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Vol. 78 Monday,

No. 231 December 2, 2013

Part VI

Commodity Futures Trading Commission

17 CFR Parts 39, 140, and 190Derivatives Clearing Organizations and International Standards; Final Rule

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72476 Federal Register / Vol. 78, No. 231 / Monday, December 2, 2013 / Rules and Regulations

1Dodd-Frank Wall Street Reform and ConsumerProtection Act, Public Law 111203, 124 Stat. 1376(2010). The text of the Dodd-Frank Act may beaccessed athttp://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

2Section 701 of the Dodd-Frank Act.37 U.S.C. 1 et seq.4See Section 725(c)(2)(i) of the Dodd-Frank Act

(giving the Commission explicit authority topromulgate rules regarding the core principlespursuant to its rulemaking authority under Section8a(5) of the CEA, 7 U.S.C. 12a(5)).

5See Derivatives Clearing Organization GeneralProvisions and Core Principles, 76 FR 69334 (Nov.8, 2011). These regulations are set forth in SubpartA and Subpart B of part 39 of the Commissionsregulations (Subpart A and Subpart B,respectively).

6Section 801 of the Dodd-Frank Act.

COMMODITY FUTURES TRADINGCOMMISSION

17 CFR Parts 39, 140, and 190

RIN 3038AE06

Derivatives Clearing Organizations andInternational Standards

AGENCY: Commodity Futures TradingCommission.

ACTION: Final rule.

SUMMARY: The Commodity FuturesTrading Commission (Commission) isadopting final regulations to establishadditional standards for compliancewith the derivatives clearingorganization (DCO) core principles setforth in the Commodity Exchange Act(CEA) for systemically importantDCOs (SIDCOs) and DCOs that electto opt-in to the SIDCO regulatoryrequirements (Subpart C DCOs).

Pursuant to the new regulations,SIDCOs and Subpart C DCOs arerequired to comply with therequirements applicable to all DCOs,which are set forth in the CommissionsDCO regulations on compliance withcore principles, to the extent thoserequirements are not inconsistent withthe new requirements set forth herein.The new regulations include provisionsconcerning: procedural requirements foropting in to the regulatory regime aswell as substantive requirementsrelating to governance, financialresources, system safeguards, specialdefault rules and procedures foruncovered losses or shortfalls, riskmanagement, additional disclosurerequirements, efficiency, and recoveryand wind-down procedures. Theseadditional requirements are consistentwith the Principles for Financial MarketInfrastructures (PFMIs) published bythe Committee on Payment andSettlement Systems and the Board of theInternational Organization of SecuritiesCommissions (CPSSIOSCO). Inaddition, the Commission is adoptingcertain delegation provisions andcertain technical clarifications.

DATES: This rule is effective December31, 2013, except for the amendments to17 CFR 39.31 and 140.94, which areeffective December 13, 2013, and theamendments to 190.09, which areeffective December 2, 2013.

FOR FURTHER INFORMATION CONTACT:Ananda Radhakrishnan, Director,Division of Clearing and Risk (DCR),at 2024185188 or [email protected];Robert B. Wasserman, ChiefCounsel, DCR, at 2024185092 [email protected];M. Laura Astrada,Associate Chief Counsel, DCR, at 202

4187622 or [email protected];Peter A.Kals, Special Counsel, DCR, at 2024185466 [email protected];JocelynPartridge, Special Counsel, DCR, at 2024185926 [email protected];orTracey Wingate, Special Counsel, DCR,at 2024185319 or [email protected],in each case, at the Commodity FuturesTrading Commission, Three Lafayette

Centre, 1155 21st Street NW.,Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. BackgroundA. Regulatory Framework for Registered

DCOsB. Designation of DCOs as Systemically

Important under Title VIII of the Dodd-Frank Act

C. Existing Standards for SIDCOsD. DCO Core Principles and Regulations for

Registered DCOsE. PFMIsF. The Role of the PFMIs in International

Banking StandardsG. New Regulations Applicable to SIDCOs

and Subpart C DCOsII. Discussion of Revised and New

RegulationsA. Regulation 39.2 (Definitions)B. Regulation 39.30 (Scope)C. Regulation 39.31 (Election to become

subject to the provisions of Subpart C)D. Regulation 39.32 (Governance for

systemically important derivativesclearing organizations and subpart Cderivatives clearing organizations)

E. Regulation 39.33 (Financial resourcesrequirements for systemically importantderivatives clearing organizations and

subpart C derivatives clearingorganizations)F. Regulation 39.34 (System safeguards for

systemically important derivativesclearing organizations and subpart Cderivatives clearing organizations)

G. Regulation 39.35 (Default rules andprocedures for uncovered credit losses orliquidity shortfalls (recovery) forsystemically important derivativesclearing organizations and subpart Cderivatives clearing organizations)

H. Regulation 39.36 (Risk management forsystemically important derivativesclearing organizations and subpart Cderivatives clearing organizations)

I. Regulation 39.37 (Additional disclosure

for systemically important derivativesclearing organizations and subpart Cderivatives clearing organizations)

J. Regulation 39.38 (Efficiency forsystemically important derivativesclearing organizations and subpart Cderivatives clearing organizations)

K. Regulation 39.39 (Recovery and wind-down for systemically importantderivatives clearing organizations andsubpart C derivatives clearingorganizations)

L. Regulation 39.40 (Consistency with thePrinciples for Financial MarketInfrastructures)

M. Regulation 39.41 (Special enforcementauthority for systemically importantderivatives clearing organizations)

N. Regulation 39.42 (Advance notice ofmaterial risk-related rule changes bysystemically important derivativesclearing organizations)

O. Regulation 140.94 (Delegation ofauthority to the Director of the Divisionof Clearing and Risk)

P. Regulation 190.09 (Member property)III. Effective DateA. Congressional Review ActB. Administrative Procedure Act

IV. Related MattersA. Paperwork Reduction ActB. Regulatory Flexibility ActC. Consideration of Costs and Benefits

I. Background

A. Regulatory Framework for RegisteredDCOs

On July 21, 2010, President Obamasigned the Dodd-Frank Wall StreetReform and Consumer Protection Act(Dodd-Frank Act).1 Title VII of the

Dodd-Frank Act, entitled the WallStreet Transparency and AccountabilityAct of 2010, 2 amended the CommodityExchange Act (CEA or the Act)3 toestablish a comprehensive regulatoryframework for over-the-counter (OTC)derivatives, including swaps.

Section 725(c) of the Dodd-Frank Actamended Section 5b(c)(2) of the CEA,which sets forth core principles that aDCO must comply with in order toregister and maintain registration withthe Commission. In furtherance of thegoals of the Dodd-Frank Act to reducerisk, increase transparency, and promotemarket integrity, the Commission,pursuant to the Commissions enhancedrulemaking authority,4 adoptedregulations establishing standards forcompliance with the DCO coreprinciples.5

B. Designation of DCOs as SystemicallyImportant under Title VIII of the Dodd-Frank Act

Title VIII of the Dodd-Frank Act,entitled Payment, Clearing, andSettlement Supervision Act of 2010, 6

http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfhttp://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfhttp://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfhttp://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfhttp://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfmailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfhttp://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfmailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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7Section 802(b) of the Dodd-Frank Act.8An FMU includes any person that manages or

operates a multilateral system for the purpose oftransferring, clearing, or settling payments,securities, or other financial transactions amongfinancial institutions or between financialinstitutions and the person. Section 803(6)(A) of theDodd-Frank Act.

9Section 804(a)(1) of the Dodd-Frank Act. The

term systemically important means a situationwhere the failure of or a disruption to thefunctioning of a financial market utility couldcreate, or increase, the risk of significant liquidityor credit problems spreading among financialinstitutions or markets and thereby threaten thestability of the financial system of the United States.Section 803(9) of the Dodd-Frank Act. See alsoAuthority to Designate Financial Market Utilities asSystemically Important, 76 FR 44763, 44774 (July27, 2011) (final rule).

10Under Section 804(a)(2) of the Dodd-Frank Act,in determining whether an FMU is or is likely tobecome systemically important, the Council musttake into consideration the following: (A) Theaggregate monetary value of transactions processedby the FMU; (B) the aggregate exposure of an FMU

to its counterparties; (C) the relationship,interdependencies, or other interactions of the FMUwith other FMUs or payment, clearing or settlementactivities; (D) the effect that the failure of or adisruption to the FMU would have on criticalmarkets, financial institutions or the broaderfinancial system; and (E) any other factors theCouncil deems appropriate.

1176 FR 44766.12See Press Release, Financial Stability Oversight

Council, Financial Stability Oversight CouncilMakes First Designations in Effort to Protect AgainstFuture Financial Crises (July 18, 2012), available athttp://www.treasury.gov/press-center/press-

releases/Pages/tg1645.aspx.

13While Chicago Mercantile Exchange, Inc.(CME Clearing), ICE Clear Credit LLC (ICE ClearCredit), and The Options Clearing Corporation(OCC) are the CFTC-registered DCOs that weredesignated as systemically important by theCouncil, the CFTC is the Supervisory Agency onlyfor CME Clearing and ICE Clear Credit; theSecurities and Exchange Commission (SEC)serves as OCCs Supervisory Agency.

14See Section 803(8)(A) of the Dodd-Frank Act(defining Supervisory Agency as the federalagency that has primary jurisdiction over a

designated financial market utility under federalbanking, securities or commodity futures laws).15See Section 805(a)(2) of the Dodd-Frank Act.

The Commission notes that, under section 805 ofthe Dodd-Frank Act, the Commission also has theauthority to prescribe risk management standardsgoverning the operations related to payment,clearing, and settlement activities for FMUs that aredesignated as systemically important by the Counciland are engaged in activities for which theCommission is the appropriate financial regulator.

16Section 752(a) of the Dodd-Frank Act, codifiedat 15 U.S.C. 8325, provides, in relevant part, thatin order to promote effective and consistent globalregulation of swaps and security based swaps, theCFTC, the SEC, and the prudential regulators (asthat term is defined in section 1a(30) of the CEA),as appropriate, shall consult and coordinate withforeign regulatory authorities on the establishment

of international standards with respect to theregulation of swaps and swap entities. In addition,section 752(b) of the Dodd-Frank Act states that inorder to promote effective and consistent globalregulation of contracts of sale of a commodity forfuture delivery and options on such contracts, theCFTC shall consult and coordinate with foreignregulatory authorities on the establishment ofinternational standards with respect to theregulation of contracts of a sale of a commodity forfuture delivery and on options on such contracts.

17See Financial Resources Requirements forDerivatives Clearing Organizations, 75 FR 63113,63119 (Oct. 14, 2010) (notice of proposedrulemaking) and Risk Management Requirementsfor Derivatives Clearing Organizations, 76 FR 3697(Jan. 20, 2011) (notice of proposed rulemaking).

18Specifically, in that final rulemaking, theCommission amended part 39 by creating a SubpartC and adding regulations that (1) increased theminimum financial resource requirements forSIDCOs, (2) restricted the use of assessments bySIDCOs in meeting such financial resource

obligations, (3) enhanced the system safeguardsrequirements for SIDCOs, and (4) granted theCommission special enforcement authority overSIDCOs pursuant to Section 807 of the Dodd-FrankAct. See Enhanced Risk Management Standards forSystemically Important Derivatives ClearingOrganizations, 78 FR 49663 (Aug. 15, 2013)(SIDCO Final Rule).

19Derivatives Clearing Organizations andInternational Standards, 78 FR 50260 (Aug. 16,2013) (notice of proposed rulemaking).

20For a summary and description of these coreprinciples and Commission regulations, see 78 FR5026250263.

21See Committee on Payment and SettlementSystems and the Technical Committee of the

Continued

was enacted to mitigate systemic risk inthe financial system and promotefinancial stability.7 Section 804 of theDodd-Frank Act requires the FinancialStability Oversight Council (Council)to designate those financial marketutilities (FMUs) 8 that the Councildetermines are, or are likely to become,systemically important.9

In determining whether an FMU issystemically important, the Counciluses a detailed two-stage designationsprocess, using certain statutoryconsiderations 10 and other metrics toassess, among other things, whetherpossible disruptions [to the functioningof an FMU] are potentially severe, notnecessarily in the sense that theythemselves might trigger damage to theU.S. economy, but because suchdisruptions might reduce the ability offinancial institutions or markets toperform their normal intermediation

functions.11 On July 18, 2012, theCouncil designated eight FMUs assystemically important under TitleVIII.12 Two of these are CFTC-registered

DCOs 13 for which the Commission isthe Supervisory Agency.14

C. Existing Standards for SIDCOs

Section 805 of the Dodd-Frank Actdirects the Commission to considerrelevant international standards andexisting prudential requirements whenprescribing risk management standards

governing the operations related topayment, clearing, and settlementactivities for FMUs that are (1)designated as systemically important bythe Council and (2) engaged in activitiesfor which the Commission is theSupervisory Agency.15 More generally,Section 752 of the Dodd-Frank Actdirects the Commission to consult andcoordinate with foreign regulatoryauthorities on the establishment ofconsistent international standards withrespect to the regulation of, among otherthings, swaps, futures, and options onfutures.16

In 2013, after careful consideration ofthe comments on the rules that it hadproposed for SIDCOs in 2010 and2011,17 and in light of domestic andinternational market and regulatory

developments, the Commissionfinalized regulations for SIDCOs in amanner consistent with the PFMIs.18Most recently, the Commissionproposed the regulations for SIDCOsand Subpart C DCOs that are beingadopted herein (the Proposal).19

D. DCO Core Principles and Regulations

for Registered DCOsAs noted in the Proposal, in order to

register and maintain registration statuswith the Commission, DCOs mustcomply with all of the DCO coreprinciples set forth in Section 5b(c)(2) ofthe CEA, as amended by Section 725 ofthe Dodd-Frank Act, as well as allapplicable Commission regulations. TheProposal did, however, identify anddiscuss those core principles andrelated Commission regulations thatwere most relevant to the proposedregulations. Specifically, the Proposaldiscussed the following DCO coreprinciples and related Commissionregulations Core Principle B (FinancialResources) and regulations 39.11 and39.29; Core Principle D (RiskManagement) and regulation 39.13; CorePrinciple G (Default Rules andProcedures) and regulation 39.16; CorePrinciple I (System Safeguards) andregulations 39.18 and 39.30; CorePrinciple L (Public Information) andregulation 39.21; Core Principle O(Governance Fitness Standards); CorePrinciple P (Conflicts of Interest); andCore Principle Q (Composition ofGoverning Boards).20

E. PFMIs1. Overview

In the SIDCO Final Rule, theCommission determined that, forpurposes of meeting its obligationpursuant to Section 805(a)(2)(A) of theDodd-Frank Act, the PFMIs, which weredeveloped by CPSSIOSCO over aperiod of several years,21 were the

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International Organization of SecuritiesCommissions, Principles for Financial MarketInfrastructures, (April 2012) available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.See also the Financial StabilityBoard June 2012 Third Progress Report onImplementation, available at http://www.financialstabilityboard.org/publications/r_120615.pdf(Noting publication of the PFMIs asachieving an important milestone in the globaldevelopment of a sound basis for central clearingof all standardised OTC derivatives).

22 In making this determination, the Commissionnoted that the adoption and implementation of thePFMIs by numerous foreign jurisdictions highlightsthe role these principles play in creating a global,unified set of international risk managementstandards for CCPs. See 78 FR 49666.

23See id., 1.19.24See Committee on Payment and Settlement

Systems and the Board of the InternationalOrganization of Securities Commissions Principlesfor Financial Market Infrastructures: DisclosureFramework and Assessment Methodology (Dec.2012) (hereinafter Disclosure Framework andAssessment Methodology), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.

25 Indeed, Subpart A and Subpart B wereinformed by the consultative report for the PFMIs.See generally 76 FR 69334.

26For a summary and description of these

principles, see 78 FR 5026350266.27The BCBS is comprised of senior

representatives of bank supervisory authorities andcentral banks from around the world including,Argentina, Australia, Belgium, Brazil, Canada,China, France, Germany, Hong Kong SAR, India,Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,the Netherlands, Russia, Saudi Arabia, Singapore,South Africa, Spain, Sweden, Switzerland, Turkey,the United Kingdom and the United States. SeeBank for International Settlements, Basel III: AGlobal Regulatory Framework for More ResilientBanks and Banking Systems, December 2010(revised June 2011), available at http://www.bis.org/publ/bcbs189.htm.

28See Capital Requirements for Bank Exposuresto Central Counterparties (July 2012), available atwww.bis.org/publ/bcbs227.pdf.The Basel CCPCapital Requirements are one component of Basel

III, a framework that is part of a comprehensive setof reform measures developed by the BCBS tostrengthen the regulation, supervision and riskmanagement of the international banking sector.See Bank for International Settlements Web site forcompilation of documents that form the regulatoryframework of Basel III, available at http://www.bis.org/bcbs/basel3.htm.

29 Bank is defined in accordance with the Baselframework to mean a bank, banking group or otherentity (i.e.bank holding company) whose capital isbeing measured. See Basel III: A Global RegulatoryFramework, Definition of Capital, paragraph 51.The term bank, as used herein, also includessubsidiaries and affiliates of the banking group orother entity. The Commission notes that a bank maybe a client and/or a clearing member of a DCO.

30See Basel CCP Capital Requirements, Annex 4,Section II, 6(i). See generally 78 FR 5026650267.

31See Basel CCP Capital Requirements, Section I,A: General Terms.

32CME at 5, n. 18.

international standards most relevant tothe risk management of SIDCOs.22 ThePFMIs set out 24 principles whichaddress the risk management andefficiency of a financial marketinfrastructures (FMI) operations.23Assessments of observance with thePFMIs focus also on the keyconsiderations set forth for each of the

principles.24 While Subpart A andSubpart B of part 39 of theCommissions regulations incorporatethe vast majority of the standards setforth in the PFMIs,25 the Commission,which is a member of the Board ofIOSCO, has an obligation under Section805(a) of the Dodd-Frank Act toimplement regulations relating to riskmanagement that conform withapplicable international standards. ThePFMIs are such standards and, with thisrulemaking, the Commission intends toadopt rules and regulations that arefully consistent with the standards set

forth in the PFMIs by the end of 2013.To that end, the Commission hasrecognized that in certain instances, thestandards set forth in the PFMIs may not

be fully covered by the requirements setforth in Subpart A and Subpart B of part39 of the Commissions regulations.Thus, this rulemaking revises Subpart Cto address those gaps, specifically withrespect to the following PFMIprinciples: Principle 2 (Governance);Principle 3 (Framework for thecomprehensive management of risks);Principle 4 (Credit risk); Principle 6(Margin); Principle 7 (Liquidity risk);Principle 9 (Money settlements);Principle 14 (Segregation andportability); Principle 15 (General

business risk); Principle 16 (Custodyand investment risks); Principle 17(Operational risk); Principle 21(Efficiency and effectiveness); Principle22 (Communication procedures andstandards); and Principle 23 (Disclosureof rules, key procedures, and marketdata).26

F. The Role of the PFMIs inInternational Banking Standards

The Commission notes that where acentral counterparty (CCP) is notprudentially supervised in a jurisdictionthat has domestic rules and regulationsthat are consistent with the standardsset forth in the PFMIs, theimplementation of certain international

banking regulations will havesignificant cost implications for thatCCP and its market participants. In Julyof 2012, the Basel Committee onBanking Supervision (BCBS),27 theinternational body that sets standardsfor the regulation of banks, publishedthe Capital Requirements for BankExposures to Central Counterparties(Basel CCP Capital Requirements),which sets forth interim rules governingthe capital charges arising from bankexposures to CCPs related to OTCderivatives, exchange tradedderivatives, and securities financingtransactions.28 The Basel CCP CapitalRequirements create financial incentivesfor banks, including their subsidiariesand affiliates,29 to clear financialderivatives with CCPs that are

prudentially supervised in a jurisdictionwhere the relevant regulator hasadopted rules or regulations that areconsistent with the standards set forthin the PFMIs. Specifically, the BaselCCP Capital Requirements introducenew capital charges based oncounterparty risk for banks conductingfinancial derivatives transactionsthrough a CCP.30 These incentivesinclude (1) lower capital charges forexposures arising from derivativescleared through a qualified CCP(QCCP) and (2) significantly highercapital charges for exposures arisingfrom derivatives cleared through non-qualifying CCPs. A QCCP is defined asan entity that (i) is licensed to operateas a CCP, and is permitted by theappropriate regulator to operate as such,and (ii) is prudentially supervised in ajurisdiction where the relevant regulatorhas established and publicly indicated

that it applies to the CCP, on an ongoingbasis, domestic rules and regulationsthat are consistent with the PFMIs.31

The failure of a CCP to achieve QCCPstatus could result in significant costs toits bank customers. As one marketparticipant noted, the ramifications forfailure to achieve QCCP status areonerous for banks CCP exposures andcan result in capital charges on tradeexposures that are 1020 times largerthan capital charges for QCCP tradeexposures.32 The increased capitalcharges for transactions through non-qualifying CCPs may have significant

business and operational implicationsfor U.S. DCOs that operateinternationally and are not QCCPs. Forinstance, banks faced with such highercapital charges may transfer theirclearing business away from such DCOsto a QCCP in order to benefit from thepreferential capital charges provided bythe Basel CCP Capital Requirements.Alternatively, banks may reduce ordiscontinue their clearing businessaltogether. Banks may also pass throughthe higher costs of transacting on a non-qualifying DCO that result from the

higher capital charges to theircustomers. Accordingly, customersusing such banks as intermediaries maytransfer their business to anintermediary at a QCCP. In short, aDCOs failure to be a QCCP may causeit to face a competitive disadvantage inretaining members and customers.

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33See QCCP definition supra Section I.F.34All comment letters are available through the

Commissions Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391.Comments addressingthe Proposal were received from the EuropeanCommission and the following parties: CME GroupInc. (CME); The Futures Industry Association(FIA); IntercontinentalExchange, Inc. (ICE);International Swaps and Derivatives AssociationInc. (ISDA); LCH.Clearnet Group Limited(LCH); The Minneapolis Grain Exchange(MGEX); New York Portfolio Clearing LLC(NYPC); and Chris Barnard.

35MGEX at 6.

36 Id. In addition, ISDAs comment letteraddressed the Commissions examination ofSIDCOs and Subpart C DCOs. Specifically, ISDAstated that revised Subpart C should specifywhether the Commission will evaluate a SIDCOs orSubpart C DCOs compliance with Subpart C as partof its general rule enforcement review program, orwhether SIDCOs and Subpart C DCOs will besubject to a more rigorous and more frequent (e.g.,annual) review process. ISDA at 4. This commentdoes not pertain to any of the proposed regulationsand is, therefore, outside the scope of the Proposal.However, the Commission notes that Section 807(a)of the Dodd-Frank Act requires the Commission toexamine a SIDCO at least once annually.

3778 FR 50297.38The Commission intends to cooperate with

other regulators, both domestically andinternationally, to foster efficient and effectivecommunication and consultation so that we maysupport each other in fulfilling our respectivemandates with respect to SIDCOs and Subpart CDCOs. See PFMIs, Responsibility E.

39 ISDA at 1.

40See Section II.E., infra.41See id.

G. New Regulations Applicable toSIDCOs and Subpart C DCOs

As described in detail in section IIbelow, this final rulemaking includes anew defined term, a Subpart C DCO, toallow registered DCOs that are notSIDCOs to elect to become subject to theprovisions in Subpart C of part 39 of theCommissions regulations (SubpartC). Further, this rulemaking revisesSubpart C so that Subpart C applies toSIDCOs and Subpart C DCOs, andincludes new or revised standards forgovernance, financial resources, systemsafeguards, default rules and proceduresfor uncovered losses or shortfalls, riskmanagement, disclosure, efficiency, andrecovery and wind-down procedures.These requirements address theremaining gaps between theCommissions regulations and the PFMIstandards. Thus, Subpart C, togetherwith the provisions in Subpart A andSubpart B, establish domestic rules and

regulations that are consistent with thePFMIs. Because Subparts A, B, and Capply to SIDCOs and Subpart C DCOson a continuing basis, SIDCOs andSubpart C DCOs should be QCCPs forpurposes of the Basel CCP CapitalRequirements.33

The Commission received twelvecomment letters, nine of whichcommented on the Proposal.34 All nineof these letters were generallysupportive of the Proposals goals.Given the importance of obtainingQCCP status for a U.S.-based DCO, theCommission requested comment onadditional measures that theCommission should take to help ensurethat Subpart C DCOs obtain QCCPstatus. MGEX responded by assertingthat steps should be taken to ensurethat the [Commissions] proposedregulations will be recognized byapplicable regulators as being consistentwith the PFMIs and that all DCOssubject to those regulations would beconsidered QCCPs in all relevantjurisdictions.35 MGEX also requestedthat the Commission coordinate withother regulators to provide a uniformframework that recognizes the oversightprovided by multiple regulatory

jurisdictions so as not to unnecessarilyburden DCOs with requirementsestablished by multiple regulatoryjurisdictions.36 As noted in theProposal, the Commission believes thatthe Subpart C regulations incombination with the provisionscontained in Subpart A and Subpart Bwould establish domestic rules andregulations that are consistent with thePFMIs. Because SIDCOs and Subpart CDCOs would have the requirements ofSubpart A, Subpart B and Subpart Capplied to them on a continuing basis,such entities should qualify as QCCPsfor purposes of the Basel CCP CapitalRequirements.37 In addition, theCommission notes that it activelycoordinates with other domestic andinternational regulators informally, asrequired by applicable law (such asthrough the rulemaking consultationprocess under Title VIII), and through

participation in several working groupsand international organizations (such asIOSCO).38 ISDA, which expressedsupport for the Commissions goal ofimplementing regulations for DCOs thatare consistent with the PFMIs by theend of 2013, suggested that theCommission issue this rulemaking as aninterim final rule so that marketparticipants will have an opportunity toprovide additional substantivecomments.39 The Commissiondeclines to do so. As is the case withother regulations, part 39 of theCommissions regulations may be

reviewed or revised by the Commissionas necessary.

The following section will addressdiscuss the comments received onspecific aspects of the Proposal inconnection with explaining each of theamended and new regulations adoptedherein.

II. Discussion of Revised and NewRegulations

A. Regulation 39.2 (Definitions)

The Commission proposed amendingregulation 39.2 by revising onedefinition and adding six new definedterms. First, the Commission proposed atechnical amendment to the definition

of systemically important derivativesclearing organization. The definitionhad described a SIDCO as a registeredDCO which has been designated by the[Council] to be systemically important. . . The proposed definition describeda SIDCO as a registered DCO which iscurrently designated . . .

Second, the Commission proposed toadd a definition for the phrase activitywith a more complex risk profile, toprovide greater clarity as to the types ofactivities that would trigger a CoverTwo financial resources requirement.The Commission proposed to defineactivity with a more complex riskprofile to include clearing creditdefault swaps, credit default futures,and derivatives that reference eithercredit default swaps or credit defaultfutures, as well as any other activitydesignated as such by the Commission.The phrase activity with a morecomplex risk profile currently appearsin regulation 39.29 (Financial resourcesrequirements), which the Commissionproposed to revise and renumber asregulation 39.33.40

The Commission also proposed to adda definition for the term subpart Cderivatives clearing organization. The

proposed definition would include anyregistered DCO that is not a SIDCO andthat has elected to become subject toSubpart C.

Finally, the Commission proposed toadd definitions for depositoryinstitution, U.S. branch or agency ofa foreign banking organization, andtrust company. These terms are usedin the provisions concerning liquidityset forth in paragraphs (c) and (d) ofrevised regulation 39.29, which theProposal renumbered as regulation39.33.41 As proposed, a depositoryinstitution would have the meaning set

forth in Section 19(b)(1)(A) of theFederal Reserve Act (12 U.S.C.461(b)(1)(A)). A U.S. branch or agencyof a foreign banking organizationwould mean the U.S. branch or agencyof a foreign banking organization asdefined in Section 1(b) of theInternational Banking Act of 1978 (12U.S.C. 3101). A trust company wouldmean a trust company that is a memberof the Federal Reserve System, under

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391

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42MGEX at 4.

43See also supra Section I.G.44See supra Section I.F.45LCH at 3.46MGEX at 23.47MGEX at 3.

48LCH at 34; MGEX at 4.49As a technical matter, the Commission

proposed to move existing paragraph (c) ofrenumbered regulation 39.30 (requiring a SIDCO toprovide notice to the Commission in advance of anyproposed change to its rules, procedures, oroperations that could materially affect the nature orlevel of risks presented by the SIDCO, inaccordance with the requirements of regulation40.10) to proposed new regulation 39.42. Becausethe other provisions of proposed regulation 39.30would pertain exclusively to the scope of SubpartC, it would be appropriate for existing paragraph (c)to be codified in a separate regulation. See infraSection II.N. for further detail.

50See SIDCO Final Rule (Discussion of riskmanagement standards). See also Section 805(b) ofthe Dodd-Frank Act.

51See supra Section I.E.52PFMIs 1.15.

Section 1 of the Federal Reserve Act (12U.S.C. 221), but that does not meet thedefinition of depository institution.

The Commission received only onecomment on the substance of theproposed definitions. Chris Barnardstated that he approved of the fact thatthe definition of activity with a morecomplex risk profile includes credit

default swaps and other activitiesdesignated as such by the Commissionunder regulation 39.33(a).

In addition, the Commission receiveda comment regarding the wording of adefined term. MGEX expressed concernregarding the title Subpart C DCO.Specifically, MGEX stated that the titleitself implies to the public that the[Subpart C] DCO is of significantlylesser status as compared to a SIDCO.42MGEX requested that the Commissioninstead use the term Qualified CentralCounterparty in its regulations and todefine that term to include any DCOthat is held to the standards set forth inSubpart C. The Commission declines toadopt this suggestion.

SIDCOs and registered DCOs thatelect to opt-in to these heightenedstandards are not identically situated inthat a SIDCO is required to comply withthe standards set forth in Subpart C

because of its importance to the USfinancial markets. In other words, aSubpart C DCO may rescind its electionwhereas a SIDCO may not. In addition,there may be circumstances in whichthe Commission may want to apply aparticular regulation only to SIDCOs.For example, regulation 39.41, enacted

pursuant to section 807c of the Dodd-Frank Act, grants the Commissionspecial enforcement authority overSIDCOs, but not Subpart C DCOs.Moreover, SIDCOs are required tocomply with regulation 40.10, enactedconsistent with section 806 of the Dodd-Frank Act, which, among other things,requires them to provide notice to theCommission not less than 60 days inadvance of proposed changes to theirrules, procedures, or operations thatcould materially affect the nature orlevel of risks presented by thesystemically important derivatives

clearing organization. This requirementis not imposed on Subpart C DCOs.Thus, it is necessary and appropriate forthe Commission to retain the ability todifferentiate between SIDCOs and otherregistered DCOs in its regulations.

Moreover, as discussed below, MGEXand other commenters have noted thatthe proposed opt-in structure isimportant in that it allows registeredDCOs that are not SIDCOs to be eligiblefor QCCP status. Once a Subpart C DCO

successfully attains QCCP status, theCommission notes that, in general, itsregulations do not prohibit a Subpart CDCO (or a SIDCO) from stating that it isa QCCP in its marketing materials.Indeed, the Commission expects thatSubpart C DCOs would marketthemselves as QCCPs, which is why aSubpart C DCO is prohibited from

marketing itself as a QCCP while in theprocess of rescinding its election.

For the reasons stated above, theCommission believes that the proposedrevised and new definitions areappropriate and, therefore, is adoptingthem as proposed.

B. Regulation 39.30 (Scope)

The Commission proposed expandingregulation 39.28 (and renumbering itregulation 39.30) so that Subpart Cwould apply to SIDCOs and Subpart CDCOs. As described above, the rulesproposed in Subpart C address the gaps

between Commission regulations andthe standards set forth in the PFMIs.43As such, a DCO that is subject to therequirements of Subpart A, Subpart B,and Subpart C should meet therequirements for QCCP status and

benefit from the lower capital chargeson clearing member banks and bankcustomers of clearing members forexposures resulting from derivativescleared through QCCPs.44 Such a DCOmay also be viewed more favorably bypotential members or customers ofmembers in that it would be seen to beheld to international standards.

The Commission requested commenton the proposed rules.

LCH and MGEX argued that theamended and new provisions of SubpartC should pertain to all registered DCOs.LCH asserted that the BCBS capital rulesprovide significant incentives for a DCOto meet the high standards embodied inthe PFMIs or face the real risk that bankclearing members will cease to clearthrough them and therefore all DCOsshould be required to comply with thesestandards.45 MGEX argued that theCommissions proposed opt-in regimegrants SIDCOs an unfair competitiveadvantage over other DCOs.46 MGEX

suggested that the Commission considerholding all registered DCOs to thesehigher standards and to provide anopt-out mechanism for thoseregistered DCOs that are not SIDCOsthat do not wish to attain QCCP status.47In addition, LCH and MGEX requestedthat, if the Commission elects to finalize

the proposed regulations with the opt-in regime, DCOs be permitted to petitionthe Commission for additional time tocomply with all of the Subpart Cregulations.48

The Commission has decided to adoptregulation 39.30 as proposed. First,

because of the potential benefitsresulting from QCCP status, as described

above, the Commission believes that aDCO that has not been designated to besystemically important should have theoption to elect to become subject toSubpart C.49 However, the Commissiondoes not believe that a DCO that is nota SIDCO should be required to be heldto Subpart C if it does not elect to

because of the potential costs associatedwith compliance with these standards.In addition, and as discussed in moredetail below, those DCOs that elect to beheld to Subpart C may choose theeffective date of their election. Becausea Subpart C DCO is not required to

comply with the regulations set forth inSubpart C until the specified effectivedate, a Subpart C DCO has a certainamount of control over the date onwhich it must comply with the SubpartC regulations.

Further, the Commission concludesthat a SIDCO should be required tocomply with revised Subpart C in orderto maintain risk management standardsthat enhance the safety and efficiency ofa SIDCO, reduce systemic risks, fostertransparency, and support the stabilityof the broader financial system.50 Inorder to support financial stability, aSIDCO must operate in a safe and sound

manner. If it fails to measure, monitor,and manage its risks effectively, aSIDCO could pose significant risk to itsparticipants and the financial systemmore broadly.51 The Commission sharesthe stated objectives of the PFMIs,namely to enhance the safety andefficiency of FMIs and, more broadly,reduce systemic risk and fostertransparency and financial stability.52As discussed in the Proposal, the PFMIs


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53See 78 FR 50260, 50268.54See discussion of the role of the PFMIs in

international banking standards supra Section I.F.,78 FR 502669.

55See Basel CCP Capital Requirements at SectionI.A.: General Terms.

56As noted above, banks alternatively may reduceor discontinue their clearing business or passthrough to their customers any higher costs oftransacting through a DCO that is not a QCCP. Seediscussion of the role of the PFMIs in InternationalBanking Standards supra Section I.F; 78 FR 50267,50269.

57See discussion of the new regulationsapplicable to SIDCOs and Subpart C DCOs supraSection I.G.

58 Id.

59Comments on proposed regulation 39.31 werereceived from the European Commission, FIA,ISDA, LCH and MGEX.

60See, e.g., European Commission at 1, LCH at 2,MGEX at 12.

61LCH at 1. See also MGEX at 1 (MGEXapplauds the Commission for attempting toestablish an avenue by which DCOs not designatedas systemically important could qualify for [QCCP]status.).

62European Commission at 1.63See LCH at 24, MGEX at 26.64See LCH at 3, MGEX at 3.65LCH at 2.66MGEX at 2.

67 Id.

68MGEX at 34.69MGEX at 3.70 Id.71See LCH at 24, MGEX at 34.72The Commission notes that, there is no general

compliance deadline for non-SIDCO DCOs. Whilea non-SIDCO that wishes to become a Subpart CDCO must satisfy all of the Subpart C requirements(except the specific obligations for which the DCOis permitted to apply for additional time to comply)at the time it elects to become subject to SubpartC, a DCO is not required to make that election atany particular time or at all, unless it determinesthat the cost of such compliance is usurped by thebenefits it would receive through Subpart C status.

73LCH at 24, MGEX at 34.

have been adopted and implemented bynumerous foreign jurisdictions.53 TheCommission notes that none of thecommenters opposed holding allSIDCOs to the Subpart C regulations.The Commission believes that a global,unified set of international riskmanagement standards for systemicallyimportant CCPs can help support the

stability of the broader financial system.As such, for the reasons described aboveand in the Proposal, the Commission

believes that SIDCOs should be requiredto comply with all of the requirementsset forth in part 39 of the Commissionsregulations, including the standards setforth in Subpart C, as revised herein.

C. Regulation 39.31 (Election to becomesubject to the provisions of Subpart C)

As discussed above and in theProposal,54 the Basel CCP CapitalRequirements impose significantlyhigher capital charges on banks(including their subsidiaries andaffiliates) that clear financial derivativesthrough CCPs that do not qualify asQCCPs (i.e., CCPs that are licensed andsupervised in a jurisdiction where therelevant regulator applies to the CCP, onan ongoing basis, domestic rules andregulations that are not consistent withthe PFMIs).55 Because such chargescould create incentives for banks tomigrate their business to CCPs that areQCCPs or to avoid clearing,56 U.S. DCOsthat operate internationally, but are notQCCPs, may face a substantialcompetitive disadvantage. The SubpartC requirements, as amended herein,

address any remaining gaps between theCommissions existing regulations andthe PFMI standards.57 Accordingly, aDCO that is subject to the collectiveobligations contained in Subpart A,Subpart B and Subpart C should be aQCCP for purposes of the Basel CCPCapital Requirements.58

Regulation 39.31, as proposed, wouldprovide a mechanism whereby a DCOthat has not been designated by theCouncil as systemically important mayelect to become subject to the provisionsof Subpart C (i.e., may opt to become

subject to the regulations otherwiseapplicable only to SIDCOs) and,thereby, attain QCCP status, should theDCO individually determine that the

benefits of achieving such statusoutweigh the costs associated withimplementing the Subpart C regulations.The Commission also proposedprocedures for withdrawing or

rescinding that election.The Commission received five

comment letters regarding proposedregulation 39.31.59 These commentsgenerally supported the adoption ofprocedures that would provide non-SIDCO DCOs the opportunity to becomeQCCPs through adherence to anenhanced regulatory regime.60 LCH, forexample, strongly supported theadoption of heightened regulatorystandards that would allow bothSIDCOs and non-SIDCOs to beQCCPs.61 The European Commissionsimilarly stated that central

counterparties that wish to operateunder safer standards and compete onthe basis of the quality of their risk-management . . . should not beprevented from doing so. 62

MGX and LCH disagreed, however,with the proposed opt-in approachand suggested alternative means forachieving the Commissionsobjectives.63 As mentioned above, bothLCH and MGEX suggested that theCommission require all currentlyregistered DCOs to be held to theenhanced regulatory requirementsproposed to be applicable only toSIDCOs and Subpart C DCOs.64 LCH

asserted that it is important for allCCPs which clear swaps and otherderivatives . . . to adhere to the higherstandards.65 MGEX claimed thatrequiring DCOs that have not beendesignated by the Council assystemically important to opt-in toSubpart C compliance is unnecessarily

burdensome and discriminatory incomparison to the regulatory treatmentof SIDCOs.66 In support of its position,MGEX noted that SIDCOs will be heldto the same standards as Subpart CDCOs, but will not be required to submita Subpart C Election Form, or to

otherwise engage in the Subpart Celection process in order to become aQCCP.67 MGEX contended thatrequiring all currently registered DCOsto be held to the enhanced regulatoryregime would negate the need for aSubpart C Election Form and, therefore,would treat all DCOs identically interms of their registration status andrequirements, which would enableDCOs to spend the time that they wouldotherwise spend on preparing a SubpartC Election Form on ensuring theircompliance with the Subpart Cregulations.68

MGEX recognized, however, anumber of potential issues withuniversal application of the Subpart Crequirements.69 For example, thisproposed alternative, by itself, wouldnot provide flexibility for DCOs that donot wish to be held to the higherstandards and could require the

Commission to expend considerableresources to verify compliance for eachcurrently registered DCO shortly afterimplementation and to engage in theprocesses necessary to revoke theSubpart C DCO status of those DCOsthat fail to satisfy the proposedregulations.70 Both MGEX and LCHsuggested alternatives. Specifically,these commenters recommended thatthe Commission replace the proposedopt-in regime with a regime underwhich the Subpart C standards would

be applicable to all DCOs, but a DCOwould be permitted to opt-out of the

heightened standards, if it believed thatattaining QCCP status was not importantfor its business.71 Both entitiesrecommended that the opt-out regime beaccompanied by an extension of thecompliance deadline 72 for all or some ofthe substantive proposed Subpart Cregulations.73 Specifically, LCH andMGEX voiced concern that it would bedifficult or unlikely for non-SIDCODCOs to satisfy the Subpart C electionand implementation requirementsnecessary to achieve QCCP status prior


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74LCH at 2, MGEX at 2. The Basel IIICounterparty Credit Risk and Exposures to CentralCounterparties-Frequently Asked Questions (BaselIII FAQs) state that, if a CCPs primary regulatorhas publicly stated that it is working towardsimplementing regulations consistent with thePFMIs, then such CCP may be treated as a QCCPuntil December 31, 2013. After December 31, 2013,the Basel III FAQs state that the CCPs primaryregulator must have implemented regulationsconsistent with the PFMIs and these regulationsmust be applied to the CCP on an ongoing basis inorder for such CCP to be eligible for QCCP status.See Basel III FAQs, Question 5.6, available at:http://www.bis.org/publ/bcbs237.pdf.

75

See LCH at 3, 4.76MGEX at 4.77See LCH at 3, 4.78See LCH at 3, MGEX at 3.79See LCH at 4, MGEX at 2.80MGEX at 2.81LCH at 4. In support of this assertion, however,

LCH cites to just one aspect of the Subpart Crequirementsthe recovery and wind-downplanswhich may not be required of certain EUCCPs in order to become and maintain QCCP status.Specifically, LCH asserts that CCPs in theEuropean Union will not be required to providerecovery and wind-down plans to become andremain QCCPs as EMIR, which implements thePFMIs in Europe, does not include such a

requirement. EU legislation implementing therecovery and wind resolution aspects of the PMIsis not expected to be proposed by the EuropeanCommission until early next year andimplementation is unlikely before 2016 at theearliest. Id. LCH also notes that laws in some EUjurisdictions will require CCPs to have recoveryplans prior to implementation of EU legislation.LCH at 4, n. 4. As noted below, the Commissionwill permit SIDCOs and Subpart C DCOs theopportunity to request that the Commission grantthe SIDCO or Subpart C DCO an extension of thedeadline with respect to recovery and wind-downplans for up to one year. See infra Section II.K.(Regulation 39.39 (Recovery and wind down forsystemically important derivatives clearingorganizations and subpart C derivatives clearingorganizations)).

82See LCH at 2, 4. LCH claims that requiring aSubpart C DCO to comply with the Subpart Cregulations by the end of 2013 would likely resultin Subpart C DCOs not being able to achieve QCCPstatus prior to that time and that the failure of aSubpart C DCO to achieve QCCP status would putthe Subpart C DCO at a completive disadvantage tonon-QCCPs that are grandfathered as QCCPs.LCH at 2. As noted below, the Commission believesthat permitting Subpart C DCOs a broad-basedopportunity to delay compliance with the SubpartC regulations, as suggested by LCH, could put aDCO at greater risk of failing to obtain QCCP status.

83See 78 FR 5026850269.84See discussion of existing standards for SIDCOs

supra Section I.C.

85See infra Section II.F. (Regulation 39.34(System safeguards for systemically importantderivatives clearing organizations and subpart Cderivatives clearing organizations)), Section G(Regulation 39.35 (Default rules or procedures foruncovered credit losses or liquidity shortfalls(recovery) for systemically important derivativesclearing organizations and subpart C derivativesclearing organizations)), and Section II.K(Regulation 39.35 (Recovery and wind-down forsystemically important derivatives clearingorganizations and subpart C derivatives clearingorganizations)).

to December 31, 2013.74 LCHspecifically stated that additional timeis necessary to come into compliancewith the regulations governingfinancial resources, system safeguards,risk management, and recovery andwind-down plans. 75 Both MGEX andLCH commented on the particulardifficulty of developing a recovery and

wind down plan citing, respectively, thecomplexity and potential effects thecontents of such a plan would have onthe operation of a DCO 76 and the factthat the Commission has not previouslyproposed any requirements with respectto such plans.77

In support of their requests foradditional time to comply with theSubpart C requirements, LCH andMGEX cited the time needed to identifygaps between their current rules andprocedures and the Subpart Cregulations, to implement any necessarychanges to comply with the Subpart C

regulations, and to prepare and submittheir Subpart C Election Forms.78 Bothentities objected to the amount of time

between the publication of the Proposaland the time when compliance will berequired in order to qualify for QCCPstatus by the end of the 2013.79

MGEX also objected to the allegeddisparate treatment afforded SIDCOswhich have been able to prepare forcompliance with the enhancedstandards at least since the release of thePFMIs in April 2012. 80 In addition,LCH asserted that, as proposed, theCommission would be requiring SubpartC DCOs to come into compliance with

all aspects of the PFMIS prior to manynon-US CCPs.81 LCH suggested that

adopting the final regulations, butpermitting compliance at a later date,would allow the Commission to adoptthe PFMIs prior to the end of 2013while, at the same time, providing DCOswith an ability to achieve QCCP status

by the end of 2013. 82The Commission continues to believe

that non-SIDCO DCOs that are willing

and able to satisfy the enhancedregulatory requirements contained inSubpart C, should, when they are ableto do so, be afforded the opportunity toattain QCCP status and to reap the

benefits that may result from thatdesignation 83 and that the applicationof Subpart C non-SIDCO DCOs that wishto become subject to regulations that areconsistent with the standards set forthin the PFMIs helps promote theinternational consistency called for inSection 752 of the Dodd-Frank Act.84Commenters addressing proposedregulation 39.31 were unanimously

supportive of this objective.Accordingly, the Commission hasdetermined to adopt a regulatoryframework that permits a DCO that hasnot been designated as systemicallyimportant by the Council to elect to

become subject to the heightenedstandards set forth in Subpart C.

In response to the commentsrecommending that the Commissionapply the regulatory requirements to allDCOs or employ an opt-out regime inlieu of the proposed opt-outprocedures, the Commission notes thatneither commenter advocating suchalternatives provided any quantitative

data or qualitative analyses of the costsand benefits of its suggestedalternatives, particularly as compared tothe Commissions Proposal. TheCommission believes it would beinappropriate to adopt the profferedalternatives absent such analyses andwithout sufficient opportunity for thepublic to review and comment upon

them.The Commission also is concerned

that an opt-out regime would unfairlyshift certain costs associated with theSubpart C regulations to those non-SIDCO DCOs that do not intend to availthemselves of the opportunity to

become QCCPs. Specifically, regulation39.31, as proposed and finalized herein,would require only those non-SIDCODCOs that wish to become subject to theSubpart C regulations (and to attain the

benefits of QCCP status) to completeand file a Subpart C Election Form.Non-SIDCO DCOs that do not wish to

become subject to the Subpart Cregulations (nor to obtain the benefits ofQCCP status) are not obligated to takeany further action. In contrast, an opt-out regime would impose an obligationto file an opt-out application on thoseDCOs that do not intend to seek the

benefit of QCCP status, while removingthe Subpart C Election Form obligationfrom those DCOs that do.

In response to commenters requestsfor additional time for Subpart C DCOsto comply with the new Subpart Cregulations, and as discussed in moredetail below, the Commission hasdetermined that it would be appropriate

to permit SIDCOs and Subpart C DCOsto request extensions of time to complywith the requirements for systemsafeguards, default rules and proceduresfor uncovered credit losses or liquidity,and recovery and wind-down planscontained in regulations 39.34, 39.35and 39.39, respectively.85 TheCommission is declining, however, topermit requests from a DCO for, or togenerally provide, a wholesaleextension of time to comply with thenew Subpart C regulations. Thus, a DCOseeking to become a Subpart C DCO willotherwise be required to be in

compliance with the Subpart Cregulations at the time it makes its

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86Notwithstanding its timing concerns, LCH hasindicated that it intends to take advantage of theSubpart C election process. LCH at 3.

87See supra n 91.88See supra Section I.F. (The Role of the PFMIs

in International Banking Standards).89Joint Press Release, Board of Governors of the

Federal Reserve System, the Commodity FuturesTrading Commission and the Securities andExchange Commission, CPSSIOSCO Issue FinalReport on Principles for Financial MarketInfrastructures (April 16, 2012).

90Basel III FAQs at 23. In the Final SIDCO Rulethe Commission explicitly advised the public of itsintention toward implementing regulations that arefully consistent with the PFMIs by the end of 2013.See SIDCO Final Rule at 4966 (Moreover, theCommission, which is a member of the Board ofIOSCO, is working towards implementing rules andregulations that are fully consistent with the PFMIsby the end of 2013).

9178 FR 50298.9278 FR 50271, 5029899.

93See supra Section II.C. (Regulation 39.31(Election to become subject to the provisions ofSubpart C)).

94MGEX at 5.95MGEX at 5 (citing 78 FR 50271).9678 FR 50271.97This distinction is even more important in the

case of a clearing organization, such as MGEX, thatwas grandfathered in to DCO status under theCommodity Futures Modernization Act of 2000(Pub. L. No. 106554, 114 Stat. 2763, sec. 112(f)(adding sec. 5a(b) to the CEA) and thus never filedan application for registration as a DCO.

98See Subpart C Election Form, ExhibitInstructions at no 2, (If the [DCO] is an Applicant,in its Form DCO, the [DCO] may summarize suchinformation and provide a cross reference to theExhibit in this Subpart C Election Form thatcontains the required information (emphasisadded)).

Subpart C election. The new Subpart Cregulations finalized herein seek toprovide DCOs that have not beendesignated by the Council assystemically important the opportunityto qualify as QCCPs. Despite LCHsassertion to the contrary,86 theCommission is concerned that a broad-

based extension of the compliance

deadline (in contrast to individuallyjustified extensions with respect toparticular requirements) would be morelikely to jeopardize the ability of aSubpart C DCO to achieve QCCP status.As noted above, rules and regulationsthat are consistent with the PFMIs must

be implementedby the end of 2013.87Moreover, as noted above, a QCCP isdefined, in part, as a CCP that isprudentially supervised in a jurisdictionwhere the relevant regulator applies tothe CCP, on an ongoing basis, domesticrules and regulations that are consistentwith the PFMIs.88

The Commission further notes that anon-SIDCO DCO is obligated to complywith the Subpart C regulations only ifand whenthe DCO affirmatively electsto become subject to such regulations,

based upon its own examination of thebenefits (including, but not limited to,the opportunity to attain QCCP status)and burdens thereof. No non-SIDCODCO is obligated to elect to become aSubpart C DCO and thereby complywith the Subpart C regulations byDecember 31, 2013 or any other dateunless it believes that it is prudent to doso in light of its particular business. TheCommission stands ready to review the

application of any DCO that is preparedto be held to the Subpart C standards,whether the DCO is prepared to do soon December 31, 2013 or any later date.

The Commission also disagrees withcommenters assertions that potentialSubpart C DCOs have only recently beenadvised of the nature of the additionalregulations to which they, if theychoose, will be subject. The final PFMIswere published in April of 2012. In thesame month, the Commission and otherdomestic financial regulators issued ajoint press release explicitly notifyingthe public of the publication of the final

PFMIs.89

At a minimum, therefore,DCOs have been on notice of thespecific requirements of the PFMIs since

April 2012. Moreover, the Basel CCPCapital Requirements were published in

July of 2012, and as mentioned above,the Basel FAQs, which were publishedin December of 2012, state that during2013, if a CCP regulator has not yetimplemented the PFMIs but haspublicly stated that it is workingtowards implementing these principles,the CCPs that are regulated by the CCPregulator may be treated as QCCPs.90Thus, by December of 2012, DCOs wereon notice of the preferential capitaltreatment that would result from

becoming subject to regulations that areconsistent with the PFMIs by the end of2013.

1. Regulation 39.31(a)EligibilityRequirements

Regulation 39.31(a), as proposed, setforth the two categories of entities thatwould be eligible to elect to become

subject to the provisions in Subpart C.As proposed: (1) A DCO that is not aSIDCO could request such electionusing the procedures set forth inproposed regulation 39.31(b) and (2) anentity applying for registration as a DCOpursuant to regulation 39.3 (DCOApplicant) could request the electionin conjunction with its application forregistration (Registration Application)using the procedures set forth inproposed regulation 39.31(c). TheCommission did not receive anycomments specifically addressingproposed regulation 39.31(a).

Accordingly, for the reasons cited in theProposal,91 the Commission is adoptingregulation 39.31(a) as proposed.

2. Regulation 39.31(b)Subpart CElection and Withdrawal Procedures forRegistered DCOs

Regulation 39.31(b), as proposed,would establish the procedures bywhich a DCO that is already registeredcould elect to become subject to theprovisions of Subpart C and theprocedure by which the DCO couldwithdraw that election.92 Commentsgenerally addressing the Proposal to

adopt regulations that would permit aDCO to elect to become subject toSubpart C (i.e., comments on the opt-

in regime) are discussed above.93 Inaddition, the Commission received onecomment referencing the Subpart CElection Form. MGEX asserted that theCommission should waive theSubpart C Election Form as it seemsoverly burdensome and costly for acurrently registered DCO to be requiredto complete an entirely new application

which calls for submission of the sameor similar information and analysis thatthe DCO previously provided [in itsDCO Application].94 In support of thisrequest, MGEX cites to a statement inthe Proposal that the Commissionanticipates considerable overlap

between the information anddocumentation contained in theRegistration Application files [sic] by aDCO Applicant and the information anddocumentation that would be requiredto be submitted to the Commission aspart of the Subpart C Election Form. 95This reference is misplaced. The cited

statement was made in the portion ofthe Proposal describing the proposedelection and withdrawal procedures fornew DCO applicants.96 The overlap ininformation and documentation towhich the Commission was referring isthe overlap between the materials thatwould be submitted by new applicantsfor DCO registration in their DCOapplications and the materials that anewly registered DCO would supply aspart of a Subpart C Election Formsubmitted shortly thereafter.97 Incontrast, the information supplied by acurrently registered DCO as part of theForm DCO that was filed when such

DCO applied for registration is likely tobe stale and would need to beupdated.98 Moreover, the Subpart CElection Form simply calls for theelecting DCO to demonstrate itscompliance with the requirements ofSubpart C, with fairly minimalformatting requirements. The form isintended to provide the Commission,clearing members, and customers (and,significantly, the regulators of such


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99See 78 FR 50269.100MGEX at 5.101 Id.102See supra Section II.I. (Regulation 39.37

(Additional disclosure for systemically importantderivatives clearing organizations and subpart Cderivatives clearing organizations)).

103MGEX at 89.

10478 FR 50272.105MGEX at 5.10678 FR 5026869.107See infra at sections II.F. (Regulation 39.34

System Safeguards), II.G. (Regulation 39.35Default Rules and Procedures), and II.K. (Regulation39.39 (Recovery and Wind-Down).

108Regulation 39.34(d), as finalized herein,provides that the Commission may, upon request,grant a SIDCO or Subpart C DCO an extension ofup to one year to comply with any of the provisionsof regulation 39.34. Regulation 39.39(f), as finalizedherein, similarly provides that a SIDCO or SubpartC DCO, upon request, may be granted an extensionof up to one year to comply with the provisions ofregulations 39.35 and 39.39. Any such requestsmade by a DCO seeking to become a Subpart C DCOwill become part of that DCOs Subpart C ElectionForm.

109The Commission notes that it is notprescribing a particular time period elapse betweenthe filing of applications for compliance extensionsand the filing of the Subpart C Election Form.

11078 FR 5026950270.111See infra Section II.C.5. (Regulation 39.31(e)

Rescission).112See supra Section II.C. (Regulation 39.31

(Election to become Subject to Subpart C) for adiscussion of comments regarding the proposedopt-in regime and process generally and the SubpartC Election Form.

11378 FR 50271.

clearing members and customers) withassurance that the electing DCO will beheld to and will be required to meet thestandards set forth in Subpart C.99 Thus,the Commission continues to believethat it is necessary and appropriate torequire DCOs electing to become subjectto Subpart C to submit such informationto the Commission.

MGEX further asserts that the SubpartC Election Form requirement putsSubpart C DCOs at a risk of delayedregulatory approval not borne bySIDCOs, which it claims aregrandfathered in to Subpart C . . . dueto their SIDCO status. 100 MGEX statesthat to ensure equal treatment amongall DCOs, any requirements to provideinformation as part of the Subpart Celection process should be imposedupon SIDCOs as well.101 TheCommission notes that SIDCOs, having

been designated as systemicallyimportant by the Council, are subject to

annual examinations under Title VIIIand are, therefore, in a different positionthan DCOs that have not been sodesignated, but wish to elect to be heldto the same international standards inan effort to attain QCCP status. TheCommission also notes that SIDCOs, aswell as Subpart C DCOs, are required byregulation 39.37, as finalized herein, tocomplete and publically disclose theirresponses to the DisclosureFramework.102 As such, and sinceSIDCOs are required to be subject to theSubpart C regulations, the Commissiondoes not feel it necessary to requireSIDCOs to complete a Subpart C

Election Form. In addition, because theCommission declines to require allDCOs to comply with the regulations inSubpart C, the Subpart C Election Formis necessary to provide a mechanism bywhich a registered DCO may elect to

become subject to Subpart C.In its comments on proposed

regulation 39.37, MGEX also assertedthat, while requiring the submission ofa Quantitative Disclosure Document isconsistent with the PFMIs, theCommission should delayimplementation of this requirementuntil the Quantitative Disclosure

Document is finalized in order to allowDCOs time to review and commentupon it or to otherwise prepare forcompliance.103 The Commissionconfirms that, as noted in the Subpart CElection Form, as proposed and

finalized herein, completion andpublication of the QuantitativeInformation Disclosure will not berequired until the criteria for suchdisclosure has been finalized andpublished, which has not yet occurred.

Finally, MGEX responded to theCommissions request for comment104on whether or not the Commission

should add a requirement that thecertifications contained in the Subpart CElection Form be made under penalty ofperjury. MGEX opposed the addition ofthis requirement.105 The Commissionnotes that such a requirement would beinconsistent with the current FormDCO, which does not include a similarrequirement. Therefore, the Commissionhas decided not to add a perjurycertification to the Subpart C ElectionForm.

Accordingly, after careful review andconsideration of the comments, and forthe reasons cited above and set forth in

the Proposal,106

the Commission isadopting regulation 39.31(b) asproposed. The Commission has,however, altered the Subpart C ElectionForm in two respects.

As discussed further below,107 DCOsthat seek to become Subpart C DCOs (aswell as SIDCOs) will be permitted torequest an extension of up to one yearto comply with any of the provisions ofregulations 39.34, 39.35, or 39.39pursuant to those regulations.108 TheCommission has determined that, to theextent that a DCO elects to request anysuch extensions, it must do so prior to

filing the Subpart C Election Form andthe General Instructions to the SubpartC Election Form have been modifiedaccordingly.109 The Commission alsohas made technical modifications to thecertifications contained in the Subpart CElection Form to account for anyextensions of time granted pursuant toregulation 39.34(d) and/or 39.39(f).

As noted in the Proposal,110 theCommission emphasizes that, consistentwith the certification required to beprovided by a DCO as part of its SubpartC Election Form, a DCO, as of the datethat its election to become subject toSubpart C becomes effective, would beheld to the requirements of Subpart C.As of that date, the DCO would be

subject to examination for compliancewith Subpart C and to potentialenforcement action for non-compliance.This status would continue until suchtime, if any, that the election is properlyvacated as set forth in regulation39.31(e), as finalized.111 To the extentthat compliance with Subpart C wouldrequire the DCO to implement new rulesor rule amendments, all such rules orrule amendments must be approved orpermitted to take effect prior to theeffective date of the DCOs election.

3. Regulation 39.31(c)Election andWithdrawal Procedures for DCOApplicants

Regulation 39.31(c), as proposed, setsforth procedures through which a DCOApplicant could request to becomesubject to the provisions of Subpart C atthe time the DCO Applicant files itsRegistration Application. TheCommission did not receive anycomments specifically addressingproposed regulation 39.31(c).112Accordingly, for the reasons cited in theProposal,113 the Commission is adoptingregulation 39.31(c) as proposed. In theinterest of administrative economy, the

Commission continues to encourageDCO Applicants to make their electionto become subject to Subpart C at thetime that their Registration Applicationis filed. Simultaneous filings wouldappear to allow Commission resourcesto be used more efficiently andeffectively.

4. Regulation 39.31(d)PublicInformation

Regulation 39.31(d), as proposed,would provide that certain portions ofthe Subpart C Election Form will beconsidered public documents that may

routinely be made available for publicinspection. The Commission did notreceive any comments with respect toproposed regulation 39.31(d).Accordingly, for the reasons set forth in


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114 Id.115 ISDA at 34.

11617 CFR 39.3(e).117FIA at 5.11878 FR 50272.119FIA at 4.120FIA at 45.12178 FR 5027172.

122See 12 CFR 1320.13(b) (procedure for theCouncil to rescind a designation of systemicimportance for a systemically important financialmarket utility).

12378 FR 50272.124 In 2010 and 2011, the Commission proposed

regulations concerning the governance of DCOs (the2010/2011 Proposals). See Requirements forDerivatives Clearing Organizations, DesignatedContract Markets, and Swap Execution FacilitiesRegarding the Mitigation of Conflicts of Interest, 75FR 63732 (Oct. 18, 2010); see also GovernanceRequirements for Derivatives ClearingOrganizations, Designated Contract Markets, andSwap Execution Facilities, 76 FR 722 (Jan. 8, 2011).The Commission notes that the regulationscontained in the 2010/2011 Proposals are thesubject of a separate rulemaking. The Commissionis not addressing those regulations in thisrulemaking.

the Proposal,114 the Commission isadopting regulation 39.31(d) asproposed.

5. Regulations 39.31(e)Rescission

Regulation 39.31(e), as proposed,would permit a Subpart C DCO torescind its election to comply withSubpart C by filing a notice of its intent

to rescind the election with theCommission. Such rescission would,however, be subject to certainconditions. As proposed, the rescissionof a DCOs election to become subject toSubpart C would become effective onthe date specified by the Subpart C DCOin its notice of intent to rescind theSubpart C election, except that therescission could not become effectiveany earlier than 90 days after the datethe notice of intent to rescind is filedwith the Commission. The Subpart CDCO would be required to comply withall of the provisions of Subpart C untilsuch rescission is effective and theCommission would retain its authorityconcerning any activities or eventsoccurring during the time that the DCOmaintained its status as a Subpart CDCO.

Regulation 39.31(e), as proposed, alsowould require a Subpart C DCO thatfiles a notice of intent to rescind to (1)provide specified notices to each of itsclearing members, and to have rules inplace requiring each of its clearingmembers to provide such notices toeach of the clearing memberscustomers; (2) provide specified noticesto the general public; and (3) remove

references to its Subpart C DCO (andQCCP) status on its Web site and inother materials that it provides to itsclearing members and customers, othermarket participants, or members of thepublic. In addition, the employees andrepresentatives of the Subpart C DCOwould be prohibited from making anyreference to the organization as aSubpart C DCO (or QCCP) on and afterthe date that the notice of its intent torescind is filed.

The Commission received twocomments addressing proposedregulation 39.31(e). ISDA recommended

that the Commission modify theproposed regulation to require, as acondition to a Subpart C DCOsrescission of its Subpart C election, tocertify that it has obtained approvalfrom clearing members (e.g.,by member

ballot) to rescind the election. 115 Inresponse to ISDAs suggestion, theCommission believes that this is amatter of corporate governance and theDCO should follow its own policies and

procedures with respect to internaldecisions regarding rescission. TheCommission further notes that existingregulation 39.3(e) does not require aDCO to certify that it has obtained theapproval of its clearing members tovacate its DCO registration prior to filingwith the Commission a request to doso 116 and, thus, requiring thecertification suggested by ISDA would

be in tension with existing regulations.Accordingly, the Commission hasdeclined to accept ISDAsrecommendation.

FIA recommended that theCommission extend the time period

between the date that a DCO files anotice of intent to rescind its election to

be subject to Subpart C and the date thatsuch rescission could become effectivefrom 90 days to 180 days.117 In supportof its recommendation, the FIA agreedwith the view voiced by the

Commission in the Proposal118

that adelay in the effective date of therescission is necessary to provide banksand other entities that wish to limittheir cleared transactions to clearingsolely through a QCCP sufficient time totransfer their business to anotherSubpart C DCO or a SIDCO.119 The FIAexpressed concern, however, that the 90day delay is insufficient to allow aclearing member to make adetermination whether to withdraw as aclearing member and, if it elects to doso, notify its customers, find one ormore clearing members prepared to

accept each customer and allow the newclearing member and each customer tonegotiate the terms of theiragreement. 120 The Commissionrecognizes that the clearing members ofa DCO that has filed a notice of intentto rescind its election to become subjectto Subpart C may need additional timeto determine and to effectuate theactions they may wish to take in lightof such filing and believes that a 180day waiting period until such rescissionmay become effective is reasonable.Accordingly, the Commission hasdecided to lengthen the minimum time

period between the date a notice ofintent to rescind an election to becomesubject to Subpart C is filed and the datethat such rescission may becomeeffective to 180 days. For the reasonscited above and set forth in theProposal,121 the Commission is adopting

regulation 39.31(e) as proposed in allother respects.

6. Regulations 39.31(f)Loss of SIDCODesignation

Regulation 39.31(f), as proposed,would provide that a SIDCO that isregistered with the Commission, butwhose designation of systemic

importance is rescinded by theCouncil,122 would immediately bedeemed to be a Subpart C DCO. SuchSubpart C DCO would be subject to theSubpart C provisions unless and until itelects to rescind its status as a SubpartC DCO. The Commission did not receiveany comments on proposed regulation39.31(f). Accordingly, for the reasons setforth in the Proposal,123 theCommission is adopting regulation39.31(f) as proposed.

7. Regulation 39.31(g)

Regulation 39.31(g), as proposed,provides that all forms and noticesrequired by regulation 39.31 shall befiled electronically with the Secretary ofthe Commission in the format andmanner specified by the Commission.The Commission did not receive anycomments on proposed regulation39.31(g) and, thus, is adopting theregulation as proposed.

D. Regulation 39.32 (Governance forsystemically important derivativesclearing organizations and subpart Cderivatives clearing organizations)

The Commission proposed addingregulation 39.32 in order to implement

DCO Core Principles O (GovernanceFitness Standards), P (Conflicts ofInterest), and Q (Composition ofGoverning Boards) for SIDCOs andSubpart C DCOs in a manner that would

be consistent with PFMI Principle 2(Governance).124

As discussed above, DCO CorePrinciple O states that each DCO mustestablish governance arrangements thatare transparent to fulfill public interestrequirements and to permit the


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125See supra Section I.D.126PFMIs at Principle 2, K.C. 45.127The provisions concerning transparency

describe which information, including theidentities of board members, should be disclosed tothe public and/or the Commission.

128See supra Section II.C. (Regulation 39.31(Election to become subject to the provisions ofSubpart C)).

consideration of the views of ownersand participants.125 DCO Core PrincipleO also requires each DCO to establishand enforce appropriate fitnessstandards for (i) directors, (ii) membersof any disciplinary committee, (iii)members of the DCO, (iv) any otherindividual or entity with direct access tothe settlement or clearing activities of

the DCO, and (v) any party affiliatedwith any entity mentioned in (i)(v)above. In addition, DCO Core PrincipleP requires each DCO to establish andenforce rules to minimize conflicts ofinterest in the decision making processof the DCO, and DCO Core Principle Qstates that each DCO must ensure thatthe composition of the governing boardor committee of the DCO includesmarket participants. These coreprinciples are substantively similar toPFMI Principle 2, which states that aCCP should have governancearrangements that are clear and

transparent, promote the safety andefficiency of [the CCP], and support thestability of the broader financial system,other relevant public interestconsiderations, and the objectives ofrelevant stakeholders. Additionally,under PFMI Principle 2, a CCP shouldhave procedures for managing conflictsof interest among board members, and

board members and managers should berequired to have appropriate skills,incentives, and experience. 126

As proposed, subsection (a) (Generalrules) would require a SIDCO or SubpartC DCO to establish governance

arrangements that: (1) Are written, clearand transparent, place a high priority onthe safety and efficiency of the SIDCOor Subpart C DCO, and explicitlysupport the stability of the broaderfinancial system and other relevantpublic interest considerations; (2)ensure that the design, rules, overallstrategy, and major decisions of theSIDCO or Subpart C DCO appropriatelyreflect the legitimate interests ofclearing members, customers of clearingmembers, and other relevantstakeholders; and (3) disclose, to anextent consistent with other statutoryand regulatory requirements onconfidentiality and disclosure: (i) Majordecisions of the board of directors toclearing members, other relevantstakeholders, and to the Commission,and (ii) Major decisions of the board ofdirectors having a broad market impactto the public.127

As proposed, subsection (b)(Governance arrangements) wouldrequire the rules and procedures of aSIDCO or Subpart C DCO to: (1)Describe the SIDCOs or Subpart CDCOs management structure; (2) clearlyspecify the roles and responsibilities ofthe board of directors and itscommittees, including the establishment

of a clear and documented riskmanagement framework; (3) clearlyspecify the roles and responsibilities ofmanagement; (4) establish proceduresfor managing conflicts of interest among

board members; and (5) assignresponsibility and accountability forrisk decisions and for implementingrules concerning default, recovery, andwind-down.

As proposed, subsection (c) (Fitnessstandards for the board of directors andmanagement) would require that boardmembers and managers have theappropriate experience, skills,

incentives and integrity; riskmanagement and internal controlpersonnel have sufficient independence,authority, resources and access to the

board of directors; and that the board ofdirectors include members who are notexecutives, officers or employees of theSIDCO or Subpart C DCO or of theiraffiliates.

The Commission requested commenton proposed regulation 39.32 and askedthat commenters include a detaileddescription of any alternatives toproposed regulation 39.32 and estimatesof the costs and benefits of suchalternatives. LCH commented that aSIDCO or Subpart C DCO should bepermitted to petition the Commissionfor additional time to comply with newregulation 39.32 and with all othersubstantive regulations contained in thisrulemaking. The Commission does not

believe that a SIDCO or Subpart C DCOshould be permitted to petition foradditional time to comply with newregulation 39.32 for the reasons statedabove.128

LCH also requested clarification as towhich major decisions of the board ofdirectors should be disclosed under newregulation 39.32(a)(3). LCH stated that a

board may make a resolution that is notdeterminative, for example tocommence exploratory negotiations formaking an acquisition. LCH stated thatit did not believe Principle 2 wouldrequire it to publish such a decision

because Explanatory Note 3.2.18 toPrinciple 2 states that an FMI need notdisclose a major decision where doingso would endanger commercial

confidentiality. The Commission agreeswith LCH that there is a distinction

between exploratory negotiations and afinal decision. The Commission alsoagrees with the suggestion made inExplanatory Note 3.2.18 that it isreasonable for a DCO to focus ondisclosing the outcome of decisionsmade by the board rather than decisions

that are not determinative. It should alsobe noted that paragraph (a)(3) does notrequire a disclosure that wouldcompromise statutory and regulatoryrequirements on confidentiality anddisclosure.

Similarly, MGEX requestedclarification as to: what qualifies as amajor decision under proposedparagraph (a)(3); which informationthe Commission was referring to infootnote 137 of the Proposal; andwhether the disclosure provision ofparagraph (a) is intended to be areiteration of existing law[s] or

regulation[s]. MGEX also suggestedthat paragraph (a) be amended toinclude a provision stating that a DCOmay withhold disclosing a majordecision of the board of directors ifdisclosing it would stifle candid boarddebate or endanger commercialconfidentiality. The Commissionagrees with MGEX that regulation 39.32affords a DCO reasonable discretion indetermining which decisions aremajor so as to warrant disclosureunder paragraph (a)(3) and whichdecisions should not be disclosed due toconcerns about confidentiality.Moreover, paragraph (a)(3) requires

disclosure of dec

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