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SEC Seeks Comments on Standards for Covered Clearing Agencies Amendment

Targeted News Service

Targeted News Service

WASHINGTON, May 22 -- The Securities & Exchange Commission published the following proposed rule in the Federal Register:

Standards for Covered Clearing Agencies

A Proposed Rule by the Securities and Exchange Commission on 05/22/2014

Publication Date: Thursday, May 22, 2014

Agency: Securities and Exchange Commission

Dates: Submit comments on or before May 27, 2014.

Comments Close: 05/27/2014

Entry Type: Proposed Rule

Action: Proposed rule.

Document Citation: 79 FR 29507

Page: 29507 -29617 (111 pages) CFR: 17 CFR 240

Agency/Docket Numbers: Release No. 34-71699

File No. S7-03-14

RIN: 3235-AL48

Document Number: R1-2014-05806

Shorter URL: https://federalregister.gov/a/R1-2014-05806

Action

Proposed Rule.

Summary

The Securities and Exchange Commission ("SEC" or "Commission") proposes to amend Rule 17Ad-22 and add Rule 17Ab2-2 pursuant to Section 17A of the Securities Exchange Act of 1934 ("Exchange Act") and the Payment, Clearing, and Settlement Supervision Act of 2010 ("Clearing Supervision Act"), adopted in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"). Among other things, the proposed rules would establish standards for the operation and governance of certain types of registered clearing agencies that meet the definition of a "covered clearing agency."

DATES:

Submit comments on or before May 27, 2014.

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ADDRESSES:

Comments may be submitted by any of the following methods: Electronic Comments

Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or

Send an email to rule-comments@sec.gov. Please include File Number S7-03-14 on the subject line; or

Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

Send paper comments to Kevin M. O'Neill, Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-03-14.

To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml).

Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Katherine Martin, Senior Special Counsel; Stephanie Park, Special Counsel; Mark Saltzburg, Special Counsel; Matthew Lee, Attorney-Adviser; and Abraham Jacob, Attorney-Adviser; Office of Clearance and Settlement, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010, at (202) 551-5710.

SUPPLEMENTARY INFORMATION:

The Commission proposes to amend Rule 17Ad-22 to add new Rule 17Ad-22(e) to establish requirements for risk management, operations, and governance of registered clearing agencies that meet the definition of a "covered clearing agency." Covered clearing agencies would include registered clearing agencies that (i) have been designated as systemically important by the Financial Stability Oversight Council ("FSOC") and for which the Commission is the supervisory agency, pursuant to the Clearing Supervision Act ("designated clearing agencies"), (ii) provide central counterparty ("CCP") services for security-based swaps or are involved in activities the Commission determines to have a more complex risk profile, where in either case the Commodity Futures Trading Commission ("CFTC") is not the supervisory agency for such clearing agency as defined in Section 803(8) of the Clearing Supervision Act, or (iii) are otherwise determined to be covered clearing agencies by the Commission. The Commission also proposes to add new Rule 17Ad-22(f) to codify the Commission's statutory authority and new Rule 17Ab2-2 to establish procedures for making determinations regarding covered clearing agencies under proposed Rule 17Ad-22(e). The Commission also proposes to amend existing Rule 17Ad-22(d) to limit its application to clearing agencies other than covered clearing agencies and to revise existing Rule 17Ad-22(a) to add 15 new definitions. The Commission has begun, and intends to continue, consultation with the FSOC and the Board of Governors of the Federal Reserve System ("the Board") and has considered the relevant international standards as required by Section 805(a)(2)(A) of the Clearing Supervision Act. [1]

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I. Current Regulatory Framework for Clearing Agencies

A. Section 17A of the Exchange Act

When Congress added Section 17A to the Exchange Act as part of the Securities Acts Amendments of 1975, it directed the Commission to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions. [2] In Section 17A of the Exchange Act, Congress directed the Commission to have due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents. [3] The Commission's ability to achieve these goals and its supervision of securities clearance and settlement systems is based upon the regulation of clearing agencies registered with the Commission ("registered clearing agencies"). Clearing agencies are broadly defined under the Exchange Act and undertake a variety of functions. [4] One such function is to act as a CCP, which is an entity that interposes itself between the counterparties to a trade. [5] Over the years, registered clearing agencies have become an essential part of the infrastructure of the U.S. securities markets. [6] Registered clearing agencies help reduce the costs and increase the safety and efficiency of securities trading and are required to be structured to manage and reduce counterparty risk. [7]

Section 17A of the Exchange Act and Rule 17Ab2-1 require entities to register with the Commission prior to performing the functions of a clearing agency. [8] Under the statute, the Commission is not permitted to grant registration unless it determines that the rules and operations of the clearing agency meet the standards set forth in Section 17A of the Exchange Act. [9] If the Commission registers a clearing agency, the Commission oversees the clearing agency to facilitate compliance with the Exchange Act using various tools that include, among other things, the rule filing process for self-regulatory organizations ("SROs") and on-site examinations by Commission staff. [10] The Commission also oversees registered clearing agencies through regular contact, including onsite visits, by Commission staff with clearing agency senior management and other personnel and ongoing interactions of Commission staff with the registered clearing agencies regarding current and expected proposed rule changes under Section 19(b) of the Exchange Act.

B. OTC Swaps Clearing and the Dodd-Frank Act

The Commission drew on its experience regulating clearing agencies to address recent developments in the over-the-counter ("OTC") derivatives markets. In December 2008, the Commission acted to facilitate the central clearing of credit default swaps ("CDS") by permitting certain entities that performed CCP services to clear and settle CDS on a temporary, conditional basis. [11] Consequently, some CDS transactions were centrally cleared prior to the enactment of the Dodd-Frank Act.

On July 21, 2010, President Barack Obama signed the Dodd-Frank Act into law. [12] The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system. [13] It is intended, among other things, to bolster the existing regulatory structure and provide regulatory tools to address risks in the OTC derivatives markets, which have experienced dramatic growth in recent years and are capable of affecting significant sectors of the U.S. economy. [14]

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1. Title VII of the Dodd-Frank Act

Title VII of the Dodd-Frank Act ("Title VII") provides the Commission and the CFTC with enhanced authority to regulate certain OTC derivatives in response to the 2008 financial crisis. [15] Title VII provides that the CFTC will regulate "swaps," the Commission will regulate "security-based swaps," and both the CFTC and the Commission will regulate "mixed swaps." [16] Title VII provides the Commission with new regulatory authority over security-based swaps by requiring, among other things, that security-based swaps generally be cleared and that clearing agencies for security-based swaps register with the Commission.

The swap and security-based swap markets traditionally have been characterized by privately negotiated transactions entered into by two counterparties, in which each assumes the credit risk of the other counterparty. [17] Title VII amended the Exchange Act to require that transactions in security-based swaps be cleared through a clearing agency if they are of a type that the Commission determines must be cleared, unless an exemption from mandatory clearing applies. [18] When structured and operated appropriately, clearing agencies may improve the management of counterparty risk in security-based swap markets and may provide additional benefits, such as the multilateral netting of trades. [19]

Title VII also added new provisions to the Exchange Act that require entities performing the functions of a clearing agency with respect to security-based swaps ("security-based swap clearing agencies") to register with the Commission and require the Commission to adopt rules with respect to security-based swap clearing agencies. [20] Specifically, new Section 17A(j) requires the Commission to adopt rules governing security-based swap clearing agencies, and new Section 17A(i) gives the Commission authority to promulgate rules that establish standards for security-based swap clearing agencies. [21] Compliance with any such rules is a prerequisite to the registration of a clearing agency that clears security-based swaps with the Commission and is also a condition to maintain its continued registration. [22] Section 17A(i) also provides that the Commission, in establishing clearing agency standards and in its oversight of clearing agencies, may conform such standards and such oversight to reflect evolving international standards. [23] Before commencing any rulemaking regarding, among other things, security-based swap clearing agencies, Title VII provides that the Commission shall consult and coordinate, to the extent possible, with the CFTC and the prudential regulators for the purpose of assuring regulatory consistency and comparability, to the extent possible. [24]

Title VII further provides that some of the entities that the Commission permitted to clear and settle CDS on a temporary, conditional basis prior to the July 21, 2010 enactment of the Dodd-Frank Act are deemed under the Dodd-Frank Act to be registered clearing agencies (the "deemed registered provision"). [25] As a result, the Chicago Mercantile Exchange, Inc. ("CME"), ICE Clear Credit LLC ("ICE"), and ICE Clear Europe LLC ("ICEEU") became clearing agencies deemed registered with the Commission on July 16, 2011, solely for the purpose of clearing security-based swaps.

2. Title VIII of the Dodd-Frank Act

The Clearing Supervision Act, adopted in Title VIII of the Dodd-Frank Act ("Title VIII"), provides for enhanced regulation of financial market utilities ("FMUs"), such as clearing agencies that manage or operate a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the FMU. [26] The enhanced regulatory regime in Title VIII applies only to FMUs that the FSOC designates as systemically important (or likely to become systemically important) in accordance with Section 804 of the Clearing Supervision Act. [27] On July 11, 2011, the FSOC published a final rule concerning its authority to designate FMUs as systemically important. [28]

Section 806(e) of the Clearing Supervision Act requires FMUs designated as systemically important to file 60 days advance notice of changes to its rules, procedures, or operations that could materially affect the nature or level of risk presented by the FMU ("Advance Notice"). [29] In addition, Section 806(e) requires each supervisory agency to adopt rules, in consultation with the Board, that define and describe when a designated FMU is required to file an Advance Notice with its supervisory agency. [30] The Commission published a final rule concerning the Advance Notice process for designated clearing agencies on June 28, 2012. [31] In evaluating an Advance Notice filed with the Commission, the Commission would assess, among other things, the consistency of the Advance Notice with the rules proposed herein, if adopted.

The Clearing Supervision Act also provides for enhanced coordination between the Commission, the Board, and the CFTC by facilitating examinations and information sharing. Under Section 807 of the Clearing Supervision Act, the Commission and the CFTC must consult annually with the Board regarding the scope and methodology of any examination of a designated FMU, and the Board is authorized to participate in any such examination. [32] Section 809 of the Clearing Supervision Act authorizes the Commission, the Board, and the CFTC to disclose to each other copies of examination reports or similar reports regarding any designated FMU. [33] It further authorizes the Commission, the Board, and the CFTC to promptly notify each other of material concerns about a designated FMU and share appropriate reports, information, or data relating to such concerns. [34] Section 813 of the Clearing Supervision Act requires the Commission and the CFTC to coordinate with the Board to develop risk management supervision programs for designated clearing agencies. [35]

Section 805(a) of the Clearing Supervision Act [36] also provides that the Commission may prescribe risk management standards governing the operations related to payment, clearing, and settlement activities ("PCS activities") of designated FMUs for which it acts as the supervisory agency, in consultation with the FSOC and the Board and taking into consideration relevant international standards and existing prudential requirements. [37]

On July 18, 2012, the FSOC designated as systemically important the following registered clearing agencies: CME, The Depository Trust Company ("DTC"), Fixed Income Clearing Corporation ("FICC"), ICE, National Securities Clearing Corporation ("NSCC"), and The Options Clearing Corporation ("OCC"). [38] Under the Clearing Supervision Act, the Commission is the supervisory agency for DTC, FICC, NSCC, and OCC. [39] The Commission jointly regulates DTC with the Board and OCC with the CFTC. [40] The Commission also jointly regulates CME and ICE with the CFTC, which serves as their supervisory agency. [41]

C. Rule 17Ad-22 Under the Exchange Act

On October 22, 2012, the Commission adopted Rule 17Ad-22 under the Exchange Act. [42] Through Rule 17Ad-22, the Commission sought to strengthen the substantive regulation of registered clearing agencies, promote the safe and reliable operation of registered clearing agencies, and improve efficiency, transparency, and access to registered clearing agencies by establishing minimum requirements with due consideration given to observed practices and international standards. [43] At that time, the Commission noted that the implementation of Rule 17Ad-22 would be an important first step in developing the regulatory changes contemplated by Titles VII and VIII of the Dodd-Frank Act. [44] Rule 17Ad-22 requires all registered clearing agencies to establish, implement, maintain and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis. [45] These requirements are designed to work in tandem with the SRO rule filing process and the requirement in Section 17A of the Exchange Act that the Commission must make certain determinations regarding a clearing agency's rules and operations for purposes of initial and ongoing registration. [46] Rule 17Ad-22 does not apply to entities that are operating pursuant to an exemption from registration as a clearing agency granted by the Commission, [47] and it does not give particular consideration to issues relevant to clearing agencies designated as systemically important FMUs.

D. Relevant International Standards

In proposing amendments to Rule 17Ad-22, the Commission considered international standards, as required by Section 805(a) of the Clearing Supervision Act, that are relevant to its supervision of covered clearing agencies. [48] CPSS-IOSCO published in April 2012 the PFMI Report [49] to replace previous standards applicable to clearing agencies contained in two earlier reports: Recommendations for Securities Settlement Systems (2001) ("RSSS") and Recommendations for Central Counterparties (2004) ("RCCP") (collectively "CPSS-IOSCO Recommendations"). [50] Commission staff participated in the development and drafting of the PFMI Report, [51] and the Commission believes that the standards set forth in the PFMI Report are generally consistent with the requirements applicable to clearing agencies set forth in the Exchange Act. [52] Regulatory authorities around the world are in various stages of updating their regulatory regimes to adopt measures that are in line with the standards set forth in the PFMI Report. [53] The rule proposals set forth below are a continuation of the Commission's active efforts to foster the development of the national clearance and settlement system.

II. Discussion of the Proposed Amendments to Rule 17Ad-22 and Proposed Rule 17Ab2-2

The Commission is proposing to amend Rule 17Ad-22 and add Rule 17Ab2-2 pursuant to Section 17A of the Exchange Act and the Clearing Supervision Act to provide a new regulatory framework for "covered clearing agencies," as defined below.

Generally, Section 17A directs the Commission to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions, having due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and the maintenance of fair competition among brokers and dealers. [54] It further requires that a clearing agency be so organized and have the capacity and rules designed to, among other things, facilitate the prompt and accurate clearance and settlement of securities transactions, and to comply with the provisions of the Exchange Act and the rules and regulations thereunder. [55] In establishing a regulatory framework for clearance and settlement, the Exchange Act requires that a registered clearing agency's rules not impose any burden on competition not necessary or appropriate in the furtherance of the purposes of the Exchange Act. [56]

Consistent with these statutory objectives, the Commission previously adopted Rule 17Ad-22(d) to establish minimum requirements for registered clearing agencies and indicated that it might consider further rulemaking at a later date. [57] In furtherance of the provisions of Section 17A of the Exchange Act and the Clearing Supervision Act described above and as previously considered by the Commission, the Commission is proposing Rule 17Ad-22(e) to establish new requirements for covered clearing agencies, which the Commission preliminarily believes are appropriate given the risks that their size, operation, and importance pose to the U.S. securities markets, the risks inherent in the products they clear, and the goals of Title VII and the Exchange Act. [58] In connection with its supervision of registered clearing agencies under Section 17A of the Exchange Act, including after the adoption of Rule 17Ad-22, [59] the Commission has considered whether enhanced requirements for covered clearing agencies could contribute to the stability of U.S. securities markets, as described further in Part IV, and has determined to issue this proposal for comment.

The Commission has preliminarily chosen to retain Rule 17Ad-22(d) and to continue to apply it to registered clearing agencies that are not covered clearing agencies. [60] The Commission preliminarily believes that retaining Rule 17Ad-22(d) ensures that clear, comprehensive, and transparent standards for registered clearing agencies that are not covered clearing agencies will continue to exist and, because they are narrower in scope, would thereby provide a more flexible regime for new entrants seeking to establish and operate registered clearing agencies, consistent with the continuing development of the national system for clearance and settlement, than would otherwise be the case with a single regime under proposed Rule 17Ad-22(e).

The Commission notes that it is not proposing to alter the existing requirements under Rule 17Ad-22(b), which establishes risk-management and participant access requirements for registered clearing agencies that perform CCP services for security-based swaps, or Rule 17Ad-22(c), which requires registered clearing agencies that provide CCP services to maintain a record of financial resources and all registered clearing agencies to post on their Web sites annual audited financial statements. [61] These requirements continue to be appropriate for all registered clearing agencies because they promote prompt and accurate clearance and settlement of securities and security-based swap transactions. Notably, Rule 17Ad-22(b) reduces the likelihood, in a participant default scenario, that losses from default would disrupt the operations of the clearing agency, and Rule 17Ad-22(c) provides an additional layer of information about the activities and financial strength of a registered clearing agency that market participants may find useful in assessing their use of the registered clearing agency's services while also assisting the Commission in its oversight of registered clearing agencies' compliance with Rule 17Ad-22 by providing a clear record of the method used by the clearing agency to, among other things, maintain sufficient financial resources. [62]

A. Overview

The Commission is proposing Rule 17Ad-22(e) to establish requirements for covered clearing agencies with respect to general organization, [63] financial risk management, [64] settlement, [65] CSDs and exchange-of- value settlement systems, [66] default management, [67] general business risk and operational risk management, [68] access, [69] efficiency, [70] and transparency. [71] The discussion below provides greater detail regarding each respective requirement in proposed Rule 17Ad-22(e). Several aspects of proposed Rule 17Ad-22(e) are similar to existing Rule 17Ad-22(d), [72] but in general the Commission preliminarily notes that certain requirements under proposed Rule 17Ad-22(e) would require covered clearing agencies to consider and adopt policies and procedures more closely tailored to the risks that are posed by covered clearing agencies, which the Commission preliminarily identified as appropriate in connection with its experience in supervising registered clearing agencies under Section 17A of the Exchange Act, including since the adoption of Rule 17Ad-22.

The Commission preliminarily believes that the requirements of proposed Rule 17Ad-22(e) would help promote governance, operations, and risk management practices more closely tailored to the risks raised by registered clearing agencies that have been designated systemically important, are engaged in activities with a more complex risk profile, or are determined to be covered clearing agencies by the Commission, consistent with Section 17A of the Exchange Act. The Commission preliminarily believes these requirements would also enable consistent supervision of designated FMUs and would reflect the Commission's consideration of international standards, as contemplated by Section 17A(i) and the Clearing Supervision Act. [73] While the Commission has made its own determination to issue the proposed rules for comment, the Commission preliminarily believes that generally updating its rules, where appropriate, to take into account the standards set forth in the PFMI Report would contribute to the efforts of regulators around the world, described above, [74] to implement consistent standards for FMIs. [75] The Commission also preliminarily believes that Rule 17Ad-22(e) would provide an additional benefit of providing support for a determination by foreign bank regulators that covered clearing agencies providing CCP services for derivatives and securities financing transactions meet the requirements for QCCP status under the Basel III framework and could therefore help reduce competitive frictions among CCPs in different jurisdictions.

Part II.A first discusses the scope of proposed Rule 17Ad-22(e), the role that written policies and procedures play in framing the proposed rule, and the reasons for imposing certain frequency of review requirements throughout the proposed rules. It then discusses the anticipated impact of the proposed rules given the existing requirements applicable to registered clearing agencies under Rules 17Ad-22(b) through (d), with which a covered clearing agency must already be in compliance.

Part II.B next discusses the proposed rules under Rule 17Ad-22(e). Finally, Parts II.C, D, and E discuss, in turn, proposed Rule 17Ab2-2, proposed Rule 17Ad-22(f), and the proposed amendment to Rule 17Ad-22(d).

1. Scope of Proposed Rule 17Ad-22(e)

The Commission is proposing to add four terms to Rule 17Ad-22(a) to identify the registered clearing agencies that would be subject to proposed Rule 17Ad-22(e). First, the Commission is proposing to add Rule 17Ad-22(a)(9) to define "financial market utility" ("FMU") as defined in Section 803(6) of the Clearing Supervision Act. [76] Second, the Commission is proposing Rule 17Ad-22(a)(8) to define "designated clearing agency." [77] A designated clearing agency would mean a clearing agency registered with the Commission under Section 17A of the Exchange Act that has been designated as a systemically important FMU by the FSOC and for which the Commission is the supervisory agency as defined in Section 803(8) of the Clearing Supervision Act. [78] Third, the Commission is proposing to add Rule 17Ad-22(a)(4) to define "clearing agency involved in activities with a more complex risk profile" [79] to mean a clearing agency registered with the Commission under Section 17A of the Exchange Act that either (i) provides central counterparty services for security-based swaps or (ii) has been determined by the Commission to be involved in activities with a more complex risk profile ("complex risk profile clearing agency"), either at the time of its initial registration or upon a subsequent determination by the Commission pursuant to proposed Rule 17Ab2-2. [80] Fourth, the Commission is proposing to add Rule 17Ad-22(a)(7) to define a "covered clearing agency" as a designated clearing agency, a complex risk profile clearing agency, or any clearing agency determined to be a covered clearing agency by the Commission pursuant to proposed Rule 17Ab2-2. [81]

The Commission preliminarily believes there could be several different bases under which registered clearing agencies would be required to comply with proposed Rule 17Ad-22(e). For instance, because DTC, FICC, NSCC, and OCC are registered clearing agencies pursuant to Section 17A of the Exchange Act and are designated clearing agencies for which the Commission is the supervisory agency under the Clearing Supervision Act, [82] they would be covered clearing agencies under proposed Rule 17Ad-22(a)(7) and would be subject to the requirements for covered clearing agencies in proposed Rule 17Ad-22(e). In addition, because ICEEU provides CCP services for security-based swaps and has been deemed registered with the Commission as a security-based swap clearing agency, [83] it would be a complex risk profile clearing agency under proposed Rule 17Ad-22(a)(4) and also subject to the requirements for covered clearing agencies proposed in Rule 17Ad-22(e).

By comparison, CME and ICE would not be subject to the proposed requirements for covered clearing agencies in Rule 17Ad-22(e) because (i) they have been designated as systemically important FMUs under Section 804 of the Clearing Supervision Act; [84] (ii) they are each dually registered with the Commission and the CFTC as a clearing agency and DCO, respectively; and (iii) the CFTC is their supervisory agency under the Clearing Supervision Act. [85] The Commission preliminarily believes that, because CME and ICE would be subject to the CFTC's requirements for systemically important DCOs, [86] applying proposed Rule 17Ad-22(e) to them could impose duplicative requirements. Given the Commission's existing regulatory authority under Section 17A(l) of the Exchange Act, [87] however, CME and ICE would remain subject to the continuing requirements for registered clearing agencies in Rules 17Ad-22(b) through (d).

Two dormant clearing agencies, the Stock Clearing Corporation of Philadelphia ("SCCP") and the Boston Stock Exchange Clearing Corporation ("BSECC"), have not been designated systemically important by the FSOC and are not involved in activities with a more complex risk profile. [88] Accordingly, each would also remain subject to the requirements in Rules 17Ad-22(b) through (d).

Further, proposed Rule 17Ab2-2 would provide the Commission flexibility to determine that the operations or circumstances of a registered clearing agency, including a registered clearing agency that is exempt from certain requirements applicable to registered clearing agencies generally, warrant designation as a covered clearing agency. [89] It would also provide flexibility to make determinations regarding newly registered clearing agencies.

The Commission preliminarily believes the requirements proposed in Rule 17Ad-22(e) aid the regulation of covered clearing agencies by, as noted above, establishing requirements more closely tailored to the risks they pose to the U.S. securities markets. For example, designated clearing agencies are systemically important because of their significance to the U.S. financial system and the risk that the failure of, or a disruption to, their functioning would increase the risk of significant liquidity or credit problems spreading among financial institutions, thereby threatening the stability of the U.S. financial system. [90] Similarly, the Commission preliminarily believes that complex risk profile clearing agencies, such as those providing CCP services for security-based swaps, subject the U.S. securities markets to a material level of systemic risk due to the nature of the products that they clear. [91] The requirements proposed in Rule 17Ad-22(e) are intended to ensure that covered clearing agencies have robust policies and procedures that help promote sound governance, operations, and risk management.

As noted above, [92] the Commission preliminarily believes that establishing separate rules for covered clearing agencies and registered clearing agencies that are not covered clearing agencies is appropriate given the Commission's goals to facilitate the development of a national system for the prompt and accurate clearance and settlement of securities consistent with Section 17A of the Exchange Act and to mitigate systemic risk consistent with Titles VII and VIII of the Dodd-Frank Act. [93] In this regard, the Commission intends that Rule 17Ad-22(d) would continue to provide minimum requirements for the operation and governance of registered clearing agencies that also facilitate the entrance of new participants, as appropriate, into the market for clearance and settlement services. [94] The Commission preliminarily believes that Rule 17Ad-22(e) would establish new requirements for established participants in the market for clearance and settlement services commensurate to the risks that their size, operation, and importance pose to the U.S. securities markets. [95]

Request for Comments. The Commission generally requests comments on all aspects of the scope of proposed Rule 17Ad-22(e), the relationship between proposed Rule 17Ad-22(e) and Rule 17Ad-22(d), and on proposed Rules 17Ad-22(a)(4), (7), (8), and (9). In addition, the Commission requests comments on the following specific issues:

Is the scope of proposed Rule 17Ad-22(e) appropriate? Why or why not? Is the scope sufficiently clear? Why or why not? Has the Commission provided sufficient guidance regarding the scope of the proposed rule? Are there aspects of the scope of the proposed rule for which the Commission should consider providing additional guidance? If so, please explain.

Given that all non-dormant registered clearing agencies would either be covered clearing agencies subject to Commission supervision or be subject to CFTC regulation as designated clearing entities for which the CFTC is the supervisory agency, should the Commission replace the existing requirements under Rule 17Ad-22(d) with the requirements proposed under Rule 17Ad-22(e)? Why or why not?

Is the Commission's proposed definition of "financial market utility" appropriate and sufficiently clear given the proposed requirements? Why or why not? Should the definition be modified? If so, how? Is there an alternative definition the Commission should consider?

Is the Commission's proposed definition of "designated clearing agency" appropriate and sufficiently clear given the requirements proposed? Why or why not? Should the definition be modified? If so, how? Is there an alternative definition the Commission should consider?

Is the Commission's proposed definition of "clearing agency involved in activities with a more complex risk profile" appropriate and sufficiently clear given the requirements proposed? Why or why not? Should the definition be modified? If so, how? Is there an alternative definition the Commission should consider?

Is the Commission's proposed definition of "covered clearing agency" appropriate and sufficiently clear given the requirements proposed? Why or why not? Should the definition be modified? If so, how? Is there an alternative definition the Commission should consider?

Are the requirements in proposed Rule 17Ad-22(e) necessary, or do the existing provisions in Rule 17Ad-22(d) already sufficiently address the issues identified in this release as justification for increased regulation?

2. Role of Written Policies and Procedures

Proposed Rule 17Ad-22(e) would require covered clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to, as applicable, fulfill the requirements set forth in paragraphs (e)(1) through (23) of the proposed rule. The Commission preliminarily believes that this approach would facilitate the Commission's supervision of covered clearing agencies, is appropriate given their role as SROs, [96] and is consistent with the approach taken by the Commission elsewhere in Rule 17Ad-22. [97] The Commission preliminarily believes that, by requiring written policies and procedures and, where appropriate, their disclosure, proposed Rule 17Ad-22(e) should help promote the development of improved standards for clearing agencies by allowing market participants to compare certain of the operations of covered clearing agencies with those of other clearing entities, which choose to make their policies and procedures publicly available or are required to do so by equivalent regulatory standards. [98]

The Commission is proposing to require policies and procedures developed by each covered clearing agency to fulfill the requirements of proposed Rule 17Ad-22(e) because the Commission preliminarily believes that it is important to allow covered clearing agencies enough flexibility to use their market experience and understanding of their institutions to shape the rules, policies, and procedures implementing proposed Rule 17Ad-22(e). This proposed approach is consistent with the Commission's established approach for supervising SROs, and the Commission preliminarily believes continuing this practice under Rule 17Ad-22(e) will allow the Commission to continue to perform its supervisory function through the SRO rule filing process under Section 19(b) of the Exchange Act and Rule 19b-4, [99] periodic inspections and examinations, other monitoring of the activities of registered clearing agencies, and other established supervisory processes. Because of the importance the Commission gives to both maintaining clearing agency flexibility and to existing oversight mechanisms, the Commission preliminarily believes that the proposed approach is appropriate.

The Commission anticipates that a covered clearing agency's rules, policies, and procedures will need to evolve over time so that it can adequately respond to changes in technology, legal requirements, the needs of its members and their customers, trading volumes, trading practices, linkages between financial markets, and the financial instruments traded in the markets that a covered clearing agency serves. Accordingly, the Commission preliminarily believes that covered clearing agencies should continually evaluate and make appropriate updates and improvements to their operations and risk management practices to facilitate prompt and accurate clearance and settlement.

3. Frequency of Review Required Under Certain Policies and Procedures

Many of the policies and procedures requirements proposed in Rule 17Ad-22(e) specify a frequency of review. Generally, the proposed regularity of review falls into three categories-- daily, monthly, or annually--and is based on the Commission's understanding of the current review practices generally at covered clearing agencies. The Commission's rationale for these differences is as follows:

Daily: For those activities that the Commission understands to be directly related to the day-to-day operations of a covered clearing agency, [100] such as activities related to the calculation and collection of margin, the Commission preliminarily believes that a covered clearing agency should undertake a daily review and make decisions on a daily basis;

Monthly: For those activities that the Commission understands to coincide with and complement the review and reporting cycles of the governance structures related to the risk management function of the covered clearing agency, [101] the Commission preliminarily believes that a covered clearing agency should undertake a monthly review; based on its supervisory experience, the Commission notes that well-functioning risk management committees of the board and similar management committees or other board or management committees commonly meet or receive reports and other risk management information from management on a monthly basis and the monthly requirement would be consistent with such meeting and reporting frequency;

Annually: For those activities that are less integral to day-to-day operations, involve issues that merit review of information collected over longer time periods, or require more high-level review and consideration by, for example, the full board of directors of a clearing agency, [102] the Commission preliminarily believes that a covered clearing agency should undertake an annual review; additionally, the Commission preliminary believes that an annual cycle is appropriate in certain instances because other major reviews such as auditing of the financial statements of registered clearing agencies and their disclosure are required to occur on an annual basis.

Request for Comments. The Commission generally requests comments on all aspects of the frequency of review that would be required to be included in a covered clearing agency's policies and procedures under each of the requirements in proposed Rule 17Ad-22(e). In addition, the Commission requests comments on whether its assessment of daily, monthly, and annual activities at covered clearing agencies is accurate and appropriate given the proposed rules. The Commission also requests comment on what factors should be considered in determining the nature, timing, and extent of the required reviews and whether other frequencies of review might be appropriate under some or all of the proposed rules.

4. Anticipated Impact of Proposed Rule 17Ad-22(e)

Based on the Commission's experience supervising registered clearing agencies, and given the current requirements applicable to registered clearing agencies under Rule 17Ad-22, the Commission preliminarily anticipates that the degree of changes that covered clearing agencies may need to make to their policies and procedures to satisfy the proposed requirements of Rule 17Ad-22(e) would vary among the particular provisions of the proposed rule and depend in part on the business model and operations of the clearing agency itself, as discussed below. The Commission preliminarily believes that, for the provisions in its proposal where a similar existing requirement has been identified, covered clearing agencies may need to make only limited changes to update their policies and procedures, and the table below provides summary information regarding the Commission's preliminary assessment of the impact of the proposed rules:

Proposed requirement .....Existing requirement

Rule 17Ad-22(e)(1) .....Rule 17Ad-22(d)(1).

Rule 17Ad-22(e)(2) .....Rule 17Ad-22(d)(8).

Rule 17Ad-22(e)(3) .....None.

Rule 17Ad-22(e)(4) .....Rules 17Ad-22(b)(1), (b)(3), (d)(14)103.

Rule 17Ad-22(e)(5) .....None.

Rule 17Ad-22(e)(6) .....Rule 17Ad-22(b)(2), (b)(4)104.

Rule 17Ad-22(e)(7) .....None.

Rule 17Ad-22(e)(8) .....Rules 17Ad-22(d)(12).

Rule 17Ad-22(e)(9) .....Rule 17Ad-22(d)(5).

Rule 17Ad-22(e)(10) .....Rule 17Ad-22(d)(15).

Rule 17Ad-22(e)(11) .....Rule 17Ad-22(d)(10).

Rule 17Ad-22(e)(12) .....Rule 17Ad-22(d)(13).

Rule 17Ad-22(e)(13) .....Rule 17Ad-22(d)(11).

Rule 17Ad-22(e)(14) .....None.

Rule 17Ad-22(e)(15) .....None.

Rule 17Ad-22(e)(16) .....Rule 17Ad-22(d)(3).

Rule 17Ad-22(e)(17) .....Rule 17Ad-22(d)(4).

Rule 17Ad-22(e)(18) .....Rules 17Ad-22(b)(5) through (7), (d)(2).

Rule 17Ad-22(e)(19) .....None.

Rule 17Ad-22(e)(20) .....Rule 17Ad-22(d)(7).

Rule 17Ad-22(e)(21) .....Rule 17Ad-22(d)(6).

Rule 17Ad-22(e)(22) .....None.

Rule 17Ad-22(e)(23) .....Rule 17Ad-22(d)(9).

With respectto theprovisions in its proposal where no similar existing requirement has been identified, the Commission preliminarily anticipates that covered clearing agencies may need to make more extensive changes to their policies and procedures (or implement new policies and procedures), and may need to take other steps, to satisfy the proposed requirements of Rule 17Ad-22(e).

For further discussion of the anticipated impact and costs and benefits of proposed Rule 17Ad-22(e), see Part IV.C.

5. General Request for Comments

The Commission generally requests comments on all aspects of proposed Rule 17Ad-22(e) and on all aspects of the definitions included in proposed Rule 17Ad-22(a), as discussed in more detail in Part II.B. [105] In addition, the Commission requests comments on the following issues:

Is each aspect of proposed Rules 17Ad-22(e)(1) through (23), including any terms used therein, sufficiently clear given the proposed requirements? Why or why not? Has the Commission provided sufficient guidance as to the meaning of each provision of the proposed rules? Are there aspects of the proposed rules for which the Commission should consider providing additional guidance? If so, please explain.

Are the Commission's definitions in proposed Rule 17Ad-22(a) accurate, appropriate, and sufficiently clear? Why or why not? Should the definitions be modified? If so, how? Should the Commission adopt alternative definitions than those proposed? Are there additional terms used in Rule 17Ad-22(e) that should be defined? Please explain.

Is the Commission's use of certain terms it believes to be commonly understood (e.g.,"high degree of confidence" or "due diligence") appropriate and accurate? Why or why not?

Would the proposed rules require covered clearing agencies to change their current practices? If so, how? What are the expected costs and benefits to covered clearing agencies in connection with adding or revising their current practices with respect to the implementation of the Commission's proposed rules? [106]

Should the Commission consider an alternative approach with respect to written policies and procedures included in the proposed rules? Why or why not? If so, what alternative approaches should the Commission consider? Please explain in detail.

Should the Commission's proposed rules be less or more prescriptive? Why or why not? If so, what alternative approaches should the Commission consider? Please explain in detail.

Are there any other factors that the Commission should take into consideration with respect to the requirements of the proposed rules?

Should there be a phase-in period with respect to any of the requirements of proposed Rule 17Ad-22(e) ? If so, what should the phase-in periods be? What facts and circumstances should the Commission consider in evaluating whether to adopt a potential phase-in period? Please explain in detail.

Could the proposed rules affect the ability of covered clearing agencies to compete for certain types of business either within the United States or internationally? If so, how? Please provide specific examples and data.

Are there significant operational or legal impediments to implementing the proposed rules? Would the proposed rules impact the ability of covered clearing agencies to clear certain products? Are any additional rules or regulations needed to facilitate compliance with the proposed rules?

Are there any requirements under existing Rule 17Ad-22 that could be viewed as being consistent with the PFMI standards without being supplemented or replaced by new requirements in proposed Rule 17Ad-22(e)? Please explain in detail.

[*Federal RegisterVJ 2014-05-22]

For more information about Targeted News Service products and services, please contact: Myron Struck, editor, Targeted News Service LLC, Springfield, Va., 703/304-1897; editor@targetednews.com; http://targetednews.com.

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