to the 
effectiveness of recovery and orderly wind-down plans. Although the 
CPMI-IOSCO discussion paper focused on existing practices with respect 
to non-default losses, the reasoning will also apply to default losses. 
Periodic testing has the potential to demonstrate whether a SIDCO's or 
Subpart C DCO's tools and resources will sufficiently cover financial 
losses resulting both from participant defaults and non-default losses 
and whether these DCOs' rules, procedures, and governance facilitate a 
viable recovery or orderly wind-down. Further, testing the DCO's 
infrastructure is an effective means of revealing deficiencies or 
weaknesses which could hamper recovery or wind-down efforts, and 
providing an opportunity to remediate them in advance.
    Thus, the Commission is proposing new Sec.  39.39(c)(8) to require 
that the recovery plan and orderly wind-down plan of each SIDCO and 
Subpart C DCO include procedures for testing the viability of the 
plans, including testing of the DCO's ability to implement the tools 
that each plan relies upon. The recovery plan and the orderly wind-down 
plan must include the types of testing that will be performed, to whom 
the findings of such tests are reported, and the procedures for 
updating the recovery plan and orderly wind-down plan in light of the 
findings resulting

[[Page 48983]]

from such tests. The testing must be conducted with the participation 
of clearing members, where the plan depends on their participation, and 
the DCO must consider including external stakeholders that the plan 
relies upon, such as service providers, to the extent practicable and 
appropriate.
    Testing must occur following any material change to the recovery 
plan or orderly wind-down plan, but in any event not less than once 
annually. The plans shall be updated in light of the findings of such 
tests.
    The Commission requests comment on this aspect of the proposal. The 
Commission specifically requests comment as to whether the rule should 
require that the SIDCO or Subpart C DCO include (rather than simply 
consider including) external stakeholders that the plan relies upon in 
the testing. The Commission also specifically requests comment on the 
proposed requirement that tests be conducted not less than annually: 
would a different minimum frequency be more appropriate?

D. Information for Resolution Planning--Sec.  39.39(f)

    As discussed above,\139\ when the Commission adopted regulations 
for recovery and wind-down plans in 2013, CPMI-IOSCO and the FSB were 
in the initial phase of drafting guidance for resolution planning 
consistent with PFMI Principle 3, Key Consideration 4, which states 
that ``an FMI should also provide relevant authorities with the 
information needed for purposes of resolution planning.'' \140\ 
Consistent with that standard, current Sec.  39.39(c)(2) requires a 
SIDCO or Subpart C DCO to have procedures for providing the Commission 
and the FDIC with information needed for purposes of resolution 
planning.\141\
---------------------------------------------------------------------------

    \139\ See text accompanying fn. 54, supra.
    \140\ PFMI Principle 3, Key Consideration 4, at 32. The 
Commission notes that resolution is distinct from orderly wind-down 
in that the latter rests within the control of the DCO.
    \141\ 17 CFR 39.39(c)(2).
---------------------------------------------------------------------------

    The Commission proposes to update its regulations to align Sec.  
39.39(c)(2), as new Sec.  39.39(f), with the additional standards and 
guidance applicable to resolution planning for systemically important 
FMIs adopted since 2013.\142\ As stated in the 2017 FSB Resolution 
Guidance, ``[a]uthorities should ensure that CCPs have in place 
adequate processes and information management systems to provide the 
authorities with the necessary data and information required for 
undertaking'' an assessment of the financial resources and tools that 
the resolution authority can reasonably expect to be available under 
the resolution regime).\143\ In the United States, upon the completion 
of the statutory appointment process set forth in Title II of the Dodd-
Frank Act, the FDIC would be appointed the receiver of a failing SIDCO 
(or other covered financial company) \144\ The supervision of a DCO 
rests with the Commission under the CEA, and, in particular, the 
supervision of a SIDCO rests with the Commission as the supervisory 
agency under Title VIII of the Dodd-Frank Act.\145\ The statutory 
bifurcation of responsibilities between the FDIC and the Commission 
creates important challenges. Under Title II of the Dodd-Frank Act, it 
is the role of the FDIC to act as receiver for a failed covered 
financial company if the requirements of Title II have been met. The 
FDIC's ability to carry out its responsibilities as receiver would 
benefit from advance preparation to ensure that, in the unlikely event 
that resolution becomes necessary, there will be an effective and 
efficient transition of the SIDCO to the FDIC receivership, thereby 
fostering the success of a Title II resolution.\146\
---------------------------------------------------------------------------

    \142\ See, e.g., 2017 FSB Resolution Guidance, at section 6.4 
(noting that ``[a]uthorities should ensure that CCPs have in place 
adequate processes and information management systems to provide the 
authorities with the necessary data and information required for 
undertaking'' an assessment of the financial resources and tools 
that the resolution authority can reasonably expect to be available 
under the resolution regime).
    \143\ 2017 FSB Resolution Guidance, at section 6.4.
    \144\ Section 202(a) of the Dodd-Frank Act; 12 U.S.C. 5382(a).
    \145\ Sections 803(8)(A)(ii) and 807(a) of the Dodd-Frank Act, 
12 U.S.C. 5462(8)(A)(ii) and 5466(a); see also Section 2(12)(C) of 
the Dodd-Frank Act, 12 U.S.C. 5301(12)(C).
    \146\ This involves coordinated planning and information sharing 
to enable a smooth transition into resolution. As the supervisory 
agency for SIDCOs, the Commission provides information for 
resolution planning to the FDIC under the auspices of a Memorandum 
of Understanding (MOU). The current MOU is the ``Memorandum of 
Understanding Between The Federal Deposit Insurance Corporation And 
The Commodity Futures Trading Commission Concerning The Sharing Of 
Information In Connection With Resolution Planning For Derivatives 
Clearing Organizations,'' dated June 26, 2015.
---------------------------------------------------------------------------

    Pursuant to section 8a(5) of the CEA,\147\ the Commission has 
authority to make and promulgate such rules and regulations as, in the 
judgment of the Commission, are reasonably necessary to effectuate any 
of the provisions or to accomplish any of the purposes of the CEA. One 
of those purposes is the avoidance of systemic risk.\148\ As further 
described in the following paragraphs, it would appear that a reporting 
requirement that would enable the Commission to aid the FDIC in its 
preparations for the resolution under Title II of a DCO--where placing 
the DCO into resolution requires a finding by the Secretary of the 
Treasury, in consultation with the President, that, inter alia, the 
failure of the DCO and its resolution under otherwise applicable 
Federal or State law would have serious adverse effects on financial 
stability in the United States \149\--is reasonably necessary to foster 
the avoidance of systemic risk.
---------------------------------------------------------------------------

    \147\ 7 U.S.C. 12a(5).
    \148\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
    \149\ Section 203(b)(2) of the Dodd-Frank Act, 12 U.S.C. 
5383(b)(2).
---------------------------------------------------------------------------

    Moreover, under Title VIII of the Dodd-Frank Act, the Commission 
may, in consultation with the FSOC and the Board of Governors of the 
Federal Reserve, prescribe regulations containing risk management 
standards, taking into consideration relevant international standards 
and existing prudential requirements, for SIDCOs governing: (i) the 
operations related to payment, clearing, and settlement activities of 
SIDCOs; and (ii) the conduct of designated activities by SIDCOs.\150\ 
Under Section 805(b) of the Dodd-Frank Act, the objectives and 
principles for such risk management standards shall be to: (1) promote 
robust risk management; (2) promote safety and soundness; (3) reduce 
systemic risks, and (4) support the stability of the broader financial 
system.\151\ Additionally, Section 805(c) of the Dodd-Frank Act states 
that the standards prescribed may address areas such as: (1) risk 
management policies and procedures; (2) margin and collateral 
requirements; (3) participant or counterparty default policies and 
procedures; (4) the ability to complete timely clearing and settlement 
of financial transactions; (5) capital and financial resources 
requirements for the SIDCO; and (6) other areas that are necessary to 
achieve the objectives and principles in Section 805(b).\152\
---------------------------------------------------------------------------

    \150\ Section 805(a)(2)(A) of the Dodd-Frank Act, 12 U.S.C. 
5464(a)(2)(A).
    \151\ 12 U.S.C. 5464(b).
    \152\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

    Similar to the context of recovery and orderly wind-down planning, 
thorough preparation ex ante is crucial for successfully managing, on 
an inherently abbreviated timeline, matters relating to resolution, in 
aid of mitigating serious adverse effects on financial stability in the 
United States. This thorough preparation for resolution is also crucial 
for establishing market confidence, and the confidence of foreign 
counterparts to the United States agencies. While the Commission 
remains persuaded that the likelihood of a SIDCO requiring

[[Page 48984]]

resolution under Title II of the Dodd-Frank Act is ``extraordinarily 
unlikely,'' \153\ thorough planning for such an exigency is 
essential.\154\
---------------------------------------------------------------------------

    \153\ See Bankruptcy Regulations, 86 FR 19324, 19386 (Apr. 13, 
2021).
    \154\ Key Attributes ] 11.1, FSB CCP Resolution Planning 
Guidance at section 7.
---------------------------------------------------------------------------

    While less likely, it remains possible that similar information may 
also be required from Subpart C DCOs in times of extreme market stress, 
if it appears at the time that the failure of such a DCO might meet the 
requirements set forth in section 203(b) of the Dodd-Frank Act.\155\ 
Thus, while the Commission anticipates that the intensity of resolution 
planning for Subpart C DCOs will be significantly less than that for 
SIDCOs, in order to promote the goal of assuring that Subpart C DCOs 
will, if necessary, remain capable of effectively being resolved under 
Title II, including during times of extreme stress, Sec.  39.39(f) 
would apply equally to SIDCOs and Subpart C DCOs.\156\
---------------------------------------------------------------------------

    \155\ 12 U.S.C. 5383(b). While the determination under Title II 
is made at the time when the entity (here a DCO) is under stress 
(see 12 U.S.C. 5383(b)(1) (determination that the financial company 
is in default or in danger of default, emphasis added), the 
determination under Title VIII is made during business as usual, 
after a detailed process including notice to the proposed 
systemically important financial market utility, and the standards 
for the determination are different than those for the designation. 
See generally Section 804 of the Dodd-Frank Act, 12 U.S.C. 5463; 12 
CFR Part 1320 (Designation of Financial Market Utilities). Thus, an 
entity not designated in advance under Title VIII may nonetheless in 
particular circumstances be determined to meet the standards for 
resolution under Title II, similarly, an entity designated in 
advance under Title VIII may not, even in the event of its failure, 
be determined to meet the standards under Title II.
    Nonetheless, it would appear that the failure of a DCO that has 
been determined during business as usual to have met the criteria 
for designation pursuant to 12 U.S.C. 5463 is more likely to have 
such adverse effects on financial stability than the failure of a 
DCO that has not been determined to have met those criteria.
    \156\ The Commission does not at this time believe that it is 
likely that the failure of a U.S.-based DCO that is neither a SIDCO 
nor a Subpart C DCO would meet the requirements set forth in Section 
203(b) of the Dodd-Frank Act, 12 U.S.C. 5383(b), given the generally 
smaller size of such DCOs and the fact that such DCOs do not have 
banks as clearing members (see supra fn. 23). For foreign-based 
DCOs, the relevant resolution authority would be the resolution 
authority in the home jurisdiction. Accordingly, the Commission is 
not proposing to extend this requirement to DCOs that are neither 
SIDCOs nor Subpart C DCOs.
---------------------------------------------------------------------------

    The Commission's DCR staff has been working with FDIC staff on 
resolution planning for the two SIDCOs. This joint work has revealed 
that the Commission does not receive certain information from the 
SIDCOs that the FDIC may need to plan for resolution. The Commission 
therefore has determined to update its reporting requirements for 
SIDCOs and Subpart C DCOs to reflect additional information that may be 
used for resolution planning consistent with the international 
standards set forth in the PFMI and related guidance.\157\
---------------------------------------------------------------------------

    \157\ See Sections 805(a)(1)(A)-(B) of the Dodd-Frank Act, 12 
U.S.C. 5464(a)(1)(A)-(B).
---------------------------------------------------------------------------

    Most of the global standards and guidance relating to planning for 
resolution (including for CCPs) apply to resolution authorities, in 
cooperation with supervisory authorities (where the resolution 
authority is separate from the supervisory authority).\158\ Because of 
the nature of principle-based regulation for DCOs, there may be 
information in the possession of a DCO that is required for resolution 
planning but may not ordinarily be reported to the Commission and may 
not be available publicly. Moreover, while the recovery and orderly 
wind-down plans described above should be comprehensive in themselves, 
there may be additional information that the Commission may require to 
plan for the resolution of a SIDCO or Subpart C DCO. The Commission 
therefore proposes to specify the types of information a SIDCO or 
Subpart C DCO may be required to provide for resolution planning in 
light of international standards and guidance established since 2013.
---------------------------------------------------------------------------

    \158\ E.g., FSB CCP Resolution Planning Guidance at section 7.
---------------------------------------------------------------------------

1. Planning for Resolution Under Title II of the Dodd-Frank Act--Sec.  
39.39(f)
    Current Sec.  39.39(c)(2) requires SIDCOs and Subpart C DCOs to 
have procedures in place to provide the Commission and the FDIC with 
information for purposes of resolution planning. This rule is 
consistent with the Key Attributes FMI Annex: ``In order to facilitate 
the implementation of resolution measures, FMIs should be required to 
maintain information systems and controls that can promptly produce and 
make available, both in normal times and during resolution, relevant 
data and information needed by the authorities for purposes of timely 
resolution planning and resolution . . . .'' \159\ The Commission is 
proposing in new Sec.  39.39(f) to clarify that the requirement that a 
DCO have procedures in place to provide information directly to the 
Commission and the FDIC for resolution planning purposes means that the 
DCO must provide such information to the Commission. The Commission 
would no longer be requiring DCOs to provide information related to 
resolution planning directly to the FDIC. The Commission provides such 
information related to resolution planning to the FDIC under the MOU.
---------------------------------------------------------------------------

    \159\ Key Attributes FMI Annex, at section 12.1.
---------------------------------------------------------------------------

    The Commission is also proposing, consistent with the Key 
Attributes FMI Annex, to require that SIDCOs and Subpart C DCOs 
maintain information systems and controls that can promptly produce and 
make available data and information requested by the Commission for 
purposes of resolution planning and resolution in the form and manner 
specified by the Commission. The Commission expects that the form and 
manner would be designed to facilitate the Commission's ability to 
share the information with the FDIC. Such systems and controls are, for 
the most part, already in place during business as usual between each 
DCO and the Commission. The explicit requirement that a SIDCO and 
Subpart C DCO ensure that its systems will continue to be able to 
provide information to the Commission during resolution is sound public 
policy, as it will ensure the Commission receives critical information 
during this transitional period. The requirements of the CEA apply to 
any DCO as long as it is doing business, and the affirmation that a 
DCO's systems will be designed to be able to continue to function 
should help to provide assurances to stakeholders and market 
participants that clearing services will continue through all potential 
exigencies.
    Accordingly, the Commission is proposing new Sec.  39.39(f) to 
require that a SIDCO or Subpart C DCO maintain information systems and 
controls to provide to the Commission any data and information 
requested for purposes of resolution planning and resolution, and that 
each must supply such information and data electronically, in the form 
and manner specified by the Commission.
2. Required Information--Sec.  39.39(f)(1)-(7)
    It is sound regulatory policy for the Commission to be transparent 
about the types of information that a SIDCO or Subpart C DCO might 
anticipate providing to the Commission, upon request, in order to 
enable the Commission to aid the FDIC in planning for resolution under 
Title II of the Dodd-Frank Act. This transparency is sound public 
policy because it would help assure stakeholders that, in the 
extraordinarily unlikely event that resolution of a SIDCO or Subpart C 
DCO under Title II becomes necessary, there will be an effective and 
efficient transition of the DCO to the FDIC receivership, and a 
successful resolution under Title II would be forthcoming. Thorough 
preparation is also helpful in supporting market confidence, and the

[[Page 48985]]

confidence of foreign counterparts to the United States agencies.\160\
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    \160\ To date, the Commission has requested information for 
resolution planning only from SIDCOs.
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    Resolution planning necessarily involves assessing a number of 
types of information: information that is publicly available, 
information that is otherwise reported to the Commission under part 39, 
and information that is in the possession of the DCOs but that is not 
otherwise reported to the Commission.
    Over past years, Commission staff has worked with staff from the 
FDIC and the SIDCOs to identify and obtain information for the purpose 
of planning for the highly unlikely event of a SIDCO entering into 
resolution.\161\ Global guidance on standards for resolution planning 
developed since 2013 have informed these information requests.
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    \161\ This is consistent with section 6.4 of the 2017 FSB 
Resolution Guidance.
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    Under Core Principle J, the Commission may request any information 
from a DCO that the Commission determines to be necessary to conduct 
oversight of the DCO.\162\ The Commission believes that certain 
information for resolution planning that goes beyond the information 
usually obtained during business as usual under the Core Principles and 
associated Part 39 regulations should be available when a DCO is 
systemically important to the financial system, may be approaching such 
systemic importance, or has opted into Subpart C.\163\ As noted above, 
the FDIC must be ready to step in as receiver of a failing DCO on very 
short notice and work to achieve a resolution that mitigates risks to 
financial stability created by the DCO's failure, including by 
restoring market confidence and preventing contagion. The information 
proposed to be requested will assist in planning for resolution, 
thereby helping the FDIC to fulfill its role and accomplish its 
objectives, which in turn helps accomplish one of the purposes of the 
CEA, the avoidance of systemic risk.
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    \162\ Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a-1(c)(2)(J). 
See also 17 CFR 39.19(c)(5)(i) (a DCO shall provide upon request any 
information related to its business as a clearing organization.)
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    Proposed subparts (1) through (7) describe seven types of 
information that are relevant to planning for resolution under Title II 
of the Dodd-Frank Act. The frequency with which information may be 
requested may vary over time, with some information requested only 
once, while other information may be requested multiple times (e.g., 
annually, or upon significant changes to the structure of the DCO's 
business arrangements). The Commission expects that, in the latter 
case, the frequency of the requests may change over time, as the 
Commission gains more knowledge.
i. Structure and Activities--Sec.  39.39(f)(1)
    As part of planning for resolution, the FDIC develops resolution 
options that are underpinned by an understanding of the structure of 
the SIDCO or Subpart C DCO. Proposed Sec.  39.39(f)(1) would cover 
information related to the SIDCO's and Subpart C DCO's structure and 
activities and would include, among other things, documents and 
information about the SIDCO's and Subpart C DCO's legal structure and 
hierarchy. The Commission anticipates that this information would 
include current comprehensive organizational charts (including all 
direct and indirect subsidiaries where the SIDCO directly or indirectly 
owns more than a fifty percent controlling interest), governing 
documents and arrangements, rights and powers of shareholders, and 
current organizational documents (including by-laws, articles of 
incorporation or association/organization, and committees). The 
Commission acknowledges that some of this information may be publicly 
available on a SIDCO's website, may be included in recovery plans, or 
may otherwise be reported to the Commission under part 39. In the event 
that information is required that is not readily available through the 
ordinary course of regulatory oversight, a SIDCO and Subpart C DCO must 
be prepared to provide current information under the umbrella of 
``structure and activities'' upon request.\164\
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    \164\ In some cases, the response may include cross-references 
to specific places where the information is already available, or 
has previously been provided, and assurance that the information 
remains current.
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    Proposed Sec.  39.39(f)(1) would request information related to the 
SIDCO's or Subpart C DCO's organizational structure and corporate 
structure, activities, governing documents and arrangements, rights and 
powers of shareholders, committee members and responsibilities.
    The Commission requests comment on this aspect of the proposal.
ii. Information About Clearing Members--Sec.  39.39(f)(2)
    Another aspect of resolution planning is developing an 
understanding of the risks that may trigger consideration of orderly 
wind-down and the implications for resolution should that orderly wind-
down fail. In order to understand these risks, certain information 
about a SIDCO's or Subpart C DCO's clearing members may be instructive. 
Generalized or anonymized information about clearing members such as 
types and amounts of collateral posted (for both house and customer 
accounts), variation margin, and contributions to default and guaranty 
funds may be instructive, both for ex ante planning and in the runway 
to resolution. Such information may provide insight into the risks that 
clearing members and the markets would be exposed to in the event of a 
systemic failure, and of the potential interplay between those risks.
    The information requested in the category may also include general 
information regarding exposures or other measures of business risk with 
respect to all or a subset of clearing members. This type of 
information may assist in the planning for potential triggers for 
resolution and for understanding potential challenges in executing a 
resolution. The Commission recognizes that this type of information 
changes over time; accordingly, the Commission anticipates that it may 
request such information on an annual basis or more frequently in the 
run-up to resolution. Proposed Sec.  39.39(f)(2) would permit requests 
for information on clearing members generally, including (for both 
house and customer accounts) information regarding collateral, 
variation margin, and contributions to default and guaranty funds.
    The Commission requests comment on this aspect of the proposal.
iii. Arrangements With Other Clearing Entities--Sec.  39.39(f)(3)
    In order to plan for continuity of operations in resolution, the 
Commission and FDIC must understand how the SIDCO or Subpart C DCO 
interacts with the operations of other DCOs and financial market 
infrastructures.\165\ In particular, the Commission and FDIC must 
understand the SIDCO's or Subpart C DCO's cross-margining or mutual 
offset arrangements. These agreements and arrangements may require 
additional handling in resolution, both because of the exposures and 
obligations the SIDCO may be subject to, as well as the resources and 
tools they may provide.
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    \165\ For example, these relationships may be between DCOs 
registered with the Commission, e.g., Chicago Mercantile Exchange 
(CME) and Options Clearing Corporation, or between a DCO registered 
with the Commission and another CCP supervised by an agency other 
than the CFTC, e.g., CME and the Fixed Income Clearing Corporation.
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    The Commission proposes to require that SIDCOs and Subpart C DCOs 
provide to the Commission upon request copies of the most current 
versions of mutual offsetting

[[Page 48986]]

arrangements or agreements for cross-margining arrangements with 
external entities. Additionally, for each such arrangement or 
agreement, the SIDCO or Subpart C DCO should be prepared to provide 
data concerning the recent scope of the relationship, such as 
information related to amounts of daily initial margin. The Commission 
proposes to require that SIDCOs and Subpart C DCOs update such 
information upon request by the Commission.
    Proposed Sec.  39.39(f)(3) would request information on 
arrangements and agreements with other clearing entities relating to 
clearing operations, including offset and cross-margin arrangements.
    The Commission requests comment on this aspect of the proposal.
iv. Financial Schedules and Supporting Details--Sec.  39.39(f)(4)
    In order to prepare for receivership operations in resolution, and 
to develop resolution strategy options, there needs to be a clear 
understanding of the SIDCO's or Subpart C DCO's financial position and 
capital structure, which may include some combination of assets, 
liabilities, revenues and expenses, in advance of an extreme event. A 
DCO's financial statements and exhibits reported to the Commission 
contain relevant information that will assist the Commission and FDIC 
in forming a detailed understanding of the potential resources and 
financial exposures of the SIDCO or Subpart C DCO that would be 
important to the success of a Title II receivership. To prepare for 
resolution, the Commission and FDIC require a detailed understanding of 
the potential supports for and impediments to potential resolution 
strategies, including sources and uses of funds in resolution.
    In order to form this understanding, it would be useful for the DCO 
to identify potential creditor claims and the potential resources 
available to satisfy such claims. There may be information in 
possession of the DCO that may not be available in public filings, on a 
DCO's website, or in financial reports and schedules required to be 
filed under other provisions of part 39, including off-balance sheet 
obligations or contingent liabilities.
    The type of information requested under proposed Sec.  39.39(f)(4) 
would include requests for information on off-balance sheet obligations 
or contingent liabilities, and obligations to creditors, shareholders, 
or affiliates not otherwise reported under Part 39.
    The Commission requests comment on this aspect of the proposal.
v. Interconnections and Interdependencies With Internal and External 
Service Providers--Sec.  39.39(f)(5)
    The evaluation of possible obstacles to the continuation of 
essential services provided by internal and external service providers 
(including affiliates and other third parties), and the use of 
software, information, and other tools provided under license, is 
integral to resolution planning. While the recovery plans required 
under Sec.  39.39(b) should include much of this information, effective 
planning for receivership may include the need for a more detailed 
understanding of the requirements to continue making use of identified 
services (and thus understanding of the steps to meet such 
requirements).
    Each SIDCO or Subpart C DCO must provide the Commission, upon 
request, copies of external or inter-affiliate contracts or agreements 
that permit the SIDCO or Subpart C DCO to perform its critical 
functions (including third-party or affiliate service agreements, 
building or equipment leases, etc.). In the case of inter-affiliate 
arrangements, the DCO should identify which entity in the group is the 
contracting party and, where relevant, whether there are any inter-
affiliate service agreements that address provision of services. This 
type of information should inform the resolution plan by revealing any 
dependencies on affiliates for essential support functions provided to 
the SIDCO or Subpart C DCO. It may also foster planning for 
alternatives where required. The Commission may also request copies of 
inter-affiliate contracts or agreements, where the SIDCO or Subpart C 
DCO provides essential support to other affiliates.
    Additionally, where some of the contracts and agreements for 
services would grant the service provider the option to terminate the 
contract in the event of assignment to a bridge financial company 
(i.e., may not be ``resolution resilient''), the resolution plan may 
need to identify alternatives. Thus, providing CFTC (and, ultimately, 
FDIC) with information that could help identify those contracts and 
agreements for services that are not resolution resilient would assist 
planning in advance of entry into resolution.
    Further, because application of the FDIC's authority under Title II 
with respect to continuation of pre-receivership contracts \166\ in the 
case of a non-U.S. contracting party may be less straightforward than 
with respect to a U.S.-based contracting party, the Commission may 
request that a SIDCO or Subpart C DCO provide a list of critical 
interconnections or interdependencies that are subject to material 
contracts/agreements governed in whole or in part by non-U.S. law.
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    \166\ See Section 210(c)(13) of the Dodd-Frank Act (``Authority 
to Enforce Contracts''), 12 U.S.C. 5390(c)(13).
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    Lastly, the resolution plan may need to maintain important tools 
and capabilities provided under license arrangements. For instance, the 
resolution plan may need to cover the transfer of licenses to the 
bridge financial company for products or indices underlying the 
contracts cleared by the SIDCO or Subpart C DCO. To accomplish this, 
the Commission may request that a SIDCO or Subpart C DCO provide a copy 
of such licenses and licensing agreements.
    The Commission anticipates that the type of information described 
above would be requested on a one-time basis, with updates to be 
provided upon significant changes to the structure of the DCO's 
business arrangements (including change to the agreements), or when new 
agreements are executed. Proposed Sec.  39.39(f)(5) would require 
SIDCOs and Subpart C DCOs to provide information regarding 
interconnections and interdependencies with internal and external 
service providers, licensors, and licensees, including information 
regarding services provided by or to affiliates and other third parties 
and related agreements, upon request by the Commission.
    The Commission requests comment on this aspect of the proposal.
vi. Information Concerning Critical Personnel--Sec.  39.39(f)(6)
    While the recovery and orderly wind-down plans contain information 
related to critical positions and resilient staffing, in order to plan 
for resolution, a DCO may have to take steps to ensure that those 
positions remain filled. This includes steps to ensure that there is an 
adequate pool of financial resources readily available to ensure that 
during times of stress, there is staff in place. During times of 
extreme stress, people in critical positions may have terminated (or 
may terminate) their association with the DCO, or their association may 
have been terminated (or may be terminated). Proposed Sec.  39.39(f)(6) 
would require a SIDCO or Subpart C DCO to provide information for all 
critical positions described in the recovery and orderly wind-down 
plans.\167\ The Commission believes that this information is essential 
if the FDIC is to succeed in a Title II receivership,

[[Page 48987]]

as they will need qualified personnel to fill these positions in order 
to manage and operate the entity.
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    \167\ As in all cases, such information would be provided and 
obtained under security arrangements appropriate to the sensitivity 
of the information.
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    The Commission requests comment on this aspect of the proposal.
vii. Other Required Information--Sec.  39.39(f)(7)
    Proposed Sec.  39.39(f)(7) would recognize that resolution planning 
is a complex, ongoing, and developing process, and that information 
requirements may change over time as the Commission and the FDIC gain 
experience with resolution planning for DCOs, and as information needs 
and business models change. Thus, certain information requirements may 
not be covered by the specific items listed in proposed Sec.  
39.39(f)(1)-(6). In that regard, proposed Sec.  39.39(f)(7) would 
include a broad provision to encompass information which the Commission 
requires for this purpose, but not covered by the specific categories 
of information in proposed Sec.  39.39(f)(1)-(6).
    The Commission requests comment on this aspect of the proposal.
3. Requested Reporting--Sec.  39.19(c)(5)(iii)
    The Commission proposes to add a new requested reporting 
requirement to Sec.  39.19 to reflect updates to the information 
requested in proposed Sec.  39.39(f)(1)-(7). Proposed Sec.  
39.19(c)(5)(iii) would require a SIDCO or Subpart C DCO that submits 
information pursuant to Sec.  39.39(f) to update the information upon 
request by the Commission. The Commission needs timely and an accurate 
information to monitor a SIDCO or Subpart C DCO, especially during 
stressful times. Depending upon the nature of the change and the 
information previously submitted, the response may be a confirmation 
that the information previously submitted remains accurate.
    The Commission requests comment on this aspect of the proposal.

D. Renaming Sec.  39.39

    When codified in 2013, Sec.  39.39 covered the Commission's 
expectations regarding a SIDCO's or Subpart C DCO's obligations with 
regard to recovery and orderly wind-down plans. The Commission proposes 
to change the title of Sec.  39.39 to reflect that the proposed 
regulations, if adopted by the Commission, will encompass recovery and 
orderly wind-down planning for SIDCOs and Subpart C DCOs, as well as 
information required to plan for resolution.
    The Commission requests comment on this aspect of the proposal.

III. Orderly Wind-Down Plans for DCOs That Are Not SIDCOs or Subpart C 
DCOs

    The Commission is proposing, as reasonably necessary to effectuate 
Core Principle D(i),\168\ to require DCOs that are neither SIDCOs nor 
Subpart C DCOs to maintain and submit to the Commission plans for 
orderly wind-down, with requirements that are substantially similar to 
the proposed requirements for the orderly wind-down plans to be 
submitted by SIDCOs and Subpart C DCOs.\169\ Given that the failure of 
one of these DCOs is much less likely to have serious adverse effects 
on financial stability in the United States,\170\ the Commission is not 
proposing to require these DCOs to maintain recovery plans.\171\
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    \168\ Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(i); see Section 8a(5) of the CEA, 7 U.S.C. 12a(5).
    \169\ For orderly wind-down planning involving insolvency or 
default of a DCO member or participant, the Commission also grounds 
this proposed rulemaking in Core Principle G(i), which requires that 
a DCO have ``rules and procedures designed for the efficient, fair, 
and safe management of events'' during such scenarios. Section 
5b(c)(2)(G)(i) of the CEA, 7 U.S.C. 7a-1(c)(2)(G)(i).
    \170\ Section 203(b)(2) of the Dodd-Frank Act, 12 U.S.C. 
5383(b)(2).
    \171\ For U.S.-based DCOs that are neither SIDCOs nor Subpart C 
DCOs, see discussion at supra fn. 156. Separately, foreign-based 
central counterparties registered with the Commission as DCOs are 
required to maintain recovery and wind-down plans by their home-
country regulators. See infra fn. 207 and accompanying text. Thus, 
even if one of these were in future to be designated as systemically 
important under Title VIII, they would already maintain a recovery 
plan.
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A. Requirement To Maintain and Submit an Orderly Wind-Down Plan--Sec.  
39.13(k)(1)(i)

    The Commission is proposing to require that a DCO that is neither a 
SIDCO nor a Subpart C DCO must nevertheless maintain and submit to the 
Commission viable plans for orderly wind-down necessitated by default 
losses and non-default losses. The possibility that such losses may 
render the DCO unable to meet its obligations or to continue its 
critical functions to the point it must wind down is inherently one of 
the risks associated with the discharging of the DCO's 
responsibilities.\172\ Additionally, the point at which a DCO must wind 
down may arise suddenly, in a manner that does not allow for time to 
plan. Wind-down plans are essential to help facilitate an orderly and 
expeditious wind-down; moreover, planning for an orderly wind-down--
including, for example, considering the circumstances that may trigger 
a wind-down, the tools the DCO would implement to help ensure an 
orderly wind-down (along with the likely effects on clearing members 
and the financial markets from implementing such tools), and the 
governance arrangements to guide decision-making during an orderly 
wind-down--can strengthen the risk management practices of the DCO 
(including by identifying vulnerabilities that can be mitigated), 
enhance legal certainty for the DCO, its clearing members and market 
participants, and increase market confidence, three pillars of the DCO 
Core Principles' aims. As discussed below, the subjects and analyses 
the Commission is proposing for inclusion in a DCO's orderly wind-down 
plan overlap with many of the analyses DCOs must otherwise undertake to 
ensure compliance with the DCO Core Principles.
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    \172\ Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(i).
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    In order to facilitate accomplishment of these goals, the 
Commission proposes to add new Sec.  39.13(k)(1)(i) to require that a 
DCO that is not a SIDCO or Subpart C DCO maintain and, consistent with 
the proposed revisions to Sec.  39.19(c)(4)(xxiv), submit to the 
Commission, a viable plan for orderly wind down necessitated by default 
losses and non-default losses, and supporting information.\173\ In 
additional support of these goals, and as discussed further below, the 
Commission is proposing to add other provisions under Sec.  39.13(k).
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    \173\ In Section IV below, discussing the reporting requirement 
in Sec.  39.19(c)(4)(xxiv), the Commission explains the reason for 
including the term ``and supporting information.''
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    The Commission requests comment on the proposed changes. In 
particular, the Commission requests comment on the extent to which the 
proposed requirements concerning orderly wind-down plans for DCOs that 
are neither SIDCOs nor Subpart C DCOs appropriately balance seeking to 
ensure that such DCOs are prepared to wind-down in an orderly manner 
and mitigating the costs of preparing plans for such a wind-down. To 
the extent a better balance can be achieved, please discuss both the 
requirements that should be deleted or modified and the basis for the 
conclusion that the regulatory goal of orderly wind-down would reliably 
be achieved in light of such changes.

B. Notice of the Initiation of Pending Wind-Down--Sec.  39.13(k)(1)(ii)

    Along the same lines--and consistent with the requirement for 
SIDCOs and

[[Page 48988]]

Subpart C DCOs--the Commission is proposing to require that a DCO have 
procedures in place to notify the Commission and clearing members, as 
soon as practicable, when orderly wind-down is pending, and to provide 
such notification in such circumstances. Timely notification of events 
is essential for helping the Commission and clearing members 
effectively to address the issues raised by the DCO's transition into 
wind-down and that having the proper procedures in place beforehand 
will facilitate such timely notification.
    The requirement that DCOs notify the Commission and clearing 
members of a pending orderly wind-down is reasonably necessary to 
effectuate Core Principle J, under which a DCO shall provide to the 
Commission all information that the Commission determines to be 
necessary to conduct oversight of the DCO,\174\ and Core Principle L, 
under which a DCO shall provide to market participants sufficient 
information to enable the market participants to identify and evaluate 
accurately the risks and costs associated with using the services of 
the DCO and disclose publicly and to the Commission information 
concerning any other matter relevant to participation in the settlement 
and clearing activities of the DCO.\175\
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    \174\ Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a-1(c)(2)(J).
    \175\ Section 5b(c)(2)(L) of the CEA, 7 U.S.C. 7a-1(c)(2)(L).
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    Accordingly, the Commission proposes to add new Sec.  
39.13(k)(1)(ii) to require that each DCO shall have procedures for 
informing the Commission and clearing members, as soon as practicable, 
when orderly wind-down is pending, and shall notify the Commission and 
clearing members consistent with proposed Sec.  39.19(c)(4)(xxv).
    The Commission requests comment on these proposed changes.

C. Orderly Wind-Down Plan: Required Elements--Sec.  39.13(k)(2)-(6)

    As is the case for SIDCOs and Subpart C DCOs, the Commission 
believes, as a general matter, that the orderly wind-down plan of a DCO 
that is not a SIDCO or a Subpart C DCO should include a summary 
providing an overview of the plan followed by a detailed description of 
how the DCO will implement the plan. The description of how the DCO 
will implement its plans shall include an identification and 
description of the critical operations and services the DCO provides to 
clearing members and financial market participants, the service 
providers upon which the DCO relies to provide these critical 
operations and services, interconnections and interdependencies, and 
staffing arrangements (including how they are resilient), obstacles to 
success of the orderly wind-down plan, aggregate cost estimates for the 
continuation of services during orderly wind-down, and how the DCO will 
ensure that its services continue through orderly wind-down. The plan 
shall also include a stress scenario analysis addressing the failure of 
each critical operation and service, a description of the criteria the 
DCO would consider in determining whether and when to trigger orderly 
wind-down and the process for monitoring for events that may trigger 
the wind-down; a description of the information-sharing and escalation 
processes within the DCO's senior management and board of directors 
following an event triggering consideration of orderly wind-down and 
identification of the factors the board of directors would consider in 
exercising judgment or discretion with respect to any decision-making 
during wind down; an identification of scenarios that may trigger 
orderly wind-down and analysis of the tools the DCO would use following 
the occurrence of each scenario; an identification and review of 
agreements to be maintained during orderly wind-down; a description of 
the DCO's governance with respect to planning for orderly wind-down and 
during the orderly wind-down; and testing. The Commission believes 
these subjects and analyses are the minimum elements that DCOs should 
incorporate in their orderly wind-down plans pursuant to their 
obligation to manage the risks associated with discharging their 
responsibilities under Core Principle D.\176\
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    \176\ To the extent foreign CCPs are subject to home 
jurisdiction regulation with different requirements for the subjects 
and analyses that must be included in their wind-down plans, the 
Commission welcomes comments describing those requirements, and 
including suggestions on how to achieve the goals of this regulation 
in a manner that appropriately addresses possible inefficiencies.
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    Accordingly, the Commission is proposing new Sec.  39.13(k)(2) to 
require a DCO to include in its orderly wind-down plans a summary 
providing an overview of the plan followed by a detailed description of 
how the DCO will implement the plan.
    The Commission requests comment on this aspect of the proposal. 
Each required element of the orderly wind-down plan is discussed in 
more detail below.
1. Critical Operations and Services, Interconnections and 
Interdependencies, and Resilient Staffing--Sec.  39.13(k)(2)(i)
    In Section II, the Commission highlighted the importance of 
incorporating into recovery and orderly wind-down plans an 
identification and description of the critical operations and services 
that the SIDCO or Subpart C DCO provides to clearing members and 
financial market participants, the service providers upon which the DCO 
relies upon to provide these critical operations and services, 
financial and operational interconnections and interdependencies, and 
resilient staffing arrangements. As set forth below, the same is true 
for the orderly wind-down plans for DCOs that are not SIDCOs or Subpart 
C DCOs.
i. Critical Operations and Services Provided by and to DCOs
    Limiting the operational disruption and financial harm to a DCO's 
clearing members and other financial market participants during an 
orderly wind-down, turns on the DCO's understanding of the critical 
operations and services that the DCO performs for clearing members and 
other financial market participants, and, in turn, operations and 
services performed by others that are critical to the DCO performing 
those critical functions. Thus, the Commission is proposing to require 
that a DCO's orderly wind-down plan include an identification and 
description of the critical operations and services that the DCO 
provides to clearing members and other financial market participants. 
For any critical (to the DCO) operations or services that the DCO 
relies upon that are performed by internal or external service 
providers, the plan should identify those providers and describe the 
critical operations or services they perform. Likewise, to the extent 
the DCO's ability to discharge its functions may be affected by the 
performance of ancillary service providers, the plan should identify 
those ancillary service providers and describe the operations or 
services they perform. By requiring the identification and description 
of the DCO's critical operations and services, including those 
performed by internal or external service providers, and any ancillary 
service providers, the Commission seeks to ensure, to the extent 
practicable, that the DCO's ability to perform the critical operations 
and services that others depend upon continues during the orderly wind-
down process.
    In the same vein, the Commission is proposing to require that a 
DCO's

[[Page 48989]]

orderly wind-down plan identify and describe the obstacles to success 
of the plan, and the DCO's plan to address the risks associated with 
the failure of each such critical operation and service. A stress 
scenario analysis (or similar undertaking) addressing the failure of 
each critical operation and service while the DCO is still a going 
concern should highlight whether and how the operation or service can 
continue in orderly wind-down. The Commission expects the DCO's orderly 
wind-down plan to address the full range of options in order to ensure 
that operations and services critical to the DCO continue in the 
orderly wind-down process. In considering and analyzing the magnitude 
of the costs associated with an orderly wind-down, certain of the DCO's 
expenses will likely increase, including, for example, legal fees, 
accounting fees, financial advisor fees, the costs associated with 
employee retention programs, and other incentives that may be necessary 
to maintain critical staff. Other costs, such as marketing or those for 
developing new products, may decrease as a result of wind-down. 
Further, a DCO shall proceed under the conservative assumption that any 
resources it may have consumed as part of its recovery efforts, if any, 
will not be available to fund critical operations and services in an 
orderly wind-down.
ii. Interconnections and Interdependencies
    The Commission is additionally proposing to require that the 
orderly wind-down plan identify and describe the DCO's financial and 
operational interconnections and interdependencies. Given the web of 
relationships that may exist among the DCO and its relevant affiliates, 
internal and external service providers, and other relevant 
stakeholders, identifying and describing the interconnections and 
interdependencies could provide much-needed transparency and clarity 
for purposes of developing and implementing an orderly wind-down plan. 
For instance, the financial resources available to a DCO during wind-
down may be limited when one financial entity serves multiple roles and 
relationships with respect to the DCO or when multiple affiliates of 
the DCO depend upon the same intercompany loan agreement or insurance 
policy with group coverage limits. Interconnections and 
interdependencies may also adversely impact the value of the DCO's 
assets, which can be crucial in wind-down where a DCO is trying to meet 
costs associated with preserving critical operations and services and 
meeting liquidity needs. Accordingly, a DCO's orderly wind-down plan 
should identify and describe any interconnections and interdependencies 
and address the effect such relationships may have on the DCO's ability 
to continue performing its functions during the wind-down process.
iii. Resilient Staffing and Support Services Arrangements
    As noted in section II, a DCO in wind-down cannot maintain critical 
operations and services without both essential personnel and support 
services. Accordingly, the Commission is proposing to require that the 
orderly wind-down plan identify and describe plans for resilient 
staffing arrangements under which personnel essential for critical 
operations and services would be maintained and services supporting the 
DCO's critical operations and services would continue. To the extent 
the DCO relies upon contractors as personnel providing critical 
operations and services, the DCO should have staffing arrangements and 
agreements in place for such contracting work to continue in wind-down. 
Similarly, to the extent the DCO relies upon third-party service 
providers to provide critical operations and services, including 
facilities, utilities, and communication technologies, the DCO should 
have arrangements and agreements in place for such third-party services 
to continue in wind-down. Further, to promote its ability to ensure the 
success of the plan, the DCO should identify obstacles to that success. 
Additionally, as part of the DCO's responsibility to maintain critical 
operations and services, the Commission is proposing to require that 
the orderly wind-down plan include aggregate cost estimates for 
essential personnel and support services, and address the manner in 
which the DCO will meet the associated costs. Just as the case may be 
for SIDCOs and Subpart C DCOs, other DCOs may be vulnerable to key 
person risk; accordingly, plans for resilient staffing arrangements 
should identify, to the extent applicable, key person risk within the 
DCO or (as relevant) affiliated legal entities that the DCO relies upon 
to provide its critical operations and services, and how the DCO has 
planned to address such risk.
    Accordingly, the Commission is proposing new Sec.  39.13(k)(2)(i) 
to require that the DCO's orderly wind-down plan include the 
identification and description of the DCO's critical operations and 
services, interconnections and interdependencies, and resilient 
staffing arrangements, obstacles to success of the orderly wind-down 
plan, as well as a stress scenario analysis addressing the failure of 
each identified critical operation or service. Additionally, the 
orderly wind-down plan must include aggregate cost estimates for the 
continuation of critical operations and services and a description of 
how the DCO will ensure that such operations and services continue 
through orderly wind-down.
    The Commission requests comment on this aspect of the proposal.
2. Triggers for Consideration of Orderly Wind-Down and Processes for 
Information-Sharing and Decision-Making--Sec.  39.13(k)(2)(ii)-(iii)
    The Commission is proposing to require that orderly wind-down plans 
for DCOs include a description of the criteria that would guide the DCO 
in considering whether and when to implement wind-down, and the process 
for monitoring for events that may trigger consideration of orderly 
wind-down. As noted in section II, any viable orderly wind-down plan 
must establish and define criteria (which may be in the alternative) 
that the DCO would consider in triggering consideration of wind-down. 
The criteria may be quantitative, such as the case where the DCO does 
not have the financial resources to continue as a going concern, or 
qualitative, such as the case where judgment may be needed (for 
instance, in circumstances involving litigation that is proceeding in a 
manner that suggests that a large, adverse finding is likely). 
Predefined criteria should help avoid undue delays in deciding whether 
to wind-down, which, in turn, should help increase the opportunity for 
an orderly wind-down. By monitoring for events that may trigger the 
consideration of wind-down, moreover, a DCO will be better situated to 
make a timely decision regarding wind-down. Further, predefined 
criteria will provide confidence to market participants and the public 
that the DCO has proper plans in place to monitor for and manage 
situations that may require an orderly wind-down.
    Additionally, the Commission is proposing to require that the 
orderly wind-down plan include a description of the information-sharing 
and escalation processes within the DCO's senior management and board 
of directors following an event triggering consideration of an orderly 
wind-down. By establishing automatic procedures under which the 
relevant decision-makers may obtain the necessary information, the DCO 
may avoid undue

[[Page 48990]]

delays in ultimately deciding whether to wind-down.
    Similarly, the Commission is proposing to require that orderly 
wind-down plans include the factors that the board of directors 
anticipates that it would consider in any decision-making regarding 
wind-down where judgment or discretion is required. The Commission 
believes that the factors enumerated in the orderly wind-down plan 
should be those that the DCO considers most important in guiding the 
discretion of the board of directors. A predefined framework within 
which the board may exercise judgment and discretion should facilitate 
a timely decision regarding wind-down.
    Accordingly, the Commission is proposing new Sec.  39.13(k)(2)(ii)-
(iii) to require that the DCO's orderly wind-down plan include a 
description of the criteria that the DCO would consider in determining 
whether to implement wind-down and, relatedly, the process for 
monitoring for events that may trigger consideration of an orderly 
wind-down; a description of the information-sharing and escalation 
processes within the DCO's senior management and board of directors 
following an event triggering consideration of an orderly wind-down; 
and the identification of the factors that the DCO considers most 
important in guiding the board of directors' judgment or discretion 
with respect to any decision-making during the wind-down.
    The Commission requests comment on this aspect of the proposal.
3. Orderly Wind-Down Scenarios and Tools--Sec.  39.13(k)(3)
    The Commission is proposing to require that a DCO's orderly wind-
down plan (i) identify the scenarios that may lead to an orderly wind-
down, i.e., those scenarios that may prevent the DCO from meeting its 
obligations or providing its critical operations and services as a 
going concern, and (ii) analyze the tools the DCO would use following 
the occurrence of each scenario. Specifically, the Commission is 
proposing to require that the analysis describe the tools the DCO would 
expect to use in an orderly wind-down that comprehensively address how 
the derivatives clearing organization would continue to provide 
critical operations and services; describe the order in which the DCO 
would expect to implement any identified tools; describe the governance 
and approval processes and arrangements that will guide the exercise of 
any available discretion in the use of each tool; describe the 
processes to obtain any approvals external to derivatives clearing 
organization (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; establish the time frame 
within which the DCO may use each tool; set out the steps necessary to 
implement each tool; describe the roles and responsibilities of all 
parties in the use of each tool; provide an assessment of the 
likelihood that the tools, individually and taken together, would 
result in orderly wind-down; and provide an assessment of the 
associated risks to non-defaulting clearing members and those clearing 
members' customers with respect to transactions cleared on the DCO, and 
linked financial market infrastructures.
    As may be the case for SIDCOs and Subpart C DCOs, the scenarios 
that may trigger consideration for wind-down are typically those where 
recovery efforts (if any) are deemed to have failed. At that point, the 
DCO will no longer be able to meet its obligations or provide its 
critical operations and services as a going concern. For each scenario 
where the DCO may reach such a point, the Commission is proposing to 
require that the orderly wind-down plan analyze the tools available to 
effectuate an orderly wind-down.
    The DCO's tools--i.e., the wind-down options available to the DCO 
in each particular scenario--comprise those actions it may take to 
effect, in an orderly manner, the sale or transfer, or if necessary in 
extreme circumstances, permanent cessation, of its clearing and other 
services. The Commission intends that the proposed analysis will 
require the DCO to assess the effectiveness of a full range of actions 
for orderly wind-down.
    Among other things, an effective set of wind-down tools enables the 
DCO to manage liquidity requirements in a manner in which critical 
operations and services would be maintained during the orderly wind-
down period. Various factors may prevent an action from being 
effective, including, for instance, the number of steps required to 
implement the action (e.g., disclosure, risk reduction, trade 
reduction, transfer or close-out of positions, and liquidation of 
investments), the time required to complete each step (e.g., contract 
termination and other relevant requirements following disclosure), the 
discretion of various parties affecting the use or sequence of the 
action (including non-defaulting parties), and any legal limits 
regarding the action (e.g., the relevant DCO rules or rule amendments 
necessary to support the use of the action and the roles, obligations 
and responsibilities of the various parties in the use of the action).
    Additionally, any action involving a proposed transfer may turn out 
to be difficult to achieve due to the financial and operational 
capacity that would be required of a transferee or the status of the 
DCO as a distressed seller. Further, the action may have adverse 
consequences on clearing members or other financial market 
participants. The Commission proposes to require this analysis in order 
to assist the DCO in determining which actions may effectuate an 
orderly wind-down where critical operations and services would be 
maintained throughout the orderly wind-down period while minimizing 
public harm.
    Accordingly, the Commission is proposing new Sec.  39.13(k)(3) to 
require that a DCO's orderly wind-down plan include, following a 
thorough analysis, the set of scenarios that may trigger consideration 
of orderly wind-down and an analysis of the tools the DCO would use in 
each scenario. The Commission is proposing to require that the analysis 
describe the tools the DCO would expect to use in an orderly wind-down; 
describe the order in which the DCO would expect to implement any 
identified tools; describe the governance, approval processes and 
arrangements that will guide the exercise of any available discretion 
in the use of each tool; establish the time frame within which the DCO 
may use each tool; set out the steps necessary to implement each tool; 
describe the roles and responsibilities of all parties in the use of 
each tool; provide an assessment of the likelihood that the tool would 
result in orderly wind-down; and provide an assessment of the 
associated risks to non-defaulting clearing members and their 
customers, linked financial market infrastructures, and the financial 
system more broadly, from the use of each tool.
    The Commission requests comment on this aspect of the proposal.
4. Agreements To Be Maintained During Orderly Wind-Down--Sec.  
39.13(k)(4)
    The Commission is proposing to require that a DCO's orderly wind-
down plan identify any agreements associated with the provision of its 
critical services and operations that are subject to alteration or 
termination as a result of winding down and describe the actions the 
DCO has taken to ensure such operations and services will continue 
during wind-down. Similar to SIDCOs and Subpart C DCOs, the DCO may 
have a variety of contractual agreements with clearing members, 
affiliates, linked central counterparties, counterparties,

[[Page 48991]]

external service providers, and other third parties. The contractual 
agreements may take the form of contracts, arrangements, agreements, 
and licenses associated with the provision of its services as a DCO, 
and may cover the DCO's rules and procedures, agreements for the 
provision of operational, administrative and staffing services, 
intercompany loan agreements, mutual offset agreements or cross-
margining agreements, and credit agreements. Under the Commission's 
proposed requirement, the DCO's orderly wind-down plan must review and 
analyze its agreements to determine if they contain covenants, material 
adverse change clauses, or other provisions that may render the 
continuation of the DCO's critical operations and services difficult or 
impracticable upon implementation of the orderly wind-down plan. The 
Commission is proposing to require that the DCO take proactive steps to 
ensure that its critical operations and services would continue in an 
orderly wind-down, notwithstanding any contractual provision to the 
contrary.
    As is the case for SIDCOs and Subpart C DCOs, a requirement 
ensuring that the DCO's agreements do not hinder its ability to 
continue critical operations and services in an orderly wind-down, or, 
if they do, that the orderly wind-down plan provides viable strategies 
to address the situation, is important to an orderly wind-down. 
Additionally, this requirement will aid in providing a higher degree of 
confidence with respect to this group of DCOs in the public markets 
even in extreme market conditions with the potential to trigger the 
consideration of implementation of orderly wind-down plans. In addition 
to Core Principle D(i), this proposed requirement is supported by Core 
Principle R, requiring that the DCO have an enforceable legal framework 
for each aspect of its activities.\177\ To the extent any agreement 
prohibits the DCO from continuing its critical operations and services 
in an orderly wind-down, a DCO may not have an enforceable legal 
framework within which to carry out all of its activities, specifically 
those associated with an orderly wind-down.
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    \177\ Section 5b(c)(2)(R) of the CEA, 7 U.S.C. 7a-1(c)(2)(R).
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing new Sec.  39.13(k)(4) to 
require that a DCO's orderly wind-down plan identify any contracts, 
arrangements, agreements, and licenses associated with the provision of 
its critical services and operations that are subject to alteration or 
termination as a result of the implementation of the orderly wind-down 
plan. The orderly wind-down plan shall describe the actions the DCO has 
taken to ensure such operations and services can continue during 
orderly wind-down, despite such potential alteration or termination.
5. Governance--Sec.  39.13(k)(5)
    The Commission is proposing to require that a DCO's orderly wind-
down plan include predefined governance arrangements with respect to 
wind-down planning and orderly wind-down that set forth the 
responsibilities of the board of directors, board members, senior 
executives and business units, describe the processes that the DCO will 
use to guide its discretionary decision-making relevant to the orderly 
wind-down plan, and describe the DCO's process for identifying and 
managing the diversity of stakeholder views and any conflict of 
interest between stakeholders and the DCO. Additionally, the Commission 
is proposing to require that the DCO's board of directors formally 
approve and annually review the orderly wind-down plan.
    An effective governance arrangement will assist DCOs in reacting 
quickly to adverse scenarios, provide transparency to the orderly wind-
down process, and help ensure that DCOs properly vet wind-down 
decisions with consideration of the interests of all relevant parties. 
Further, the proposed requirements with respect to governance are 
supported by Core Principle O, which requires that DCOs establish 
transparent governance arrangements to fulfill public interest 
requirements and permit the consideration of the views of owners and 
participants,\178\ and Core Principle P, which requires that DCOs 
establish both rules to minimize conflicts of interest in the decision 
making-process and a process for resolving conflicts of interest.\179\
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    \178\ Section 5b(c)(2)(O) of the CEA, 7 U.S.C. 7a-1(c)(2)(O).
    \179\ Section 5b(c)(2)(P) of the CEA, 7 U.S.C. 7a-1(c)(2)(P).
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    Accordingly, the Commission is proposing new Sec.  39.13(k)(5) to 
require that a DCO's orderly wind-down plan describe an effective 
governance structure that clearly defines the responsibilities of the 
board of directors, board members, senior executives and business 
units, describe the processes that the DCO will use to guide its 
discretionary decision-making relevant to the orderly wind-down plan, 
and describe the DCO's process for identifying and managing the 
diversity of stakeholder views and any conflict of interest between 
stakeholders and the DCO. Additionally, the Commission is proposing to 
require that a DCO's board of directors formally approve and annually 
review the orderly wind-down plan.
    The Commission requests comment on this aspect of the proposal.
6. Testing--Sec.  39.13(k)(6)
    For DCOs that are neither SIDCOs nor Subpart C DCOs, the Commission 
is proposing a testing requirement as part of the orderly wind-down 
plan that is similar, but not identical, to proposed new Sec.  
39.39(c)(8). Specifically, the Commission is proposing new Sec.  
39.13(k)(6) to require that the orderly wind-down plan for these DCOs 
include procedures for testing the DCO's ability to implement the tools 
upon which the orderly wind-down plan relies. The orderly wind-down 
plan must include the types of testing that will be performed, to whom 
the findings of such tests will be reported, and the procedures for 
updating the plan in light of the findings resulting from such tests. 
Such testing must occur following any material change to the orderly 
wind-down plan, but in any event not less frequently than once 
annually.
    The testing requirement for DCOs that are neither SIDCOs nor 
Subpart C DCOs should emphasize the reliable operability of the tools 
that potentially would be implemented in a wind-down; as such, the 
Commission is not proposing to require these DCOs to conduct crisis 
management drills or similar exercises as part of the testing 
requirement. Moreover, because of the wide range of possible types of 
clearing members, the Commission is not proposing to require these DCOs 
to conduct testing with the participation of clearing members.\180\ 
Nonetheless, where the plan relies upon the performance of clearing 
members and other internal stakeholders, or external stakeholders such 
as service providers, such DCOs should consider whether involving such 
parties is practical.
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    \180\ Such DCOs that are subject to regulation by other 
authorities may be subject to more stringent requirements with 
respect to testing by those authorities.
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    As discussed above, however, testing the orderly wind-down plan--
through assessing the operation and sufficiency of tools and resources 
to address losses--and updating the plan accordingly is a critical part 
of a DCO's risk management practice. Testing can reveal deficiencies in 
the effectiveness of specific tools. It can also enhance the tools and 
resources for identifying, measuring, monitoring, and managing risk in 
general. Periodic testing, moreover may reveal any deficiencies or

[[Page 48992]]

weaknesses in a DCO's infrastructure which may hamper wind-down 
efforts.
    The Commission requests comment on this aspect of the proposal. The 
Commission specifically requests comment on the proposed requirement 
that tests be conducted not less than annually: would a different 
minimum frequency be more appropriate for DCOs other than SIDCOs or 
Subpart C DCOs?

D. Conforming Changes to Bankruptcy Provisions--Part 190

    The Commission is proposing several conforming changes to Part 
190's bankruptcy provisions that follow from the proposed requirement 
that all DCOs maintain viable plans for orderly wind-down. First, 
current Sec.  190.12(b)(1) requires that a DCO in a Chapter 7 
proceeding provide to the trustee copies of, among other things, the 
wind-down plan it must maintain pursuant to Sec.  39.39(b).\181\ The 
Commission is proposing that the regulation be amended to include 
orderly wind-down plans that DCOs must maintain pursuant to proposed 
new Sec.  39.13(k) in addition to Sec.  39.39(b).
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    \181\ 17 CFR 190.12(b)(1).
---------------------------------------------------------------------------

    Second, current Sec.  190.15(a) requires that the trustee not avoid 
or prohibit certain actions taken by the DCO either reasonably within 
the scope of, or provided for in, any wind-down plan maintained by the 
DCO and filed with the Commission pursuant to Sec.  39.39.\182\ The 
Commission is proposing that the regulation be amended to include 
orderly wind-downs plans maintained by DCOs and filed with the 
Commission pursuant to proposed new Sec.  39.13(k) in addition to Sec.  
39.39.
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    \182\ 17 CFR 190.15(a).
---------------------------------------------------------------------------

    Third, current Sec.  190.15(c) requires that the trustee act in 
accordance with any wind-down plan maintained by the debtor and filed 
with the Commission pursuant to Sec.  39.39 in administering the 
bankruptcy proceeding.\183\ The Commission is proposing that the 
regulation be amended to include orderly wind-downs plans maintained by 
DCOs and filed with the Commission pursuant to proposed new Sec.  
39.13(k) in addition to Sec.  39.39.
---------------------------------------------------------------------------

    \183\ 17 CFR 190.15(c).
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    Last, current Sec.  190.19(b)(1) requires that a shortfall in 
certain funds be supplemented in accordance with the wind-down plan 
maintained by the DCO pursuant to Sec.  39.39 and submitted pursuant to 
Sec.  39.19.\184\ The Commission is proposing that the paragraph be 
amended to include orderly wind-downs plans maintained by DCOs pursuant 
to proposed new Sec.  39.13(k) in addition to Sec.  39.39.
---------------------------------------------------------------------------

    \184\ 17 CFR 190.19(b)(1).
---------------------------------------------------------------------------

    The Commission requests comment on this aspect of the proposal.

IV. Establishment of Time To File Orderly Wind-Down Plan--Sec.  
39.19(c)(4)(xxiv)

    In light of the proposed requirement that all DCOs maintain and 
submit to the Commission viable plans for orderly wind down and 
supporting information, the Commission is proposing to establish the 
timing for submitting orderly wind-down plans and supporting 
information for DCOs currently registered with the Commission. As the 
Commission is proposing to amend Sec.  39.19(c)(4)(xxiv) to establish 
the time for SIDCOs and Subpart C DCOs to file a recovery plan and an 
orderly wind-down plan, the Commission proposes to amend the same 
section to establish a fixed deadline for DCOs currently registered 
with the Commission to file orderly wind-down plans. Under the proposed 
rule, DCOs currently registered with the Commission must complete and 
submit orderly wind-down plans and supporting information within six 
months from the effective date of the rule (if it is adopted). Pursuant 
to Core Principle D(i), all DCOs must already ensure they possess the 
ability to manage the risks associated with discharging their 
responsibilities through the use of appropriate tools and procedures. A 
potential wind down, due either to default or non-default losses, is 
always a latent risk for any DCO engaged in clearing and settlement 
activities; accordingly, DCOs should already have some plans in place 
for implementing tools and procedures to manage an orderly wind-down.
    The Commission proposes to require that any DCO that submits an 
application for registration with the Commission six months or more 
after the effective date of this rulemaking (if it is adopted), must 
submit its orderly wind-down plans and supporting information at the 
time it submits an application for registration with the Commission 
under Sec.  39.3.\185\ The Commission is also requiring that all DCOs, 
upon revising their plans, but in any event no less frequently than 
annually, submit the current plan(s) and supporting information to the 
Commission, along with a description of any changes and the reason(s) 
for such changes.\186\
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    \185\ For any DCO that submits (or has submitted) an application 
for registration with the Commission before the date that is six 
months after the effective date of this rulemaking, if it is 
adopted, the Commission is proposing to require that the DCO have 
until the date that is six months after the effective date of this 
rulemaking to submit its orderly wind-down plan and supporting 
information.
    \186\ See Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a-1(c)(2)(J) 
(``Core Principle J--Reporting'') (requiring that DCOs provide to 
the Commission all information that the Commission determines to be 
necessary to conduct oversight of the DCO).
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    In Sec.  39.19(c)(4)(xxiv), as well as in Sec.  39.13(k) and Sec.  
39.39(b), the Commission is proposing to add the words ``and supporting 
information'' to references to submitting recovery and/or orderly wind-
down plans. DCOs may, in some instances, include supporting information 
within their plans, or may organize the documentation with supporting 
information kept separately, e.g., as an appendix or annex. To avoid 
confusion as to whether such separately kept information is required to 
be submitted to the Commission, and to ensure that the Commission has 
timely access to such supporting information, the Commission is 
proposing to amend Sec. Sec.  39.19(c)(4)(xxiv), 39.13(k) and 39.39(b) 
to require its submission explicitly.
    Accordingly, the Commission proposes to amend Sec.  
39.19(c)(4)(xxiv). Specifically, the Commission proposes to require 
that any DCO not currently registered with the Commission submit its 
viable plans for orderly wind-down and supporting information at the 
time it files its application for registration with the Commission 
under Sec.  39.3. Because the Commission is proposing to require that 
all DCOs must maintain and submit plans for orderly-wind down and 
supporting information, the Commission proposes to remove the current 
language from Sec.  39.19(c)(4)(xxiv) suggesting or providing that DCOs 
that are not SIDCOs or Subpart C DCOs may maintain and submit orderly 
wind-down plans to the Commission. For DCOs that are currently 
registered with the Commission and are not SIDCOs or Subpart C DCOs, 
the Commission is proposing to require that they submit their viable 
plans for orderly wind-down and supporting information no later than 
six months after this rulemaking, if finalized, is published. Upon 
revising their plans, moreover, but in any event no less frequently 
than annually, all DCOs shall submit the current plan(s) and supporting 
information to the Commission, along with a description of any changes 
and the reason(s) for such changes.
    The Commission requests comment on this aspect of the proposal. The 
Commission specifically requests comment concerning whether a DCO 
should additionally be required to update its recovery and orderly 
wind-

[[Page 48993]]

down plans upon changes to the DCO's business model, operations, or the 
environment in which it operates, to the extent such changes 
significantly affect the viability or execution of the recovery and 
orderly wind-down plans. The Commission also specifically requests 
comment concerning whether six months is sufficient time to develop 
these plans, or if a longer time (e.g., one year) would be more 
appropriate.

V. Amendment to Sec.  39.34(d)

    As discussed in the context of recovery plans and orderly wind-down 
plans, the Commission proposes to discontinue the process by which the 
Commission could grant, upon request of a SIDCO or DCO that is electing 
to become subject to subpart C, up to one year to comply with 
Sec. Sec.  39.39 and 39.35.\187\ The Commission is proposing to remove 
a similar provision in Sec.  39.34(d) wherein a SIDCO or Subpart C DCO 
could request, and the Commission may grant, up to one year to comply 
with any provision of Sec.  39.34 (System safeguards for SIDCOs and 
Subpart C DCOs) because granting such requests would be inconsistent 
with the system safeguard rules for SIDCOs and Subpart C DCOs that have 
been in effect for years.\188\ The Commission is therefore proposing to 
remove Sec.  39.34(d) in its entirety.
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    \187\ See 17 CFR 39.39(f).
    \188\ See System Safeguards Testing Requirements for Derivatives 
Clearing Organizations, 81 FR 64322 (Sept. 19, 2016).
---------------------------------------------------------------------------

    The Commission requests comment on this aspect of the proposal.

VI. Amendments to Appendix B to Part 39--Subpart C Election Form

    The Commission is proposing to amend the Subpart C Election Form to 
reflect the above proposed changes to Part 39. One of these amendments 
will reflect the elimination of the request for an extension of up to 
one year to comply with any of the provisions of Sec. Sec.  39.34, 
39.35, or 39.39. The ``General Instructions'' and ``Elections and 
Certifications'' portions of the Subpart C Election Form are proposed 
to be amended to delete the references to requests for relief of up to 
one year for those sections of part 39. Another amendment will modify 
Exhibit F-1 to include the DCO's recovery plan, orderly wind-down plan, 
supporting information for these plans, and a demonstration that the 
plans comply with the requirements of Sec.  39.39(c).
    The Commission requests comment on this aspect of the proposal.

VII. Amendments to Appendix A to Part 39--Form DCO

    The Commission is proposing to amend Form DCO, in particular, 
Exhibit D--Risk Management to reflect the above proposed changes to 
Part 39. The amendment will add an Exhibit D-5 to include the DCO's 
orderly wind-down plan, and a demonstration that the plan complies with 
the requirements of proposed Sec.  39.13(k).
    The Commission requests comment on this aspect of the proposal.

VIII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\189\ The 
regulations proposed by the Commission will affect only DCOs. The 
Commission has previously established certain definitions of ``small 
entities'' to be used by the Commission in evaluating the impact of its 
regulations on small entities in accordance with the RFA.\190\ The 
Commission has previously determined that DCOs are not small entities 
for the purposes of the RFA.\191\ Accordingly, the Chairman, on behalf 
of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that 
the proposed regulations will not have a significant impact on a 
substantial number of small entities.
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    \189\ 5 U.S.C. 601-612.
    \190\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618 (Apr. 30, 1982).
    \191\ See A New Regulatory Framework for Clearing Organizations, 
66 FR 45604, 45609 (Aug. 29, 2001).
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B. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\192\
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    \192\ Section 15(b) of the CEA, 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposed rules implicate any other 
specific public interest to be protected by the antitrust laws.
    The Commission has considered the proposed rulemaking to determine 
whether it is anticompetitive and has identified no anticompetitive 
effects. The Commission requests comment on whether the proposed 
rulemaking is anticompetitive and, if it is, what the anticompetitive 
effects are.
    Because the Commission has preliminarily determined that the 
proposed rules are not anticompetitive and have no anticompetitive 
effects, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the CEA. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the CEA that would otherwise be served by 
adopting the proposed rules.

C. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \193\ provides that Federal 
agencies, including the Commission, may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a valid control number from the Officer of 
Management and Budget (OMB). The PRA is intended, in part, to minimize 
the paperwork burden created for individuals, businesses, and other 
persons as a result of the collection of information by federal 
agencies, and to ensure the greatest possible benefit and utility of 
information created, collected, maintained, used, shared, and 
disseminated by or for the Federal Government.\194\ The PRA applies to 
all information, regardless of form or format, whenever the Federal 
Government is obtaining, causing to be obtained, or soliciting 
information, and includes required disclosure to third parties or the 
public, of facts or opinion, when the information collection calls for 
answers to identical questions posed to, or identical reporting or 
recordkeeping requirements imposed on, ten or more persons.\195\ This 
proposed rulemaking contains reporting and recordkeeping requirements 
that are collections of information within the meaning of the PRA. This 
section addresses the impact of the proposal on existing information 
collection requirements associated with part 39 of the Commission's 
regulations. Changes to the existing information requirements as a 
result of this proposal are set forth below. OMB has assigned Control 
No 3038-006, ``Requirements for Derivatives Clearing Organizations,'' 
to the information collections associated

[[Page 48994]]

with these regulations.\196\ The Commission is revising its total 
burden estimates for this clearance to reflect the proposed amendments.
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    \193\ 44 U.S.C. 3501 et seq.
    \194\ 44 U.S.C. 3501.
    \195\ 44 U.S.C. 3502(3).
    \196\ For the previously approved estimates, see ICR Reference 
No. 202303-3038-001, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202303-3038-001.
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    The Commission therefore is submitting this proposal to the OMB for 
its review in accordance with the PRA.\197\ Responses to this 
collection of information would be mandatory. The Commission will 
protect any proprietary information according to the Freedom of 
Information Act and part 145 of the Commission's regulations.\198\ In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the CEA, from making public any 
``data and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' \199\ Finally, the Commission is also required to 
protect certain information contained in a government system of records 
according to the Privacy Act of 1974.\200\
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    \197\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \198\ 5 U.S.C. 552; 17 CFR part 145 (Commission Records and 
Information).
    \199\ 7 U.S.C. 12(a)(1).
    \200\ 5 U.S.C. 552a.
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1. Event-Specific Reporting--Sec.  39.19(c)(4)
    Proposed Sec.  39.39(b) would require a SIDCO or Subpart C DCO to 
submit written recovery plans and orderly wind-down plans within six 
months of designation as a SIDCO or upon a DCO's election as a Subpart 
C DCO (in each case, if this happens subsequent to the effective date), 
consistent with current Sec.  39.19(c)(4)(xxiv). This reporting 
requirement is already included in the information collection burden 
associated with the collection of information titled ``Requirements for 
Derivatives Clearing Organizations, OMB Control No. 3038-0076.'' The 
Commission has previously estimated that this requirement entails an 
estimated 4,320 burden hours for all covered DCOs along with an 
associated annual cost burden of $341,280.\201\ While the timing for 
this reporting requirement has changed, there is no change in 
frequency, and the Commission does not anticipate any other change to 
this reporting requirement caused by this change to the timing for the 
report to be submitted. However, because of enhancements to the 
requirements for these plans, the Commission anticipates an increase in 
the reporting burden from the proposed subjects and analyses that 
SIDCOs and Subpart C DCOs would be required to include in their 
recovery and orderly wind-down plans from 480 hours to 600 hours. The 
Commission will use a blended rate of 50% financial examiners ($237/
hour) and 50% lawyers ($499/hour) resulting in $368/hour.\202\
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    \201\ This is based on the Commission's estimate that nine 
covered DCOs will be required to submit one written recovery plan 
and wind-down plan annually. The Commission had estimated that 
covered DCOs will require 480 hours on average to draft the required 
plans at a previously estimated $79 per hour.
    \202\ According to the May 2021 National Occupational Employment 
and Wage Estimates Report produced by the U.S. Bureau of Labor 
Statistics, available at https://www.bls.gov/oes/current/oes_nat.htm, the mean salary for category 23-1011, ``Lawyers,'' is 
$198,900. This number is (a) divided by 1800 work hours in a year to 
account for sick leave and vacations, (b) multiplied by 4.0 to 
account for retirement, health, and other benefits or compensation, 
as well as for office space, computer equipment support, and human 
resources support, and (c) in light of recent high inflation, 
further multiplied by 1.1294 to account for the change in the 
Consumer Price Index for Urban Wage-Earners and Clerical Workers 
from 263.612 in May of 2021 to 297.730 in April of 2023, all of 
which yields an hourly rate of $499. Using a similar analysis, 
category 13-2061, ``Financial Examiners,'' under business and 
financial services occupations, has a mean annual salary of $94,270, 
yielding an hourly rate of $237.
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    The Commission specifically invites public comment on the accuracy 
of its estimates that the proposed regulations will not impose a new 
reporting burden but increase the reporting burden estimate to 600 
hours.
    The Commission's burden estimate for Sec.  39.19(b), including 
drafting or updating, approving, and testing the wind-plan, is as 
follows:
    Estimated number of respondents: 6.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 600.
    Estimated annual hours burden: 3,600.
    Estimated gross annual reporting burden: $1,324,800.
    Proposed Sec.  39.13(k)(1)(i) would require a DCO that is neither a 
SIDCO nor a Subpart C DCO to submit, pursuant to Sec.  
39.19(c)(4)(xxiv), a written orderly wind-down plan. Given the 
similarities between the recovery plan and orderly wind-down plan, and 
the consequent efficiencies in preparing both plans, the Commission 
estimates that the orderly wind-down plan would require 400 hours to 
develop for non-SIDCO and non-Subpart C DCOs and 100 hours/year to 
update. The estimated 400 hours represents a reduction of one-third the 
amount of time that the Commission estimates is required for SIDCOs and 
Subpart C DCOs to develop both the recovery plan and orderly wind-down 
plan. This proposed amendment, if adopted, would increase the existing 
annual burden for this clearance by 3,600 hours.\203\ The Commission 
will use the same blended rate of $368/hour. The Commission 
specifically invites public comment on the accuracy of its estimates.
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    \203\ In an effort to adequately estimate the potential burden, 
the Commission will ignore the fact that, as discussed elsewhere in 
this NPRM, some DCOs have developed, and regularly update, their 
orderly wind-down plans pursuant to regulations imposed by non-U.S. 
regulators.
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    The Commission's burden estimate for Sec.  39.19(c)(4)(xxiv), 
including drafting or updating, approving, and testing the wind-plan, 
is as follows:
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 400.
    Estimated annual hours burden: 3,600.
    Estimated gross annual reporting burden: $1,324,800.
    The Commission is proposing to add new Sec.  39.19(c)(4)(xxv) to 
require that each SIDCO or Subpart C DCO that is required to have a 
procedure for informing the Commission when the recovery plan is 
initiated or that orderly wind-down is pending pursuant to either Sec.  
39.39(b)(2) or Sec.  39.13(k)(1) shall notify the Commission and 
clearing members as soon as practicable when the DCO has initiated its 
recovery plan or that orderly wind-down is pending. SIDCOs and Subpart 
C DCOs are currently required under Sec.  39.39(c)(1) to have 
procedures in place to notify the Commission when a recovery plan or 
orderly wind-down was initiated and the Commission is now proposing to 
codify this as a formal notification requirement, thus, the Commission 
does not view this aspect of the proposed regulation as a new reporting 
requirement under OMB Control No. 3038-0076. However, the requirement 
to notify clearing members was set out in CFTC Letter No. 16-61 but was 
not codified, and may therefore be considered a new event-specific 
reporting requirement. The Commission anticipates that, if adopted, the 
notification to the Commission and to clearing members will be drafted 
by a lawyer (and thus involve a cost/hour of $308) and will be an 
electronic notification. The current regulation requires procedures be 
in place to notify the Commission, and the proposed regulation requires 
that the notification be sent to the Commission and to clearing 
members. The Commission anticipates that proposed Sec. Sec.  
39.39(b)(2), 39.13(k)(1)(ii), and 39.19(c)(4)(xxv)

[[Page 48995]]

would increase the event-specific reporting burden estimate marginally.
    Since notifications of this type are accomplished by electronic 
means, the existing procedure will have to be updated to include notice 
to the DCO's clearing members. Since this can be accomplished using 
methods and tools that the DCO currently uses to provide notices to 
members of, e.g., changes in DCO rules or procedures, it is unlikely 
that the DCO will need to design and implement new tools.
    While no DCO (and no CFTC-regulated clearinghouse prior to the 
amendments to the CEA that provided for regulation of DCOs) has ever 
initiated recovery, several have (due to a paucity of business) made 
the decision to wind-down operations. The Commission conservatively 
estimates that one notification (total) under Sec.  39.19(c)(4)(xxv) 
would occur every four years.
    The Commission's burden estimate for Sec.  39.19(c)(4)(xxv) is as 
follows:
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 0.25.
    Average number of hours per report: 1.
    Estimated annual hours burden: 0.25.
    Estimated gross annual reporting burden: $125.
2. Requested Reporting--Sec.  39.19(c)(5)
    The Commission is proposing to add a new requested reporting 
requirement for SIDCOs and Subpart C DCOs that submit information to 
the Commission pursuant to Sec.  39.39(f)(2). Proposed Sec.  
39.19(c)(5)(iii) would require a SIDCO or Subpart C DCO that submits 
information for resolution planning purposes to update the information 
upon request of the Commission. The Commission believes this is a new 
requested reporting requirement, which will be performed by lawyers at 
a cost of $499/hour. This proposed amendment, if adopted, would 
increase the existing annual burden for this clearance by an estimated 
600 hours. The Commission's burden estimate for this new reporting 
requirement under Sec.  39.39(c)(5) is as follows:
    Estimated number of respondents: 6.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 100.
    Estimated annual hours burden: 600.
    Estimated gross annual reporting burden: $299,400.
    These proposed information collection requirements would result in 
an incremental increase in the annual hours burden associated with OMB 
Clearance No. 3038-0076. The Commission estimates the proposed 
amendments, if adopted, would yield the following incremental totals:
    Estimated number of annual responses for all respondents: 15.25.
    Estimated total annual burden hours for all respondents: 4,920.25.
    Estimated gross annual reporting burden: $1,889,285.
    Request for comment
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussion above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission will consider public comments on this proposed collection of 
information in:
    (1) Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) Evaluating the accuracy of the estimated burden of the proposed 
collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    (3) Enhancing the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) Minimizing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    Organizations and individuals desiring to submit comments on the 
proposed information collection requirements should send those comments 
to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202)395-6566 (fax); or
     [email protected] (email).
    Please provide the Commission with a copy of submitted comments so 
that, if the Commission determined to promulgate a final rule, all 
comments can be summarized and addressed in the final rule preamble. 
Please refer to the ADDRESSES section of this rulemaking for 
instructions on submitting comments to the Commission. A copy of the 
supporting statements for the collections of information discussed 
above may be obtained by vising RegInfo.gov. OMB is required to make a 
decision concerning the proposed information collection requirements 
between thirty (30) and sixty (60) days after the publication of the 
Notice of Proposed Rulemaking in the Federal Register. Therefore, a 
comment to OMB is best assured of receiving full consideration if OMB 
receives it within 30 calendar days of publication of this NPRM. 
Nothing in the foregoing affects the deadline enumerated above for 
public comments to the Commission on the proposed rules.

D. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\204\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five specific considerations identified in section 15(a) of the CEA 
(collectively referred to as section 15(a) factors) addressed below.
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    \204\ Section 15(a) of the CEA, 7 U.S.C. 19(a).
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    The Commission recognizes that the proposed amendments may impose 
costs. The Commission has endeavored to assess the expected costs and 
benefits of the proposed amendments in quantitative terms, including 
PRA-related costs, where possible. In situations where the Commission 
is unable to quantify the costs and benefits, the Commission identifies 
and considers the costs and benefits of the applicable proposed 
amendments in qualitative terms. The lack of data and information to 
estimate those costs is attributable in part to the nature of the 
proposed amendments, in that they will require DCOs to undertake 
analyses that are specific to the characteristics of each DCO, 
including the specifics of the DCO's business model, services and 
operations provided by the DCO to clearing members and other financial 
market participants, products cleared (and the DCO's role in the 
financial sector), services and operations provided by others that the 
DCO relies upon to provide its services and operations to others, 
infrastructure, and governance arrangements. Both the initial costs, 
and any initial and recurring compliance costs, will also depend on the 
size, existing infrastructure, practices, and cost structure of each 
DCO.
    The Commission generally requests comment on all aspects of its 
cost-benefit considerations, including the identification and 
assessment of any

[[Page 48996]]

costs and benefits not discussed herein; data and any other information 
to assist or otherwise inform the Commission's ability to quantify or 
qualitatively describe the costs and benefits of the proposed 
amendments; and substantiating data, statistics, and any other 
information to support positions posited by commenters with respect to 
the Commission's discussion. The Commission welcomes comment on such 
costs, particularly from existing SIDCOs and Subpart C DCOs that can 
provide quantitative cost data based on their respective experiences. 
Commenters may also suggest other alternatives to the proposed 
approach.
    2. Baseline
    The baseline for the Commission's consideration of the costs and 
benefits of this proposed rulemaking are: (1) the DCO Core Principles 
set forth in section 5b(c)(2) of the CEA; (2) the Commission's 
regulations in Subpart C of part 39, which establish additional 
standards for compliance with the core principles for those DCOs that 
are designated as SIDCOs or have elected to opt-in to the Subpart C 
requirements in order to achieve status as a QCCP; and (3) the subpart 
C Election Form in appendix B to part 39.
    Some of the proposed revisions and amendments to Sec.  39.39 would 
codify staff guidance and international standards. To the extent that 
market participants have relied upon the staff guidance that is 
proposed to be codified, the actual costs and benefits of the proposed 
rules, as discussed in this section of the proposal, may not be as 
significant. Additionally, the proposed changes to Sec.  39.39 would 
not apply to all fifteen DCOs currently registered with the Commission. 
Rather, the proposed amendments to Sec.  39.39 apply to SIDCOs and 
Subpart C DCOs. There are currently two SIDCOs,\205\ and four Subpart C 
DCOs.\206\ All SIDCOs and Subpart C DCOs have recovery plans and 
orderly wind-down plans on file with the Commission which may generally 
be consistent with the staff guidance issued in CFTC Letter No. 16-61 
and current Sec.  39.39(b). Additionally, the SIDCOs have already 
provided information related to resolution planning which may fulfill 
requests for information under current Sec.  39.39(c)(2), which is 
proposed to be revised as Sec.  39.39(f).
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    \205\ CME and ICC.
    \206\ ICE Clear US, Inc.; Minneapolis Grain Exchange, LLC; Nodal 
Clear, LLC; and OCC.
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    As discussed further below, the Commission is proposing to require 
that DCOs that are neither SIDCOs nor electors into Subpart C to 
develop and maintain plans for orderly wind-down. This would be a new 
requirement. However, of the nine such DCOs that are currently 
registered, five are based in jurisdictions that implement regulatory 
requirements that are consistent with the PFMI.\207\ These include 
standards that require both recovery and orderly wind-down plans. 
Accordingly, to the extent that these five DCOs have already designed 
and maintain plans for orderly wind-down that are consistent with the 
proposed rules, the actual costs and benefits of the proposed rules, as 
discussed in this section of the proposal, may be reduced.\208\ These 
standards will be new, however, for the remaining four non-Subpart C 
DCOs (and for any new DCOs that are similarly situated).\209\
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    \207\ These are ICE NGX Canada, Inc. (Canada), LCH SA (France), 
Eurex Clearing AG (Germany), as well as ICE Clear Europe and LCH Ltd 
(United Kingdom). Each of these jurisdictions has reported that they 
have fully implemented the standards in the PFMI. See https://www.bis.org/cpmi/level1_status_report.htm.
    \208\ To the extent foreign CCPs are subject to home 
jurisdiction regulation with different requirements for the subjects 
and analyses that must be included in their orderly wind-down plans, 
the Commission welcomes comments describing those requirements, and 
including suggestions on how to achieve the goals of this regulation 
in a manner that appropriately addresses possible inefficiencies.
    \209\ CBOE Clear Digital, LLC, CX Clearinghouse, L.P., LedgerX 
LLC, and North American Derivatives Exchange, Inc.
---------------------------------------------------------------------------

    The Commission's analysis below compares the proposed amendments to 
the regulations in effect today; however, it then takes into account 
current industry practices that may mitigate some of the costs and 
benefits set out in each section. The Commission seeks comment on all 
aspects of the baseline.
    3. Recovery Plan and Orderly Wind-Down Plan--Sec.  39.39(b)
    The Commission is clarifying that each SIDCO and Subpart C DCO must 
submit its recovery plan and orderly wind-down plan to the Commission 
consistent with existing Sec.  39.19(c)(4)(xxiv). The Commission is 
further proposing in Sec.  39.39(b)(2) to require that a SIDCO or 
Subpart C DCO notify the Commission and clearing members when the 
recovery plan is initiated or orderly wind-down is pending, and to add 
a corresponding event-specific reporting requirement in Sec.  
39.19(c)(4)(xxv). Proposed Sec.  39.39(b)(3) would also establish that 
a SIDCO must file its recovery plan and (to the extent it has not 
already filed one) orderly wind-down plan within six months of 
designation as a SIDCO, and a DCO electing to be subject to Subpart C 
of the Commission's regulations must file its recovery plan and (to the 
extent it has not already filed one) orderly wind-down plan on the 
effective date of its election.
i. Benefits
    Proposed Sec.  39.39(b)(1) explicitly requires that a SIDCO and a 
Subpart C DCO must have plans for recovery and orderly wind-down, and 
that these plans must each cover both default losses and non-default 
losses. This has the benefit of enhancing the resilience of these DCOs, 
and reducing the risk that they pose to clearing members and other 
financial market participants (and, in some cases, to the financial 
system), by requiring these plans to cover the full range of risks.
    Proposed Sec.  39.39(b)(2) requires that SIDCOs and Subpart C DCOs 
have procedures to notify the Commission and clearing members that 
recovery is initiated or orderly wind-down is pending as soon as 
practicable, and that such notice is provided to the Commission and 
clearing members. The requirement to notify the Commission is not a new 
requirement, and the requirement to notify clearing members, which was 
explicit in the staff guidance, will aid clearing members in protecting 
their interests.
    Finally, establishing a date for the filing of recovery plans and 
orderly wind-down plans in proposed Sec.  39.39(b)(3),\210\ is 
responsive to commenters' requests made over time for date certainty, 
and choosing six months as that certain date takes into account both 
resilience and practicality. Requiring that a newly-designated SIDCO 
submit its plans no later than six months after designation and that a 
DCO submit its plans at the time of making the election to become 
subject to Subpart C (if it has not already done so) fosters the 
objectives of promoting resiliency and prepares SIDCOs and Subpart C 
DCOs to meet the challenges of recovery or orderly wind-down in the 
event that they are necessary. Further, allowing newly designated 
SIDCOs six months to submit their plans should provide enough time to 
develop the plans. The Commission believes that these regulations will 
benefit registrants and market participants.
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    \210\ With respect to orderly wind-down plans, the Commission 
notes that this requirement would be applicable only to the extent 
the DCO does not have an orderly wind-down plan on file at the 
Commission.
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ii. Costs
    The current regulations require a SIDCO or Subpart C DCO to 
maintain viable plans for recovery and orderly wind-down, and to submit 
such plans to the Commission. DCOs already have systems in place to 
notify clearing

[[Page 48997]]

members when specific actions are taken, and the Commission believes 
that these existing systems can be used to notify clearing members when 
the recovery plan is initiated or orderly wind-down is pending. Thus, 
the costs involved would be the effort involved in preparing to use 
these existing systems to notify clearing members when the recovery 
plan is initiated or orderly wind-down is pending (including testing), 
and, if and when necessary, using them to make such notifications. 
Moreover, it does not appear that establishing the specified periods 
for filing the will cause additional costs above those involved in 
developing the recovery and orderly wind-down plans.
iii. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of sections 
15(a)(2)(A), (B), (D), and (E) of the CEA, the proposed amendments will 
protect market participants, enhance the financial integrity of futures 
markets, reflect sound risk management practices, and enhance the 
public interest, by ensuring that the Commission and clearing members 
are notified when the recovery plan is initiated or orderly wind-down 
is pending, thereby aiding the Commission in taking action to protect 
markets and the broader financial system, and enabling clearing members 
to protect their own interests.
    Section 15(a)(2)(C), price discovery, is not implicated by the 
proposed amendments.
4. Recovery Plan and Orderly Wind-Down Plan: Required Elements--Sec.  
39.39(c)
    Proposed Sec.  39.39(c) would establish the required content of a 
SIDCO's or Subpart C DCO's recovery plan and orderly wind-down plan 
consistent with the guidance set forth in CFTC Letter No. 16-61. 
Proposed Sec.  39.39(c)(1)-(8) would require that each plan's 
description include the identification and description of the critical 
operations and services the DCO provides to clearing members and other 
financial market participants, the service providers the DCO relies 
upon to provide these critical operations and services, 
interconnections and interdependencies, resilient staffing 
arrangements, obstacles to success of the plan, stress scenario 
analyses, potential triggers for recovery and orderly wind-down, 
available recovery and orderly wind-down tools, analyses of the effect 
of the tools on each scenario, lists of agreements to be maintained 
during recovery and orderly wind-down, and governance arrangements.
i. Benefits
    Current Sec.  39.39 does not provide explicit regulations governing 
the required elements of a SIDCO's or Subpart C DCO's recovery plan and 
orderly wind-down plan. At the time the 2013 rule was promulgated, the 
international standards and guidance covering such elements (with which 
a SIDCO and Subpart C DCO must comply) were consultative and not 
finalized. CFTC Letter No. 16-61 provided SIDCOs and Subpart C DCOs 
with comprehensive guidance related to the elements of acceptable 
recovery plans and orderly wind-down plans. Proposed Sec.  39.39(c) 
would codify elements for a recovery plan and orderly wind-down plan 
that are, in general, drawn from the guidance on international 
standards related to recovery plans and orderly wind-down plans adopted 
by international standards-setting bodies since 2013, and described in 
detail in CFTC Letter No. 16-61.
    Codifying the guidance set out in CFTC Letter No. 16-61, and 
enhancing the set of elements discussed in that guidance through 
proposed Sec.  39.39(c)(1)-(8) should benefit market participants, 
including both DCOs and their members, by establishing specific 
regulatory requirements for well-designed and effective recovery and 
orderly wind-down plans. The requirements of proposed Sec.  
39.39(c)(1)-(8) should contribute to DCOs achieving a better ex ante 
understanding of, the critical services and operations that it provides 
clearing members and other financial market participants, the services 
and operations provided by others (including internal staff) upon which 
it depends to provide those services and operations (and contractual 
arrangements with such others that might be altered or terminated as a 
result of the circumstances that lead to the need for recovery or 
orderly wind-down), the scenarios that might lead to recovery or 
orderly wind-down, of the challenges a DCO would face in a recovery or 
wind-down scenario, the tools that the DCO would rely upon to meet 
those challenges, and the challenges and complexities in using those 
tools, and the DCO's governance arrangements for recovery and orderly 
wind-down. This understanding will be significantly enhanced if the DCO 
engages in annual testing of its plans, and modifies those plans in 
light of the results of such testing.
    Thus, the DCOs, clearing members, and other financial market 
participants will benefit through the DCO being better prepared to meet 
those challenges successfully (and thus being more likely to continue 
to provide those critical services and operations upon which clearing 
members and other financial market participants depend, and to avoid 
the potential harms to clearing members, other financial market 
participants, and the financial system more broadly, from a disorderly 
cessation of those services and operations).
    Including these explicit and specific requirements for recovery 
plans and orderly wind-down plans should significantly enhance the 
DCO's ability to implement its recovery plan (or, if necessary, orderly 
wind-down plan) promptly and effectively. Additionally, the information 
will better enable a newly designated SIDCO, or a DCO that is electing 
subpart C status, to understand the requirements for well-developed and 
effective plans, and to consider relevant issues including the tools it 
intends to activate, its process for monitoring for triggers, the 
sequencing of tools, impediments to the timely or successful use of its 
tools, its governance arrangements, internal and external approval 
processes, and whether contractual agreements will continue during 
recovery and orderly wind-down; moreover, it will have a plan in place 
to handle exigencies in a manner that mitigates the risk of financial 
instability or contagion.
ii. Costs
    The specific requirements for a recovery plan's and orderly wind-
down plan's description, analysis, and testing set forth in this 
regulation will require substantial time to be spent on analytical 
effort by DCO staff, including attorneys, compliance staff, and other 
subject matter experts. DCO staff will spend time to review existing 
plans and supporting arrangements, compare them to the proposed rules 
(to the extent that they are ultimately adopted), and make 
modifications or additions to those plans, in light of, inter alia, the 
specifics of each DCO's business model, services and operations 
provided by the DCO to clearing members and other financial market 
participants, products cleared (and the DCO's role in the financial 
sector), services and operations provided by others that the DCO relies 
upon to provide its services and operations to others, infrastructure, 
and governance arrangements. The revised plans will then need to be 
reviewed, first by senior management and then by the board of 
directors, at the cost of the

[[Page 48998]]

time of those persons, and potentially further amended in light of the 
results of such reviews (resulting in the further expenditure of time).
    All of these DCOs will need to incur the cost of staff time to 
undertake additional analysis to (a) ensure that their recovery and 
orderly wind-down plans meet those portions of the proposed 
requirements that represent codification of staff guidance, and (b) 
meet those portions of the proposed requirements that represent 
enhancements to the staff guidance (this includes enhancements 
resulting from changes to definitions, e.g., calling for considerations 
of non-default losses due to the actions of malicious actors, including 
internal, external, and nation-states).
    This additional analysis includes developing an overview of each 
plan and describing how the plan will be implemented, ensuring that 
each plan identifies and describes (i) the critical operations and 
services that the DCO provides to clearing members and other financial 
market participants, (ii) the service providers upon which the DCO 
relies to provide these operations and services, (iii) plans for 
resilient staffing arrangements for continuity of operations, (iv) 
obstacles to success of the plans, (v) plans to address the risks 
associated with the failure of each critical operation and service, 
(vi) how the DCO will ensure that the identified operations and 
services continue thorough recovery and orderly wind-down.
    Further, the DCO will need to ensure that the analysis of scenarios 
for its recovery plan includes each of the scenarios specified in Sec.  
39.39(c)(2)(ii)(A)-(K) and (iii), or that the analysis documents why 
such scenario is not possible in light of the DCO's structure and 
activities, and that, for each possible scenario, the analysis includes 
the elements specified in Sec.  39.39(c)(2)(i)(A)-(F). The DCO will 
need to ensure that the analysis establishes triggers for recovery or 
consideration of orderly wind-down, and the information-sharing and 
governance process within senior management and board of directors. The 
DCO will also need to ensure that the plans describe the tools that it 
would use to meet the full scope of financial deficits that the DCO 
might need to remediate, and, for each set of tools, provides the 
additional analysis described in Sec.  39.39(c)(4)(ii)-(ix) (for the 
recovery plan) and Sec.  39.39(c)(5)(iii)-(x) (for the orderly wind-
down plan).
    Additionally, the DCO will need to ensure that its plans include 
determinations of which of the contracts, etc. associated with the 
provision of its services as a DCO are subject to alteration or 
termination as a result of the implementation of recovery or orderly 
wind-down, and the actions that the DCO has taken to ensure that its 
critical operations and services will continue during recovery and 
orderly wind-down despite such alteration or termination. The DCO will 
also need to ensure that the plans are formally approved, and annually 
reviewed, by the board of directors, describe effective governance 
structures and processes to guide discretionary decision-making 
relevant to each plan, and describe the DCO's process for identifying 
and managing the diversity of stakeholder views and any conflict of 
interest between stakeholders and the DCO.
    Moreover, the DCO will need to ensure that its plans include 
procedures for testing their viability, including the DCO's ability to 
implement the tools that each plan relies upon. This also includes the 
types of testing to be performed, to whom the results are reported, and 
procedures for updating the plans in light of the findings resulting 
from such tests. The tests need to include the participation of 
clearing members, where the plans rely upon their participation. The 
tests must be repeated following any material change to the recovery 
plan or orderly wind-down plan, but in any event not less than once 
annually.
    If the foregoing recovery or orderly wind-down planning identifies 
vulnerabilities that need to be improved upon, the DCO will incur the 
cost of remediating such vulnerabilities.
    As noted earlier in this section, plans revised in light of the 
foregoing analysis will then need to be reviewed, first by senior 
management and then by the board of directors, at the cost of the time 
of those persons, and potentially further amended in light of the 
results of such reviews (resulting in the further expenditure of time).
    It is impracticable to quantify these costs, because they depend on 
the specific design and other circumstances of each DCO. including the 
specific services and operations that the DCO provides to clearing 
members and other financial participants, the services and operations 
provided by others that the DCO relies upon to provide those services, 
the contractual arrangements between and those service providers, and 
the DCO's current recovery and orderly wind-down plans., It seems 
likely that these requirements will require hundreds of hours of the 
effort of skilled professionals, at a cost of tens of (perhaps more 
than a hundred) thousands of dollars.
    For DCOs that are currently SIDCOs or Subpart C DCOs, or other DCOs 
that may currently maintain recovery and orderly wind-down plans, the 
amount of time required for each DCO to initially amend its recovery 
plan and orderly wind-down plan may vary depending on the extent to 
which the DCO already addressed the foregoing requirements in its 
existing plans. The analysis and plan preparation that a SIDCO or 
Subpart C DCO will undertake to comply with this regulation, including 
designing and implementing changes to existing plans, was, to a 
significant extent, established in the 2016 staff guidance, and, based 
on staff's experience, SIDCOs and Subpart C DCOs generally already 
follow those standards. To that extent, for these DCOs, those costs may 
be reduced.
    The Commission requests comment from existing SIDCOs and Subpart C 
DCOs concerning their estimates of the time, and corresponding costs, 
they would expect to incur in ensuring that their existing plans meet 
the requirements of the proposed rule, along with supporting data 
concerning the amount of effort expended on preparing existing plans, 
and the extent to which additional time may need to be spent to conform 
such plans to the proposed rules. The Commission also seeks comment 
from the public more generally as to estimates, along with supporting 
data, of the time, and corresponding costs that might be incurred in 
developing recovery and orderly wind-down plans that meet those 
requirements.
    Additionally, to what extent are existing SIDCOs and Subpart C DCOs 
following the staff guidance in CFTC Letter No. 16-61? What is the 
impact of current practice among existing SIDCOs and Subpart C DCOs 
with respect to that staff guidance on the costs and benefits that 
would result from implementation of the proposed rules?
iii. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the section 15(a) factors. In 
consideration of sections 15(a)(2)(A), (B), (D), and (E) of the CEA, 
the Commission believes the proposed amendments to Sec.  39.39(c)(1)-
(8) would enhance existing protection of market participants and the 
public and the financial integrity of futures markets, and the 
regulations should aid in sound risk management practices by ensuring 
that the DCO considers in advance the impact that recovery and orderly 
wind-down would have on its operations and customers. Moreover, 
specifying the contents of the plans in the regulation

[[Page 48999]]

should increase the possibility that a DCO could continue to provide 
the critical services and operations upon which its clearing members 
and other financial market participants depend, and reduce the 
possibility that a DCO would fail in a disorganized fashion. The 
proposed rule should reduce the likelihood of a DCO's failure to meet 
its obligations to its members, thereby enhancing protection for a 
DCO's members and their customers, and should help to avoid the 
systemic effects of a DCO failure. Having the requisite plans in place, 
moreover, should allow DCOs to handle exigencies in a manner that 
mitigates the risk of financial instability or contagion. These 
benefits favor the public interest. Section 15(a)(2)(C), price 
discovery, does not appear to be implicated by the proposed amendments.
5. Information for Resolution Planning--Sec.  39.39(f)
    The Commission is proposing in Sec.  39.39(f) to require that a 
SIDCO and Subpart C DCO maintain information systems and controls to 
provide data and information necessary for the purposes of resolution 
planning to the Commission, and upon request provide such data and 
information to the Commission, electronically, in the form and manner 
specified by the Commission. Proposed Sec.  39.39(f)(1)-(7) describes 
the types of information deemed pertinent to planning for resolution of 
a SIDCO or Subpart C DCO under Title II of the Dodd-Frank Act. Much of 
this information may already be provided to the Commission, and thus 
may not be requested. The proposed regulation expands on current Sec.  
39.39(c)(2) and lists explicitly the types of information that SIDCOs 
and Subpart C DCOs may be required to provide upon request because they 
are relevant to resolution planning, but which may not ordinarily be 
required to be provided under other sections of part 39.
i. Benefits
    Proposed Sec.  39.39(f)(1)-(7) describes the types of information 
that the Commission proposes to require for resolution planning under 
Title II of the Dodd-Frank Act. Thorough preparation ex ante is crucial 
for successfully managing matters relating to the resolution of a SIDCO 
or Subpart C DCO, as well as for establishing market confidence and the 
confidence of foreign counterparts to the Commission and to the United 
States agencies responsible for resolution of a SIDCO or Subpart C DCO. 
Because of the nature of principles-based regulation, there is some 
information in the possession of the DCO that, while important for 
resolution planning purposes, may not ordinarily be reported to the 
Commission and may not be publicly available. Thus, the primary benefit 
from this regulation is that the type of information to be requested 
will be available to the DCO, and upon request, the Commission may 
obtain the information in order to assist the Commission in planning 
and preparing for the resolution of a distressed DCO. There is also 
considerable public benefit in enhancing preparedness for resolution by 
making available to FDIC, as the resolution authority, information 
relevant to planning for the resolution of a SIDCO or Subpart C DCO.
ii. Costs
    The proposal assumes that there is information relevant to 
resolution planning that is not ordinarily reported to the Commission 
under Sec.  39.19, but which is in the possession of the DCO. As such, 
SIDCOs and Subpart C DCOs will face certain incremental costs (from 
gathering the information, reviewing it for accuracy, and transmitting 
it to the Commission) to produce this information upon request as 
required by proposed Sec.  39.39(f)(1)-(7). Gathering the information 
and transmitting it would likely be accomplished by paraprofessionals, 
while review may require the work of paraprofessionals or 
professionals. The time that would be required to accomplish these 
tasks would depend on the information requested and the DCO's 
information system architecture. A crude estimate of the time required 
might be 10-20 hours, at a cost of $3,000-$6,000, once or twice a year 
for a SIDCO, and once every five years for a Subpart C DCO.
    To the extent that some of this information requires analyses by 
the DCO that are not currently conducted, such incremental costs may be 
more significant. Here, the DCO would need to develop tools to analyze 
its information (which may involve new uses for existing tools, or may 
in some cases require the development of new tools), gather the 
underlying data, use the tools, review the results, and then transmit 
those results to the Commission. This may also involve effort in 
working with Commission staff to clarify and/or to sharpen the request. 
While some of this effort might be accomplished by paraprofessionals, 
the proportion that would need the effort of professionals would likely 
be greater than in the previous paragraph. A crude estimate of the time 
required might be 30-60 hours, at a cost of $12,000-$24,000, once a 
year for a SIDCO, and once every ten years for a Subpart C DCO.
    It should be noted that the Commission does not anticipate asking 
Subpart C DCOs for information for resolution planning in the near 
term. This is because, even in the highly unlikely event that a Subpart 
C DCO would enter recovery, and that such recovery would fail, the 
likelihood of such a DCO qualifying for resolution under Title II is 
fairly low.
    The Commission seeks comments, in particular from SIDCOs and 
Subpart C DCOs, on the accuracy of these estimates (with respect to 
both time required and cost), and on how they may be improved. In 
particular, SIDCOs that have responded to similar requests in the past 
are invited to discuss the costs that they incurred in doing so (both 
in building tools where necessary and in gathering and reviewing the 
information), and to provide insight into expected costs to do so in 
the future.
iii. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specified considerations 
identified in section 15(a) of the CEA. In consideration of sections 
15(a)(2)(A), (B), (D), and (E) of the CEA, the Commission preliminarily 
believes that proposed Sec.  39.39(f)(1)-(7) would protect market 
participants and the public, and support the financial integrity of 
futures markets, by enhancing preparation for resolution of DCO in 
advance of systemic failure, and thus increasing the likelihood that 
resolution would be successful. Furthermore, advance planning may 
identify issues that should and can be corrected in advance of market 
failure, thereby providing an opportunity to improve DCO risk 
management practices and further enhance the protection of market 
participants and the public, and the financial integrity of the 
derivatives markets. Finally, there is a strong public interest in 
holding CFTC-registered SIDCOs and Subpart C DCOs to regulations that 
incorporate international standards and guidance. Section 15(a)(2)(C), 
price discovery, does not appear to be implicated by this proposal.
6. Requested Reporting--Sec.  39.19(c)(5)(iii)
    Proposed Sec.  39.39(f)(1)-(7) requires a corresponding amendment 
to Sec.  39.19(c)(5) regarding requested reporting. Proposed Sec.  
39.19(c)(5)(iii) would require that a SIDCO or Subpart C DCO that 
submits information related to resolution planning to the Commission 
pursuant to Sec.  39.39(f)(1)-

[[Page 49000]]

(7), shall update the information upon request.
i. Benefits
    The Commission is proposing an additional requirement to clarify 
that the information for resolution planning requested under proposed 
Sec.  39.39(f) would be updated upon request. By requesting (and then 
providing to the FDIC) current, accurate, and pertinent information for 
resolution planning, the Commission may be able to assist in resolution 
planning more effectively. The financial system benefits as a whole 
when the FDIC can obtain, with the aid of the Commission, current, 
accurate, and pertinent information for resolution planning related to 
a SIDCO's or Subpart C DCO's structure and activities (Sec.  
39.39(f)(1)), clearing members (Sec.  39.39(f)(2)), arrangements with 
other DCOs (Sec.  39.39(f)(3)), financial schedules and supporting 
details (Sec.  39.39(f)(4)), interconnections and interdependencies 
with internal and external service providers (Sec.  39.39(f)(5)), 
information concerning critical personnel (Sec.  39.39(f)(6)), and 
other necessary information (Sec.  39.39(f)(7)).
ii. Costs
    The Commission anticipates that proposed Sec.  39.19(c)(5) would 
add incremental costs to the business-as-usual activities of the DCOs. 
For information that is regularly maintained by the DCO, this would 
involve repeating the efforts described above in Section VIII.D.5(ii) 
of gathering, reviewing, and transmitting the information. For 
information that requires analyses that are not currently conducted by 
the DCO, the corresponding efforts described above in Section 
VIII.D.5(ii) would be called for, but some may be reduced or 
eliminated: the DCO would once again need to gather the information, 
but would presumably be able to use the tools that it repurposed (or 
newly developed) when it responded to the information request for the 
first time. Moreover, there may not be a need to clarify or sharpen the 
request, to the extent that the request is identical (except for time-
period) to the first request. The DCO would still need to review the 
results, and transmit them to the Commission.
iii. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specified considerations 
identified in section 15(a) of the CEA. In consideration of sections 
15(a)(2)(A), (B), (D), and (E) of the CEA, the Commission believes that 
Sec.  39.39(f)(1)-(7) protects market participants and the public, and 
promotes the financial integrity of futures markets, by ensuring that 
resolution plans are based on current, accurate, and pertinent 
information. Further, planning for resolution is a pillar of sound risk 
management principles, and supports the public interest. Section 
15(a)(2)(C), price discovery, does not appear to be implicated by this 
proposal.
7. Viable Plans for Orderly Wind-Down for DCOs That Are Neither SIDCOs 
Nor Subpart C DCOs--Sec.  39.13(k)
    Proposed Sec.  39.19(k)(1)(a) would require that DCOs that are 
neither SIDCOs nor Subpart C DCOs maintain and submit to the Commission 
viable plans for orderly wind down necessitated by default losses and 
non-default losses. As discussed above, proposed Sec.  39.19(k)(2)-(6) 
would enumerate the information required to be incorporated in an 
orderly wind-down plan.
i. Benefits
    Requiring DCOs that are neither SIDCOs nor Subpart C DCOs to 
maintain viable plans for orderly wind-down should contribute to a 
better ex ante understanding by such DCOs of the critical services and 
operations that clearing members and other financial market 
participants depend upon them to provide, and of the challenges the DCO 
would face in doing so. DCOs will benefit through better preparation to 
meet those challenges; moreover, by enumerating certain subjects, 
analyses, and testing that all DCOs must include in their orderly wind-
down plans, a DCO's ability to wind-down promptly and in an orderly 
manner during any exigency should be significantly enhanced. To the 
extent that this analysis identifies vulnerabilities, the DCO will have 
the opportunity to remediate them.\211\
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    \211\ To the extent that a foreign-based DCO already maintains 
an orderly wind-down plan, pursuant to the regulations of its home-
country regulator, that meets the standards set in the proposed 
regulation, these benefits would be reduced or eliminated.
---------------------------------------------------------------------------

    Importantly, an orderly and expeditious wind-down will help 
mitigate the damage to the DCO's participants (and their customers, if 
any) by facilitating either the continuation of the DCO's services 
(potentially through another DCO) or the prompt return of their 
participants' collateral.
ii. Costs
    The Commission anticipates that some DCOs may bear a significant 
cost burden, as described further below, due to the proposed 
regulation, because of the various analyses and testing these DCOs 
would be required to conduct.
    The specific requirements for an orderly wind-down plan's 
description, analysis, and testing set forth in this regulation will 
require substantial time to be spent on analytical effort by DCO staff, 
including attorneys, compliance staff, and other subject matter 
experts. DCO staff will need to draft plans and supporting arrangements 
that meet the standards set in the proposed rules (to the extent that 
they are ultimately adopted) in light of, inter alia, the specifics of 
each DCO's business model, services and operations provided by the DCO 
to clearing members and other financial market participants, products 
cleared (and the DCO's role in the financial sector), services and 
operations provided by others that the DCO relies upon to provide its 
services and operations to others, infrastructure, and governance 
arrangements. The plans will then need to be reviewed, first by senior 
management and then by the board of directors, at the cost of the time 
of those persons, and potentially further amended in light of the 
results of such reviews (resulting in the further expenditure of time).
    These analyses include developing an overview of the orderly wind-
down plan and describing how the plan will be implemented, ensuring 
that the orderly wind-down plan identifies and describes (i) the 
critical operations and services that the DCO provides to clearing 
members and other financial market participants, (ii) the service 
providers upon which the DCO relies to provide these operations and 
services, (iii) plans for resilient staffing arrangements for 
continuity of operation, (iv) obstacles to success of the plan, (v) 
plans to address the risks associated with the failure of each critical 
operation and service, (vi) how the DCO will ensure that the identified 
operations and services continue thorough orderly wind-down.
    Further, the DCO will need to ensure that the analysis of scenarios 
for its orderly wind-down plan identifies scenarios that may prevent 
the DCO from meeting its obligations or providing critical operations 
and services as a going concern. The DCO will need to ensure that the 
analysis establishes triggers for consideration of orderly wind-down, 
and the information-sharing and governance process within senior 
management and board of directors. The DCO will also need to ensure 
that the plan describes the tools that it would use in an orderly wind-
down that comprehensively address how the DCO would continue to

[[Page 49001]]

provide critical services, the governance and approval processes and 
arrangements that will guide the exercise of any available discretion, 
the steps necessary to implement each tool, the roles and 
responsibilities of all parties in the use of each tool, an assessment 
of the likelihood that the tools, individually and taken together, 
would result in an orderly wind-down, and an assessment of the risks to 
non-defaulting clearing members and their customers, and linked 
financial market infrastructures.
    Additionally, the DCO will need to ensure that its plan includes 
determinations of which of the contracts, etc. associated with the 
provision of its services as a DCO are subject to alteration or 
termination as a result of the implementation of the orderly wind-down 
plan, and the actions that the DCO has taken to ensure that its 
critical operations and services will continue during orderly wind-down 
despite such alteration or termination. The DCO will also need to 
ensure that the plans are formally approved, and annually reviewed, by 
the board of directors, describe effective governance structures and 
processes to guide discretionary decision-making relevant to the plan, 
and describe the DCO's process for identifying and managing the 
diversity of stakeholder views and any conflict of interest between 
stakeholders and the DCO.
    Moreover, the DCO will need to ensure that its plan includes 
procedures for testing the DCO's ability to implement the tools that 
the orderly wind-down plan relies upon. This also includes describing 
the types of testing to be performed, to whom the results are reported, 
and procedures for updating the plans in light of the findings 
resulting from such tests. The tests must be repeated following any 
material change to the orderly wind-down plan, but in any event not 
less than once annually.
    If the foregoing wind-down planning identifies vulnerabilities that 
need to be improved upon, the DCO will incur the cost of remediating 
such vulnerabilities.
    As noted earlier in this section, plans revised in light of the 
foregoing analysis will then need to be reviewed, first by senior 
management and then by the board of directors, at the cost of the time 
of those persons, and potentially further amended in light of the 
results of such reviews.
    While it is impracticable to quantify these costs, because they 
depend on the specific design and other circumstances of each DCO. it 
seems likely that these requirements will require less effort than the 
corresponding requirements for both recovery plans and orderly wind-
down plans for SIDCOs and Subpart C DCOs, because these DCOs are 
required only to prepare, and meet the standards for, an orderly wind-
down plan. Moreover, in many cases, the business structure and 
operations of these DCOs may be less complex than those of SIDCOs or 
Subpart C DCOs. Nonetheless, the Commission estimates that an orderly 
wind-down plan will require hundreds of hours of the effort of skilled 
professionals, at a cost of tens of thousands of dollars.
    For those DCOs that are based in jurisdictions that, pursuant to a 
legal framework that is consistent with the PFMI, already require them 
to maintain orderly wind-down plans, the cost should be substantially 
less, as the requirements for orderly wind-down plans are likely to be 
comparable to the requirements applicable in those other jurisdictions 
(and thus these DCOs would, for the most part, be able to rely upon 
their existing plans).\212\ For other DCOs that are not required to 
have orderly wind-down plans pursuant to regulations of either the CFTC 
or other regulators, these costs would be larger while the orderly 
wind-down plans are first being developed, although there will be 
additional (albeit reduced) costs in reviewing, testing, and updating 
these plans on an ongoing basis. The initial costs may be mitigated to 
the extent that such DCOs may already have some form of a wind-down 
plan in place as part of their general risk management strategy. 
Additionally, DCOs may already have performed some of the proposed 
analyses as part of their existing regulatory compliance programs.
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    \212\ To the extent that this assumption is incorrect, and the 
proposal would require foreign-based DCOs to comply with overly 
burdensome additional requirements, the Commission seeks comments 
that set forth inconsistencies between the proposed requirements and 
the requirements in the relevant foreign jurisdictions, and 
recommendations as to how those inconsistencies can and should be 
mitigated through amendments to the proposed requirements.
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iii. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) of the CEA, the Commission believes that the proposed 
regulations should protect market participants and the public. At the 
outset, a viable plan for orderly wind down reduces uncertainty in 
times of market stress, since its existence enhances legal certainty 
for the DCO's clearing members and market participants, and increases 
the likelihood of an orderly and expeditious wind-down that will 
mitigate the harm to their interests from the closing of the DCO. 
Further, a viable plan for orderly wind-down should increase market 
confidence, because clearing members and their customers would know 
beforehand that the DCO is well prepared to undertake an orderly wind-
down, if necessary. Importantly, the proposed regulations should 
enhance protection for a DCO's members and their customers by reducing 
the likelihood that a DCO would fail to meet certain obligations to its 
members and other market participants in orderly wind-down.
    In consideration of section 15(a)(2)(B) of the CEA, with respect to 
the efficiency, competitiveness, and financial integrity of markets, 
plans for orderly wind-down (and for determining when orderly wind-down 
might be necessary) would enhance financial integrity of markets, by 
enhancing the likelihood that any wind-down would be orderly, and the 
existence of these standards might enhance market participants 
confidence in (and thus the competitiveness of) DCOs.
    In consideration of section 15(a)(2)(D) of the CEA, the proposed 
regulations would aid in sound risk management practices. The 
requirement to maintain and submit to the Commission viable plans for 
orderly wind-down provides greater clarity and transparency before 
wind-down and facilitates timely decision-making and the continuation 
of critical operations and services during orderly wind-down. Wind-down 
planning--including, for example, considering the circumstances that 
may trigger an orderly wind-down, the tools the DCO would implement to 
help ensure an orderly wind-down (along with the likely effects on 
clearing members and the financial markets from implementing such 
tools), and the governance arrangements to guide decision-making during 
a wind-down--also would strengthen the risk management practices of the 
DCO by, among other things, identifying vulnerabilities that can be 
mitigated and preparing for multiple exigencies. Having an orderly 
wind-down plan in place, moreover, should allow the DCO to handle 
exigencies in a manner that mitigates the risk of financial instability 
or contagion. Moreover, in consideration of section 15(a)(2)(E), having 
an orderly wind-down plan in place would promote the public interest. 
However, section 15(a)(2)(C), price discovery, is not implicated by the 
proposed amendments.

[[Page 49002]]

8. Notification Requirement for DCOs That Are Neither SIDCOs Nor 
Subpart C DCOs of Pending Orderly Wind-Down--Sec. Sec.  39.19(k)(1)(b) 
and 39.19(c)(4)(xxv)
    The Commission is proposing in new Sec.  39.19(k)(1)(b) that DCOs 
that are neither SIDCOs nor Subpart C DCOs have procedures in place for 
informing the Commission and clearing members, as soon as practicable, 
when orderly wind-down is pending, consistent with the requirements of 
proposed new paragraph Sec.  39.19(c)(4)(xxv).\213\
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    \213\ Proposed new Sec.  39.19(c)(4)(xxv) would provide that 
each DCO shall notify the Commission and clearing members as soon as 
practicable when, among other things, orderly wind-down is pending.
---------------------------------------------------------------------------

i. Benefit
    A DCO should notify the Commission as soon as practicable of a 
pending orderly wind-down so that the Commission may promptly take 
appropriate steps to monitor the wind-down process, and to protect the 
interests of clearing members and other market participants. Likewise, 
a DCO should notify its clearing members as soon as practicable as 
well, so that they may promptly take steps to protect themselves 
(including, e.g., by seeking to replace hedge positions). Such 
information-sharing fosters market transparency, which can serve to 
increase confidence and enhance market participants' abilities to 
protect their own interests.
ii. Costs
    DCOs should already have tools and procedures in place for 
notifying the Commission and clearing members of other circumstances or 
events triggering notification; Thus, the only costs involved would be 
the effort involved in preparing to use these existing tools and 
procedures to notify the Commission and clearing members when orderly 
wind-down is pending (including testing), and, if and when necessary, 
using them to make such notifications.
iii. Section 15(a) Factors
    The proposed regulations should protect market participants and the 
public under section 15(a)(2)(A) of the CEA, enhance efficiency, 
competitiveness, and financial integrity of futures markets under 
section 15(a)(2)(B) of the CEA, aid in sound risk management practices 
under section 15(a)(2)(D) of the CEA, and promote the public interest 
under section 15(a)(2)(E) of the CEA. Clearing members and their 
customers cannot accurately evaluate the risks and costs associated 
with using a DCO's services if they do not have sufficient information, 
including when the DCO is no longer a going concern. A requirement that 
clearing members be notified as soon as practicable of a pending 
winding-down also allows market participants time to take action to 
protect their own interests. Likewise, market participants can use a 
DCO's services with the confidence that the DCO will not delay in 
notifying them of a pending orderly wind-down, which should enhance 
competitiveness. The requirement also reduces risk by providing DCO's 
stakeholders sufficient notice to help ensure an orderly wind-down. 
However, section 15(a)(2)(C), price discovery, is not implicated by the 
proposed amendments.

9. Timing for DCOs' Submission of Recovery and Orderly Wind-Down 
Plans--Sec.  39.19(c)(4)(xxiv)

    Proposed Sec.  39.19(c)(4)(xxiv) would continue to require that a 
DCO that is required to maintain recovery and orderly wind-down plans 
pursuant to Sec.  39.39(b) shall submit its plans to the Commission no 
later than the date the DCO is required to have the plans. It would add 
an explicit requirement that those plans be accompanied by supporting 
information, and would newly require that a DCO that is required to 
maintain orderly wind-down plans pursuant to Sec.  39.13(k) shall 
submit its plans and supporting information at the time it files its 
application for registration under Sec.  39.3.\214\ The Commission is 
proposing a deadline of six months from the effective date of the rule 
(if adopted) for those DCOs currently registered with the Commission to 
complete and submit the orderly wind-down plans and supporting 
information. Moreover, this proposed rule would continue to require 
that a SIDCO or Subpart C DCO, upon revising the plan(s), submit the 
current (formerly, ``revised'') plan(s) to the Commission, along with a 
description of any changes and the reason(s) for such changes. This 
requirement would be new for other DCOs. The proposal would add 
requirements that the plans, including any supporting information, must 
be submitted at least annually.
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    \214\ As previously noted, for any DCO that submits (or has 
submitted) an application for registration with the Commission 
before the date that is six months after the effective date of this 
rulemaking, if it is adopted, the Commission is proposing to require 
that the DCO have until the date that is six months after the 
effective date of this rulemaking to submit its orderly wind-down 
plans.
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i. Benefits
    DCOs seeking registration with the Commission will promptly have 
orderly wind-down plans and supporting information available upon 
registration. Clearing members and potential customers, moreover, will 
immediately benefit from orderly wind-down planning that has already 
taken place. For those DCOs currently registered with the Commission, 
the Commission believes six months is sufficient with respect to both 
the time and resources necessary for orderly wind-down planning, and 
takes into account the need to prepare promptly viable plans for 
orderly wind-down, given that a disorderly wind-down poses risks to 
clearing members and other financial market participants, and 
potentially, in some cases, risk to the financial system, especially in 
turbulent and uncertain market environments.
    Requiring that current plans be submitted at least annually would 
help to ensure that the plans available to the Commission for review 
remain reasonably current (given the possibility that some minor 
changes or updates to the plans may be considered as not meeting the 
threshold of ``revisions''), thereby aiding the Commission's exercise 
of its supervisory responsibilities both in its ongoing risk-based 
examination program and in case of financial distress at the DCO.
    As discussed above in Section IV, DCOs may, in some instances, 
include supporting information within their plans, or may organize the 
documentation with supporting information kept separately, e.g., as an 
appendix or annex. Adding the term ``and supporting information'' would 
have the benefit of ensuring that the Commission has timely access to 
such supporting information.
ii. Costs
    The Commission anticipates that the costs for DCOs to submit the 
viable plans for orderly wind-down that they are otherwise required to 
maintain would be limited to the cost of transmission using DCOs' 
already established systems and procedures to submit documents to the 
Commission. Similarly, re-submitting current plans with supporting 
information should involve only the costs of gathering that information 
together and transmitting it, as the information must be at hand in 
order to plan adequately. As discussed above, some DCOs will already 
have orderly wind-down plans in place; others may already have 
considered at least some of the subjects and analyses as part of their 
efforts to comply with the DCO Core Principles.
iii. Section 15(a) Factors
    For the same reasons as previously noted above, the Commission 
believes the proposed regulations would protect

[[Page 49003]]

market participants and the public under section 15(a)(2)(A) of the 
CEA, enhance competitiveness of futures markets under section 
15(a)(2)(B) of the CEA, and aid in sound risk management practices 
under section 15(a)(2)(D) of the CEA. Ensuring the prompt availability 
of viable plans for orderly wind down would reduce uncertainty in times 
of market stress, increase market confidence, and provide assurance to 
market participants and the public that DCOs are meeting minimum risk 
standards. Likewise, orderly wind-down plans enhance protection for a 
DCO's members and their customers. Having viable plans for orderly 
wind-down already in place additionally provides greater clarity and 
transparency before wind-down, assists the DCO in identifying 
vulnerabilities and preparing for multiple exigencies, and facilitates 
timely decision-making and the continuation of critical operations and 
services during orderly wind-down. Given its benefits, the Commission 
believes that new DCOs should have viable plans for orderly wind-down 
in place at the time they seek registration and before market 
participants come to rely upon them. The Commission has considered the 
other section 15(a) factors and believes they are not implicated by the 
proposed amendments.
10. Conforming Changes to Bankruptcy Provisions--Part 190.
    Based upon the proposed requirement that all DCOs maintain viable 
plans for orderly wind-down, the Commission is proposing several 
conforming changes to Part 190's bankruptcy provisions. Specifically, 
current Sec.  190.12(b)(1) would be amended so that a DCO in a Chapter 
7 proceeding provide to the trustee copies of, among other things, 
orderly wind-down plans it must maintain pursuant to new Sec.  39.13(k) 
in addition to Sec.  39.39(b). Current Sec.  190.15(a) would be amended 
so that the trustee not avoid or prohibit certain actions taken by the 
DCO either reasonably within the scope of, or provided for in, any 
orderly wind-down plains maintained by the DCO and filed with the 
Commission pursuant to new Sec.  39.13(k) in addition to Sec.  39.39. 
Current Sec.  190.15(c) would be amended so that the trustee act in 
accordance with any orderly wind-down plans maintained by the debtor 
and filed with the Commission pursuant to new Sec.  39.13(k) in 
addition to Sec.  39.39 in administering the bankruptcy proceeding. 
Current Sec.  190.19(b)(1) would be amended so that a shortfall in 
certain funds be supplemented in accordance with orderly wind-down 
plans maintained by the DCO pursuant to new Sec.  39.19(k) in addition 
to Sec.  39.39.
i. Benefits
    In promulgating the current Part 190 bankruptcy rules for DCOs in 
2021, the Commission found that ``directing a trustee to implement the 
DCO's own default rules and procedures, and recovery and orderly wind-
down plans, would benefit the estate by providing the trustee with a 
menu of purpose-built rules, procedures and plans to liquidate a DCO, 
which rules, procedures and plans the DCO has developed subject to the 
requirements of the Commission's regulations and supervision of the 
Commission. Adding concepts of reasonability and practicability will 
give the trustee the discretion to modify those rules, procedures, and 
plans where and to the extent appropriate.'' \215\ Adding the orderly 
wind-down plans required under proposed Sec.  39.13(k) for DCOs other 
than SIDCOs and Subpart C DCOs should further achieve these benefits, 
by providing such a menu in an additional context, namely the 
bankruptcy of these DCOs.
---------------------------------------------------------------------------

    \215\ Bankruptcy Regulations, 86 FR 19324, 19412 (Apr. 13, 
2021).
---------------------------------------------------------------------------

ii. Costs
    The Commission does not anticipate additional costs from the 
proposed regulations. The amendments are conforming changes so that the 
orderly wind-down plan of a DCO that is neither a SIDCO nor a Subpart C 
DCO is given the same weight as a SIDCO's or Subpart C DCO's orderly 
wind-down plan would be given in bankruptcy.
iii. Section 15(a) Factors
    The proposed regulations should enhance protection for market 
participants and the public under section 15(a)(2)(A) of the CEA, 
enhance the competitiveness and financial integrity of futures markets 
under section 15(a)(2)(B) of the CEA, aid in sound risk management 
practices under section 15(a)(2)(D) of the CEA, and promote the public 
interest under section 15(a)(2)(E) of the CEA. The assurance that the 
orderly wind-down plan, to the extent reasonable and practicable, and 
consistent with the protection of customers, will be followed in a 
bankruptcy proceeding should instill confidence in a DCO's clearing 
members and customers, who can make certain decisions without fear that 
a trustee will inappropriately diverge from the orderly wind-down plan 
in bankruptcy. Moreover, market participants in general can be assured 
that the DCO's pre-bankruptcy actions will not be voided by the 
trustee; likewise, the DCO's clearing members and customers can 
anticipate that a shortfall will be supplemented in the manner provided 
for in the orderly wind-down plan. The Commission also believes that a 
viable plan for orderly wind-down should also reduce the risk of 
disorderly events in bankruptcy. All of these factors would also 
promote the public interest. However, section 15(a)(2)(C), price 
discovery, is not implicated by the proposed amendments.
11. Requests for Up to One Year To Comply With Sec. Sec.  39.34(d), 
39.35, and 39.39(f)
    Conforming to the approach of setting a six-month deadline 
discussed in section VIII(D)(4) above, the Commission is proposing to 
discontinue the process currently provided in subpart C pursuant to 
which the Commission may grant, upon request of a SIDCO or DCO that is 
electing to become subject to Subpart C, up to one year to comply with 
Sec. Sec.  39.34, 39.35, and 39.39. The costs and benefits, and the 
application of the CEA Section 15(a) factors, for this approach were 
discussed there.
12. Amendments to Appendix A and Appendix B to Part 39
    The Commission is proposing to amend Exhibit D to Form DCO. The 
proposal would add a requirement to provide as Exhibit D-5, the DCO's 
orderly wind-down plan, and a demonstration that the plan complies with 
the requirements of Sec.  39.13(k).
    This proposed change would implement the proposal to require the 
submission of the orderly wind-down plan. The Commission has considered 
the section 15(a) of the CEA factors and believes that they are not 
implicated by the proposed change to Form DCO.
    The Commission is also proposing to amend the ``General 
Instructions'' and ``Elections and Certifications'' portions of the 
Subpart C Election Form. The proposal would remove the sections of the 
forms that reference requests for an extension of time to comply with 
any of the provisions of Sec. Sec.  39.34, 39.35, and 39.39. Similarly, 
the Commission is proposing to amend the requirements for Exhibit F-1 
to call for the attachment of the applicant's recovery plan and orderly 
wind-down plan, supporting information for these plans, and a 
demonstration that the plans comply with Sec.  39.39(c).
    These proposed changes would implement the proposal to delete the 
provision for making such requests for

[[Page 49004]]

an extension of time, and the proposal to require the submission of the 
plans. The Commission does not anticipate that these proposed changes 
would impose any costs on SIDCOs or Subpart C DCOs. The Commission has 
considered the factors called for in section 15(a) of the CEA and 
believes that they are not implicated by the proposed changes to the 
Subpart C Election Form.

List of Subjects

17 CFR Part 39

    Default rules and procedures, Definitions, Reporting requirements, 
Risk management, Recovery and Orderly wind-down, System safeguards.

17 CFR Part 190

    Bankruptcy, Brokers, Reporting and recordkeeping requirements.

    For the reasons stated in the preamble the Commodity Futures 
Trading Commission proposes to amend 17 CFR Chapter I as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

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

    Authority:  7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464; 
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July 
21, 2010, 124 Stat. 1749.

0
2. Amend Sec.  39.2 by adding the definitions of ``Default losses,'' 
``Nondefault losses,'' ``Orderly wind-down or wind-down,'' and 
``Recovery'' in alphabetical order to read as follows:


Sec.  39.2  Definitions.

* * * * *
    Default losses means credit losses or liquidity shortfalls created 
by the default of a clearing member in respect of its obligations with 
respect to cleared transactions.
* * * * *
    Non-default losses means losses from any cause, other than default 
losses, that may threaten the derivative clearing organization's 
viability as a going concern. These include, but are not limited to,
    (1) any potential impairment of a derivatives clearing 
organization's financial position, as a business concern, as a 
consequence of a decline in its revenues or an increase in its 
expenses, such that expenses exceed revenues and result in a loss that 
the derivatives clearing organization must charge against capital,
    (2) losses incurred by the derivatives clearing organization on 
assets held in custody or on deposit in the event of a custodian's (or 
subcustodian's or depository's) insolvency, negligence, fraud, poor 
administration or inadequate record-keeping,
    (3) losses incurred by the derivatives clearing organization from 
diminution of the value of investments of its own or its participants' 
resources, including cash or other collateral,
    (4) losses from adverse judgments, or other losses, arising from 
legal, regulatory, or contractual obligations, including damages or 
penalties, and the possibility that contracts that the derivatives 
clearing organization relies upon are wholly or partly unenforceable, 
and
    (5) losses occasioned by deficiencies in information systems or 
internal processes, human errors, management failures, malicious 
actions (whether by internal or external threat actors), disruptions to 
services provided by third parties, or disruptions from internal or 
external events that result in the reduction, deterioration, or 
breakdown of services provided by the derivatives clearing 
organization.
* * * * *
    Orderly wind-down or wind-down means the actions of a derivatives 
clearing organization to effect the permanent cessation, sale, or 
transfer, of one or more of its critical operations or 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 derivatives clearing organization, 
consistent with its rules, procedures, and other ex-ante contractual 
arrangements, to address any uncovered credit loss, liquidity 
shortfall, inadequacy of financial resources, or business, operational 
or other structural weakness, including the replenishment of any 
depleted pre-funded financial resources and liquidity arrangements, as 
necessary to maintain the derivatives clearing organization's viability 
as a going concern.
* * * * *
0
3. In 39.13, add and reserve paragraph (j), and add paragraph (k) to 
read as follows:


Sec.  39.13  Risk management.

* * * * *
    (j) [Reserved].
    (k) Orderly wind-down plan. (1) Orderly wind-down plan required. 
Each derivative clearing organization that is not a systemically 
important derivatives clearing organization or a subpart C derivatives 
clearing organization shall:
    (i) Maintain and, consistent Sec.  39.19(c)(4)(xxiv), submit to the 
Commission, a viable plan for orderly wind-down that may be 
necessitated by default losses and by non-default losses, including 
supporting information for that plan.
    (ii) Have procedures for informing the Commission and clearing 
members, as soon as practicable, when orderly wind-down is pending, and 
shall notify the Commission and clearing members consistent with Sec.  
39.19(c)(4)(xxv).
    (2) Orderly wind-down plan description. The orderly wind-down plan 
required by paragraph (k)(1) of this section shall include an overview 
of the plan and a description of how the plan will be implemented. The 
description of the plan shall include the identification and 
description of the derivatives clearing organization's critical 
operations and services, interconnections and interdependencies, 
resilient staffing arrangements, stress scenario analyses, potential 
triggers for consideration of implementing the orderly wind-down plan, 
available wind-down tools, analyses of the effect of the tools on each 
scenario, lists of agreements to be maintained during orderly wind-
down, and governance arrangements.
    (i) Critical operations and services, interconnections and 
interdependencies, and resilient staffing arrangements. The orderly 
wind-down plan shall identify and describe the critical operations and 
services the derivatives clearing organization provides to clearing 
members and other financial market participants, the service providers 
upon which the derivatives clearing organization relies to provide 
these critical operations and services, including internal and external 
service providers and ancillary services providers, financial and 
operational interconnections and interdependencies, aggregate cost 
estimates for the continuation of services during orderly wind-down, 
plans for resilient staffing arrangements for continuity of operations, 
obstacles to success of the orderly wind-down plan, plans to address 
the risks associated with the failure of each critical operation and 
service, and how the derivatives clearing organization will ensure that 
each identified operation and service continues through orderly wind-
down.
    (ii) Orderly wind-down triggers. The orderly wind-down plan shall 
establish the criteria that may trigger consideration of implementation 
of that plan, and the process the derivatives

[[Page 49005]]

clearing organization has in place for monitoring for events that may 
trigger implementation of the plan.
    (iii) Governance description. The orderly wind-down plan shall 
include a description of the pre-determined information-sharing and 
escalation process within the derivatives clearing organization's 
senior management and the board of directors. The derivatives clearing 
organization must have a defined process that will be used that will 
include the factors the derivatives clearing organization considers 
most important in guiding the board of directors' exercise of judgment 
and discretion with respect to its orderly wind-down plan in light of 
those triggers and that process.
    (3) Orderly wind-down scenarios and tools. The orderly wind-down 
plan shall:
    (i) identify scenarios that may prevent the derivatives clearing 
organization from meeting its obligations or providing critical 
operations and services as a going concern;
    (ii) describe the tools that the derivatives clearing organization 
would expect to use in an orderly wind-down that comprehensively 
address how the derivatives clearing organization would continue to 
provide critical operations and services;
    (iii) describe the order in which each such tool would be expected 
to be used;
    (iv) describe the governance and approval processes and 
arrangements within the derivatives clearing organization for the use 
of each of the tools available, including the exercise of any available 
discretion;
    (v) describe the processes to obtain any approvals external to 
derivatives clearing organization (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) establish the time frame within which each such tool could be 
used;
    (vii) set out the steps necessary to implement each such tool;
    (viii) describe the roles and responsibilities of all parties in 
the use of each such tool;
    (ix) provide an assessment of the likelihood that the tools, 
individually and taken together, would result in orderly wind-down; and
    (x) provide an assessment of the associated risks from the use of 
each such tool to non-defaulting clearing members and those clearing 
members' customers with respect to transactions cleared on the 
derivatives clearing organization, and linked financial market 
infrastructures.
    (4) Agreements to be maintained during orderly wind-down. The 
derivatives clearing organization shall determine which of its 
contracts, arrangements, agreements, and licenses associated with the 
provision of its critical operations and services as a derivatives 
clearing organization are subject to alteration or termination as a 
result of implementation of the orderly wind-down plan. The orderly 
wind-down plan shall describe the actions that the derivatives clearing 
organization has taken to ensure that its critical operations and 
services will continue during orderly wind-down, despite such potential 
alteration or termination.
    (5) Governance. The derivatives clearing organization's orderly 
wind-down plan shall:
    (i) Be formally approved, and annually reviewed, by the board of 
directors;
    (ii) Describe an effective governance structure that clearly 
defines the responsibilities of the board of directors, board members, 
senior executives and business units;
    (iii) Describe the processes that the derivatives clearing 
organization will use to guide its discretionary decision-making 
relevant to the orderly wind-down plan; and
    (iv) Describe the derivatives clearing organization's process for 
identifying and managing the diversity of stakeholder views and any 
conflict of interest between stakeholders and the derivatives clearing 
organization.
    (6) Testing. Each derivatives clearing organization's orderly wind-
down plan shall include procedures for testing the derivatives clearing 
organization's ability to implement the tools that the orderly wind-
down plan relies upon. The orderly wind-down plan shall include the 
types of testing that will be performed, to whom the findings of such 
tests are reported, and the procedures for updating the orderly wind-
down plan in light of the findings resulting from such tests. Such 
testing shall occur following any material change to the orderly wind-
down plan, but in any event not less than once annually, and the plan 
shall be promptly updated in light of the findings resulting from such 
testing.
* * * * *
0
4. In Sec.  39.19, revise paragraph (c)(4)(xxiv) and add paragraphs 
(xxv) and (c)(5)(iii) to read as follows:


Sec.  39.19  Reporting.

* * * * *
    (c) * * *
    (4) * * *
    (xxiv) A derivatives clearing organization that is required to 
maintain recovery and orderly wind-down plans pursuant to Sec.  
39.39(b) shall submit its plans and supporting information to the 
Commission no later than the date on which the derivatives clearing 
organization is required to have the plans. A derivatives clearing 
organization that is required to maintain an orderly wind-down plan 
pursuant to Sec.  39.13(k) shall submit its plan and supporting 
information to the Commission at the time it files its application for 
registration under Sec.  39.3. A derivatives clearing organization 
shall, upon revising its recovery plan or orderly wind-down plan, but 
in any event no less frequently than annually, submit the current 
plan(s) and supporting information to the Commission, along with a 
description of any changes and the reason(s) for such changes.
    (xxv) Each derivatives clearing organization shall notify the 
Commission and clearing members as soon as practicable when the 
derivatives clearing organization has initiated its recovery or when 
orderly wind-down is pending.
* * * * *
    (5) * * *
    (iii) Information for resolution planning. A systemically important 
derivatives clearing organization or subpart C derivatives clearing 
organization that submits information to the Commission pursuant to 
Sec.  39.39(f)(2) shall update such information upon request.
* * * * *
0
5. In Sec.  39.34, remove and reserve paragraph (d) to read as follows:


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

* * * * *
    (d) [Reserved].
* * * * *
0
6. In Sec.  39.39, revise the section heading and paragraphs (a), (b), 
(c), and (f) to read as follows:


Sec.  39.39  Recovery and orderly wind-down for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations; Information for resolution planning.

* * * * *
    (a) Definitions. For the purposes of this section: Unencumbered 
liquid financial assets include cash and highly liquid securities.
* * * * *
    (b) Recovery plan and orderly wind-down plan. (1) Each systemically

[[Page 49006]]

important derivatives clearing organization and subpart C derivatives 
clearing organization shall maintain and, consistent with Sec.  
39.19(c)(4)(xxiv), submit to the Commission, viable plans for recovery 
and orderly wind-down that may be necessitated, in each case, by 
default losses and by non-default losses, including supporting 
information for such plans.
    (2) Each systemically important derivatives clearing organization 
and subpart C derivatives clearing organization shall have procedures 
for informing the Commission and clearing members, as soon as 
practicable, when the recovery plan is initiated or orderly wind-down 
is pending, and shall notify the Commission and clearing members 
consistent with Sec.  39.19(c)(4)(xxv).
    (3) Each systemically important derivatives clearing organization 
shall file a recovery plan and (to the extent it has not already done 
so) an orderly wind-down plan, and supporting information for these 
plans, within 6 months of designation as systemically important by the 
Financial Stability Oversight Council. Each derivatives clearing 
organization electing to become subject to the provisions of Subpart C 
of this chapter shall file a recovery plan and (to the extent it has 
not already done so) an orderly wind-down plan, and supporting 
information for these plans, as part of its election. Each recovery 
plan and orderly wind-down plan shall be updated annually.
    (c) Requirements for recovery plan and orderly wind-down plan. The 
recovery plan and orderly wind-down plan required by paragraph (b) of 
this section shall include an overview of each plan and a description 
of how each plan will be implemented. The description of each plan 
shall include the identification and description of the derivatives 
clearing organization's critical operations and services, 
interconnections and interdependencies, resilient staffing 
arrangements, stress scenario analyses, potential triggers for recovery 
and orderly wind-down, available recovery and wind-down tools, analyses 
of the effect of the tools on each scenario, lists of agreements to be 
maintained during recovery and orderly wind-down, and governance 
arrangements.
    (1) Critical operations and services, interconnections and 
interdependencies, and resilient staffing arrangements. The recovery 
plan and orderly wind-down plan shall identify and describe the 
critical operations and services the derivatives clearing organization 
provides to clearing members and other financial market participants, 
the service providers upon which the derivatives clearing organization 
relies to provide these critical operations and services, including 
internal and external service providers and ancillary services 
providers, financial and operational interconnections and 
interdependencies, aggregate cost estimates for the continuation of 
services during recovery and orderly wind-down, plans for resilient 
staffing arrangements for continuity of operations, obstacles to 
success of the recovery plan and orderly wind-down plan, plans to 
address the risks associated with the failure of each critical 
operation or service, and how the derivatives clearing organization 
will ensure that each identified operation or service continues through 
recovery and orderly wind-down.
    (2) Recovery scenarios and analysis. Each systemically important 
derivatives clearing organization and subpart C derivatives clearing 
organization shall identify scenarios that may prevent it from meeting 
its obligations or providing its critical services as a going concern.
    (i) For each scenario, the recovery plan shall provide an analysis 
that includes:
    (A) a description of the scenario;
    (B) the events that are likely to trigger the scenario;
    (C) the derivatives clearing organization's process for monitoring 
for such events;
    (D) the market conditions and other relevant circumstances that are 
likely to result from the scenario;
    (E) the potential financial and operational impact of the scenario 
on the derivatives clearing organization 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 derivatives clearing organization 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.
    (ii) The derivatives clearing organization's recovery plan 
scenarios should also address the default risks and non-default risks 
to which the derivatives clearing organization is exposed, and shall 
include at least the scenarios listed in paragraphs (c)(2)(ii)(A) 
through (K) of this section, to the extent such a scenario is possible 
in light of the derivatives clearing organization's structure and 
activities. For any scenario enumerated in paragraphs (c)(2)(ii)(A) 
through (K) of this section that the derivatives clearing organization 
determines is not possible in light of its structure and activities, 
the derivatives clearing organization should document its reasoning.
    (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 liabilities related to the 
derivatives clearing organization's obligations with respect to cleared 
transactions and those not specific to the derivatives clearing 
organization's business as a derivatives clearing organization;
    (J) Losses resulting from interconnections and interdependencies 
among the derivatives clearing organization and its parent, affiliates, 
and/or internal or third-party service providers; and
    (K) Losses resulting from interconnections and interdependencies 
with other derivatives clearing organizations.
    (iii) The recovery plan shall also consider any combination of at 
least two 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 derivatives clearing 
organization, are particularly relevant to the derivatives clearing 
organization's business. The derivatives clearing organization shall 
document the reasons why the selected scenarios are particularly 
relevant.
    (3) Recovery and orderly wind-down triggers.
    (i) A systemically important derivatives clearing organization's or 
subpart C derivatives clearing organization's:
    (A) recovery plan shall establish the criteria that may trigger 
implementation or consideration of implementation of that plan, and the 
process the derivatives clearing organization has in place for 
monitoring for events that are

[[Page 49007]]

likely to trigger the scenarios identified in paragraph (c)(2) of this 
section; and
    (B) orderly wind-down plan shall establish the criteria that may 
trigger consideration of implementation of that plan, and the process 
the derivatives clearing organization has in place for monitoring for 
events that may trigger implementation of the plan.
    (ii) The recovery plan and orderly wind-down plan shall include a 
description of the pre-determined information-sharing and escalation 
process within the derivatives clearing organization's senior 
management and the board of directors. The derivatives clearing 
organization must have a defined governance process that will be used 
that will include the factors the derivatives clearing organization 
considers most important in guiding the board of directors' exercise of 
judgment and discretion with respect to recovery and orderly wind-down 
plans in light of those triggers and that process.
    (4) Recovery tools. A derivatives clearing organization or subpart 
C derivatives clearing organization shall have a recovery plan that 
includes the following:
    (i) a description of the tools that the derivatives clearing 
organization would expect to use in each scenario required by paragraph 
(b) of this section that meet the full scope of financial deficits the 
derivatives clearing organization may need to remediate and 
comprehensively address how the derivatives clearing organization would 
continue to provide critical operations and services;
    (ii) the order in which each such tool would be expected to be 
used;
    (iii) the time frame within which each such tool would be expected 
to used;
    (iv) a description of the governance and approval processes and 
arrangements within the derivatives clearing organization 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 
derivatives clearing organization (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 each such tool;
    (vii) a description of the roles and responsibilities of all 
parties, including non-defaulting clearing members, in the use of each 
such tool;
    (viii) whether the tool is mandatory or voluntary;
    (ix) an assessment of the likelihood that the tools, individually 
and taken together, would result in recovery; and
    (x) an assessment of the associated risks from the use of each such 
tool to non-defaulting clearing members and those clearing members' 
customers with respect to transactions cleared on the derivatives 
clearing organization, linked financial market infrastructures, and the 
financial system more broadly.
    (5) Orderly wind-down scenarios and tools. Each systemically 
important derivatives clearing organization and Subpart C derivatives 
clearing organization shall:
    (i) identify scenarios that may prevent it from meeting its 
obligations or providing critical operations and services as a going 
concern;
    (ii) describe the tools that it would expect to use in an orderly 
wind-down that comprehensively address how the derivatives clearing 
organization would continue to provide critical operations and 
services;
    (iii) describe the order in which each such tool would be expected 
to be used;
    (iv) establish the time frame within which each such tool would be 
expected to be used;
    (v) describe the governance and approval processes and arrangements 
within the derivatives clearing organization for the use of each of the 
tools available, including the exercise of any available discretion;
    (vi) describe the processes to obtain any approvals external to the 
derivatives clearing organization (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;
    (vii) set out the steps necessary to implement each such tool;
    (viii) describe the roles and responsibilities of all parties, 
including non-defaulting clearing members, in the use of each such 
tool;
    (ix) provide an assessment of the likelihood that the tools, 
individually and taken together, would result in orderly wind-down; and
    (x) provide an assessment of the associated risks from the use of 
each such tool to non-defaulting clearing members and those clearing 
members' customers with respect to transactions cleared on the 
derivatives clearing organization, linked financial market 
infrastructures, and the financial system more broadly.
    (6) Agreements to be maintained during recovery and orderly wind-
down. A systemically important derivatives clearing organization and 
subpart C derivatives clearing organization shall determine which of 
its contracts, arrangements, agreements, and licenses associated with 
the provision of its critical operations and services as a derivatives 
clearing organization are subject to alteration or termination as a 
result of implementation of the recovery plan or orderly wind-down 
plan. The recovery plan and orderly wind-down plan shall describe the 
actions that the derivatives clearing organization has taken to ensure 
that its critical operations and services will continue during recovery 
and orderly wind-down despite such alteration or termination.
    (7) Governance. Each systemically important derivatives clearing 
organization and Subpart C derivatives clearing organization's recovery 
plan and orderly wind-down plan shall, in each case,
    (i) Be formally approved, and annually reviewed, by the board of 
directors;
    (ii) Describe an effective governance structure that clearly 
defines the responsibilities of the board of directors, board members, 
senior executives, and business units;
    (iii) Describe the processes that the derivatives clearing 
organization will use to guide its discretionary decision-making 
relevant to each plan; and
    (iv) Describe the derivatives clearing organization's process for 
identifying and managing the diversity of stakeholder views and any 
conflict of interest between stakeholders and the derivatives clearing 
organization.
    (8) Testing. The recovery plan and orderly wind-down plan of each 
systemically important derivatives clearing organization and Subpart C 
derivatives clearing organization shall include procedures for testing 
the viability of the recovery plan and orderly wind-down plan, 
including testing of the derivatives clearing organization's ability to 
implement the tools that each plan relies upon. The recovery plan and 
the orderly wind-down plan shall include the types of testing that will 
be performed, to whom the findings of such tests are reported, and the 
procedures for updating the recovery plan and orderly wind-down plan in 
light of the findings resulting from such tests. A systemically 
important derivatives clearing organization and Subpart C derivatives 
clearing organization shall conduct the testing described in this 
paragraph with the participation of their clearing members, where the 
plan depends on their participation, and the derivatives clearing 
organization shall consider including external stakeholders that the 
plan relies upon, such as service providers, to the extent practicable 
and appropriate. Such testing shall occur following any material change 
to the recovery plan or orderly wind-down plan, but in any event not 
less than once

[[Page 49008]]

annually, and the plan shall be promptly updated in light of the 
findings resulting from such testing.
* * * * *
    (f) Information for resolution planning. To the extent not already 
provided pursuant to paragraph (b) of this section, or required by 
Sec.  39.19, a systemically important derivatives clearing organization 
or subpart C derivatives clearing organization shall maintain 
information systems and controls that are designed to enable the 
derivatives clearing organization to provide data and information 
electronically, as requested by the Commission for purposes of 
resolution planning and during resolution under Title II of the Dodd-
Frank Act, and shall provide such information and data in the form and 
manner specified by the Commission. This includes the following:
    (1) Information regarding the derivatives clearing organization's 
organizational structure and corporate structure, activities, governing 
documents and arrangements, rights and powers of shareholders, and 
committee members and their responsibilities.
    (2) Information concerning clearing members, including (for both 
house and customer accounts) information regarding collateral, 
variation margin, and contributions to default and guaranty funds.
    (3) Arrangements and agreements with other derivatives clearing 
organizations, including offset and cross-margin arrangements.
    (4) Off-balance sheet obligations or contingent liabilities, and 
obligations to creditors, shareholders, or affiliates not otherwise 
reported under part 39.
    (5) Information regarding interconnections and interdependencies 
with internal and external service providers, licensors, and licensees, 
including information regarding services provided by or to affiliates 
and other third parties and related agreements.
    (6) Information concerning critical personnel.
    (7) Any other information deemed appropriate to plan for resolution 
under Title II of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
0
7. Revise Appendix A to Part 39--Form DCO Derivatives Clearing 
Organization Application for Registration to read as follows:
BILLING CODE 6351-01-P

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0
8. Revise Appendix B to part 39--Subpart C Election Form to read as 
follows:

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BILLING CODE 6351-01-C

PART 190--BANKRUPTCY RULES

0
9. The authority citation for part 190 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6c, 6d, 6g, 7a-1, 12, 12a, 19 and 24; 
11 U.S.C. 362, 546, 548, 556, and 761-767, unless otherwise noted.

0
10. In Sec.  190.12, revise paragraph (b)(1) to read as follows:


Sec.  190.12  Required reports and records.

* * * * *
    (b) * * *
    (1) As soon as practicable following the commencement of a 
proceeding that is subject to this subpart and in any event no later 
than three hours following the later of the commencement of such 
proceeding or the appointment of the trustee, the debtor shall provide 
to the trustee copies of each of the most recent reports that the 
debtor was required to file with the Commission under Sec.  39.19(c) of 
this chapter, including copies of any reports required under Sec. Sec.  
39.19(c)(2), (3), and (4) of this chapter (including the most up-to-
date version of any recovery and orderly wind-down plans of the debtor 
maintained pursuant to Sec.  39.13(k) or Sec.  39.39(b) of this 
chapter) that the debtor filed with the Commission during the preceding 
12 months.
* * * * *
0
11. In Sec.  190.15, revise paragraphs (a) and (c) to read as follows:


Sec.  190.15  Recovery and wind-down plans; default rules and 
procedures.

    (a) Prohibition on avoidance of actions taken pursuant to recovery 
and orderly wind-down plans. Subject to the provisions of section 766 
of the Bankruptcy Code and Sec. Sec.  190.13 and 190.18, the trustee 
shall not avoid or prohibit any action taken by a debtor subject to 
this subpart that was reasonably within the scope of, and was provided 
for, in any recovery and orderly wind-down plans maintained by the 
debtor pursuant to Sec.  39.13(k) or Sec.  39.39(b) of this chapter and 
filed with the Commission pursuant to Sec.  39.19 of this chapter.
* * * * *
    (c) Implementation of recovery and orderly wind-down plans. In 
administering a proceeding under this subpart, the trustee shall, in 
consultation with the Commission, take actions in accordance with any 
recovery and orderly wind-down plans maintained by the debtor pursuant 
to Sec.  39.13(k) or Sec.  39.39(b) of this chapter and filed with the 
Commission pursuant to Sec.  39.19 of this chapter, to the extent 
reasonable and practicable, and consistent with the protection of 
customers.
* * * * *
0
12. In Sec.  190.19, revise paragraph (b)(1) to read as follows:


Sec.  190.19  Support of daily settlement.

* * * * *
    (b) * * *
    (1) Such funds shall be supplemented with the property described in 
paragraphs (b)(1)(i) through (iv) of this section, as applicable, to 
the extent necessary to meet the shortfall, in accordance with the 
derivatives clearing organization's default rules and procedures 
adopted pursuant to Sec.  39.16 and, as applicable, Sec.  39.35 of this 
chapter, and (with respect to paragraph (b)(1)(ii) of this section) any 
recovery and orderly wind-down plans maintained pursuant to Sec.  
39.13(k) or

[[Page 49047]]


Sec.  39.39(b) of this chapter and submitted pursuant to Sec.  39.19 of 
this chapter. Such funds shall be included as member property and 
customer property other than member property in the proportion 
described in paragraph (a) of this section, and shall be distributed 
promptly to members' house accounts and members' customer accounts 
which accounts are entitled to payment of such funds as part of that 
daily settlement.
* * * * *

    Issued in Washington, DC, on July 3, 2023 by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.


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

Appendices to Derivatives Clearing Organizations Recovery and Orderly 
Wind-Down Plans; Information for Resolution Planning--Voting Summary 
and Chairman's and Commissioners' Statements

Appendix 1--Voting Summary

    On this matter, Chairman Behnam and Commissioners Johnson and 
Goldsmith Romero voted in the affirmative. Commissioner Pham voted 
to concur. Commissioner Mersinger voted in the negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    As a fundamental pillar of global financial reform efforts and 
our most universally effective tool in the box, central clearing 
reduces risks, fosters resiliency, and builds continuity and 
confidence in financial markets. The global implementation of the 
central clearing mandate has produced a significant demand for 
clearing services and a substantial increase in overall clearing 
volumes in the swaps market. However, clearing is not without risk. 
Policymakers, both bank and market regulators, must take the 
necessary steps to ensure that clearinghouses are not simply 
commercially viable, but can continue to operate and provide 
critical services as expected, even in times of extreme market 
stress.
    Today, the Commission considered a proposed rule to amend the 
requirements related to recovery and orderly wind-down and 
resolution planning for Derivatives Clearing Organizations (DCOs) 
that have been designated as systemically important (SIDCOs) as well 
as other DCOs that elect to comply with DCO core principles by 
satisfying the higher standards for SIDCOs--referred to as ``Subpart 
C DCOs.'' At a high level, the proposal would codify and expand 
existing staff guidance,\1\ as well as propose to specify the types 
of information that a SIDCO or Subpart C DCO may be required to 
provide to the Commission to share with the FDIC for resolution 
planning. Building on the themes of risk management, resilience and 
contingency planning, this proposal aims to build consistency, 
awareness, and preparedness across SIDCOs and Subpart C DCOs by 
providing greater predictability should an unlikely event occur that 
prevents a DCO from being able to meet its obligations, provide 
critical services to its members, or if a DCO ultimately needs to 
wind-down operations in an orderly manner. That is why I fully 
support the proposal.
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    \1\ See CFTC Letter No. 16-61, Recovery Plans and Wind-down 
Plans Maintained by Derivatives Clearing Organizations and Tools for 
the Recovery and Orderly Wind-down of Derivatives Clearing 
Organizations (July 21, 2016), available at https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-61&field_csl_letter_types_target_id%5B%5D=711&field_csl_letter_year_value=.
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    Today's proposal would set forth in Commission regulation an 
expectation that SIDCOs and Subpart C DCOs, as financial market 
infrastructures, have comprehensive and effective recovery plans and 
orderly wind-down plans. These plans would analyze the services that 
clearing members and others rely upon the DCOs to provide, as well 
as the necessary services that others provide to the DCOs. DCOs 
would also be required to consider, as part of their planning 
process, a thorough set of scenarios that might potentially create 
losses that challenge their ability to provide their critical 
operations and services. Some scenarios that we specify may not be 
applicable to every DCO, and the proposal notes scenarios are to be 
considered to the extent they are possible in light of the DCO's 
structure and activities. However, the proposal, reiterating 
existing guidance, cautions DCOs considering whether a scenario is 
possible to avoid confusing ``low risk'' with ``zero risk.'' There 
is a difference. A low risk scenario, which is remotely possible, 
must be addressed by the plans whereas a scenario that is not 
possible would not. It is critical that scenario analyses and, in 
turn, the preparation of recovery and orderly wind-down plans occur 
during business-as-usual operations, and not during times of stress, 
in order to ensure thorough preparation and planning.
    I have remarked before, among the many lessons learned from the 
2008 financial crisis, the interconnectedness of our global 
financial system is one of, if not the single, most important. All 
risk analyses must include a holistic examination of the systemic 
relationships throughout all of our financial markets. The proposal 
would require a SIDCO and Subpart C DCO to identify its financial 
and operational interconnections and interdependencies, plans for 
resilient staffing arrangements, governance structure, and any 
contracts or agreements subject to alteration in the event of 
orderly wind-down. The proposal also requires each SIDCO and Subpart 
C DCO to assess the full range of options for recovery and orderly 
wind-down, to test the plans, and to notify clearing members when 
recovery or wind-down is initiated.
    In light of recent market events, the proposal approved by the 
Commission would require all DCOs, not just SIDCOs and Subpart C 
DCOs, to submit viable plans for orderly wind-down. The wind-down 
plan requirements for non-SIDCOs that are not Subpart C DCOs are 
similar in that the plan must identify scenarios, triggers, and 
available tools.
    Finally, the proposal expands on existing regulation requiring 
SIDCOs and Subpart C DCOs to have procedures in place for providing 
the Commission with information needed for resolution planning. In 
the spirit of regulatory transparency, this proposal identifies 
categories of information that a SIDCO or Subpart C DCO would be 
required to provide to the Commission for such planning.
    I look forward to the public's submission of comments and 
feedback on this proposed rulemaking.

Appendix 3--Statement of Commissioner Kristin N. Johnson

    Derivatives clearing organizations (DCOs) play a significant 
role in our markets by providing essential clearing and settlement 
market infrastructure. As intermediaries, these firms serve a 
fundamental role in creating stability. DCOs face substantial risks 
including custody, credit, and liquidity risk; general business, 
operational, and legal risks; as well as the risk of clearing member 
defaults. Such risks may pose a threat to a DCO's continuity of 
operations, as well as its clearing members and the broader 
financial system.
    During periods of stress, DCOs provide services that are crucial 
for continuity in the financial markets they serve. Given the 
significance of DCOs in our markets, a liquidity or solvency crisis 
event at a DCO may trigger effects that have far-reaching 
consequences throughout the entire financial system. Recovery and 
wind-down plans are critical to prevent losses across our markets 
and any knock-on effects or spill over into other markets. It is 
essential that DCOs have recovery and orderly wind-down plans to 
prevent significant market disruption throughout our financial 
system.
    I support the Commission's consideration of the proposed 
regulations on recovery and orderly wind-down plans for DCOs. The 
proposed rule addresses the longstanding need for DCOs to have wind-
down plans. While the Commission has previously taken appropriate 
steps to introduce recovery and orderly wind-down plans for DCOs 
deemed systemically important in the aftermath of the 2008 Financial 
Crisis, evidence suggests the need to ensure the integrity of not 
only the largest DCOs, but all DCOs. In addition, the proposal 
provides for an important update to Commission regulations for DCOs 
including codification of staff guidance 16-61 and incorporation of 
international guidance on recovery and resolution planning issued 
since 2013.\1\ The implementation of these proposed regulations 
would operate to support the strength and continuity of all DCOs as

[[Page 49048]]

instructed by the reforms established in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank).\2\
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    \1\ Commodity Futures Trading Commission, Notice of Proposed 
Rulemaking on Derivatives Clearing Organizations Recovery and 
Orderly Wind-down Plans; Information for Resolution Planning, p. 5-6 
(Jun. 7, 2023), https://www.cftc.gov/media/8711/votingdraft060723_17CFRPart39b/download (hereinafter ``NPRM on DCO 
Recovery and Orderly Wind-down Plans'').
    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
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The History and Development of Sec.  39.39 Recovery and Wind-Down 
Regulations

I. Legislative and Regulatory History

    In 2010, Congress passed the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd Frank Act'') establishing a clearing 
framework for over-the-counter derivatives, including swaps.\3\ The 
Dodd Frank Act introduced statutory authority for the Commission to 
promulgate regulations governing DCOs. Title VII of the Dodd-Frank 
Act sets out eighteen core principles for DCOs (DCO Core 
Principles), with which DCOs must comply in order to register and 
maintain registration with the Commission.\4\ The DCO Core 
Principles ``serve to reduce risk, increase transparency, and 
promote market integrity within the financial system.'' \5\ In 
conjunction with section 8a(5) of the Commodity Exchange Act (CEA), 
Title VII grants the Commission authority to promulgate regulation 
as necessary to implement and enforce the DCO Core Principles.\6\ In 
2011, the Commission adopted regulations to implement Title VII of 
Dodd-Frank.\7\ These regulations created regulatory standards for 
compliance with DCO Core Principles.\8\ Among the many regulations 
adopted was Part 39, including DCO Core Principle D--Risk 
Management.\9\ Core Principle D requires DCOs to have policies and 
procedures in place that ensure the DCO will be able to manage the 
risks associated with discharging its responsibilities.\10\
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    \3\ Derivatives Clearing Organizations and International 
Standards, 78 FR 72,475, 72,476 (Dec. 12, 2013) (codified in 17 CFR 
pt. 39) (hereinafter ``2013 DCOs Rule Release'').
    \4\ 7 U.S.C. 7a-1(c)(2).
    \5\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 4.
    \6\ 7 U.S.C. 7a-1(c)(2)(A)(i); 7 U.S.C. 12a(5).
    \7\ Derivatives Clearing Organizations General Provisions and 
Core Principles, 76 FR 69,333 (Nov. 8, 2011) (codified in 17 CFR 
pts. 1, 21, 29, and 140) (hereinafter ``2011 DCOs Core Principles 
Release'').
    \8\ 2011 DCOs Core Principles Release at 69,335.
    \9\ Id. at 69,362.
    \10\ 7 U.S.C. 7a-1(c)(2)(D).
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    Title VIII of the Dodd-Frank Act introduced a collaborative, 
multi-agency framework for regulating systemically important 
financial market utilities (FMUs) providing payment, clearing, and 
settlement activities.\11\ Specifically, section 804 of the Dodd-
Frank Act provides the Financial Stability Oversight Council (FSOC) 
with the authority to designate certain FMUs as systemically 
important.\12\ This includes the ability to designate DCOs as 
systemically important (SIDCOs). In 2012, FSOC designated two CFTC-
registered DCOs as SIDCOs.\13\
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    \11\ Section 805 of the Dodd-Frank Act, 12 U.S.C. 5464.
    \12\ Section 804 of the Dodd-Frank Act, 12 U.S.C. 5463.
    \13\ 2013 DCOs Final Rule Release at 72,477.
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    In addition to establishing a multi-agency regulatory framework, 
Title VIII created standards for SIDCOs for risk mitigation.\14\ The 
objectives and principles for risk management at SIDCOs include (1) 
promoting risk management; (2) promoting safety and soundness; (3) 
reducing systemic risks; and (4) supporting the stability of the 
broader financial system.\15\ The risks that DCOs face may not only 
threaten the viability and strength of a DCOs operations, but also 
may threaten clearing members of DCOs and the broader financial 
system. Such risks include credit and liquidity risk by both the DCO 
itself and its clearing members as well as other general business, 
operational, custody, investment, and legal risks.\16\ All of these 
risks could result in financial failures of DCOs. Disorderly failure 
\17\ of DCOs--in particular SIDCOs--would likely cause significant 
disruption to our financial markets.\18\ This systemic risk results 
in a necessity for DCOs to have viable plans for recovery and 
orderly wind-down during times of significant stress or in the event 
of failure.
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    \14\ Enhanced Risk Management Standards for Systemically 
Important Derivatives Clearing Organizations, 78 FR 49,663, 49,665 
(Aug. 15, 2023) (codified in 17 CFR pt. 39) (hereinafter ``2013 
SIDCOs Final Rule Release'').
    \15\ Section 805 of the Dodd-Frank Act, 12 U.S.C. 5464(b). As 
outlined in section 805(c), these standards may address such areas 
as: (1) Risk management policies and procedures; (2) margin and 
collateral requirements; (3) participant or counterparty default 
policies and procedures; (4) the ability to complete timely clearing 
and settlement of financial transactions; (5) capital and financial 
resources requirements for designated [FMUs]; and (6) other areas 
that are necessary to achieve the objectives and principles in 
[section 805](b). 2013 SIDCO Final Rule Release at 49,665 (quoting 
12 U.S.C. 5464(C)).
    \16\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 5.
    \17\ While not formally defined in Dodd-Frank, ``disorderly 
failure'' typically refers to a significant disruption to a 
financial institution without a plan for recovery or wind-down that 
results in the inability of the institution to maintain ongoing 
viability that cause detrimental impacts to customers, clients, 
related entities, and the broader financial system.
    \18\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 5.
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    Title VIII of the Dodd-Frank Act also directs the Commission to 
consider prudential requirements and international standards when 
promulgating risk management regulations that govern operations 
relating to payment, clearing, and settlement activities for 
SIDCOs.\19\ In 2013, the Commission considered international 
standards relevant to risk management of SIDCOs as required under 
section 805(a)(2)(A).\20\ At that time, the Commission determined 
the most relevant international standards were the Principles for 
Financial Market Infrastructure (PFMIs) established by the Bank for 
International Settlements (BIS) and the International Organization 
of Securities Commissions (IOSCO).\21\ The PFMIs are a ``unified set 
of international risk management standards for central 
counterparties'' (CCPs) that facilitate clearing and settlement.\22\ 
They set out a list of twenty-four principles that seek to address 
the numerous risks faced by CCPs.\23\
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    \19\ 2013 SIDCO Final Rule Release at 49,665.
    \20\ See 2013 SIDCO Final Rule Release.
    \21\ 2013 SIDCO Final Rule Release at 49,666.
    \22\ Id.
    \23\ Id.
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    Later in 2013, the Commission implemented the Part 39 
regulations setting out broad rules for recovery, wind-down, and 
resolution planning for SIDCOs and Subpart C DCOs.\24\ In adopting 
these wind-down and recovery regulations, the Commission considered 
PFMI Principles 3 and 15.\25\ PFMI Principle 3 calls for a framework 
for the comprehensive management of risks including legal, credit, 
liquidity, business, and operational risks.\26\ PFMI Principle 15 
covers general business risk and calls for a CCPs to identify, 
monitor, and manage general business risk.\27\ The Commission 
determined that although there is no DCO Core Principle that 
directly calls for DCOs to establish recovery and wind-down plans, 
DCO Core Principles B (financial resources), D (risk management), G 
(default rules and procedures), and I (system safeguards), as well 
as PFMI Principles 3 and 15, collectively support the need for DCOs 
to create policies and procedures that identify scenarios that may 
prevent a SIDCO or Subpart C DCO ``from providing critical 
operations and services as a going concern and would assess the 
effectiveness of a full range of options for recovery and wind-
down.'' \28\ In light of this determination, the Commission adopted 
Regulation 39.39 which requires SIDCOs and Subpart C DCOs ``to 
maintain viable plans for recovery and orderly wind-down.'' \29\
---------------------------------------------------------------------------

    \24\ 2013 DCOs Final Rule Release at 72,494. In 2013, the 
Commission also adopted regulations to allow registered DCOs that 
are not designated as SIDCOs to elect to become subject to the 
provisions of Subpart C of part 39 of the Commission's regulations. 
Those DCOs that make the election are referred to as Subpart C DCOs. 
In making this election, Subpart C DCOs voluntarily agree to operate 
in compliance with and be subject to review for compliance with 
PFMIs and other heightened standards for SIDCOs. See 2013 DCOs Final 
Rule Release at 72,479.
    \25\ 2013 DCOs Final Rule Release at 72,495.
    \26\ Id. at 72,478.
    \27\ Id. at 72,495.
    \28\ Id.
    \29\ Id.
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II. CFTC Letter 16-61 and International Standards

    At the time the Commission adopted Regulation 39.39, there was 
no specific international guidance on wind-down and recovery 
planning. In 2014, the Committee on Payments and Market 
Infrastructures (CPMI) with IOSCO issued guidance for FMIs and 
governing authorities on development of recovery plans (2014 CPMI-
IOSCO Recovery Guidance).\30\ The guidance considered and 
interpreted key principles relevant to recovery planning, including 
PFMI Principles 3 and 15.\31\ Further, the report provided guidance 
on the recovery planning

[[Page 49049]]

process, contents of recovery plans, and recovery tools to be used 
by FMIs.\32\
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    \30\ CPMI-IOSCO, Recovery of financial market infrastructures 
(Oct. 15, 2014) (hereinafter ``2014 CPMI-IOSCO Recovery Guidance'').
    \31\ 2014 CPMI-IOSCO Recovery Guidance.
    \32\ 2014 CPMI-IOSCO Recovery Guidance.
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    In 2016, in light of 2014 CPMI-IOSCO Recovery Guidance, the 
staff of the Commission's Division of Clearing and Risk (DCR) issued 
Letter 16-61 to provide additional details on the subjects and 
analyses that SIDCOs and Subpart C DCOs should include in their 
wind-down plans.\33\ The letter provided a list of subjects DCR 
believed SIDCOs and Subpart C DCOs should analyze and include in 
their recovery and wind-down plans including such as inclusion of 
particular tools to be used in recovery and wind-down.\34\ 
Specifically, the guidance provided a list of specific scenarios to 
be evaluated and set out a framework for how to identify, monitor 
for, and analyze the scenario and include such information in 
recovery plans.\35\ Further, the guidance suggested a framework for 
how to identify, implement, and analyze recovery tools in such 
scenarios and how to incorporate it into recovery plans.\36\ 
Finally, the guidance also provided a framework for including 
processes for wind-down options in the event of a failure or 
inability to successfully implement a recovery plan.\37\
---------------------------------------------------------------------------

    \33\ CFTC Letter No. 16-61 (July 21, 2016).
    \34\ Id.
    \35\ Id. at 5.
    \36\ Id. at 7.
    \37\ Id. at 9.
---------------------------------------------------------------------------

    In 2017, CPMI and IOSCO issued further guidance that updated the 
2014 CPMI-IOSCO Recovery Guidance.\38\ The guidance sought to 
clarify, among other things, how to implement recovery plans, 
replenish financial resources, and transparency in recovery 
tools.\39\ Further, in 2017, the Financial Stability Board issued 
guidance regarding CCP resolution planning that included 
recommendations for resolution authorities about continuity of 
critical functions and implementation of crisis management groups, 
and development of resolution plans.\40\ Most recently, in August 
2022, CPMI and IOSCO published a discussion paper on CCP practices 
to address non-default loses which included a discussion of annual 
testing and review of a CCP's recovery plan.\41\
---------------------------------------------------------------------------

    \38\ CPMI-IOSCO, Recovery of financial market infrastructures 
(July 5, 2017) (hereinafter ``2017 CPMI-IOSCO Recovery Guidance'').
    \39\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 15.
    \40\ Id. (citing FSB, Guidance on Central Counterparty 
Resolution and Resolution Planning (July 5, 2017) (hereinafter 
``2017 FSB Resolution Guidance'')).
    \41\ Id. at 16 (citing CPMI-IOSCO, A discussion paper on central 
counterparty practices to address non-default loses (Aug. 4, 2022)).
---------------------------------------------------------------------------

Recovery and Orderly Wind-Down Planning

    Recovery planning is essential to DCO risk management and 
provides a mechanism to consider risk scenarios and their potential 
scope of impact, as well as evaluate specific tools, steps, and 
contingency plans. Recovery plans provide well-established and well-
tested actionable steps that may address exigent and extreme 
circumstances that may threaten the viability of DCOs. An 
anticipated scenario with a thoughtful corresponding recovery plan 
provides for a DCO to have an efficient and effective recovery 
``such that it can continue to provide its critical services'' even 
while its viability may be threatened.\42\ Additionally, recovery 
plans provides stability, certainty, and clarity for a DCO's 
clearing members and clients and may reduce the potential for panic 
and contagion. The reduction of stress and uncertainty as a result 
of advance recovery planning results in optimized, efficient, and 
effective recovery actions. Recovery planning is globally recognized 
as essential for market stability, and post-financial crisis reforms 
emphasize this understanding. As stated by CMPI-IOSCO in 2014:
---------------------------------------------------------------------------

    \42\ Id. at 17.

`Recovery' concerns the ability of an FMI to recover from a threat 
to its viability and financial strength so that it can continue to 
provide its critical services without requiring the use of 
resolution powers by authorities. Recovery therefore takes place in 
the shadow of resolution.\43\
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    \43\ 2014 CPMI-IOSCO Recovery Guidance.

    When recovery is not a viable option or where the execution of a 
recovery plan is ineffective, it is critical to financial stability 
for FMIs to have orderly resolution plans. Title II of the Dodd-
Frank Act established the Orderly Liquidation Authority, an 
alternative framework and process to bankruptcy to efficiently and 
expeditiously wind-down financial institutions.\44\ Title II 
establishes the Federal Deposit Insurance Corporation (FDIC) as the 
receiver for failing financial institutions designated as 
systematically important, like SIDCOs.\45\ Effective wind-down plans 
provide the benefit of well-considered strategic planning for wind-
down in advance of any viability threatening event that can be 
shared with the FDIC in an instance of insolvency. Wind-down plans 
facilitate the efficient transition of a SIDCO into FDIC 
receivership. Orderly wind-down procedures enhance financial market 
stability by minimizing the fallout of financial instability and 
ultimately minimize systemic risk.
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    \44\ Section 204(b) of the Dodd-Frank Act (codified at 12 U.S.C. 
5384(b)).
    \45\ See 12 U.S.C. 5384(b).
---------------------------------------------------------------------------

Amendments to Part 39

    Today, the Commission--in consultation with the FDIC, the Board 
of Governors of the Federal Reserve System, and the Securities and 
Exchange Commission (SEC)--takes the next step in recovery and wind-
down planning for DCOs by proposing amendments that encompass all 
DCOs and provide clarity and specificity on the quality of such 
plans. We recognize that the failure of any DCO, not just those 
deemed systemically important, might result in significant market 
disruption. As such, the proposed regulations seek to provide 
important clarity and consistency for not only SIDCOs and Subpart C 
DCOs, but all DCOs. This NPRM codifies and expands upon DCR's 16-61 
Letter and incorporates international guidance on recovery and 
resolution planning issued since 2013. The DCR staff has 
thoughtfully crafted proposed rules which will guide SIDCOs, Subpart 
C DCOs, and all other DCOs in updating or crafting wind-down plans 
and, in some instances, recovery plans.
    Currently, Regulation 39.39 only applies to SIDCOs and Subpart C 
DCOs. It requires these DCOs ``to maintain viable plans for recovery 
and orderly wind-down.'' \46\ The regulation specifies that in 
developing such plans, SIDCOs and Subpart C DCOs must identify 
scenarios which may prevent the DCO from meeting its obligations, 
providing its critical operations and services, and assess options 
for recovery and wind-down.\47\ The wind-down plan must include 
procedures to timely notify the Commission when a recovery plan is 
initiated or a wind-down plan is pending as well as procedures for 
providing both the Commission and FDIC with necessary information 
for resolution planning.\48\ Section 39 also requires the plans to 
be supported with financial resources sufficient to implement such 
plans.\49\ SIDCOs and Subpart C DCOs must also maintain viable plans 
for raising additional financial resources, including capital, which 
must be approved by the DCO's board of directors and regularly 
updated.\50\ For non-SIDCOs and non-Subpart C DCOs, no regulation 
currently requires them create and maintain recovery or wind-down 
plans.\51\
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    \46\ 2013 DCOs Final Rule Release at 72,495; 17 CFR 39.39(b).
    \47\ 17 CFR 39.39(c)(1).
    \48\ 17 CFR 39.39(c)(2).
    \49\ 17 CFR 39.39(d).
    \50\ 17 CFR 39.39(e).
    \51\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 13.
---------------------------------------------------------------------------

    To align part 39 with CFTC Letter No. 16-61 and international 
standards, the Commission proposes to require all DCOs to create, 
maintain, and submit to the Commission plans for orderly wind-down 
substantially similar to those currently required for SIDCOs and 
Subpart C DCOs.\52\ Additionally, the Commission proposes to amend 
Regulation 39.39 for SIDCOs and Subpart C DCOs to include eight 
specific sections in their wind-down and recovery plans:
---------------------------------------------------------------------------

    \52\ Proposed Sec.  39.13(k); NPRM on DCO Recovery and Orderly 
Wind-down Plans, p. 18-19.
---------------------------------------------------------------------------

    1. Identify and describe critical operations and services, 
interconnections and interdependencies, and agreements and plans to 
address the risks associated with each.\53\
---------------------------------------------------------------------------

    \53\ Proposed Sec.  39.39(c)(1).
---------------------------------------------------------------------------

    2. Conduct a six-part analysis for each recovery scenario, 
including for commonly applicable scenarios like settlement or 
custodian bank failure and scenarios resulting from investment risk, 
poor business results, fraud, legal liabilities, and losses 
resulting from interconnectedness and interdependencies.\54\
---------------------------------------------------------------------------

    \54\ Proposed Sec.  39.39(c)(2).
---------------------------------------------------------------------------

    3. Discuss criteria that may trigger consideration or 
implementation of the recovery plan, describes a plan for monitoring 
events that are likely trigger the recovery plan, and includes a 
description of information-sharing and escalation processes

[[Page 49050]]

with the DCO's senior management and board.\55\
---------------------------------------------------------------------------

    \55\ Proposed Sec.  39.39(c)(3).
---------------------------------------------------------------------------

    4. Describe recovery tools, the order in which they will be 
used, the time frame for use of each tool, governance and approvals 
to execute the tools, necessary steps to implement the tools, 
whether a tool is mandatory or voluntary, and an assessment of the 
risks associated with each tool.\56\
---------------------------------------------------------------------------

    \56\ Proposed Sec.  39.39(c)(4).
---------------------------------------------------------------------------

    5. Identify and describe scenarios that would prevent the DCO 
from meeting its obligations and tools that may be used in the 
orderly wind-down.\57\
---------------------------------------------------------------------------

    \57\ Proposed Sec.  39.39(c)(5).
---------------------------------------------------------------------------

    6. Determine the agreements, arrangements, and licenses that are 
subject to change or termination as a result of activation of a 
recovery or wind-down plan and describe actions the DCO will take to 
ensure continuity of operations and services during recovery and 
wind-down despite alteration or termination.\58\
---------------------------------------------------------------------------

    \58\ Proposed Sec.  39.39(c)(6).
---------------------------------------------------------------------------

    7. Include a requirement for an annual review and formal 
approval by the board of directors and describe the governance 
structure that defines the responsibilities of board members, senior 
executives, and business units. Must also include description of the 
decision-making process.\59\
---------------------------------------------------------------------------

    \59\ Proposed Sec.  39.39(c)(7).
---------------------------------------------------------------------------

    8. Describe procedures for testing of viability plans and tools. 
The description must describe the types of testing and the 
procedures for updating the plans in light of findings from test 
results. The testing must be conducted with participation of 
clearing members.\60\
---------------------------------------------------------------------------

    \60\ Proposed Sec.  39.39(c)(8).
---------------------------------------------------------------------------

    The other proposed amendments for Part 39 include updates to 
definitions to apply generally to all DCOs, establishing a fixed 
deadline to develop and file recovery and wind-down plans, requiring 
DCOs to provide certain information directly to the Commission to be 
shared with the FDIC \61\ as well as information upon request, and 
updating the Subpart C election forms.
---------------------------------------------------------------------------

    \61\ This includes information about organization structure, 
activities, and governance; information about clearing members; 
arrangements with other clearing entities (including offset and 
cross-margin arrangements); financial schedules and supporting 
details (off balance sheet obligations, contingent liabilities, 
obligations to creditors, shareholders, and affiliates). Proposed 
Sec.  39.39(f).
---------------------------------------------------------------------------

Conclusion

    Prior to Dodd-Frank, there were limited means to facilitate 
orderly resolution. The lack of planning for financial distress 
proved tremendously harmful to our economy in a period of severe 
disruption. I believe the proposed rules, as currently drafted, 
would effectively facilitate transparency as well as provide a 
foundation for quick, efficient, and effective action in instances 
of market instability and risk to DCOs operations. Greater 
transparency and thoughtfully developed risk plans will result in 
increased confidence in our derivatives markets.
    I want to thank the staff of the Division of Clearing and Risk--
Robert Wasserman, Megan Wallace, and Eric Schmelzer--for their 
diligent and thoughtful work on these proposed regulations.
    While I support the proposal, I look forward to carefully 
considering the comments we receive to determine the best path 
forward to protect our markets through the stability of DCOs. I am 
hopeful the comments submitted in response to the proposal will 
offer thoughtful guidance on the questions offered in the release of 
the notice of proposed rule-making.

Appendix 4--Statement of Commissioner Christy Goldsmith Romero

    No one expects to fail. But the lessons from the 2008 financial 
crisis highlight how quickly contagion can spread between highly 
interconnected institutions, threatening the viability of firms. As 
the Special Inspector General for TARP (``SIGTARP''), I reported to 
Congress on the decisions made by the Government to save ``too big 
to fail'' Wall Street institutions. The theme that ran through our 
findings was a massive failure in planning, and shock from 
institutions and regulators caught unaware by dangerous 
interconnections across the financial system. The Government 
intervened with bailouts to avoid the chaos from disorderly bank 
failures that would hurt Main Street.
    Fast forward to 2023, where the financial industry and 
regulators were once again shocked by bank failures--regional bank 
failures that required government intervention, although not a 
bailout. These failures seemed to happen at lightning speed as 
online banking and other technology as well as social media played a 
role in snowballing customer redemptions.\1\ Once again, the lack of 
planning was apparent, and the government intervention was intended 
to help Main Street.
---------------------------------------------------------------------------

    \1\ An unfortunate consequence of these regional bank failures 
was large numbers of depositors withdrawing their funds only to 
deposit them in the largest banks. See, e.g., Edward Harrison, The 
Fed Is Helping Too-Big-to-Fail Banks Become Bigger, Bloomberg (May 
2, 2023) available at https://www.bloomberg.com/news/newsletters/2023-05-02/the-fed-is-helping-too-big-to-fail-banks-become-bigger.
---------------------------------------------------------------------------

    That government intervention 15 years after Congress authorized 
TARP only reinforces the importance of Dodd-Frank Act provisions 
designed to protect our financial system from systemic risk. I have 
reported to, and testified before, Congress on lessons learned from 
the 2008 financial crisis, on how to manage systemic risk, and on 
efforts to prevent future government intervention, such as 
requirements for living wills from the largest banks. I testified 
before the Senate in 2014 that I strongly supported the Dodd-Frank 
Act's ``dual approach: front line measures aimed at keeping the 
largest financial institutions safe and sound, and a last line 
defense aimed at letting a company fail without damaging the 
economy.'' \2\
---------------------------------------------------------------------------

    \2\ Written Testimony Submitted by The Honorable Christy L. 
Romero, Special Inspector General for the Troubled Asset Relief 
Program Before the U.S. Senate Banking, Housing and Urban Affairs 
Committee Subcommittee on Financial Institutions and Consumer 
Protection, available at https://www.sigtarp.gov/sites/sigtarp/files/Testimony/SIGTARP_testimony_TBTF_and_SIFI_regulation_July_16_2014.pdf (July 
16, 2014) (2014 Goldsmith Romero Testimony).
---------------------------------------------------------------------------

    I support the proposed rule today because it does just that. It 
strengthens both front line measures and the last line of defense by 
laying out specific requirements for all clearinghouses to have 
orderly wind-down plans. This expands our requirements for wind-down 
plans from a handful of clearinghouses to the full range of 
clearinghouses--ranging from those deemed systemically important to 
new or future entrants, such as those who are digital asset-focused. 
The rule today codifies and strengthens the provisions in Commission 
guidance from 2016, and is designed in consideration of 
international standards.
    I support the proposed rule because it has two major benefits. 
First, just as with bank living wills, the requirement for orderly 
wind-down plans decreases the likelihood that any failure will be 
disorderly, chaotic, or require government intervention, thereby 
protecting financial stability--in other words, the last line of 
defense. Second, the exercise of creating and maintaining the plans 
with the specific requirements contained in the rule could help to 
prevent the failure of clearinghouses by shoring up areas of 
potential existential risk and giving the Commission insight into 
risk exposure for our own oversight responsibilities--in other 
words, front line measures.
    I want to thank the staff for these efforts to implement the 
goals of the Dodd-Frank Act and protect the financial system. I 
thank them for working with my office on changes to improve the 
proposal in ways that will promote greater transparency into 
interconnections in our financial system and improve accountability 
for clearinghouses as they develop and test their plans.

Last Line Defense: The Proposal Will Help Protect Financial Stability 
in the Face of New Kinds of Market Stress by Reducing the Likelihood of 
Disorderly and Chaotic Failures

    As I testified to Congress in 2014, it is crucial for regulators 
and institutions to make use of ``what was missing in the crisis--
time--time to understand the interconnections and the risk they 
pose, and limit any dangerous risk so they are not caught unaware 
again.'' \3\ While we already require systemically significant 
clearinghouses and a small handful of other clearinghouses to 
maintain orderly wind-down plans,\4\ we do not require it for all.
---------------------------------------------------------------------------

    \3\ 2014 Goldsmith Romero Testimony.
    \4\ Derivatives Clearing Organizations and International 
Standards, 78 FR 72476, 72494 (Dec. 2, 2013).
---------------------------------------------------------------------------

    In supporting the expansion of the requirement for orderly wind-
down plans to all clearinghouses, I am reminded of one of my 
interviews with Treasury Secretary Timothy Geithner. Secretary 
Geithner told me, ``What size and mix of business do you classify as 
systemic?. . . . It depends too much on the state of the world at 
the time. You won't be able to make a judgment about

[[Page 49051]]

what's systemic and what's not until you know the nature of the 
shock.'' \5\
---------------------------------------------------------------------------

    \5\ See Statement of Christy Romero, Acting Special Inspector 
General, Troubled Asset Relief Program Before the House Committee on 
Financial Services Subcommittee on Financial Institutions and 
Consumer Credit, available at https://www.sigtarp.gov/sites/sigtarp/files/Testimony/Citi_Too_Big_To_Fail_June_14_2011_Testimony.pdf 
(June 14, 2011).
---------------------------------------------------------------------------

    Although the Financial Stability Oversight Council makes 
systemic designations, the fact that the Government intervened in 
regional bank failures this year emphasizes that disorderly failures 
of even non-systemic financial players can cause chaos and harm 
regular people. Additionally, this month our nation faced challenges 
with the debt ceiling, which would have had substantial impacts, 
which may not be planned for by all institutions.
    By requiring orderly wind-down plans for all, and adopting the 
proposed standardized requirements before a crisis hits, we can 
better understand which market stresses might cause severe 
disruptions across clearinghouses, and how a failure may spread 
across derivatives markets, the financial system, and even the 
economy. We can then engage in supervision to ensure that 
clearinghouses effectively manage risk.

Front Line Measures: The Best Use of Orderly Wind-Down Plans Is Helping 
To Ensure We Never Need To Rely on Them

    It has been said that those who fail to plan, plan to fail. But 
when it comes to financial stability, planning to fail is actually 
one of the best ways to avoid failing. A handful of clearinghouses 
already have wind-down plans pursuant to Commission guidance from 
2016.\6\
---------------------------------------------------------------------------

    \6\ Staff have provided guidance on what clearing houses should 
consider when developing recovery and wind-down plans, much of which 
is codified in this rule. CFTC Letter No. 16-61, Recovery Plans and 
Wind-down Plans Maintained by Derivatives Clearing Organizations and 
Tools for the Recovery and Orderly Wind-down of Derivatives Clearing 
Organizations, (July 16, 2016) (hereinafter CFTC Letter No. 16-61), 
available at: https://www.cftc.gov/csl/16-61/download. The 2016 
guidance was intended to be consistent with international standards. 
I note that this guidance has not been updated in seven years--seven 
years that included disruption and substantial market stresses.
---------------------------------------------------------------------------

    I support the proposed rule with its specific requirements of 
what these wind-down plans should include because it can help 
mitigate the risk of failure, and prevent the need to ever rely on 
them. I testified before Congress in 2014 saying, that I encouraged 
regulators to use living wills to ``build a comprehensive roadmap of 
interconnections to capture the common risks, linkages and 
interdependencies in the financial system.'' \7\
---------------------------------------------------------------------------

    \7\ 2014 Goldsmith Romero Testimony.
---------------------------------------------------------------------------

    I support that the proposed rule contains those same 
requirements--the inclusion of a clearinghouse's interconnections 
and interdependences. In addition to the well-established 
clearinghouses, our registrants include clearing houses (as well as 
applicants) that are focused largely on digital assets. This 
includes some clearinghouses where the clearing members are retail 
customers. Given the highly interconnected nature of the digital 
asset industry, and our lack of visibility into unregulated 
affiliates, we could find ourselves without the information needed 
to identify affiliate risk and supervise the management of that 
risk. This was most notably experienced with registered 
clearinghouse Ledger X, an affiliate of FTX.
    Additionally, an increase in cyberattacks, including the one on 
ION Markets, show how increasing reliance on third party services 
and providers can create new avenues for disruption. When those 
disruptions hit multiple firms at once, the damage can compound, 
creating cascading failures that threaten financial stability. By 
requiring clearinghouses to identify these kinds of 
interdependencies and interconnections before they become a problem, 
as well as to identify potential triggering events, document how 
they will monitor these triggers, and conduct stress scenario 
analysis, this proposal encourages a systemic perspective that would 
help clearinghouses and the Commission steer away from trigger 
events, and more comprehensively manage what would otherwise be 
existential risk.\8\
---------------------------------------------------------------------------

    \8\ It would require clearinghouses to identify scenarios that 
may prevent them from fulfilling their critical role, including not 
just due to adverse market outcomes, but also financial effects from 
cybersecurity events and other losses from interconnections with 
third party services and providers. And it requires a clearinghouse 
to consider how a combination of failures, like the sort that crop 
up in a financial crisis, might affect its ability to operate.
---------------------------------------------------------------------------

    The proposal also requires clearinghouses to test wind-down 
plans annually, or when they are updated. This is an opportunity for 
a regular robust assessment of the risks that a clearinghouse faces. 
The proposal recognizes that testing may be enhanced by 
participation by other stakeholders. I look forward to hearing 
comments about whether there are situations or scenarios where the 
participation of stakeholders other than clearing members should be 
required, instead of simply considered.
    Clearinghouses can only identify failures caused by risks that 
they consider and review. The scenarios prescribed by the proposal 
would require assessing a broad range of relevant risks. I look 
forward to hearing from commenters about whether there are any other 
areas that might help us promote the resilience of clearinghouses 
and protect against chaotic failures.

This Proposal Will Only Protect the Financial System if We Have the 
Courage To Apply It

    Unlike living wills for systemically important banks, there is 
no formal review or acceptance requirement for these wind-down 
plans. But that does not excuse us from a responsibility to 
carefully scrutinize the plans to ensure that they are 
comprehensive, appropriate, and rigorously tested. In 2011, I 
testified before Congress that rules designed to prevent systemic 
risk that would require government intervention ``are only as 
effective as their application'' and that ultimately, we ``rely on 
the courage of the regulators to protect our nation's broader 
financial system.'' \9\
---------------------------------------------------------------------------

    \9\ Statement of Christy Romero, Acting Special Inspector 
General, Troubled Asset Relief Program Before the House Committee on 
Financial Services Subcommittee on Financial Institutions and 
Consumer Credit, available at https://www.sigtarp.gov/sites/sigtarp/files/Testimony/Citi_Too_Big_To_Fail_June_14_2011_Testimony.pdf, 
(June 14, 2011).
---------------------------------------------------------------------------

    We should have the courage to use these plans as a roadmap for 
our own vigilant oversight of derivatives markets and a guide for 
where we should focus efforts to bolster resilience to market 
stresses. I welcome comment on all aspects of the proposal, but 
especially those recommending additional ways we can promote 
financial stability.
    For these reasons, I support the proposed rule.

Appendix 5--Dissenting Statement of Commissioner Summer K. Mersinger

    I cannot support the proposed amendments to Part 39 of the 
Commodity Futures Trading Commission's \1\ regulations before us 
today. The proposed amendments would: (1) make substantial changes 
to the current recovery and orderly wind-down plan regulations 
applicable to systemically important derivatives clearing 
organizations (SIDCOs) and Subpart C derivatives clearing 
organizations (Subpart C DCOs); \2\ (2) require for the first time 
that all other CFTC-registered derivatives clearing organizations 
(DCOs) have orderly wind-down plans; (3) revise the CFTC's 
bankruptcy regulations that the CFTC just recently amended to now 
require a bankruptcy trustee to act in accordance with a DCO's 
recovery and orderly wind-down plans; and (4) require SIDCOs and 
Subpart C DCOs to provide copious amounts of information to the 
Federal Deposit Insurance Corporation (FDIC) through the CFTC for 
the purpose of planning the potential resolution of the entity (the 
Proposal).
---------------------------------------------------------------------------

    \1\ This statement uses the terms CFTC or Commission to refer to 
the Commodity Futures Trading Commission.
    \2\ As used herein, the term Subpart C DCO refers to a 
derivatives clearing organization that elects to be subject to the 
provisions in Subpart C of Part 39 of the Commission's regulations.
---------------------------------------------------------------------------

    To be clear, in considering the Proposal, the Commission is not 
debating whether SIDCOs and Subpart C DCOs should be required to 
engage in thoughtful planning for recovery and orderly wind-down. 
That has already been decided.\3\ They are required to do so.\4\ In 
fact, they have been required to do so since December 2013.\5\
---------------------------------------------------------------------------

    \3\ See Derivatives Clearing Organizations and International 
Standards, 78 FR 72476 (Dec. 2, 2013).
    \4\ CFTC Rule 39.39(b), 17 CFR 39.39(b) (``Each [SIDCO] and 
[Subpart C DCO] shall maintain viable plans for: (1) recovery or 
orderly wind-down, necessitated by uncovered credit losses or 
liquidity shortfalls; and, separately, (2) recovery or orderly wind-
down necessitated by general business risk, operational risk, or any 
other risk that threatens the [DCO's] viability as a going 
concern.'').
    \5\ See 78 FR at 72476 (stating ``the rule is effective December 
31, 2013''). However, the Commission may, upon request, grant a 
SIDCO or a Subpart C DCO up to one year to comply with any provision 
of CFTC regulations 39.39 or 39.35. See CFTC Rule 39.39(f), 17 CFR 
39.39(f).

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

[[Page 49052]]

    Instead, through a set of prescriptive requirements, the 
Proposal takes a ``government knows best'' approach to recovery and 
orderly wind-down plans and the events that might trigger them. 
Furthermore, the Proposal's obligation to have an orderly wind-down 
plan, and many of the Commission's prescriptive directives attendant 
thereto, would extend to all DCOs, not just the SIDCOs and Subpart C 
DCOs that tend to be the largest and most complex derivatives 
clearinghouses.

Ignoring the Work of SIDCOs and Subpart C DCOs Over the Past Decade

    Over the past decade, SIDCOs and Subpart C DCOs have spent 
considerable time and resources developing viable plans for recovery 
and orderly wind-down. Adoption of those plans was not a one-time 
event, and those plans have not been allowed to grow stale. Indeed, 
current CFTC regulations require SIDCOs and Subpart C DCOs to 
maintain those plans.\6\
---------------------------------------------------------------------------

    \6\ CFTC Rule 39.39(b), 17 CFR 39.39(b).
---------------------------------------------------------------------------

    In accordance with Commission regulations, SIDCOs and Subpart C 
DCOs have been revising and updating those plans and taking steps to 
develop their strategies and tools, including adopting changes to 
their rulebooks that explicitly set forth tools they would use and 
when they would use them. Furthermore, the CFTC has engaged with 
SIDCOs and Subpart C DCOs on the contents of those plans and 
associated rules, including through approving rule changes and 
conducting examinations.
    The Proposal would make significant changes to the CFTC's 
current regulations addressing recovery and orderly wind-down plans. 
With respect to SIDCOs and Subpart C DCOs, I do not believe that the 
benefits of the rule changes in this Proposal outweigh the costs of 
implementing them. Worse, I believe that the Proposal's prescriptive 
requirements would undermine the ability of SIDCOs and Subpart C 
DCOs to manage risks during business as usual and appropriately plan 
for recovery and orderly wind-down.

The Proposal Is Too Prescriptive

    I am further concerned that the Proposal would require every DCO 
to consider as a potential trigger for recovery or orderly wind-
down, as applicable,\7\ a scenario that some DCOs might be able to 
manage during business as usual--a much preferred outcome in my 
opinion. This is not just a difference of semantics. The distinction 
between whether a DCO can manage a specific factual circumstance 
during business as usual or whether that fact pattern would trigger 
recovery or orderly wind-down has significant financial and 
governance implications.
---------------------------------------------------------------------------

    \7\ The Proposal would require all DCOs to have orderly wind-
down plans, and only SIDCOs and Subpart C DCOs to have recovery 
plans.
---------------------------------------------------------------------------

    In fact, if the CFTC requires a DCO to have tools and resources 
in its recovery plan to address a scenario that the DCO has 
determined it can manage during business as usual, then those 
resources and tools are required to be set aside for recovery and, 
by definition, are not available to manage the situation during 
business as usual. Not only is that inefficient and 
counterproductive, it undermines the focus on the DCO's risk 
management during business as usual. It is the DCO, not the 
Commission, that is in the best position to determine what risks it 
can manage during business as usual, and what risks would trigger 
use of its recovery plan and/or orderly wind-down plan, and to 
allocate its resources accordingly.
    Furthermore, the Proposal would require recovery and orderly 
wind-down plans to consider a potentially limitless set of 
scenarios. The Proposal states, ``The [DCO's] recovery plan 
scenarios should also address the default risks and non-default 
risks to which the [DCO] is exposed.'' While the preamble spends a 
significant amount of time pontificating on a variety of risk-
inducing scenarios, the Proposal does not define the terms ``default 
risks'' or ``non-default risks'' that are used in the rule text, and 
the requirement contains no limiting language. Without clear 
definitions or limitations, this phrase requires a DCO to consider 
every risk to which it might possibly be exposed in its recovery and 
orderly wind-down plans.
    The Proposal goes on to require each SIDCO and Subpart C DCO to 
``identify scenarios that may prevent it from meeting its 
obligations or providing its critical services as a going concern'' 
\8\ (emphasis added) in its recovery and orderly wind-down plans. I 
am concerned that this extremely low threshold could capture 
anything--and everything.
---------------------------------------------------------------------------

    \8\ The Proposal uses the term ``critical services'' with 
respect to recovery scenarios and the term ``critical operations and 
services'' with respect to orderly wind-down scenarios.
---------------------------------------------------------------------------

    As if considering the aforementioned ``risks'' and ``scenarios'' 
were not enough, the Proposal requires a SIDCO's or Subpart C DCO's 
recovery plan to ``establish the criteria that may trigger 
implementation or consideration of implementation of that plan,'' 
and its orderly wind-down plan to ``establish the criteria that may 
trigger consideration of implementation of that plan.'' I am not 
sure there is a clear distinction between ``risks,'' ``scenarios,'' 
and ``triggers'' in the Proposal.

A Faulty Premise and Unnecessary Requirements for All DCOs

    Based on the Proposal's definition of ``orderly wind-down,'' \9\ 
one purpose of having an orderly wind-down plan is to effect the 
permanent cessation of one or more of a DCO's critical operations or 
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. We already have such a process--the 
bankruptcy of a DCO pursuant to chapter 7 of the U.S. Bankruptcy 
Code and Part 190 of the Commission's regulations.
---------------------------------------------------------------------------

    \9\ The Proposal defines ``orderly wind-down'' as ``the actions 
of a derivatives clearing organization to effect the permanent 
cessation, sale, or transfer, of one or more of its critical 
operations or 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.''
---------------------------------------------------------------------------

    Indeed, the Commission engaged in an extensive effort just a few 
years ago to update Part 190 of the Commission's regulations so that 
they specifically address the bankruptcy of a DCO.\10\ By imposing 
on every DCO costly and burdensome requirements designed to prevent 
the DCO from ever going through the bankruptcy process, or to 
control that process by attempting to tell a bankruptcy trustee that 
it must follow the DCO's orderly wind-down plan, the Proposal 
assumes that bankruptcy proceedings are so fraught with the peril of 
disorder that any DCO going through bankruptcy pursuant to chapter 7 
of the U.S. Bankruptcy Code and Part 190 of the Commission's 
regulations would threaten the stability of the U.S. financial 
system.
---------------------------------------------------------------------------

    \10\ See Part 190 Bankruptcy Regulations, 86 FR 19324, 19325 
(Apr. 13, 2021) (stating that one of the ``major themes in the 
revisions to part 190'' is that ``[t]he Commission is promulgating a 
new subpart C to part 190, governing the bankruptcy of a clearing 
organization. In doing so, the Commission is establishing ex ante 
the approach to be taken in addressing such a bankruptcy, in order 
to foster prompt action in the event such a bankruptcy occurs, and 
in order to establish a more clear counterfactual (i.e., `what would 
creditors receive in a liquidation in bankruptcy?') in the event of 
a resolution of a clearing organization pursuant to Title II of 
Dodd-Frank.'') (footnote omitted).
---------------------------------------------------------------------------

    I question the fundamental premise of the Proposal that every 
DCO offers one or more services that is so critical that the sale, 
transfer, or permanent cessation of that service would threaten the 
stability of the U.S. financial system, thereby justifying the 
requirement that every DCO develop an orderly wind-down plan to 
avoid that. The preamble of the Proposal acknowledges that ``the 
failure of [a DCO that is neither a SIDCO nor a Subpart C DCO] is 
much less likely to have `serious adverse effects on financial 
stability in the United States,' '' and states that, as a result of 
that conclusion, ``the Commission is not proposing to require these 
DCOs to maintain recovery plans.'' And yet, the Proposal would 
require those DCOs to expend significant time and resources to 
maintain and submit to the Commission a plan to ``effect the 
permanent cessation, sale, or transfer, of one or more of its 
critical operations or 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.''
    Just as I do not believe that it is necessary for every DCO to 
have an orderly wind-down plan, I certainly do not see the purpose 
of a DCO applicant submitting an orderly wind-down plan to the CFTC 
as part of its application for registration as a DCO. Not only does 
a DCO applicant lack a magic ball to foresee its future level of 
success, the applicant might not even be approved by the Commission. 
We are asking applicants to plan for going-out-of-business before 
they even have permission to go into business.

Unbridled Access to Information

    I also am very concerned by the unbridled scope of information 
the Commission could

[[Page 49053]]

demand from SIDCOs and Subpart C DCOs under the Proposal with the 
goal of the Commission providing said information to the FDIC for 
purposes of resolution planning. As the primary regulator of SIDCOs 
and Subpart C DCOs, the CFTC can already request and receive 
information necessary to appropriately oversee these entities.\11\ 
Additionally, pursuant to CFTC Regulation 39.39(c)(2), each SIDCO 
and Subpart C DCO already must have ``procedures for providing the 
Commission and the [FDIC] with information needed for purposes of 
resolution planning.'' \12\
---------------------------------------------------------------------------

    \11\ The preamble to the Proposal notes that ``Under Core 
Principle J, the Commission may request any information from a DCO 
that the Commission determines to be necessary to conduct oversight 
of the DCO'' and concedes that its aim is to obtain and provide to 
the FDIC ``certain information for resolution planning that goes 
beyond the information usually obtained during business as usual 
under the Core Principles and associated Part 39 regulations.''
    \12\ CFTC Rule 39.39(c)(2), 17 CFR 39.39(c)(2)
---------------------------------------------------------------------------

    The Proposal would specify six types of information that each 
SIDCO and Subpart C DCO would be required to provide upon request. 
It then includes an all-encompassing catch-all category of ``any 
other information deemed appropriate to plan for resolution under 
Title II of the Dodd-Frank Act.'' I do not support giving a 
government regulator, let alone two federal regulators, unlimited 
access to information, especially when that information is being 
collected for the purpose of providing it to a federal regulator 
that is not the entity's primary regulator. I am unmoved, and 
certainly not comforted, by the assertion that someone (though it is 
unclear who) must ``deem the information appropriate'' before it is 
requested by the CFTC or shared with the FDIC.
    What's more, in light of today's cybersecurity risks, government 
agencies must take care in determining what information they collect 
and store. We must only collect information we need to do our job as 
regulators, not information we may want at some point for some event 
that may or may not materialize.

Conclusion

    I have great respect for the Commission's long history of 
implementing principles-based regulation and allowing our regulated 
entities the flexibility to build the appropriate policies and 
procedures--best suited for their unique business--to satisfy those 
principles. Unfortunately, this Proposal supplants prescriptions for 
principles and regulatory constraints for flexibility.

Appendix 6--Concurring Statement of Commissioner Caroline D. Pham

    I respectfully concur regarding the Notice of Proposed 
Rulemaking for Derivatives Clearing Organizations Recovery and 
Orderly Wind-down Plans; Information for Resolution Planning. While 
I generally support and appreciate the diligent efforts on this 
proposal, I do have several significant concerns regarding the 
proposal's breadth and prescriptiveness, as well as foundational 
questions on accountability and the role of the government in 
resolution planning.

Strengthening the Financial System Through Global Standards

    It has been almost 14 years since the G20 met in Pittsburgh to 
address the financial stability risks that emerged during the 2008 
global financial crisis. One pivotal outcome of that meeting was the 
agreement to improve the over-the-counter (OTC) derivatives markets 
by agreeing that all standardized OTC contracts should be exchange-
traded and cleared through regulated central counterparties (CCPs) 
by 2012, aiming to diminish counterparty credit risk and enhance 
transparency.\13\ This important decision resulted in a stronger and 
more resilient financial system by aiming to prevent a recurrence of 
the crisis from inadequate risk management. At that meeting, the G20 
leaders pledged to implement this central clearing mandate in a 
coordinated and consistent manner across jurisdictions.
---------------------------------------------------------------------------

    \13\ See Leaders' Statement: The Pittsburgh Summit (2009), 
available at https://www.oecd.org/g20/summits/pittsburgh/G20-Pittsburgh-Leaders-Declaration.pdf.
---------------------------------------------------------------------------

    In 2012, the Committee on Payments and Market Infrastructures 
\14\ and the International Organization of Securities Commissions 
(CPMI-IOSCO) established the Principles for Financial Market 
Infrastructures (PFMIs).\15\ The PFMIs are a set of international 
standards that provide guidance for the operation and oversight of 
certain financial market utilities (FMUs), including CCPs (such as 
CFTC-regulated derivatives clearing organizations (DCOs) or SEC-
regulated clearing agencies), trade repositories, payment systems, 
and central securities depositories (CSDs), that the international 
community has determined to be an essential component to preserving 
financial stability in the global financial markets.\16\
---------------------------------------------------------------------------

    \14\ The Committee on Payments and Market Infrastructures was 
renamed the Committee on Payment and Settlement Systems. See History 
of the CPMI, Bank for International Settlements, available at 
https://www.bis.org/cpmi/history.htm.
    \15\ See Principles for Financial Market Infrastructures, Bank 
for International Settlements, available at https://www.bis.org/cpmi/info_pfmi.htm.
    \16\ Id.
---------------------------------------------------------------------------

U.S. Approach to Implementation of the PFMIs

    Pursuant to Title VIII of the Dodd-Frank Act, the U.S. has 
implemented the PFMIs through multiple regulators overseeing 
different FMUs, including DCOs, clearing agencies, payment systems, 
and CSDs.\17\ The Financial Stability Oversight Council (FSOC) 
designates certain FMUs as systemically important if they pose a 
risk to the stability of the U.S. financial system (designated FMUs 
or DFMUs).\18\ To date, the FSOC has designated eight FMUs as 
systemically important, including two systemically important 
derivatives clearing organizations (SIDCOs) regulated by the 
CFTC.\19\
---------------------------------------------------------------------------

    \17\ See Designated Financial Market Utilities, Board of 
Governors of the Federal Reserve System, available at 
www.federalreserve.gov/paymentsystems/designated_fmu_about.htm.
    \18\ Id.
    \19\ The Federal agency that has primary jurisdiction over one 
of the eight designated FMUs is indicated in parentheses: The 
Clearing House Payments Company, L.L.C. (Federal Reserve); CLS Bank 
International (Federal Reserve); Chicago Mercantile Exchange, Inc. 
(CFTC); The Depository Trust Company (Securities and Exchange 
Commission (SEC)); Fixed Income Clearing Corporation (SEC); ICE 
Clear Credit L.L.C. (CFTC); National Securities Clearing Corporation 
(SEC); and The Options Clearing Corporation (SEC). See id.
---------------------------------------------------------------------------

    The CFTC, the SEC, and the Federal Reserve have all taken steps 
to implement Title VIII and the PFMIs, and to promote the stability 
and efficiency of FMUs subject to their oversight. All three U.S. 
regulators have to achieve the same outcomes, because each is 
implementing the same standards from Title VIII and the PFMIs. In 
reviewing each agency's approach--the Fed's Regulation HH and the 
SEC's recent proposal for recovery and wind-down plans for clearing 
agencies--it seems that there is an opportunity for greater 
alignment and consistency across the CFTC, SEC, and the Fed to 
implementing these same requirements. I believe the U.S. should take 
an outcomes-based approach to oversight of DFMUs because we all have 
to get to the same destination in the end.

CFTC's 2013 Recovery and Wind-Down Rule for SIDCOs and Subpart C DCOs

    In 2013, the CFTC determined that the PFMIs were the most 
relevant international standards for the risk management of SIDCOs, 
for purposes of meeting its obligations under Title VIII, and began 
implementing rules fully consistent with the PFMIs.\20\ 
Specifically, the CFTC promulgated its recovery and wind-down rules 
for SIDCOs and Subpart C DCOs in 2013.\21\ Since then, we have been 
fortunate enough to receive valuable guidance from CPMI-IOSCO and 
the Financial Stability Board regarding resolution frameworks for 
FMUs, the recovery planning process, and the content of recovery 
plans. These guidelines were initially published in 2014 and 
subsequently updated in 2017 (``CPMI-IOSCO Recovery Guidance''), 
providing us with invaluable insights.\22\ I support keeping the 
CFTC's rules up-to-date and upholding international standards under 
Title VIII and the PFMIs established by CPMI-IOSCO.
---------------------------------------------------------------------------

    \20\ See Derivatives Clearing Organizations and International 
Standards, 78 FR 72475, 72478 (Dec. 2, 2013) and Derivatives 
Clearing Organizations General Provisions and Core Principles, 85 FR 
4800, 4822 (Jan. 27, 2020).
    \21\ Id.
    \22\ See CPMI-IOSCO, Recovery of financial market 
infrastructures (Oct. 15, 2014), available at https://www.bis.org/cpmi/publ/d121.pdf and CPMI-IOSCO, Resilience of central 
counterparties: further guidance on the PFMI (July 5, 2017), 
available at https://www.bis.org/cpmi/publ/d163.htm.
---------------------------------------------------------------------------

    In our derivatives markets, DCOs provide central clearing and 
serve as intermediaries who effectively mitigate risk for hundreds 
of thousands of transactions every day through the settlement and 
central clearing of contracts. A significant portion of settlement 
and clearing in the derivatives market is carried out by two CFTC-
registered DCOs

[[Page 49054]]

designated as SIDCOs by the FSOC in 2012.\23\ It is no secret that 
if one of these SIDCOs were to experience a failure or collapse that 
it could have far-reaching and detrimental effects on the broader 
financial system. As ``giant warehouses of risk'', SIDCOs play a 
crucial role in mitigating risks for the entire global financial 
system. However, in the event of any DCO's financial distress or 
potential failure, effective regulations are necessary to ensure an 
orderly wind-down and recovery process. And that is why I believe it 
is so important that our DCOs are efficiently-regulated and well-
managed at every level, and why the CFTC has long had the preeminent 
regulatory framework for the oversight of CCPs and led many 
international initiatives to strengthen financial stability.
---------------------------------------------------------------------------

    \23\ See note 7, supra.
---------------------------------------------------------------------------

    While the prospect of a DCO collapse may appear to be beyond the 
realm of possibility, it is crucial for regulators to avoid 
succumbing to a failure of imagination. In instances where existing 
regulations prove inadequate, it is our responsibility through 
rulemakings to devise contingency plans for such worst-case 
scenarios.

Striking a Balance in Our Rulemaking--More Is Not Always Better

    I thank the staff of the Division of Clearing and Risk and the 
Office of General Counsel for their work on this proposal. I would 
also like to particularly thank Bob Wasserman and Eric Schmelzer for 
their hard work and for the time they spent with my office on this 
proposal.
    Generally, it is important that the CFTC continues to 
periodically review our regulations to see that they remain fit-for-
purpose and to update them as necessary to reflect developments in 
international standards as well as in our markets. But as I 
mentioned earlier, while I support today's proposed rulemaking, I do 
have some significant concerns.

Definitions

    First, regarding the definitions in this proposal. I appreciate 
that we attempt to align our definition for ``orderly wind-down'' 
with the definition in Regulation HH, as well as considered the 
definition in the recent SEC proposal. I thank the staff for making 
the revisions that I requested and welcome comments.
    Another definition of particular focus to me was ``legal risk.'' 
Given my experience implementing governance, risk, and control 
frameworks--including legal risk management--I took particular care 
to evaluate the proposal's definition of legal risk and worked with 
the staff to try to ensure that the CFTC's definition was consistent 
with both international standards as well as best practices. I drew 
upon my own experience with risk governance frameworks for legal 
risk. I also looked at other aspects of the CFTC rules where we 
address legal risk for swap dealers and FCMs, as well as the Basel 
Committee publications on operational risk (since legal risk is a 
subset of operational risk), as well as the aforementioned CPMI-
IOSCO Recovery Guidance, and the Fed's definition of legal risk 
(although that is for banking organizations). I then suggested, and 
my language is incorporated into the proposal, that the definition 
of legal risk includes ``losses arising from legal, regulatory, or 
contractual obligations.'' I encourage commenters to take a look at 
this proposed definition for legal risk, which builds upon some 
statements in the Recovery Guidance, and to weigh in if this is an 
appropriate definition, or if there's a better or alternate 
formulation.

Recovery Scenarios

    Second, I believe it would be helpful to have commenters provide 
feedback on the likelihood of the stress scenarios and whether each 
of these scenarios are events or types of risk that should be 
included in all DCOs' recovery plans. I also believe that there 
should be a materiality threshold in connection with determining the 
recovery scenarios that need to be addressed.
    One example of a materiality threshold is that the applicable 
recovery scenarios would need to have a ``significant likelihood'' 
of being triggered, or to evaluate whether multiple scenarios 
happening at the same time would pose a material risk to the DCO. I 
would like to have commenters weigh in on potential approaches to 
tailoring the type and number of required recovery scenarios.

Information for Resolution Planning

    Third, turning to resolution planning, I believe that it is 
important to consider the respective roles and responsibilities of 
the CFTC as the primary regulator over our DCOs, and the FDIC as the 
resolution authority under Title II. Based on my own experience 
engaging with the FDIC, I understand and support the need for the 
FDIC to be able to carefully engage in resolution planning to 
address the financial stability risk posed by SIDCOs.
    However, I believe that the accountability for sound financial 
and risk management should lie squarely with CCPs, including for 
stress, disruption, and even the unlikely event of resolution. 
Instead, it seems that our proposal shifts accountability from CCP 
management to the CFTC as regulator, and the FDIC as the primary 
responsible party for resolution planning, making it the 
government's job, not CCP management's job, to plan ahead. I believe 
this oversteps the appropriate role of government, and even 
interferes with day-to-day business operations by diverting limited 
resources from critical risk areas to burdensome document 
production. I will highlight a few examples.
    Our proposal requires that SIDCOs produce voluminous information 
and documentation directly to the CFTC on an ex ante basis, so that 
the CFTC can then, in turn, review the information and documentation 
and then produce it to the FDIC to maintain. This raises several 
concerns.
    From one perspective, I am concerned that we are shifting 
accountability and responsibility from the management of the SIDCOs 
where it should be, to the CFTC. One example is the proposal's 
requirements with respect to producing legal contracts for internal 
and external service providers, so that the CFTC and the FDIC can 
identify which contracts or agreements for services are not 
resolution resilient. It does not make sense to me why the burden-
shifting is first on the CFTC and the FDIC. It is critical that the 
management of the SIDCOs identify and mitigate their legal risks, 
and in the first instance, review their own legal contracts and make 
their own determination.
    I am not familiar with any other circumstance, for any other 
regulator, in which that type of legal documentation is 
comprehensively produced to the regulator on an ongoing basis to 
maintain. I believe that it is more common for regulated entities to 
be required to maintain an inventory of such legal documentation in 
addition to recordkeeping and retention requirements, and to 
mitigate the legal risks associated with those legal contracts or 
contractual obligations. Then, the regulator would periodically 
inspect or examine the framework for legal risk management and any 
specific regulatory requirements associated with the specific type 
of legal documentation, including the review of a sample or multiple 
samples of those legal contracts as appropriate. I would like to 
hear from commenters if this approach, which is standard practice 
for inspections and examinations, would make sense here.
    Another example of this burden-shifting from business management 
to the regulators is with respect to producing copies of licenses 
and licensing agreements to the CFTC so that the CFTC can then 
produce them to the FDIC. I am not aware of any other regulator that 
keeps its own document repository of business licenses and licensing 
agreements for regulated entities.
    Regarding information about clearing members that is requested 
for resolution planning, I do wonder if the CFTC already has this 
information because we directly regulate clearing members such as 
futures commission merchants (FCMs) and swap dealers. I would like 
to ensure that we are collecting any information from SIDCOs in the 
most efficient way possible, in order to make the best use of the 
CFTC's limited resources and to limit the administrative burden. 
And, it goes without saying that I hope the CFTC will request only 
information that is truly necessary, and is not information that the 
CFTC already collects, in order to minimize duplication.
    And more generally, because the SEC and the Fed are the other 
regulators with primary jurisdiction over their respective DFMUs, I 
would like to know if the SEC and the Fed will be taking the same 
approach as the CFTC to the production of information for resolution 
planning to the FDIC. Again, there should be alignment across all 
three agencies if we are all subject to the same Dodd-Frank 
statutory requirements.

Orderly Wind-Down Plans

    Fourth, moving to orderly wind-down plans, there are a number of 
detailed technical requirements set forth in the proposal. I will 
address a few of particular concern.
    Ancillary service providers. The proposal includes a requirement 
to identify ancillary service providers in connection with critical 
operations and services provided by and to

[[Page 49055]]

DCOs. To be clear, this requirement is referring to fourth parties, 
which is the next frontier after third party risk management. I 
encourage commenters to address whether this requirement is an 
appropriate way to approach the risk from fourth parties, or if it 
the proposal is overbroad.
    Annual testing. Regarding annual testing of tools for wind-down 
plans, I wonder if there is a more appropriate frequency for testing 
that would make sense for smaller DCOs that present a more limited 
risk profile. I believe that testing frequency should be risk-based, 
and I appreciate that the staff added this question into the 
proposal at my request. I also noted that it is possible that more 
than one tool can be used concurrently, and the staff have added a 
question regarding listing the order in which DCOs would use tools 
for wind-down plans.
    Wind-down scenarios. On a technical point regarding wind-down 
scenarios, the proposal includes a requirement to assess the 
associated risks to non-defaulting clearing members and their 
customers and linked FMIs. I appreciate that the staff made some 
adjustments to that language in order to reflect my concern that 
because there are clearing members that are not FCMs that clear on 
an agency basis for their customers, that the proposal more 
accurately contemplates different types of clearing members and 
clearing models or market structure.
    For example, there are clearing members of a DCO that are swap 
dealers and do self-clearing of their principal trading activities. 
Without clarification, the rule text could have been construed to 
encompass all of the clients, counterparties, and customers of a 
swap dealer that is a clearing member, even if unrelated to the swap 
dealer's self-clearing of swap dealing activity--such as the retail 
banking customers of a commercial bank, where the federally-
chartered banking entity subject to regulation by the Office of the 
Comptroller of the Currency, is also registered with the CFTC as a 
swap dealer. I believe it would be overreaching for a DCO to be 
required to assess the associated risks of a DCO wind-down scenario 
to the retail banking customers of that legal entity.
    Scope and lack of tailoring. I believe the proposal takes a one-
size-fits-all approach to DCO wind-down plans by requiring all DCOs, 
regardless of size or risk profile, to adhere to the same extensive 
requirements. As one example, I imagine that for fully-
collateralized DCOs which present a lesser risk profile, the cost of 
the legal and consulting fees to draft such wind-down plans could 
easily exceed their total annual operating budget, and a much 
simpler or straightforward plan would be sufficient. Accordingly, I 
believe the Commission should consider whether to allow risk-based 
tailoring of wind-down plans, and I appreciate that the staff has 
included a question in the proposal to reflect my concern.

Implementation of Plans

    Finally, regarding implementation period, I am concerned that 
the mere six months for implementation that is permitted in the 
proposal is not sufficient for the incredibly thorough and detailed 
plans that the proposal requires. I appreciate that the staff has 
added a question on the appropriate amount of time to implement 
these new requirements for DCO recovery and orderly wind-down plans.

Conclusion

    The world has come a long way since the 2008 global financial 
crisis to address systemic risk and financial stability in 
connection with FMIs such as CCPs, and I commend the leadership of 
the CFTC's efforts, alongside the G20, Financial Stability Board, 
IOSCO, the Bank for International Settlements (BIS) CPMI, and both 
U.S. and non-U.S. authorities. Though much work has been done, I 
believe in the adage that one's work is never done. That is why I 
support, and continue to support, the Commission and staff in 
periodically reviewing and updating our rules to reflect 
developments in international standards as well as in markets.
    It is evident that the staff has invested significant time and 
effort in their drafting of this proposal for DCO recovery and 
orderly wind-down plans, and information for resolution planning, 
and I appreciate the staff's thoughtfulness. Nonetheless, I 
respectfully concur because I have several significant concerns 
regarding the proposal's breadth and prescriptiveness, as well as 
foundational questions on accountability and the role of the 
government in resolution planning.
    Further, I believe there could be important benefits to 
enhancing the clarity of this proposal. The sheer length of the 
proposed rule itself makes it challenging to discern and address 
specific issues effectively. I believe that a more direct and 
concise rule would be prudent, and I look forward to receiving 
public comment.

[FR Doc. 2023-14457 Filed 7-27-23; 8:45 am]
BILLING CODE 6351-01-P

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