Standards for Covered Clearing Agencies

1See 12 U.S.C. 5464(a)(2)(A).
2See Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions (‘‘CPSS–IOSCO’’), Principles for financial market infrastructures (Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf. In 2014, the CPSS became the Committee on Payments and Market Infrastructures (‘‘CPMI’’). SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34–78961; File No. S7–03–14] RIN 3235–AL48 Standards for Covered Clearing Agencies AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) is adopting amendments to Rule 17Ad– 22 and adding new 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’’), enacted in Title VIII of the Dodd￾Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’). Among other things, the rules establish enhanced standards for the operation and governance of those clearing agencies registered with the Commission (‘‘registered clearing agencies’’) that meet the definition of ‘‘covered clearing agency.’’ DATES: Effective date: December 12, 2016. Compliance date: April 11, 2017. The compliance date is discussed in
Part II.G below.
FOR FURTHER INFORMATION CONTACT:
Jeffrey Mooney, Assistant Director; Stephanie Park, Senior Special Counsel; Matthew Lee, Branch Chief; Elizabeth Fitzgerald, Branch Chief; or DeCarlo McLaren, Attorney-Adviser; Office of Market Infrastructure, 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 is amending Rule 17Ad–22 by adding new Rule 17Ad–22(e) to establish requirements for the operation and governance of registered clearing agencies that meet the definition of a ‘‘covered clearing agency.’’ A covered clearing agency includes a registered clearing agency that (i) has been designated as systemically important by the Financial Stability Oversight Council (‘‘FSOC’’) and for which the Commission is the supervisory agency under the Clearing Supervision Act (‘‘designated clearing agency’’), or (ii) provides central counterparty (‘‘CCP’’) services for security-based swaps or is involved in activities the Commission determines to have a more complex risk profile (‘‘complex risk profile clearing agency’’), unless the Commodity Futures Trading Commission (‘‘CFTC’’) is the supervisory agency under the Clearing Supervision Act. To facilitate the addition of new Rule 17Ad–22(e), the Commission is amending existing Rule 17Ad–22(d) to limit its application to clearing agencies other than covered clearing agencies and revising Rule 17Ad–22(a) to add 14 new definitions. The Commission is also adopting new Rule 17Ad–22(f) to codify the Commission’s statutory authority under Section 807(c) of the Clearing Supervision Act and new Rule 17Ab2–2 to establish procedures for making determinations regarding covered clearing agencies in certain defined circumstances, described further below. In developing these rules, Commission staff has consulted with the FSOC, CFTC, and Board of Governors of the Federal Reserve System (‘‘FRB’’). The Commission has also considered the relevant international standards as required by Section 805(a)(2)(A) of the Clearing Supervision Act.1 The relevant international standards for designated clearing agencies and complex risk profile clearing agencies are the Principles for Financial Market Infrastructures (‘‘PFMI’’).2
Table of Contents
I. Introduction
A. Regulatory Framework

1. Exchange Act
2. Dodd-Frank Act
3. Rule 17Ad–22
4. Regulation SCI
5. Relevant International Standards
6. Recognition and Equivalence Within the
   EU
   B. Summary of the Commission’s Proposal
   C. Comments Received
7. Financial Stability and the Dodd-Frank
   Act
8. Relationship Between Rules 17Ad–22(d)
   and (e)
9. Relationship Among Rules 17Ad–22(b),
   (c), and (e)
10. Risk of Duplicative or Inconsistent
    Regulation
11. Flexible Versus Prescriptive Approaches
    to Regulation, and the Role of Rule Filings under Rule 19b–4
12. Consistency With the PFMI
13. Other Comments
    II. Description of the Amendments to Rule
    17AD–22 and Rule 17AB2–2 A. Scope of Rule 17Ad–22(e)
14. As Applied to CCPs Generally
15. As Applied to Security-Based Swap
    Clearing Agencies
16. As Applied to Dually Registered
    Clearing Agencies
    B. Principles-Based Approach to Rule 17Ad–22(e)
    C. Requirements for Covered Clearing
    Agencies Under Rule 17Ad–22(e)
17. Rule 17Ad–22(e)(1): Legal Risk
18. Rule 17Ad–22(e)(2): Governance
19. Rule 17Ad–22(e)(3): Framework for the
    Comprehensive Management of Risks
20. Rule 17Ad–22(e)(4): Credit Risk
21. Rule 17Ad–22(e)(5): Collateral
22. Rule 17Ad–22(e)(6): Margin
23. Rule 17Ad–22(e)(7): Liquidity Risk
24. Rule 17Ad–22(e)(8): Settlement Finality
25. Rule 17Ad–22(e)(9): Money Settlements
26. Rule 17Ad–22(e)(10): Physical Delivery
    Risks
27. Rule 17Ad–22(e)(11): CSDs
28. Rule 17Ad–22(e)(12): Exchange-of￾Value Settlement Systems
29. Rule 17Ad–22(e)(13): Participant￾Default Rules and Procedures
30. Rule 17Ad–22(e)(14): Segregation and
    Portability
31. Rule 17Ad–22(e)(15): General Business
    Risk
32. Rule 17Ad–22(e)(16): Custody and
    Investment Risks
33. Rule 17Ad–22(e)(17): Operational Risk
    Management
34. Rule 17Ad–22(e)(18): Access and
    Participation Requirements
35. Rule 17Ad–22(e)(19): Tiered
    Participation Arrangements
36. Rule 17Ad–22(e)(20): Links
37. Rule 17Ad–22(e)(21): Efficiency and
    Effectiveness
38. Rule 17Ad–22(e)(22): Communication
    Procedures and Standards
39. Rule 17Ad–22(e)(23): Disclosure of
    Rules, Key Procedures, and Market Data D. Rule 17Ab2–2
40. Proposed Rule
41. Comments Received and Commission
    Response
42. Final Rule
    E. Rule 17Ad–22(f)
    F. Amendment to Rule 17Ad–22(d) G. Effective and Compliance Dates
    III. Economic Analysis
    A. Economic Baseline
43. Regulatory Framework for Registered
    Clearing Agencies
44. Current Practices
    B. Consideration of Benefits, Costs, and the Effect on Competition, Efficiency, and Capital Formation
45. General Economic Considerations
46. Effect on Competition, Efficiency, and
    Capital Formation
47. Effect of Amendments to Rule 17Ad–22
    and Rule 17Ab2–2
    IV. Paperwork Reduction Act
    A. Summary of Collection of Information and Use of Information
48. Rule 17Ad–22(e)(1)
49. Rule 17Ad–22(e)(2)
50. Rule 17Ad–22(e)(3)
51. Rule 17Ad–22(e)(4)
52. Rule 17Ad–22(e)(5)
53. Rule 17Ad–22(e)(6)
54. Rule 17Ad–22(e)(7)

3See 15 U.S.C. 78q–1(a)(2); see also Report of the Senate Committee on Banking, Housing & Urban Affairs, S. Rep. No. 94–75, at 4 (1975) (urging that ‘‘[t]he Committee believes the banking and security industries must move quickly toward the establishment of a fully integrated national system for the prompt and accurate processing and settlement of securities transactions’’). 4See 15 U.S.C. 78q–1(a)(2)(A). 5See Exchange Act Release No. 34–71699 (Mar. 12, 2014), 79 FR 16865 (Mar. 26, 2014), corrected at 79 FR 29507, 29510–11 (May 22, 2014); see also Exchange Act Release No. 34–68080 (Oct. 22, 2012), 77 FR 66219, 66221–22 (Nov. 2, 2012) (discussing the same) (‘‘Clearing Agency Standards adopting release’’). 6See 15 U.S.C. 78c(a)(23)(A) (providing the definition of ‘‘clearing agency’’). 7See 17 CFR 240.17Ab2–1. 8See 15 U.S.C. 78q–1(b)(3)(A) through(I) (identifying nine determinations that the Commission must make regarding the rules and structure of a clearing agency to grant registration). In 1980, the Commission published a statement of the views and positions of Commission staff regarding the requirements of Section 17A. See Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June 23, 1980). 9See 15 U.S.C. 78q–1(b)(3)(A), (C), (D), (F). 10See 17 CFR 240.17a–1(a) through (c); see also 15 U.S.C. 78q(a)(1), (2). 11Upon registration, registered clearing agencies are SROs under Section 3(a)(26) of the Exchange Act. See 15 U.S.C. 78c(a)(26). 12An SRO must submit proposed rule changes to the Commission for review and approval pursuant to Rule 19b–4 under the Exchange Act. A stated policy, practice, or interpretation of an SRO, such as its written policies and procedures, would generally be deemed to be a proposed rule change. See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4. 13See 15 U.S.C. 78s(b)(3)(A) (setting forth the types of proposed rule changes that take effect upon filing with the Commission). The Commission may temporarily suspend those rule changes within 60 days of filing and institute proceedings to determine whether to approve or disapprove the rule changes. See 15 U.S.C. 78s(b)(3)(C).
8. Rule 17Ad–22(e)(8)
9. Rule 17Ad–22(e)(9)
10. Rule 17Ad–22(e)(10)
11. Rule 17Ad–22(e)(11)
12. Rule 17Ad–22(e)(12)
13. Rule 17Ad–22(e)(13)
14. Rule 17Ad–22(e)(14)
15. Rule 17Ad–22(e)(15)
16. Rule 17Ad–22(e)(16)
17. Rule 17Ad–22(e)(17)
18. Rule 17Ad–22(e)(18)
19. Rule 17Ad–22(e)(19)
20. Rule 17Ad–22(e)(20)
21. Rule 17Ad–22(e)(21)
22. Rule 17Ad–22(e)(22)
23. Rule 17Ad–22(e)(23)
24. Rule 17Ab2–2
25. Rule 17Ad–22(c)(1)
B. Respondents
C. Total Annual Reporting and
Recordkeeping Burdens

1. Rule 17Ad–22(e)(1)
2. Rule 17Ad–22(e)(2)
3. Rule 17Ad–22(e)(3)
4. Rule 17Ad–22(e)(4)
5. Rule 17Ad–22(e)(5)
6. Rule 17Ad–22(e)(6)
7. Rule 17Ad–22(e)(7)
8. Rule 17Ad–22(e)(8)
9. Rule 17Ad–22(e)(9)
10. Rule 17Ad–22(e)(10)
11. Rule 17Ad–22(e)(11)
12. Rule 17Ad–22(e)(12)
13. Rule 17Ad–22(e)(13)
14. Rule 17Ad–22(e)(14)
15. Rule 17Ad–22(e)(15)
16. Rule 17Ad–22(e)(16)
17. Rule 17Ad–22(e)(17)
18. Rule 17Ad–22(e)(18)
19. Rule 17Ad–22(e)(19)
20. Rule 17Ad–22(e)(20)
21. Rule 17Ad–22(e)(21)
22. Rule 17Ad–22(e)(22)
23. Rule 17Ad–22(e)(23)
24. Total Burden for Rule 17Ad–22(e)
25. Total Burden for Rule 17Ab2–2
26. Total Burden for Rule 17Ad–22(c)(1)
    D. Collection of Information Is Mandatory E. Confidentiality
    V. Regulatory Flexibility Act
    A. Registered Clearing Agencies B. Certification
    VI. Statutory Authority
    I. Introduction
    A. Regulatory Framework Below is an overview of the regulatory requirements for registered clearing agencies that relate to the amendments to Rule 17Ad–22 and new Rule 17Ab2– 2 as set forth under the Exchange Act, the Dodd-Frank Act, and Commission rules and regulations thereunder.
27. Exchange Act
    Section 17A of the Exchange Act
    directs the Commission to facilitate the establishment of (i) a national system for the prompt and accurate clearance and settlement of securities transactions and (ii) linked or coordinated facilities for clearance and settlement of securities transactions.3 In facilitating the establishment of the national clearance and settlement system, the Commission must have due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents.4 As discussed in the Standards for Covered Clearing Agencies proposing release (‘‘CCA Standards proposing release’’),5 clearing agencies are broadly defined in the Exchange Act and undertake a variety of functions.6 Under
    Section 17A and Rule 17Ab2–1,7 an
    entity that meets the definition of a clearing agency is required to register with the Commission or obtain from the Commission an exemption from registration prior to performing the functions of a clearing agency. To grant registration to a clearing agency, the Exchange Act requires the Commission to determine that the rules and operations of the applicant clearing agency meet the standards set forth in
    Section 17A.8 Specifically, Section
    17A(b)(3) provides that a clearing agency shall not be registered unless the Commission determines that the clearing agency’s rules are consistent with the Exchange Act. In so doing, the Commission must determine that, among other things, (i) the clearing agency is so organized and has the capacity to be able to facilitate the prompt and accurate clearance and settlement of securities transactions and to safeguard securities or funds in its custody or control, (ii) the rules of the clearing agency assure a fair representation of its members and participants in the selection of its directors and administration of its affairs, (iii) the rules of the clearing agency provide for the equitable allocation of reasonable dues and fees, and (iv) the rules of the clearing agency are designed to promote the prompt and accurate clearance and settlement of securities transactions.9 Following registration, the Commission supervises registered clearing agencies using various tools. One of these tools is Rule 17a–1 under the Exchange Act, which requires every registered clearing agency to keep and preserve at least one copy of all documents, including all correspondence, memoranda, papers, books, notices, accounts, and other such records as shall be made or received by it in the course of its business as such and in the conduct of its self-regulatory activity for a period not less than five years and, upon request of any representative of the Commission, to promptly furnish to the possession of such representative copies of any such documents required to be kept.10 Another of these tools is the rule filing process for self-regulatory organizations (‘‘SROs’’),11 set forth in Section 19(b) of the Exchange Act and rules and regulations thereunder. A registered clearing agency is required to file with the Commission any proposed rule or proposed change in, addition to, or deletion from the registered clearing agency’s rules.12 The Commission publishes all proposed rule changes for comment and reviews them. Proposed rule changes are generally required to be approved by the Commission prior to going into effect; however, certain types of proposed rule changes take effect upon filing with the Commission.13 When reviewing a proposed rule change, the Commission considers the submissions of the clearing agency together with any comments received on the proposed rule change in making a determination of whether the proposed rule change is consistent with the requirements of the Exchange Act. In

14See 15 U.S.C. 78q–1(d).
15See 15 U.S.C. 78u(a).
16See 15 U.S.C. 78s(h).
17See 15 U.S.C. 78q–1(i), (j); Dodd-Frank Act, Sec. 763(b), 124 Stat. at 1768–69 (adding paragraphs (i) and (j) to Section 17A of the Exchange Act). 18The objectives and principles for the risk management standards prescribed under the Clearing Supervision Act shall be to (i) promote robust risk management; (ii) promote safety and soundness; (iii) reduce systemic risks; and (iv) support the stability of the broader financial system. Further, the Clearing Supervision Act states that the standards may address areas such as risk management policies and procedures; margin and collateral requirements; participant or counterparty default policies and procedures; the ability to complete timely clearing and settlement of financial transactions; capital and financial resources requirements for designated FMUs; and other areas that are necessary to achieve the objectives and principles described above. See 12 U.S.C. 5464(b), (c). 19See 12 U.S.C. 5462(6). The definition of ‘‘financial market utility’’ in Section 803(6) of the Clearing Supervision Act contains a number of exclusions that include, but are not limited to, certain designated contract markets, registered futures associations, swap data repositories, swap execution facilities, national securities exchanges, national securities associations, alternative trading systems, security-based swap data repositories, security-based swap execution facilities, brokers, dealers, transfer agents, investment companies, and futures commission merchants. See 12 U.S.C. 5462(6)(B). 20See 12 U.S.C. 5463. An FMU is systemically important if the failure of or a disruption to the functioning of such FMU could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system. See 12 U.S.C. 5462(9). On July 18, 2012, the FSOC designated as systemically important the following then-registered clearing agencies: CME Group (‘‘CME’’), The Depository Trust Company (‘‘DTC’’), Fixed Income Clearing Corporation (‘‘FICC’’), ICE Clear Credit (‘‘ICC’’), National Securities Clearing Corporation (‘‘NSCC’’), and The Options Clearing Corporation (‘‘OCC’’). The Commission is the supervisory agency for DTC, FICC, NSCC, and OCC, and the CFTC is the supervisory agency for CME and ICE. The Commission jointly regulates ICC and OCC with the CFTC. The Commission also jointly regulates ICE Clear Europe (‘‘ICEEU’’), which has not been designated as systemically important by FSOC, with the CFTC and Bank of England. The Commission also jointly regulated CME with the CFTC until 2015, when the Commission published an order approving CME’s request to withdraw from registration as a clearing agency. See Exchange Act Release No. 34–76678 (Dec. 17, 2015), 80 FR 79983 (Dec. 23, 2015). 21See 12 U.S.C. 5465(e)(1)(A); 17 CFR 240.19b– 4(n). The Commission published a final rule concerning the filing of advance notices for designated
clearing agencies in 2012. See Exchange Act Release No. 34–67286 (June 28, 2012), 77 FR 41602 (July 13, 2012). 22See 12 U.S.C. 5465(e). 23See 12 U.S.C. 5466. 24See 12 U.S.C. 5472; see also Risk Management Supervision of Designated Clearing Entities (July 2011), available at https://www.federalreserve.gov/ publications/other-reports/files/risk-management￾supervision-report-201107.pdf (describing the joint supervisory framework of the Commission, CFTC, and FRB). 25See 12 U.S.C. 5464(a)(2). The Commission notes that, under Rule 17Ad–22(a)(6), a SIFMU for which the Commission is the supervisory agency is a ‘‘designated clearing agency.’’ See infra note 134 and accompanying text. 26See CCA Standards proposing release, supra note 5, at 29513; see also 17 CFR 240.17Ad–22; Clearing Agency Standards adopting release, supra note 5, at 66225–26. 27See Clearing Agency Standards adopting release, supra note 5, at 66224–25. 28See 17 CFR 240.17Ad–22(b), (d). 29See supra notes 8–9 and accompanying text. addition, Section 17A of the Exchange Act further provides the Commission with authority to adopt rules as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act and prohibits a clearing agency from engaging in any activity in contravention of such rules and regulations.14 In addition, Commission staff conducts examinations of registered clearing agencies to assess, among other things, existing and emerging risks, compliance with applicable statutory and regulatory requirements, and a clearing agency’s oversight of compliance by its participants with its rules. Section 21(a) of the Exchange Act provides the Commission with authority to initiate and conduct investigations to determine if there have been violations of the federal securities laws.15 Section 19(h) of the Exchange Act also provides the Commission with authority to institute civil actions seeking injunctive and other equitable remedies and/or administrative proceedings arising out of such investigations.16
2. Dodd-Frank Act
Title VII of the Dodd-Frank Act provides the Commission with authority to regulate certain over-the-counter (‘‘OTC’’) derivatives. Specifically, Title VII added provisions to the Exchange Act that (i) 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 (ii) direct the Commission to adopt rules with respect to security-based swap clearing agencies.17 The Clearing Supervision Act, enacted in Title VIII of the Dodd-Frank Act, provides for the enhanced regulation of certain financial market utilities (‘‘FMUs’’).18 FMUs include 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.19 FSOC has designated certain FMUs as systemically important or likely to become systemically important (‘‘SIFMUs’’).20 SIFMUs are required to file 60-days advance notice of changes to rules, procedures, and operations that could materially affect the nature or level of risk presented by the SIFMU (‘‘advance notice’’).21 The Clearing Supervision Act authorizes the Commission to object to changes proposed in such an advance notice, which would prevent the clearing agency from implementing the change.22 The Clearing Supervision Act also provides for enhanced coordination between the Commission and FRB by allowing for regular on-site examinations and information sharing.23 The Clearing Supervision Act further provides that the Commission and CFTC shall coordinate with the FRB to jointly develop risk management supervision programs for SIFMUs.24 In addition, the Clearing Supervision Act provides that the Commission and CFTC may each prescribe risk management standards governing the operations related to payment, clearing, and settlement activities (‘‘PCS activities’’) of SIFMUs for which each is the supervisory agency, in consultation with the FSOC and FRB and taking into consideration relevant international standards and existing prudential requirements.25
3. Rule 17Ad–22
In 2012, the Commission adopted Rule 17Ad–22 under the Exchange Act 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.26 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.27 In this regard, Rule 17Ad–22(b) established certain requirements for clearing agencies that provide CCP services, and Rule 17Ad– 22(d) established requirements for the operation and governance of all registered clearing agencies.28 The requirements in Rule 17Ad–22 help guide Commission determinations, when considering an application to register as a clearing agency, that the rules and operations of the applicant clearing agency satisfy the requirements in Section 17A of the Exchange Act.29 Today’s amendments to Rule 17Ad–22 build on the existing framework for registered clearing agencies by establishing new requirements for designated clearing agencies, complex risk profile clearing agencies unless the

30See Exchange Act Release No. 34–73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014) (‘‘Regulation SCI adopting release’’). 31See 17 CFR 242.1000 (providing the definition of ‘‘SCI SROs’’). 32See 17 CFR 242.1001. 33See 17 CFR 242.1000 (providing definitions of ‘‘SCI systems’’ and ‘‘critical SCI systems’’). 34See 17 CFR 242.1001(a)(2)(v). 35See 17 CFR 242.1002(c)(3). 36See Regulation SCI adopting release, supra note 30, at 72277. 37See id. at 72285 n.395. 38See 12 U.S.C. 5464(a)(2); see also supra note 25 and accompanying text. 39See supra note 2 and accompanying text. The PFMI defines a ‘‘financial market infrastructure’’ (‘‘FMI’’) as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions. See PFMI, supra note 2, at 7. FMIs include CCPs, central securities depositories (‘‘CSDs’’), securities settlement systems (‘‘SSSs’’), and trade repositories (‘‘TRs’’). Cf. 12 U.S.C. 5462(6)(B) (defining ‘‘financial market utility’’ under the Clearing Supervision Act). The PFMI presumes that all CSDs, SSSs, CCPs, and TRs are systemically important in their home jurisdiction. See PFMI, supra note 2, at 131 & n.177 (noting the ‘‘presumption . . . that all CSDs, SSSs, CCPs, and TRs are systemically important because of their critical roles in the markets they serve,’’ but also noting that ultimately ‘‘national law will dictate the criteria to determine whether an FMI is systemically important’’). The Commission notes that the PFMI’s definition of ‘‘financial market infrastructure’’ is consistent with the Commission’s prior use of the term. See Study of Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No. 231, 92d Cong., 1st Sess. 13 (1971) (defining ‘‘financial market infrastructure’’ as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions). 40See PFMI, supra note 2, at 17. 41CPMI–IOSCO has also published subsequent guidance relevant to implementation of the PFMI. See PFMI: Disclosure framework and Assessment methodology (Dec. 2012), available at http:// www.bis.org/cpmi/publ/d106.pdf (‘‘PFMI disclosure framework’’); Recovery of FMIs (Oct. 2014), available at http://www.bis.org/cpmi/publ/ d121.pdf; Public quantitative disclosure standards for CCPs (Feb. 2015), available at http:// www.bis.org/cpmi/publ/d125.pdf (‘‘PFMI quantitative disclosures’’); Guidance on cyber resilience for FMIs (Nov. 2015, consultative report), available at http://www.bis.org/cpmi/publ/ d138.pdf; Resilience and recovery for CCPs (July 2016, consultative report), available at http:// www.bis.org/cpmi/publ/d149.pdf. 42See 15 U.S.C. 78q–1. 43See, e.g., CPMI–IOSCO, Implementation monitoring of PFMIs: Third update to the Level 1 assessment report (June 2016),
available at http:// www.bis.org/cpmi/publ/d145.pdf (describing efforts by various jurisdictions to adopt standards for FMIs consistent with the PFMI). Both the CFTC and FRB have indicated publicly that they have completed all measures necessary to incorporate fully the PFMI into their regulatory frameworks. See id. at 35. 44See BCBS, Capital requirements for bank exposures to central counterparties (Apr. 2014), available at http://www.bis.org/publ/bcbs282.pdf (‘‘BCBS capital framework’’). See generally Basel III:
A global regulatory framework for more resilient banks and banking systems (rev. June 2011), available at http://www.bis.org/publ/bcbs189.pdf (describing the Basel III framework, which preceded the BCBS capital framework). CFTC is the supervisory agency, and, pursuant to Rule 17Ab2–2, any other clearing agencies determined by the Commission to be covered clearing agencies.
4. Regulation SCI
In 2014, the Commission adopted Regulation Systems Compliance and Integrity (‘‘Regulation SCI’’) to strengthen the technology infrastructure of the U.S. securities markets.30 In particular, the Commission notes that Regulation SCI is designed to reduce the occurrence of systems issues, improve resiliency when systems problems do occur, and enhance the Commission’s oversight and enforcement of securities market technology infrastructure. Since adoption of Regulation SCI, the Commission has established a monitoring and examination structure to oversee compliance with Regulation SCI. Regulation SCI applies to ‘‘SCI entities,’’ a term which includes SROs such as registered clearing agencies.31 It requires SCI entities to, among other things, maintain policies and procedures reasonably designed to ensure that certain systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that they operate in a manner that complies with the Exchange Act as well as their own rules.32 Certain SCI systems that are ‘‘critical SCI systems’’ are held to heightened requirements under Regulation SCI,33 including a requirement to establish, maintain, and enforce written policies and procedures reasonably designed, among other things, to include a two-hour resumption goal following a wide-scale disruption,34 and broader dissemination obligations for ‘‘major SCI events.’’ 35 The definition of critical SCI systems in Regulation SCI was designed to cover ‘‘those SCI systems whose functions are critical to the operation of the markets, including those systems that represent potential single points of failure in the securities markets.’’ 36 Regulation SCI requires SCI entities to take certain corrective actions when ‘‘SCI events’’ occur. Regulation SCI defines SCI events to include an event in an SCI entity’s SCI systems that disrupts, or significantly degrades, the normal operation of an SCI system. In the Regulation SCI adopting release, the Commission explained its view that for clearance and settlement systems a return to ‘‘normal operations’’ following a systems disruption would include all steps necessary to effectuate timely and accurate end of day settlement.37
5. Relevant International Standards
When prescribing regulations that contain risk management standards for designated clearing agencies, Section 805(a) of the Clearing Supervision Act requires the Commission to consider the relevant international standards and existing prudential requirements.38 As previously noted, the PFMI is the relevant international standard for systemically important financial market infrastructures, such as covered clearing agencies.39 The PFMI sets forth twenty￾four principles, each of which includes a headline standard and a list of key considerations that further explain the headline standard. Accompanying explanatory notes further discuss the objectives of and rationales for the standards, as well as provide guidance on how the standard can be implemented.40 Commission staff co-chaired the working group within CPSS–IOSCO that drafted both the consultative and final versions of the PFMI,41 and the Commission believes that the requirements applicable to clearing agencies set forth in the Exchange Act and the rules thereunder, including the rules adopted today, are consistent with the standards set forth in the PFMI.42 Regulatory authorities around the world are in various stages of updating their regulatory regimes to adopt measures consistent with the PFMI.43 The rules set forth below are a continuation of the Commission’s active effort to foster the development of the national clearance and settlement system, consistent with the requirements of the Exchange Act, and enhance the regulation and supervision of SIFMUs, consistent with the Clearing Supervision Act. In addition, the Basel Committee on Banking Supervision (‘‘BCBS’’) has finalized an updated capital framework that sets standards for capital charges arising from bank exposures to CCPs related to OTC derivatives, exchange￾traded derivatives, and securities financing transactions.44 Among other things, the BCBS capital framework includes lower capital charges for exposures to a qualifying CCP (‘‘QCCP’’) that is subject to a regulatory framework consistent with the PFMI. The availability of QCCP status for certain covered clearing agencies with bank clearing members would have

45See infra Part III.A.1.b (further discussing the BCBS capital framework). The FRB and the Office of the Comptroller of the Currency have adopted rules implementing the material elements of the BCBS interim framework for capitalization of bank exposures to CCPs. See Regulatory Capital Rules:
Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk￾weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, 76 FR 62017, 62099 (Oct. 11, 2013) (‘‘Regulatory Capital Rules’’). In doing so, the FRB noted the ongoing international discussions on the topic and stated that it intends to revisit its rules once the BCBS capital framework is revised. See id. The FRB and the Office of the Comptroller of the Currency’s rules define ‘‘QCCP’’ to mean, among other things, a SIFMU under the Clearing Supervision Act. See 12 CFR 217.2; see also Regulatory Capital Rules, supra, at 62100. 46See, e.g., Fiona Maxwell, EU members of U.S. options CCP face $30 billion capital hit: OCC fears approval will be held up by absence of SEC clearing rules, Risk.net, Nov. 30, 2015, available at http:// www.risk.net/risk-magazine/news/2436901/eu￾members-of-us-options-ccp-face-usd30bn-capital￾hit (‘‘A new wrinkle in the transatlantic dispute over clearing house regulation could leave 18 European banks facing an estimated $30 billion jump in capital requirements, and limit access to equity options listed in the [United States] . . . . The potential capital hit for OCC members is a consequence of the Capital Requirements Regulation (CRR), which states that European banks—whether acting through their branch or subsidiary—will only be given a 2% risk weight for cleared trades if using a so-called qualifying CCP following expiration of the current extended grandfathering period. Clearing at a non-QCCP can translate to risk weights of more than 1250%.’’). 47On March 16, 2016, the EC issued an equivalence decision stating that the CFTC’s regulatory framework for CCPs is equivalent to EU requirements. See Commission Implementing Decision (EU) 2016/377 of 15 March 2016 on the equivalence of the regulatory framework of the United States of America for central counterparties that are authorised and supervised by the CFTC to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council, available at http://eur-lex.europa.eu/legal-content/ EN/TXT/?uri=CELEX:32016D0377. 48Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms. As noted earlier, although the United States affords QCCP status to SIFMUs, QCCP status in the EU is distinct from the U.S. banking regulators’ determination that any FMU designated as systemically important by FSOC is a U.S. QCCP. 49See Article 25(6), Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, available at http://eur-lex.europa.eu/legal-content/EN/TXT/ ?uri=CELEX:32012R0648. 50See, e.g., Philip Stafford, European banks face U.S. capital hit unless rules converge, FT.com, Apr. 4, 2016, available at
http://www.ft.com/cms/s/0/ bbe6678a-f5c5-11e5-803c￾d27c7117d132.html#axzz48oFXlFrR. 51See Article 25(6) of EMIR. 52As noted above, ICEEU is also regulated by the Bank of England. See supra note 20. 53See supra Part I.C.5 (further describing the obligations of a registered clearing agency to file proposed rule changes under Rule 19b–4). 54See Exchange Act Release No. 34–73075 (Sept. 11, 2014), 79 FR 55848 (Sept. 17, 2014); Exchange Act Release No. 34–72756 (Aug. 4, 2014), 79 FR 46479 (Aug. 8, 2014); Exchange Act Release No. 34– 72755 (Aug. 4, 2014), 79 FR 46481 (Aug. 8, 2014); Exchange Act Release No. 34–72754 (Aug. 4, 2014), 79 FR 46477 (Aug. 8, 2014). 55To apply with the Commission for an exemption under Section 17A(b)(1), the applicant must complete and file a Form CA–1. In this context, an applicant must attach to its Form CA– 1, along with the other customary exhibits, an Exhibit S. The Exhibit S is a statement by the applicant demonstrating why the granting of an exemption would be consistent with the public interest, the protection of investors and the implications for the capital charges applicable to those members.45
6. Recognition and Equivalence Within
the EU
The Commission is aware of recent public attention on the availability of QCCP status under EU capital requirements for certain covered clearing agencies that operate in the United States and have bank clearing members affiliated with a European Union (‘‘EU’’) entity.46 Specifically, the Commission understands that availability of QCCP status in the EU for a U.S. CCP hinges on the European Securities and Markets Authority (‘‘ESMA’’) recognizing the U.S. CCP pursuant to the requirements of the European Markets Infrastructure Regulation (‘‘EMIR’’). Recognition by ESMA, in turn, is subject to the European Commission (‘‘EC’’) first making certain findings regarding the Commission’s regulatory regime for CCPs.47 Recognition by ESMA would result in QCCP status for those U.S. CCPs for purposes of the EU’s capital requirements, allowing EU-based clearing members of U.S. CCPs to continue to operate and provide clearing services to market participants based in the EU. Under the EU’s capital requirements regulation, EU banks and their subsidiaries will incur higher capital charges if they clear through a U.S. CCP not afforded QCCP status in the EU, that is, a CCP not recognized or authorized by ESMA.48 As an initial matter, the Commission understands that, for the EC to make an equivalence decision, Article 25(6) of the European Markets Infrastructure Regulation (‘‘EMIR’’) requires the EC to determine that the legal and supervisory arrangements of a third country ensure that CCPs authorised in that third country comply with legally binding requirements which are equivalent to the requirements laid down in [EMIR], that those CCPs are subject to effective supervision and enforcement in that third country on an ongoing basis and that the legal framework of that third country provides for an effective equivalent system for the recognition of CCPs authorised under third-country legal regimes.49 The Commission understands that its adoption of new Rule 17Ad–22(e) could be relevant to the EC’s ongoing consideration of the Commission’s regulatory regime for CCPs.50 Further, with respect to EMIR’s requirement that the legal and supervisory regime of the United States include an ‘‘effective equivalent system’’ for the recognition of CCPs authorized under non-U.S. legal regimes, the Commission notes the following.51 First, the Commission observes that, in certain specific contexts, it is not unfamiliar with the EMIR regime given that one registered clearing agency, ICEEU, is subject to EMIR and will be a covered clearing agency pursuant to Rule 17Ad–22(a)(5).52 As previously discussed, each registered clearing agency is an SRO subject to Section 19(b) of the Exchange Act, which requires SROs to submit proposed rule changes to the Commission for public comment and Commission review and approval.53 In the course of its regulation of ICEEU as a registered clearing agency, the Commission has published, reviewed, and approved under the Exchange Act a number of proposed rule
changes submitted by ICEEU under Rule 19b–4 that, based on the information and representations made by ICEEU at the time, were intended to facilitate ICEEU’s efforts to comply with EMIR. These proposed rule changes covered such areas as (i) segregation and portability of customer positions and margin, (ii) risk modeling, (iii) back testing, (iv) stress testing, (v) default management, and (vi) liquidity risk management.54 Further, the Commission observes that the Exchange Act and Commission rules require that CCPs register with the Commission in certain circumstances, and if registered, must comply with the relevant U.S. requirements, including the Commission rules applicable to registered clearing agencies. The Commission also observes that the registration and supervisory framework for clearing agencies under the Exchange Act provides the Commission with broad authority to provide exemptive relief from certain of the Commission’s regulatory requirements under the Exchange Act. Specifically,
Section 17A(b)(1) of the Exchange Act
provides the Commission with authority to exempt a clearing agency or any class of clearing agencies from any provision of Section 17A or the rules or regulations thereunder. Such an exemption may be effected by rule or order, upon the Commission’s own motion or upon application, and conditionally or unconditionally.55 The

purposes of Section 17A of the Exchange Act, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds. 56See 15 U.S.C. 78q–1(b)(1). 57See Exchange Act Release No. 34–39643 (Feb. 11, 1998), 63 FR 8232 (Feb. 18, 1998), as modified by Exchange Act Release No. 34–43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001); Exchange Act Release No. 34–38328 (Feb. 24, 1997), 62 FR 9225 (Feb. 28, 1997). In the case of matching service providers, the Commission first sought comment on providing exemptive relief before considering any application for exemptive relief. See Exchange Act Release No. 34–39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13,
1998) (‘‘Even though matching services fall within
the definition of clearing agency, the Commission preliminarily is of the view that an entity that limits its clearing agency functions to providing matching services need not be subject to the full panoply of clearing agency regulation.’’). The Commission then engaged a close analysis of the attendant facts and circumstances of each applicant for an exemption from registration as a clearing agency on a case-by￾case basis. See, e.g., Exchange Act Release No. 34– 44188 (Apr. 17, 2001), 66 FR 20494 (Apr. 23, 2001) (order granting exemption from registration as a clearing agency to Global Joint Venture Matching Services—US, LLC, now Omgeo). 58See, e.g., Understanding regarding an Application of Euroclear Bank for an Exemption under U.S. Federal Securities Laws (Jan. 30, 2001), available at https://www.nbb.be/doc/cp/nl/ aboutcbfa/mou/pdf/mou_2001-01-30_ euroclearbank.pdf; Exchange Act Release No. 34– 37309 (June 12, 1996) (notice of filing of application for exemption from registration as a clearing agency by Cedel Bank); see also Undertaking on Consultation and Cooperation regarding Belgian Firms that are Members of U.S. Clearing Organizations (July 6, 2006), available at http:// www.sec.gov/about/offices/oia/oia_bilateral/ belgium.pdf. 59The Commission notes that, as defined in Rule 17Ad–22(a)(4) and as used in this release, ‘‘security￾based swap clearing agencies’’ are a subset of complex risk profile clearing agencies that provide CCP services for security-based swaps. For a CCP other than a security-based swap clearing agency, the Commission may determine whether the activities of such CCP have a more complex risk profile and, therefore, whether such CCP is a covered clearing agency pursuant to Rule 17Ab2–
2. See infra Part II.D (further discussing
Commission determinations under Rule 17Ab2–2). 60Rule 17Ad–22(d) sets forth minimum requirements for the operation and governance of registered clearing agencies. Under the proposal, all registered clearing agencies and covered clearing agencies would also remain subject to the requirements in Section 17A of the Exchange Act and the other relevant Commission rules and regulations thereunder, including Rules 17Ad– 22(a), (b), and (c). Commission’s exercise of authority to grant exemptive relief must be consistent with the public interest, the protection of investors, and the purposes of Section 17A, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds.56 The outcome of any exemptive request by the Commission (including, potentially, any exemptions from requirements under Rule 17Ad–22(e)) is dependent on a number of elements. For example, the Commission has used its authority under Section 17A(b)(1) of the Exchange Act to grant exemptions to certain non-U.S. clearing agencies. These exemptions have been tailored in each instance to the exemptive applicants’ contemplated clearing agency activities. In certain instances, non-U.S. clearing agencies have received exemptive relief from the registration requirement under Section 17A(b)(1) to perform the functions of a clearing agency with respect to transactions involving U.S. government and agency securities for U.S. participants.57 Factors the Commission has considered when determining whether to grant an exemption have included the anticipated level or volume of activity that the applicant seeks to effect within the United States. Generally, the particular system of supervision and oversight in a jurisdiction may also be factors for the Commission to consider in evaluating any non-U.S. framework. Other factors the Commission could consider in exercising its exemptive authority could include: the structure of, scope of, and requirements under the regulatory regime to which the applicant is subject in its home jurisdiction; the extent to which the presence of said regime is relevant to the findings the Commission must make in considering an exemption under
Section 17A(b)(1) of the Exchange Act,
and the nature of the non-U.S. covered clearing agency’s activities. Such factors, depending on the attendant facts and circumstances, could lead the Commission to determine that the full scope of the requirements under Rule 17Ad–22(e) need not be applied to a non-U.S. clearing agency to achieve the Commission’s regulatory objectives. The Commission also notes that where it has exercised its exemptive authority under Section 17A(b)(1) of the Exchange Act, the Commission and the relevant national competent authority (‘‘NCA’’) of the non-U.S. clearing agency have entered into cooperative arrangements whereby the Commission and the NCA have arranged to communicate and cooperate to fulfill their respective regulatory mandates.58 For the purposes of the discussion immediately above, such cooperation could also be useful in streamlining the Commission’s consideration and analysis of an application for registration or an exemption from any provision of Section 17A of the Exchange Act or the rules or regulations thereunder by a non-U.S. clearing agency. For example, in the case of a non-U.S. clearing agency that is seeking to register or seeking an exemption with the Commission and is already subject to EMIR, the Commission could look to coordinate with the applicant’s NCA for the purposes of analyzing and evaluating any materials the applicant might submit as part of the Form CA– 1, including the documentation generated in the course of the NCA’s EMIR authorization process for the applicant, and any self-assessment an applicant might produce to evidence its analysis of potential duplication between EMIR requirements and Commission requirements for registered clearing agencies. Such cooperative arrangements could be useful not only for the registration or exemption process but also ongoing coordinated or joint supervisory matters between the Commission and the NCA. However, as previously noted, additional careful analysis would need to be performed by the Commission on a case-by-case basis before the Commission could be willing to determine whether such cooperative arrangements would be appropriate. B. Summary of the Commission’s Proposal The Commission is adopting Rules 17Ad–22(e) and (f) and amendments to Rules 17Ad–22(a) and (d) substantially as proposed. The Commission is adopting Rule 17Ab2–2 with several modifications in light of the comments received. Modifications to the proposed rules are discussed in Part II. Below is a brief summary of the Commission’s proposal as set forth in the CCA Standards proposing release. In proposing amendments to Rule 17Ad–22, the Commission sought to establish an enhanced regulatory framework for registered clearing agencies that meet the definition of a ‘‘covered clearing agency.’’ Specifically, as proposed, a covered clearing agency would include (i) a designated clearing agency; (ii) a complex risk profile clearing agency unless the CFTC is the supervisory agency; 59 and (iii) any other registered clearing agency
that the Commission determines to be a covered clearing agency pursuant to the procedures set forth in proposed Rule 17Ab2–2. A covered clearing agency would be subject to the requirements in Rule 17Ad–22(e) whereas a registered clearing agency that is not a covered clearing agency would remain subject to the requirements in Rule 17Ad–22(d).60 As discussed in the CCA Standards proposing release, the Commission believed that such an approach would allow the Commission to maintain discretion to apply Rule 17Ad–22(d) to certain new clearing agencies while also

61See CCA Standards proposing release, supra note 5, at 29516. 62See infra note (discussing the definition of ‘‘systemically important in multiple jurisdictions’’). 63Each definition is discussed in Part II. For discussion of the new definition of ‘‘sensitivity analysis,’’ see Part II.C.6.c. 64See infra Part II.E. 65See letters from Timothy W. Cameron, Asset Management Group—Head, and Laura Martin, Asset Management Group—Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, and David W. Blass, General Counsel, and Jennifer S. Choi, Associate General Counsel, Investment Company Institute (May 12, 2016) (‘‘AMG–ICI’’); Chris Barnard (May 26, 2014) (‘‘Barnard’’); Dennis M. Kelleher, President and CEO, Stephen Hall, Securities Specialist, Katelynn Bradley, Attorney, and Caitlin Kline, Derivatives Specialist, Better Markets, Inc. (May 27, 2014) (‘‘Better Markets’’); Kurt N. Schact, CFA, Managing Director, Standards and Financial Market Integrity, and Linda L. Rittenhouse, Director, Capital Markets, CFA Institute (May 27,
2014) (‘‘CFA Institute’’); Kathleen M. Cronin, Senior
Managing Director, General Counsel, and Corporate Secretary, CME Group, Inc. (May 27, 2014) (‘‘CME’’); Larry E. Thompson, Managing Director and General Counsel, The Depository Trust and Clearing Corporation (May 27, 2014) (‘‘DTCC’’); Scott C. Goebel, Senior Vice President and General Counsel, Fidelity Investments (May 27, 2014) (‘‘Fidelity’’); Paul Swann, President and Managing Director, ICE Clear Europe Limited (May 23, 2014) (‘‘ICEEU’’); Dorothy M. Donohue, Acting General Counsel, Investment Company Institute (May 21,
2014) (‘‘ICI’’); Stephen O’Connor, Chairman,
International Swaps and Derivatives Association, Inc. (May 22, 2014) (‘‘ISDA’’); John Joyce, Northern Illinois University College of Law (Apr. 1, 2014) (‘‘Joyce’’); Susan Milligan, Head of U.S. Public Affairs, LCH.Clearnet (May 27, 2014) (‘‘LCH’’); James E. Brown, Executive Vice President, General Counsel, and Secretary, The Options Clearing Corporation (May 27, 2014) (‘‘OCC’’); Akshat Tewary et al., Occupy the SEC (June 10, 2014) (‘‘OSEC’’); Sheila Bair, Chair, The Systemic Risk Council (May 28, 2014) (‘‘SRC’’); Jarryd E. Anderson, Vice President, Regulatory Affairs, The Clearing House Association LLC (May 27, 2014) (‘‘The Clearing House’’); Tim Buckley, Managing Director and Chief Investment Officer, and John Hollyer, Principal and Head of Risk Management and Strategy Analysis, Vanguard (May 27, 2014) (‘‘Vanguard’’). Copies of the comment letters are available at http://www.sec.gov/comments/s7-03- 14/s70314.shtml. 66See Barnard at 1 (also focusing support on the proposed financial risk management and liquidity requirements); CFA Institute at 2 (expressing overall support for the proposed rules); CME at 2 (applauding the Commission’s efforts to support dually registered entities as they continue to focus their resources on the important work of maintaining effective systems of governance and enhancing their operational strength); DTCC at 3 (stating that it is broadly supportive of the proposed rules); ICEEU at 1 (expressing support for comprehensive regulation of clearing agencies and linking such comprehensive regulation to the PFMI and the rules of the Commission); OCC at 3 (expressing support for the Commission’s effort to strengthen the substantive regulation of registered clearing agencies). 67For comments not directed to the substance of the proposal itself, see Part I.C.7. applying the requirements under Rule 17Ad–22(e) to those clearing agencies that raise systemic risk concerns due to, among other things, their size, systemic importance, global reach, or the risks inherent in the products they clear.61 To facilitate this approach, the Commission proposed to modify Rule 17Ad–22(d) so that it would only apply to a registered clearing agency other than a covered clearing agency. Under proposed Rule 17Ad–22(e), a covered clearing agency would be required to establish, implement, maintain and enforce written policies and procedures reasonably designed to address the following topics concerning its operation and governance:

• General organization (including
  legal basis, governance, and a framework for the comprehensive management of risks);
• financial risk management
  (including credit risk, collateral, margin, and liquidity risk);
• settlement (including settlement
  finality, money settlements, and physical deliveries);
• CSDs and exchange-of-value
  settlement systems;
• default management (including
  default rules and procedures and segregation and portability);
• business and operational risk
  management (including general business risk, custody and investment risks, and operational risk);
• access (including access and
  participation requirements, tiered participation arrangements, and links);
• efficiency (including efficiency and
  effectiveness and communication procedures and standards); and
• transparency.
  The Commission is adopting Rule 17Ad–22(e) substantially as proposed. Each of the requirements under Rule 17Ad–22(e), any modifications made thereto, and the comments received with respect to them, are discussed in
  Part II.C.
  In addition, the Commission proposed Rule 17Ab2–2 to provide the Commission with procedures to make determinations regarding the following:
• Whether a registered clearing
  agency should be considered a covered clearing agency;
• whether a covered clearing agency
  meets the definition of ‘‘systemically important in multiple jurisdictions;’’ 62 and
• whether the activities of a clearing
  agency providing CCP services have a more complex risk profile. The proposed rule would allow such determinations to occur either at the Commission’s own initiative or upon request by either a clearing agency or one of its members. In each case, the Commission would publish notice of its intention to consider such determinations, together with a brief statement of the grounds under consideration, and provide at least a 30- day public comment period prior to any determination. Under the proposed rule, the Commission may also provide a clearing agency subject to any proposed determination opportunity for hearing. The Commission is adopting Rule 17Ab2–2 substantially as proposed. Modifications to Rule 17Ab2–2 made in response to the comments received are discussed in Part II.D. To facilitate the addition of proposed Rule 17Ad–22(e) and proposed Rule 17Ab2–2, the Commission proposed to add 14 new definitions to Rule 17Ad– 22(a). The Commission is adopting those definitions substantially as proposed, but is combining the definitions of ‘‘sensitivity analysis’’ and ‘‘conforming sensitivity analysis’’ into one definition of ‘‘sensitivity analysis.’’ 63 Each of the definitions, any modifications made thereto, and the comments received with respect to them, are discussed in Part II.C. Finally, the Commission also proposed Rule 17Ad–22(f) to codify the Commission’s statutory authority under
  Section 807(c) of the Clearing
  Supervision Act. The Commission received no comments regarding Rule 17Ad–22(f) and is adopting it as proposed.64
  C. Comments Received
  The Commission received seventeen comment letters in response to the CCA Standards proposing release.65 Commenters included market participants from across the financial industry, including registered clearing agencies, non-U.S. clearing agencies, non-profit groups, various entities participating in or representing professionals who provide investment or asset management services, participants in the derivatives markets, an association of banks representing clearing participants and members of certain CCPs, and members of the general public. Commenters generally supported the Commission’s proposal and the Commission’s ongoing efforts to regulate registered clearing agencies,66 though several also raised concerns regarding certain aspects of the proposed rules, as discussed throughout this release. Below is a discussion of the comments that were not directed to the content of a particular proposed rule and, where appropriate, the Commission’s response.67 Comments received that were directed to a particular proposed rule, or aspects thereof, are discussed in
  Part II.

68See CME at 1.
69See The Clearing House at 1.
70See Barnard at 1.
71See supra notes 3–4 and accompanying text. 72See supra note 18 and accompanying text. 73See Vanguard at 1. 74See OSEC at 3. 75See OSEC at 1. The commenter, however, also raised concerns with the proposed dual framework under existing Rule 17Ad–22(d) and proposed Rule 17Ad–22(e) because the commenter believed the dual framework could facilitate regulatory arbitrage. See id. at 1–2; see also infra note 80 and accompanying text. 76See id. 77See DTCC at 4 (citing proposed Rules 17Ad– 22(e)(1), (8), (10), and (12) as examples). 78See id. 79See CCA Standards proposing release, supra note 5, at 29516.

1. Financial Stability and the Dodd￾Frank Act
   One commenter supported the Commission’s stated goal of contributing to the enhancement of the stability of the U.S. securities markets.68 Another commenter strongly supported the Commission’s efforts to promote financial stability through the application of enhanced standards for covered clearing agencies, in particular those that act as CCPs for security-based swaps and other derivatives.69 A third commenter similarly expressed the belief that the proposed requirements should promote market integrity, improve the robustness of clearing systems, and protect the financial system against contagion.70 The Commission believes that Rule 17Ad– 22(e) achieves these goals by supporting the objectives of (i) the Exchange Act to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions and linked or coordinated facilities for clearance and settlement of securities transactions, having 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,71 and (ii) the Clearing Supervision Act to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system.72 One commenter generally supported the mandate of Title VII of the Dodd￾Frank Act to promote transparency and regulation in the derivatives markets.73 Another commenter noted that the Dodd-Frank Act has sought to shed light on the opaque markets for swaps and other exotic OTC derivatives, which numerous other commentators have asserted contributed to the recent financial crisis, by requiring such derivatives to be cleared through registered clearing agencies.74 The commenter stated that this shift toward transparency could be useful if clearing agencies are themselves robust and stable, noting that, in some ways, the risks associated with OTC derivatives trading have not gone away but simply shifted to clearing agencies. The commenter stated that, thus, it is vital for the Commission to not only promulgate strong regulations for clearing agencies but also to enforce such regulations in a vigorous manner. As noted above, the Commission believes that the focus in Rule 17Ad– 22(e) on transparency, governance, financial risk management, and operational risk management are consistent with the objectives of promoting strong rules that help ensure covered clearing agencies are robust and stable, and that any risks particular to OTC derivatives trading and the risks present in clearing such derivatives are addressed in requirements for the covered clearing agency’s management of financial risks.
2. Relationship Between Rules 17Ad–
   22(d) and (e)
   One commenter generally supported the Commission’s approach to the regulation of registered clearing agencies, which the commenter stated applies a more general set of standards under Rule 17Ad–22(d) for registered clearing agencies other than covered clearing agencies.75 The commenter stated that this framework would allow new entrants to more firmly establish themselves as clearing agencies, which is important for the deconsolidation and diffusion of risk across the market. The commenter noted that at present the clearance and settlement industry, like much of the financial sector, can be described as highly concentrated, and stated that it is paramount that the Commission set policies that promote the proliferation of viable new clearing agencies, given that existing clearing agencies typically serve as intermediaries for trillions of dollars in trading volumes. In the commenter’s view, such concentration in the provision of clearance and settlement services results in risk concentration and inhibits price allocation for services, which, in turn, inhibits liquidity.76 The Commission is mindful of these concerns and notes, as discussed above, that the approach under Rules 17Ad–22(d) and (e) take into account various clearing agency activities and the risks they pose while promoting robust risk management practices and the general safety and soundness of registered clearing agencies. In particular, as discussed in
   Part III.B.1.d, the Commission has
   considered the level of concentration in the provision of clearing agency services. One commenter expressed the belief that some of the proposed requirements under Rule 17Ad–22(e) represent a clarification of existing requirements under Rule 17Ad–22(d) rather than enhanced standards related to the particular risks arising from a clearing agency’s systemic importance.77 The commenter recommended that the Commission review and revise Rule 17Ad–22(d) to align it with the analogous provisions under proposed Rule 17Ad–22(e), particularly if the different language in the proposed rule is intended to clarify language in the existing rule or represents a logical outgrowth from it. The commenter stated that, to the extent any provision of the proposed rules reflects a best practice, the provision should apply to all registered clearing agencies.78 The Commission does not believe that the requirements under Rule 17Ad– 22(e) represent a clarification of existing requirements in Rule 17Ad–22(d) or a codification of best practices. As discussed above, the Commission proposed to maintain Rule 17Ad–22(d) to ensure that the Commission could efficiently and effectively regulate registered clearing agencies depending on the specific activity and risks that each type of clearing agency poses to the U.S. financial system. Thus, Rule 17Ad– 22(d) applies requirements to registered clearing agencies other than covered clearing agencies, consistent with the continuing development of the national system for clearance and settlement. Since no clearing agency would be subject to both Rule 17Ad–22(d) and Rule 17Ad–22(e), the Commission does not believe that confusion would arise from similarities or differences between the requirements under the two separate rules. With respect to best practices, Rule 17Ad–22(e) includes requirements for covered clearing agencies intended to address the activity and 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 both the Exchange Act and the Dodd-Frank Act, and is not an attempt to merely reflect best practices.79 One commenter stated that the Commission must be vigilant to prevent companies from engaging in regulatory arbitrage by seeking application of Rule 17Ad–22(d) when the requirements of

80See OSEC at 1–2.
81See id. at 2.
82 In a separate release, the Commission is proposing to modify the definition of ‘‘covered clearing agency’’ to include all CCPs, CSDs, and SSSs. See Exchange Act Release No. 34–78963 (Sept. 28, 2016) (‘‘CCA Definition proposing release’’). 83See OSEC at 2. 84See id. 85See id. 86See id. 87See 12 U.S.C. 5466. 88See supra note 82. 89See DTCC at 4–5. 90See id. at 5. 91See id.; see also 17 CFR 240.17Ad–22(b)(1)–(4). 92See infra Part II.B (discussing the principles based approach to Rule 17Ad–22(e)). 93See Rule 17Ad–22(c)(1), infra Part VI. proposed Rule 17Ad–22(e) would be more appropriate.80 The commenter explained that the Commission can expect, for instance, large entities to float new subsidiaries or affiliates seeking to operate under Rule 17Ad– 22(d), even though the risk profile of the subsidiary may be part of the greater risk exposure of the entity at-large.81 The Commission is mindful of this concern and notes that, in a separate release, the Commission has proposed an expanded definition of ‘‘covered clearing agency’’ that, if adopted, may further reduce potential opportunities for arbitrage.82 The same commenter also recommended that the Commission regularly evaluate registered clearing agencies subject to Rule 17Ad–22(d) to ensure that their activities have not risen to a level warranting oversight and requirements pursuant to Rule 17Ad– 22(e).83 The commenter stated that the Commission should require frequent audits of the policies and procedures of clearing agencies operating under Rule 17Ad–22(d) and proposed Rule 17Ad– 22(e) because (i) smaller, profitable clearing agencies may quickly outgrow Rule 17Ad–22(d) and (ii) covered clearing agencies may shift their operations materially after crafting robust policies and procedures under Rule 17Ad–22(e). In addition, the commenter noted that even if policies and procedures are implemented in good faith, their efficacy could be questionable because standard measurements of credit and liquidity risk may only encourage excessive confidence in the risk profile of financial institutions.84 The same commenter stated that the Commission’s vigorous enforcement of clearing rules will ultimately remain more important in achieving real-world risk reduction than the mere promulgation of detailed rules.85 The commenter noted that clearing agencies by definition collect various counterparty risks and, while the agglomeration of such risks by clearing agencies may have not played a significant role in the most recent financial crisis, the continued growth of trading operations and the consolidation of market power in the banking and finance sectors suggest that clearing agencies could serve as ‘‘ground zero’’ in the next crisis.86 As to this commenter, the Commission notes that registered clearing agencies are subject to inspections and examinations under both the Exchange Act and the Clearing Supervision Act.87 The Commission also monitors registered clearing agencies to assess and evaluate the risks
posed by each clearing agency. Rule 17Ad–22(e) provides the Commission with requirements against which a covered clearing agency can be, among other things, monitored, inspected, and examined with respect to its establishing, implementing, maintaining, and enforcing policies and procedures for managing credit and liquidity risk and its compliance with such policies and procedures. In addition, the Commission is proposing in a separate release to expand the definition of ‘‘covered clearing agency’’ to include all CCPs, CSDs, and SSSs. If adopted, the requirements applied to CCPs, CSDs, and SSSs would be uniform under Rule 17Ad–22(e).88
3. Relationship Among Rules 17Ad–
22(b), (c), and (e)
One commenter raised concerns regarding overlap between existing Rules 17Ad–22(b)(1) through (4) and several of the provisions of proposed Rule 17Ad–22(e).89 The commenter expressed the belief that proposed Rules 17Ad–22(e)(4), (6), and (7) fully address all of the matters covered by existing Rules 17Ad–22(b)(1) through (4) and that subjecting covered clearing agencies that provide CCP services to both sets of requirements may create ambiguities and inconsistencies.90 The commenter urged the Commission to revise the proposal so that the provisions of existing Rules 17Ad– 22(b)(1) through (4) are not applicable to covered clearing agencies that provide CCP services.91 The Commission notes that the commenter has not identified specific ambiguities or inconsistencies between Rules 17Ad–22(b) and (e) that might result from application of both rule sets. With respect to the potential for inconsistency, the Commission believes that while Rule 17Ad–22(e) may overlap with some requirements in Rule 17Ad–22(b), it is not inconsistent with Rule 17Ad–22(b) and, as a general matter, includes requirements intended to supplement the more general requirements in Rule 17Ad–22(b). With respect to the potential for ambiguity, the Commission notes that Rule 17Ad– 22(b) applies to a registered clearing agency that provides CCP services and Rule 17Ad–22(e) applies to a registered clearing agency that is a covered clearing agency. To the extent that a registered clearing agency is one that both provides CCP services and is a covered clearing agency, then it is subject to the requirements in both rule sets, with the more general requirements in Rule 17Ad–22(b) supplemented by the requirements of Rule 17Ad–22(e). The Commission therefore is declining to limit application of Rule 17Ad–22(b) to clearing agencies that provide CCP services and are not covered clearing agencies. The commenter stated in the alternative that, at a minimum, the Commission should clarify that the requirement in existing Rule 17Ad– 22(c)(1), which requires a registered clearing agency that provides CCP services to calculate and maintain a record of its financial resources available to cover participant defaults in accordance with existing Rule 17Ad– 22(b)(3), should instead be determined and calculated in accordance with proposed Rule 17Ad–22(e)(4). The Commission believes that such clarification in the rule text is appropriate. The Commission further believes that, in light of the closely linked nature between the management of credit and liquidity risk, and the holistic approach taken in Rule 17Ad– 22(e),92 a covered clearing agency generally should also calculate and maintain a record of its qualifying liquid resources under Rule 17Ad–22(e)(7). The Commission therefore is amending Rule 17Ad–22(c)(1) to include a reference to the requirements for financial resources and qualifying liquid resources in Rules 17Ad–22(e)(4) and (e)(7) respectively, so that covered clearing agencies have reporting
requirements for their financial and qualifying liquid resources equivalent to other registered clearing agencies.93 The Commission notes that, to the extent the computations for financial resources under Rules 17Ad–22(b)(3) and (e)(4) are the same, a covered clearing agency could indicate so in the supporting documentation required pursuant to Rule 17Ad–22(c)(1).

94See ICI at 2.
95See CCA Standards proposing release, supra note 5, at 29508 (noting that the Commission has begun, and intends to continue, consultation with the CFTC, FRB, and FSOC). 96See Fidelity at 7. 97See id. at 7–8. 98See supra note 1 and accompanying text; see also CCA Standards proposing release, supra note 5, at 29508 & n.1 (noting the same at the proposing stage). 99See CME at 2 (citing CCA Standards proposing release, supra note 5, at 29516). 100See CME at 2. 101See ICEEU at 7–8. 102See id. at 1–2. 103See id. at 8. 104See id. at 2. 105See supra Part I.A. 106See supra notes 1–2, 43, and accompanying text. 107See OSEC at 2. 108See supra Parts I.A.1 and 2.
4. Risk of Duplicative or Inconsistent
Regulation
One commenter noted that coordination among regulators in implementing derivatives reform is critical to the efficient functioning of the derivatives market by alleviating duplicative and potentially conflicting regulation of cross-border transactions.94 In response, the Commission notes that, as discussed above and previously in the CCA Standards proposing release, the Commission has consulted with the CFTC, FRB, and FSOC in developing these rules.95 Another commenter similarly expressed the belief that consistent international regimes are critical to mitigating regulatory arbitrage because opportunities for regulatory arbitrage would disadvantage smaller market participants.96 The commenter stated that no basis exists for different regulatory treatment between U.S. and non-U.S. markets for security-based swaps, noting that the Commission may conform its standards for clearing agencies to reflect evolving international standards, consistent with the Dodd￾Frank Act and the Exchange Act.97 As noted above, the Commission has considered the relevant international standards in developing these rules, consistent with the Dodd-Frank Act and the Exchange Act, and the Commission believes that the scope of and requirements in Rule 17Ad–22(e) appropriately address the risk profile of CCPs that clear security-based swaps.98 A third commenter supported the view that imposing requirements on dually registered entities would subject them to duplicative regimes,99 and the commenter stated that avoiding unnecessarily duplicative regulation allows for the most efficient use of both public and private sector resources towards the shared goal of protecting the financial system.100 A fourth commenter stated that the Commission should be wary of imposing additional requirements on top of those imposed by other regulators, particularly where other regulators are attempting to (or have) imposed the same or substantially similar standards.101 The commenter expressed the concern that, particularly for those clearing entities that are regulated by multiple governmental authorities in multiple jurisdictions, the approach taken in the proposed rules may unnecessarily subject clearing entities to the risk of duplicative or inconsistent regulation.102 The commenter expressed the belief that avoiding unnecessarily duplicative or, worse, inconsistent regulation is key to maximizing effective regulation and the use of limited regulatory activities.103 The commenter stated that avoiding unnecessarily duplicative regulation will also allow the Commission to focus its resources on the particular activities within its jurisdiction that present increased risks and should therefore be subject to increased supervision. The commenter urged the Commission, in implementing enhanced standards for covered clearing agencies, to take a more flexible approach that is not ‘‘one￾size-fits-all’’ and considers the overall regulatory status of the relevant clearing agency.104 With respect to these
two commenters, the Commission notes, as previously discussed, that the Commission has consulted with the CFTC, FRB, and FSOC in the development of these rules to, in part, avoid unnecessarily duplicative or inconsistent regulation with respect to clearing agencies that are dually registered in the United States. With respect to such clearing agencies—as well as clearing agencies regulated by authorities in other jurisdictions—the Commission is nonetheless mindful, pursuant to the comprehensive framework for regulating swaps and security-based swaps established in Title VII, that the SEC has been given regulatory authority over security-based swaps. CCPs that clear security-based swaps present risks to the securities markets that must be subject to appropriate risk management. The Commission’s intent with respect to Rule 17Ad–22(e) is, in part, to take another incremental step under Rule 17Ad–22 to ensure that these risks are appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act.105 In this regard, the Commission does not believe that it has taken a ‘‘one-size-fits-all’’ approach; rather, the Commission has, through Rule 17Ad–22, sought to apply requirements commensurate and appropriate to the risk posed by the clearing agency functions and activities specific to covered clearing agencies as they exist in, and serve, the U.S. securities markets. The Commission acknowledges that other rules and regulations may apply to a covered clearing agency that are similar in scope or purpose to Rule 17Ad–22(e). However, the presence of similar regulations does not negate the Commission’s obligation to ensure that risk in the U.S. securities markets is appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act. Further, because Rule 17Ad–22(e) and other comparable regulations—including those of the CFTC—are based on the same international standards,106 the potential for inconsistent regulation is low. The commenters have provided no examples suggesting that Rule 17Ad–22(e) is inconsistent with another comparable regulation. Nonetheless, Part I.A.6 above discusses the process by which the Commission could consider the attendant facts and circumstances in assessing the application of Rule 17Ad– 22(e) to a non-U.S. covered clearing agency that is subject to similar regulation in its home jurisdiction, and
Part II.A.2 further discusses comments
regarding the risk of duplicative or inconsistent regulation targeted to security-based swap clearing agencies subject to similar regulation in the home jurisdiction. Finally, one commenter noted that opportunities for regulatory arbitrage may exist based on differences between the Commission’s proposed approach and rules adopted by the CFTC.107 Opportunities for regulatory arbitrage only exist, however, when there are gaps or conflicting regulations for the same matter. Here, as noted above, the Commission and CFTC have separate and distinct statutory mandates, as set forth in the Exchange Act and the Commodity Exchange Act, respectively, for the different markets they regulate. The Commission has specific authority over the national system for clearance and settlement of U.S. securities transactions, including transactions involving security-based swaps.108 Under the Clearing Supervision Act, the Commission also has specific authority over those SIFMUs for which it is the

109See OCC at 3.
110See id. at 4.
111See DTCC at 3.
112See id.
113See DTCC at 12–13.
114See OSEC at 2.
115See CCA Standards proposing release, supra note 5, at 29517. 116See supra Parts I.A.1 and 2. 117See 15 U.S.C. 78s(g). 118See DTCC at 13; see also supra notes 11–13 and accompanying text (providing an overview of the requirement to submit proposed rule changes to the Commission for review). 119See supra note 12 and accompanying text. 120See ISDA at 1. 121See ISDA at 1–2 & n.4 (citing CFTC requirements at 17 CFR 39.40). 122See id. at 1. 123See supra notes 1–2 and accompanying text; see also CCA Standards proposing release, supra note 5, at 29508 & n.1. 124See LCH at 2. 125See ICEEU at 1. supervisory agency. In this regard, such a regulatory structure does not on its face create opportunities for regulatory arbitrage based on any differences between the Commission’s proposed approach and rules adopted by the CFTC.
5. Flexible Versus Prescriptive
Approaches to Regulation, and the Role of Rule Filings Under Rule 19b–4 One commenter supported the proposed approach that covered clearing agencies be allowed flexibility to use their market experience and understanding of their institutions to shape the implementation of proposed Rule 17Ad–22(e).109 The commenter emphasized that a flexible and holistic approach would allow a clearing agency to make decisions from a perspective of overall risk management, which may be more productive than a more prescriptive approach.110 Another commenter was broadly supportive of the proposed rules, noting that the rules provide covered clearing agencies with the necessary flexibility to design and structure their policies and procedures to take into account the differences among clearing agencies.111 The commenter expressed the view that the Commission generally achieved the appropriate balance between taking a principles-based approach (providing clearing agencies with flexibility) and a more prescriptive, granular approach (limiting a clearing agency’s discretion).112 The commenter also expressed the belief that the precise form of the written policies and procedures required by proposed Rule 17Ad–22(e) should be a matter for the clearing agency to determine, and the commenter listed among such policies and procedures the following: Service guides, operational agreements, compliance procedures, link agreements, and protocols.113 A third commenter, in contrast, was concerned that the proposed rules rely inordinately on internal risk testing and standards rather than a clear set of external, regulatory demands.114 In the commenter’s view, financial firms often view their policies and procedures as mere inconveniences. The Commission does not believe that policies and procedures established by covered clearing agencies and required pursuant to Rule 17Ad–22(e) can or would be viewed as ‘‘mere inconveniences.’’ In proposing Rule 17Ad–22(e) the Commission stated— and continues to believe—that it is important for covered clearing agencies to use their experience and understanding of the markets they serve to shape the rules, policies, and procedures implementing proposed Rule 17Ad–22(e).115 Nonetheless, as discussed above, Rule 17Ad–22(e) provides the Commission with a uniform set of requirements against which a covered clearing agency can be monitored, inspected, and examined. Additionally, the Commission notes that, in using its experience to shape the policies and procedures that implement Rule 17Ad–22(e), a covered clearing agency must at all times comply with the requirements of both Section 19 of the Exchange Act and the rules and regulations thereunder for SROs, as well as, for designated clearing agencies, the advance notice requirements of the Clearing Supervision Act and the rules and regulations thereunder.116 Under
Section 19(g) of the Exchange Act, a
registered clearing agency (as an SRO) must comply with its own rules and, absent reasonable justification or excuse, enforce compliance with its own rules by its participants.117 One of the above commenters further stated that there should be no change in the requirement for filing proposed rule changes under Rule 19b–4 under the Exchange Act, and noted that not all written policies and procedures that would be adopted by a clearing agency in compliance with the proposed rule would be the subject of rule filings under Rule 19b–4.118 The Commission notes that the amendments to Rule 17Ad–22 do not alter the definition of a rule or a proposed rule change under the Exchange Act, nor do the amendments change a registered clearing agency’s obligation to file proposed rule changes under Rule 19b– 4.119
6. Consistency With the PFMI
Five commenters generally supported the Commission’s proposed approach at least in part because they believed it would reflect consistency with the PFMI, as described further below. One commenter supported the Commission’s efforts to update its rules for clearing agencies to take into account the PFMI and to provide support for determinations by non-U.S. banking regulators that covered clearing agencies satisfy the requirements for QCCP status under the BCBS capital framework.120 The commenter expressed the belief that it would be beneficial for the Commission’s rules to recite the Commission’s intent to establish standards for covered clearing agencies that are consistent with the PFMI and to interpret them in that context so long as it does not result in inconsistency with the Exchange Act or other Commission regulations, noting that the CFTC included such provision in its regulations for systemically important derivatives clearing organizations (‘‘SIDCOs’’).121 In this regard, the commenter noted that one of the elements of the QCCP definition under the BCBS capital framework is that the relevant regulator has ‘‘publicly indicated’’ that it applies to a CCP, on an ongoing basis, domestic rules and regulations that are consistent with the PFMI.122 As previously discussed, the Commission has publicly indicated that, in developing Rule 17Ad–22(e), the Commission has, among other things, considered the relevant international standards, including the PFMI.123 The Commission also believes, as previously discussed in Part I.A.5, that the requirements applicable to clearing agencies set forth in the Exchange Act and the rules thereunder, including the rules adopted today, are consistent with the PFMI, and that the rules set forth below are a continuation of the Commission’s active effort to foster the development of the national clearance and settlement system consistent with the requirements of the Exchange Act. A second commenter similarly supported the Commission’s proposal to adopt enhanced regulatory standards that are consistent with the PFMI and that would facilitate the ability of covered clearing agencies to be considered QCCPs.124 A third commenter welcomed the efforts of the Commission to implement standards for clearing agencies that are consistent with the PFMI.125 A fourth commenter noted that enhanced standards are necessary to ensure that the Commission’s regulation of CCPs is consistent with international standards, including the PFMI—which serves as a

126See The Clearing House at 1–2. The Commission notes that, since the comment letter was submitted, CPMI–IOSCO has published a final report on this topic. See supra note 41 (citing to the final report). 127See DTCC at 3. 128See id. 129See Better Markets at 4–5. 130 In the Commission’s experience, proposed rule changes of the type necessary to implement the rules would generally entail changes to the SRO’s written policies and procedures that must be submitted for Commission review and approval pursuant to Rule 19b–4 under the Exchange Act. See supra note 12. 131See ISDA at 4, 6 (recommending that the Commission (i) develop, in a subsequent rulemaking, more detailed rules that require customer-by-customer accounting of the collateral value held by the covered clearing agency with respect to security-based swap positions and impose corresponding limitations on the value of collateral that the covered clearing agency may apply towards losses on other customers’ positions carried by the participant and (ii) commit to a study of insolvency of security-based swap clearing agencies with the goal of identifying uncertainties, proposing solutions, and fostering public discussion); CFA Institute at 2 (expressing general concern regarding the central clearing of OTC swaps and derivatives, urging the Commission to take caution in regulating OTC swaps and derivatives, and asking the Commission to consider whether to require all OTC contracts, whether standardized or not, to be cleared); SRC at 2 (stating that the SEC and CFTC continue to lack the resources available to other self-funded financial regulators, creating structural weakness). The Commission also received one comment letter that recommended modifications to Rule 17Ad– 22(e)(14) and other rulemaking outside the scope of Rule 17Ad–22. See AMG–ICI at 8–12. 132 If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. 133See 12 U.S.C. 5462(6) (defining ‘‘financial market utility’’ pursuant to the Clearing Supervision Act); supra note 20 (further discussing FMUs under the Clearing Supervision Act). 134Rule 17Ad–22 does not currently apply to entities operating pursuant to an exemption from clearing agency registration. 135See 15 U.S.C. 78c(a)(68). 136The Commission notes that, because of modifications to Rule 17Ad–22(a), the definition of ‘‘financial market utility’’ is being moved to Rule 17Ad–22(a)(7), the definition of ‘‘designated Continued prerequisite to obtaining QCCP status under the BCBS capital framework—and CPSS–IOSCO’s consultative report Recovery of Financial Market Infrastructures (‘‘Consultative Recovery Report’’).126 A fifth commenter noted that the Commission’s approach differs from the PFMI in some areas (e.g., segregation and
portability and liquidity risk), reflecting the nature of the securities markets and the particular requirements of the Exchange Act.127 The commenter supported this approach because covered clearing agencies need to have appropriate flexibility to implement timely modifications to relevant parameters, assumptions, and approaches. The commenter also expressed the belief that the Commission has generally struck the appropriate balance with respect to incorporating the PFMI principles and the level of granular requirements thereunder.128 A sixth commenter, in contrast to the above commenters, urged the Commission to adopt the key considerations of each principle identified in the PFMI and to strengthen the proposed rules to affirmatively require robust standards and procedures that ensure accountability, independence, and financial stability.129 To the extent that the commenter identified a particular key consideration that the Commission should include as a requirement in Rule 17Ad–22(e), it is discussed and addressed in Part II.C. As a general matter, the Commission believes that the requirements applicable to clearing agencies set forth in the Exchange Act and the rules thereunder, including the rules adopted today, are consistent with the PFMI. The Commission also believes Rule 17Ad– 22(e) achieves the appropriate balance between imposing new requirements on covered clearing agencies and allowing each covered clearing agency, subject to its obligations and responsibilities as an SRO under the Exchange Act, to design its policies and procedures pursuant to Rule 17Ad–22(e). This approach is consistent with the Commission’s existing approach under Rules 17Ad– 22(b) and (d) and recognizes that each registered clearing agency has different organizational and operating structures and clears distinct products that warrant a tailored approach to governance and risk management respectively. The Commission notes that such a policies and procedures approach is also consistent with the Commission’s existing regulation of SROs generally.130 In addition, in the discussion of each final rule under Rule 17Ad–22(e) in Part II.C, the Commission has provided guidance based on the key considerations in the PFMI.
7. Other Comments
The Commission also received several comments that were not directed to the substance of the CCA Standards proposal itself. These comments recommended study and rulemaking beyond the scope of the proposed amendments to Rule 17Ad–22 and Rule 17Ab2–2.131
II. Description of the Amendments to
Rule 17Ad–22 and Rule 17Ab2–2 Below is a discussion of the amendments to Rule 17Ad–22 and Rule 17Ab2–2. Part II.A discusses the scope of new Rule 17Ad–22(e). Part II.B discusses the Commission’s principles￾based approach to developing the requirements in Rule 17Ad–22(e). Part II.C discusses the requirements for covered clearing agencies under new Rule 17Ad–22(e) and the definitions that the Commission is adopting in Rule 17Ad–22(a). Part II.D discusses new Rule 17Ab2–2, Part II.E discusses new Rule 17Ad–22(f), and Part II.F discusses the amendment to Rule 17Ad–22(d).
Part II.G discusses the effective and
compliance dates.132
A. Scope of Rule 17Ad–22(e) To facilitate the approach to clearing agency regulation described in Part I.B, the Commission proposed to add five definitions to Rule 17Ad–22(a) to identify those clearing agencies that would be subject to the requirements in Rule 17Ad–22(e). First, the Commission proposed to define ‘‘financial market utility’’ as defined in Section 803(6) of the Clearing Supervision Act.133 Second, the Commission proposed to define ‘‘designated clearing agency’’ as a clearing agency registered with the Commission under Section 17A of the Exchange Act that is designated as systemically important by the FSOC and for which the Commission is the supervisory agency as defined in
Section 803(8) of the Clearing
Supervision Act.134 Third, the Commission proposed to define ‘‘clearing agency involved in activities with a more complex risk profile’’ to mean a clearing agency registered with the Commission under Section 17A of the Exchange Act and that either (i) provides CCP 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. Fourth, the Commission also proposed to define ‘‘security-based swap’’ to mean security-based swap as defined in
Section 3(a)(68) of the Exchange Act.135
The Commission received no comments regarding these four definitions. The Commission is modifying the definition of ‘‘clearing agency involved in activities with a more complex risk profile’’ to strike ‘‘and’’ because it is unnecessary. The Commission is adopting the remaining three definitions as proposed.136

clearing agency’’ is being moved to Rule 17Ad– 22(a)(6), the definition of ‘‘security-based swap’’ is being moved to Rule 17Ad–22(a)(15). The definition of ‘‘clearing agency involved in activities with a more complex risk profile’’ remains in Rule 17Ad– 22(a)(4). See infra Part VI. 137The Commission notes that, because of modifications to Rule 17Ad–22(a), the definition of ‘‘covered clearing agency’’ is being moved to Rule 17Ad–22(a)(5). See infra Part VI. 138See infra Part II.D.2.a. 139 In addition, as first noted in Part 0, in a separate release the Commission is proposing to modify the definition of ‘covered clearing agency’ to include all CCPs, CSDs, and SSSs. See CCA Definition proposing release, supra note 82, at 25– 26. 140See CFA Institute at 2; OSEC at 3; The Clearing House at 1; DTCC at 4 (recommending that any provision of the proposed rules that reflects best practices should be applied to all registered clearing agencies). 141See The Clearing House at 1. 142See CFA Institute at 2. 143See id. The commenter also suggests that, to account for these risks, the Commission reconsider whether all OTC contracts, whether standardized or not, ought to clear through covered clearing agencies. The Commission notes that whether OTC contracts ought to be subject to mandatory clearing requirements was not a subject of this rulemaking during the proposing stage, and the Commission therefore believes this comment is outside the scope of this rulemaking. 144See OSEC at 3. 145As previously discussed, security-based swap clearing agencies are a subset of complex risk profile clearing agencies under Rule17Ad–22(a)(5). See supra note 59. 146See CCA Definition proposing release, supra note 82, at 25–43. 147See DTCC at 4. 148See supra notes 77–78 and accompanying text. 149See CME, ICEEU, and LCH. 150See ICEEU at 3. 151See id. at 3–4. 152See supra note 17 and accompanying text. Fifth, the Commission proposed to define ‘‘covered clearing agency’’ to mean a designated clearing agency, a complex risk profile clearing agency for which the CFTC is not the supervisory agency, or any clearing agency determined to be a covered clearing agency by the Commission pursuant to proposed Rule 17Ab2–2. Commenters expressed several views on the entities and activities that should be included within the ‘‘covered clearing agency’’ definition. In Part I.C.4 above, the Commission considered comments focused generally on the potential for duplicative or inconsistent regulation as a result of the proposed scope of Rule 17Ad–22(e). Below is a discussion of comments directed to aspects of the definition of ‘‘covered clearing agency.’’ 137 Comments directed to the scope of proposed Rule 17Ab2–2(a), which would have provided procedures for the Commission to determine whether a registered clearing agency is a covered clearing agency, are discussed separately in Part II.D. In light of those comments, the Commission has determined not to adopt proposed Rule 17Ab2–2(a), and therefore, in
adopting the definition of ‘‘covered clearing agency,’’ the Commission has also determined to not adopt the proposed prong regarding determinations pursuant to Rule 17Ab2–2.138 Accordingly, the Commission is adopting the definition of ‘‘covered clearing agency’’ to mean a designated clearing agency or a complex risk profile clearing agency for which the CFTC is not the supervisory agency as defined in the Clearing Supervision Act.139

1. As Applied to CCPs Generally
   Four commenters supported applying enhanced standards to CCPs generally.140 One commenter noted that the mandatory clearing of OTC derivatives introduced following the 2008 financial crisis has heightened the need for enhanced standards for CCPs.141 A second commenter suggested that the Commission apply Rule 17Ad– 22(e) to all clearing agencies to reduce the risk of failure and the problems such a failure would cause for investors.142 In so suggesting, the commenter cited to the size of the derivatives markets and the potential for disruption and systemic risk that those markets may have on covered clearing agencies.143 A third commenter similarly cited to the risks associated with derivatives trading that has shifted into clearing agencies.144 With respect to these three commenters, the Commission notes that, according to the ‘‘covered clearing agency’’ definition, a CCP is a covered clearing agency in either of the following circumstances: (i) If the CCP is a designated clearing agency; or (ii) if the CCP is a complex risk profile clearing agency,145 unless the CFTC is the supervisory authority under the Clearing Supervision Act. Accordingly, under the ‘‘covered clearing agency’’ definition, five of the six active CCPs registered with the Commission will be a covered clearing agency subject to Rule 17Ad–22(e). The Commission believes that it is important to take an initial step to establish coverage of Rule 17Ad–22(e) over this group of clearing agencies and is adopting the ‘‘covered clearing agency’’ definition with only the modification described above regarding Rule 17Ab2–2. However, in consideration of these comments, the Commission is proposing in a separate release to amend the definition of ‘‘covered clearing agency’’ so that it would apply to any registered clearing agency that, among other things, provides CCP services.146 Under this proposed definition, any CCP registered with the Commission would be a covered clearing agency. The fourth commenter recommended that any provision of the proposed rules that reflects best practices should be applied to all registered clearing agencies, CCPs or otherwise.147 This comment has been previously addressed in Part I.C.2.148
2. As Applied to Security-Based Swap
   Clearing Agencies
   In contrast, three commenters sought to limit the scope of Rule 17Ad–22(e) further than was proposed.149 The Commission believes these arguments are unpersuasive, for the reasons described below. One of these commenters expressed the view that Rule 17Ad–22(e) should not apply to complex risk profile clearing agencies but only to designated clearing agencies, and that applying the enhanced regime of Rule 17Ad–22(e) to non-designated clearing agencies undermines the significance of being designated, which the commenter stated is inconsistent with the distinction Congress sought to create between systemically important clearing agencies and other non-designated clearing agencies.150 The commenter stated that the Commission should take an approach similar to the CFTC, whereby non-designated clearing agencies could choose to ‘‘opt-in’’ to the enhanced requirements of Rule 17Ad–22(e) if desired. The commenter further stated that security-based swap clearing agencies should not automatically fall within the definition of a covered clearing agency, stating that it is not clear security-based swap clearing inherently raises issues that require enhanced standards as compared to other clearing activities.151 The Commission believes, however, that it is important to establish coverage of the enhanced standards of Rule 17Ad–22(e) for CCPs that clear security￾based swaps. In the Commission’s view, in addition to designations of systemic importance under the Clearing Supervision Act, Title VII of the Dodd￾Frank Act sets out separate and equally important objectives. As described above, Title VII provides the Commission with enhanced authority to regulate security-based swaps, and, among other things, requires the Commission to adopt rules with respect to security-based swap clearing agencies.152 The Commission previously has noted that Title VII’s mandate for the central clearing of security based swaps, wherever possible and appropriate, reinforces the need for

153See CCA Standards proposing release, supra note 5, at 29576. 154See ICEEU at 7. 155See id. The commenter further states that this approach will help reduce the likelihood of clearing agencies being subject to inconsistent regulation. The Commission addressed this aspect of the comment above in Part I.C.4. 156See ICEEU at 7. 157See infra Parts II.C.1–7, 17 (discussing each, respectively). 158See Exchange Act Release No. 34–69284 (Apr. 3, 2013), 78 FR 21046 (Apr. 9, 2013) (‘‘Dually Registered CA release’’). 159See id. at 21047. 160See ICEEU at 5–6; LCH at 3. The Commission has previously addressed more general comments regarding the risk of duplicative or inconsistent regulation above in Part I.C.4. 161See ICEEU at 5–6; LCH at 3. 162See id. 163See ICEEU at 6; LCH at 3 (citing Exchange Act Release No. 34–69490 (May 1, 2013), 78 FR 30968, 31039 (May 23, 2013) (‘‘Cross-Border proposing release’’)). 164See ICEEU at 6. 165See id. 166See LCH at 3. based swap clearing agencies to ensure the stability of the U.S. securities markets.153 The requirements in Rule 17Ad–22(e), among other things, help to mitigate the risks inherent in the functions of a CCP, including a CCP for security-based swaps, and therefore the Commission believes that requiring registered clearing agencies performing such CCP functions to comply with Rule 17Ad–22(e), in addition to those registered clearing agencies that are designated clearing agencies, is consistent with the framework of both Title VII and the Clearing Supervision Act. In light of these considerations, the Commission does not believe that an opt-in regime is appropriate for security￾based swap clearing agencies. In the alternative, the commenter stated that application of Rule 17Ad– 22(e) should be limited to the particular business or product lines of a covered clearing agency that warrant application of the higher standards.154 The commenter noted that many clearing agencies clear a range of products, some of which are within and others outside of the Commission’s jurisdiction. According to the commenter, for those clearing agencies only some activities, such as the clearing of security-based swaps, should trigger application of Rule 17Ad–22(e), and therefore the requirements in Rule 17Ad–22(e) should be limited to those business or product lines. The commenter noted that this would be applicable where the activity is substantially separate from other business lines, such as through the use of a separate guaranty fund. The commenter recognized that certain standards may not be easily applied to a particular business line,155 but noted that a categorical rule that does not take into account the scope of a particular clearing agency’s security-based swap activities or the risks presented by them raises concerns.156 Rule 17Ad–22(e) applies to a covered clearing agency and does not make distinctions among the various product or business lines that the covered clearing agency manages. In the Commission’s experience,
many aspects of a clearing agency’s operations are managed at the entity level (i.e., as a clearing agency) irrespective of product or business line. For example, the clearing agency’s legal framework, governance, risk management framework, financial risk management, and operational risk management are determined as part of the policies and procedures of the entity (i.e., the clearing agency), and therefore these areas are not separated out to apply exclusively to a particular business or product line.157 Thus, requirements in Rule 17Ad–22(e) directed to these aspects of a clearing agency’s operations generally could not be easily applied only to a particular business or product line when the clearing agency’s operations and risk management are organized at the entity level. The Commission believes that this approach avoids unnecessary complexity and fragmentation in the policies and procedures of a clearing agency. The operations and risk management of a covered clearing agency are closely interrelated across various activities in which the clearing agency engages, and within Rule 17Ad–22(e), the requirements have significant interactions among each other, with some building upon others or complementing others. The Commission believes that this generally also supports a holistic application of the requirements in Rule 17Ad–22(e). However, the Commission understands that some covered clearing agencies may manage certain activities and risk at an entity level while others manage the same activities and risk at a business or product level. Covered clearing agencies retain the ability to distinguish among their products in crafting their policies and procedures. Because a covered clearing agency’s practices are diverse and difficult to generalize, the Commission has sought to address such concerns in other ways, such as by streamlining the process for rule filings under Rule 19b-4 filed by dually registered clearing agencies.158 Specifically, for rule filings that primarily concern the clearing operations of a registered clearing agency that are not linked to securities clearing operations but only to clearing of products under the authority of the CFTC, the Commission provides a streamlined process for such rule filings to become effective upon filing with the Commission.159 Additionally, two commenters urged the Commission to exclude non-U.S. security-based swap clearing agencies registered with the Commission from the definition of ‘‘covered clearing agency’’ when they are regulated in their home jurisdictions under a regime that is consistent with the PFMI.160 The commenters stated that this approach would be consistent with the Commission’s treatment under Rule 17Ad–22(e) of dually registered SIDCOs for which the CFTC is the supervisory agency under the Clearing Supervision Act and believe a similar exclusion would be appropriate for clearing agencies subject to other regulatory frameworks.161 The commenters further stated that any decision to
apply the enhanced standards for covered clearing agencies should take into account whether, and the extent to which, the clearing agency is already subject to similar or comparable standards under other regulation,162 noting that recognizing existing foreign regulation is consistent with the Commission’s proposals on regulation of cross-border activities generally.163 In the commenters’ view, the approach set out in the Commission’s Cross-Border proposing release sensibly balanced the interests of the Commission with those of foreign regulators and appropriately considered the costs and benefits of adding additional regulatory requirements where the home country regulation is comparable. In this regard, one commenter expressed the belief that deference to home country regulation is appropriate because both Rule 17Ad–22(e) and applicable U.K. regulations are consistent with the PFMI, noting that U.S. and U.K. regulators thus have generally aligned interests.164 In particular, the commenter cited, as comparable regulation to Rule 17Ad– 22(e), regulation by the Bank of England under existing U.K. legislation and, for those clearing agencies that have been granted authorization as a CCP under EMIR, the regulations under EMIR.165 A second commenter echoed this viewpoint, noting that EMIR is consistent with the PFMI.166 Finally, one of the commenters stated that, in areas where the Commission determines that the home country regulation is not comparable and determines that additional regulation may be appropriate, any incremental regulation

167See ICEEU at 6.
168See ICEEU at 5.
169See id.
170See LCH at 3.
171See supra notes 1–2, 43, and accompanying text. 172See Dually Registered CA release, supra note 158, at 21047. 173See CME at 3. 174See CCA Definition proposing release, supra note 82, at 39–42. under Rule 17Ad–22 should be targeted to those areas of difference.167 One commenter further stated that, at a minimum, a clearing agency subject to Rule 17Ad–22(e) in addition to comparable home regulation is subject to duplicative regulation, which is costly for both the clearing agency and its regulators and serves no meaningful regulatory purpose.168 The commenter also stated that it is critical that a clearing agency not be subject to inconsistent regulations in different jurisdictions, noting that such inconsistencies can arise not only when relevant regulations are different but also when regulators interpret substantially similar regulations in different ways. As a result, the commenter stated that a clearing agency can still be significantly burdened by being subject to two substantially similar sets of regulations, and in its view, the commenter expressed the view that it would be preferable to allow clearing agencies, where possible, to be subject to a single set of standards.169 The other commenter also supported an approach that would minimize duplicative requirements on those registered clearing agencies subject to both Rule 17Ad–22(e) and home regulation, while ensuring that all registered clearing agencies that clear security-based swaps are regulated in a manner that is consistent with the PFMI.170 In response to the above comments, the Commission does not believe that a non-U.S. security-based swap clearing agency regulated in its home jurisdiction, under a regime consistent with the PFMI, should be excluded, as a threshold matter, from designation as a covered clearing agency. As previously discussed in Part I.C.4, the Commission’s intent with respect to Rule 17Ad–22(e) is, in part, to take another incremental step under Rule 17Ad–22 to ensure that risks inherent in certain CCP activity, including the central clearing of security-based swaps, are appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act. The Commission has, through Rule 17Ad– 22, sought to apply requirements commensurate and appropriate to the risk posed by the clearing agency functions and activities specific to covered clearing agencies as they exist in, and serve, the U.S. securities markets. The Commission acknowledges that other rules and regulations may apply to a covered clearing agency that are similar in scope or purpose to Rule 17Ad–22(e). However, the presence of similar regulations does not negate the Commission’s obligation to ensure that risk in the U.S. securities markets is appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act. Further, because Rule 17Ad–22(e) and other comparable
regulations are based on the same international standards,171 the Commission believes the potential for any inconsistent regulation is low. Indeed, applying Rule 17Ad–22(e) to a covered clearing agency that is also subject to comparable regulation consistent with the PFMI in its home jurisdiction should improve harmonization between the Commission’s regulatory regime and that of the home jurisdiction, which would reduce the burdens associated with the presence of similar regulation under multiple regulatory regimes. In addition, because clearing agency practices are diverse and difficult to generalize, the Commission has sought to address concerns about duplicative regulation in other ways, such as through streamlining the process for rule filings under Rule 19b-4 filed by clearing agencies dually registered with the Commission and the CFTC so that rule filings that do not pertain to securities clearing operations become effective upon filing with the Commission, without pre-effective notice and opportunity for comment.172 In addition, Part I.A.6 above discusses the process by which the Commission could consider the attendant facts and circumstances in assessing the application of Rule 17Ad–22(e) to a non-U.S. covered clearing agency that is subject to similar regulation in its home jurisdiction.
3. As Applied to Dually Registered
Clearing Agencies
One commenter noted that the proposed definition is sufficiently broad to enable the Commission to include SIDCOs. The commenter stated that the potential for a SIDCO to be determined to be a covered clearing agency is inconsistent with the Commission’s acknowledgment of the purposes of the Clearing Supervision Act and there being duplicative requirements for some dually registered entities.173 The commenter recommended that the Commission expressly exclude from the definition of ‘‘covered clearing agency’’ those clearing agencies for which the CFTC is the supervisory agency pursuant to the Clearing Supervision Act. The Commission notes that the definition of ‘‘covered clearing agency’’ does expressly exclude those clearing agencies for which the CFTC is the supervisory agency. As previously discussed, in a separate release, the Commission is proposing to amend the definition of a covered clearing agency, and addresses the potential effects of the proposed amendment on clearing agencies dually registered with the CFTC.174 B. Principles-Based Approach to Rule 17Ad–22(e) Rule 17Ad–22(e) requires a covered clearing agency to establish, implement, maintain and enforce written policies and procedures that address a variety of issues, as described in detail below. The Commission’s approach sets forth requirements that a covered clearing agency must achieve when developing its written policies and procedures. With a number of exceptions, Rule 17Ad–22(e) does not prescribe a specific tool or arrangement to achieve its requirements. The Commission believes that when determining the content of its policies and procedures, each covered clearing agency must have the ability to consider its unique characteristics and circumstances, including ownership and governance structures, effect on direct and indirect participants, membership base, markets served, and the risks inherent in products cleared. This ability, however, is subject to the requirements of the SRO rule filing and advance notice processes, which provide some opportunities for the public and participants to comment on the covered clearing agency’s rules, policies, and procedures. The Commission does not believe that a granular or prescriptive approach to its regulation of covered clearing agencies would be appropriate, nor would such an approach ensure that a covered clearing agency does not become a transmission mechanism for systemic risk. Moreover, the Commission believes that the primarily principles-based approach reflected in Rule 17Ad–22(e) will help a covered clearing agency continue to develop policies and procedures that can effectively meet the evolving risks and challenges in the markets that the covered clearing agency serves. It has

175See, e.g., Clearing Agency Standards adopting release, supra note 5, at 66231–32 (noting, with respect to credit exposures and margin requirements under Rule 17Ad–22(d), that a less prescriptive and more flexible rule sets a more appropriate baseline standard and stressing the importance of considering different markets characterized by different trading patterns, volumes, liquidity, transparency and other unique market characteristics when determining the appropriate risk management mechanisms for a particular clearing agency). 176Comments that were of a general nature have been discussed in Part I.C. 177See supra Part I.B. 178See supra Part I.C.6. 179See CCA Standards proposing release, supra note 5, at 29519–20. 180See id. In addition, the Commission notes that the definition of ‘‘transparent’’ is also used in Rules 17Ad–22(e)(2) and (10). See infra Parts II.C.2 and
10. 181See CFA Institute at 5. 182See The Clearing House at 18.
been the Commission’s experience that particular securities markets (e.g., equities, fixed income, and options) have their unique conventions, characteristics, and structure that are best addressed on a market-by-market basis. The Commission recognizes that a less prescriptive approach can help promote efficient and effective practices and encourage regulated entities to consider how to manage their regulatory obligations and risk management practices in a way that complies with Commission rules, while considering the particular characteristics of their business, and believes the approach reflected in across Rule 17Ad–22, including new paragraph (e), is consistent with this approach. Such a principles-based approach also is consistent with the approach taken in Rule 17Ad–22(d).175 As a general matter, the Commission believes that using broadly prescriptive requirements that, on an absolute and ex ante basis, prohibit a covered clearing agency’s use of particular tools makes it more difficult for a covered clearing agency to maintain flexibility, subject to its obligations and responsibilities as an SRO under the Exchange Act, to address the ever-evolving challenges and risks inherent in the securities markets. Accordingly, the Commission believes that the approach adopted here appropriately preserves such flexibility for a covered clearing agency, and the broader market, to respond to particular risks or issues arising in its operations in an effective manner. Finally, in certain instances, commenters have suggested that the Commission either prohibit or endorse a covered clearing agency’s use of particular tools or rules, policies, or procedures. As discussed in more detail below, the Commission generally declines to take such an approach because it is inconsistent with the principles-based approach reflected in Rule 17Ad–22(e). Instead, the Commission’s approach to Rule 17Ad– 22(e) is designed to allow the Commission to consider particular tools in the context of the specific facts and circumstances facing a clearing agency in light of its governance structure, the products it clears, and the markets it serves. In addition, in consideration of the issues raised by commenters, the Commission has provided guidance consistent as to what a covered clearing agency generally should consider when developing and maintaining its policies and procedures consistent with Rule 17Ad–22(e).
C. Requirements for Covered Clearing
Agencies Under Rule 17Ad–22(e) Below is a discussion of each of the requirements in new Rule 17Ad–22(e), the related new definitions in Rule 17Ad–22(a), and the comments received by the Commission that were targeted to specific elements of those requirements and definitions.176 As previously noted, the Commission is adopting Rule 17Ad– 22(e) and the related definitions in Rule 17Ad–22(a) substantially as proposed.177 To the extent the Commission is adopting any modifications either to the requirements in Rule 17Ad–22(e) or the definitions in Rule 17Ad–22(a), such modifications are discussed in detail below. Moreover, the below sections are organized by the particular rules under Rule 17Ad–22(e), with discussion of the definitions incorporated into the overall substantive discussion of each particular rule. Further, in the discussion of each final rule below, the Commission has included guidance that a covered clearing agency generally should consider as it develops and maintains its rules, policies, and procedures in compliance with Rule 17Ad–22(e). As previously noted, this guidance is based, in part, on the key considerations in the PFMI.178 The Commission intends for this guidance to be read in conjunction with the relevant requirements set forth in Rule 17Ad– 22(e), so as to provide further explanation of the types of issues a covered clearing agency generally should consider when implementing those requirements. The Commission does not intend for this guidance to expand, diminish, or otherwise modify the requirements under Rule 17Ad– 22(e).

1. Rule 17Ad–22(e)(1): Legal Risk
   a. Proposed Rule
   As proposed, Rule 17Ad–22(e)(1) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions.179 The Commission proposed Rule 17Ad–22(a)(20) to define ‘‘transparent’’ to mean that relevant documentation is disclosed, as appropriate, to the Commission and other relevant authorities, to clearing members and customers of clearing members, to the owners of the covered clearing agency, and to the public, to the extent consistent with other statutory and Commission requirements.180 b. Comments Received and Commission Response
   i. Use of Legal Opinions
   One commenter supported the Commission’s proposal that each covered clearing agency have policies and procedures that provide for a well￾founded, clear, transparent, and enforceable legal basis for each of its activities in all relevant jurisdictions, and noted that legal uncertainty can increase risk.181 A second commenter stated that the Commission explicitly should require a covered clearing agency to obtain, on at least an annual basis, legal opinions on the enforceability of structures used to contain losses within a clearing service upon the insolvency of the clearing service or the covered clearing agency, including closeout netting, right of set￾off, classification as a repurchase-style transaction, and collateral protection opinions, and then disclose these opinions to its participants.182 In satisfying the requirements in Rule 17Ad–22(e)(1), a covered clearing agency could include within its policies and procedures a requirement regarding legal opinions as to certain matters, such as the enforceability of structures used to contain losses within a clearing service upon the insolvency of the clearing service or the covered clearing agency. The use of legal opinions may be one consideration but compliance with Rule 17Ad–22(e)(1) ultimately requires that the covered clearing agency’s policies and procedures, taken as a whole, to be reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions. Whether legal opinions are useful to a covered clearing agency and, if so, what form they ought to take or subject matter they ought to address, may vary on a case-by-case

183The Commission notes that every registered clearing agency must keep and preserve at least one copy of all documents as shall be made or received by it in the course of its business as such and in the conduct of its self-regulatory activity. 17 CFR 240.17a–1. 184See id. 185See infra Part VI. 186 In addition, for covered clearing agencies, the ‘‘relevant jurisdiction’’ includes the United States and any other jurisdiction where the covered clearing agency operates. 187See CCA Standards proposing release, supra note 5, at 29520–22. 188See CFA Institute at 6. 189See id. 190See OCC at 4–5. basis depending on the particular facts and circumstances. Because the appropriate use of legal opinions will vary on a case-by-case basis, the Commission does not believe it is appropriate to modify Rule 17Ad– 22(e)(1) to include a specific requirement for legal opinions addressing particular matters.183
ii. Definition of ‘‘Transparent’’
One commenter, although supportive of the Commission’s proposal to require covered clearing agencies to develop policies and procedures to fulfill the requirements of Rule 17Ad–22(e), noted that, because some policies and procedures may include commercially sensitive information, it would be inappropriate to require a covered clearing agency to disclose all of its policies and procedures. The commenter stated that it would be helpful for the language of the rules to explicitly reflect this reality, which was acknowledged by the Commission in the preamble to the proposed rules.184 The Commission acknowledges that disclosure of certain information, for example, proprietary or commercially sensitive information, may not be appropriate to be disclosed publicly or to all parties. Because the definition of ‘‘transparent’’ is limited to relevant documentation, as appropriate, and does not conflict with other statutory and Commission requirements on confidentiality and disclosure, it does not lead to the concerns noted by the commenter. The Commission already noted in proposing the rule that certain types of information, such as confidential information, may not be appropriate for disclosure in some circumstances and to some parties. In addition, the level of disclosure required will necessarily depend on the particular facts and circumstances. The definition of ‘‘transparent’’ provides a covered clearing agency with some discretion to develop written policies and procedures addressing disclosures and the use of confidential or proprietary information, consistent with statutory and Commission requirements. To improve clarity, the Commission is modifying the definition of ‘‘transparent’’ to mean for the purposes of paragraphs (e)(1), (2), and (10) of this
section, to the extent consistent with
other statutory and Commission requirements on confidentiality and disclosure, that documentation required under paragraphs (e)(1), (2), and (10) is disclosed to the Commission and, as appropriate, to other relevant authorities, to clearing members and to customers of clearing members, to the owners of the covered clearing agency, and to the public. Below, the Commission provides additional guidance regarding the definition of ‘‘transparent.’’
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(1) as proposed and adopting the definition of ‘‘transparent’’ as described above but moving it to Rule 17Ad–22(a)(19) because of other modifications to Rule 17Ad–22(a).185 Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad– 22(e)(1), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures to address legal risk:

• Whether its policies and procedures
  for legal risk provide a high degree of certainty for each material aspect of its activities in all relevant jurisdictions;
• whether its rules, policies and
  procedures, and contracts are clear, understandable, and consistent with relevant laws and regulations;
• whether it can articulate the legal
  basis for its activities to the relevant authorities, participants, and, where relevant, participants’ customers, in a clear and understandable way;
• whether it has rules, policies and
  procedures, and contracts that are enforceable in all relevant jurisdictions, and whether it has a high degree of certainty that actions taken by it under such rules, policies and procedures, and contracts will not be voided, reversed, or subject to stays; and
• whether, if it conducts business in
  multiple jurisdictions, it can identify and mitigate the risks arising from any potential conflict of laws across jurisdictions. The Commission notes that a covered clearing agency operating in multiple jurisdictions under Rule 17Ad–22(e)(1) generally should address any conflicts of law issues that it may encounter.186 With respect to the definition of ‘‘transparent,’’ the Commission notes that certain types of information, such as confidential information, may not be appropriate for public disclosure or disclosure to certain third parties and that confidential information could be reflected in policies and procedures with respect to the security of information technology or other critical systems, such as, for example, as part of business continuity planning. The Commission also notes that generally a covered clearing agency could meet the definition of ‘‘transparent’’ by posting relevant documentation to its Web site.

2. Rule 17Ad–22(e)(2): Governance
   a. Proposed Rule
   As proposed, Rules 17Ad–22(e)(2) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for governance arrangements that are: clear and transparent; clearly prioritize the safety and efficiency of the covered clearing agency; support the public interest requirements in Section 17A of the Exchange Act and the objectives of owners and participants; and establish that the board of directors and senior management have appropriate experience and skills to discharge their duties and responsibilities.187 b. Comments Received and Commission Response
   i. Scope of Interests To Consider
   The scope of interests required to be considered as part of Rule 17Ad– 22(e)(2)(iii) attracted a range of comments. One commenter conveyed strong support for the Commission’s requirement that covered clearing agencies adopt policies and procedures for clear and transparent governance arrangements that prioritize safety and efficiency, noting that decisions made by covered clearing agencies could have an impact on multiple financial markets and jurisdictions.188 The commenter urged that governance measures should support the objectives of owners and participants and, with respect to certain matters, the public interest. The commenter also noted that a clearing agency’s reactions to competition could undermine the safety and soundness of the clearing agency as well as the industry as a whole.189 A second commenter sought to clarify that proposed Rule 17Ad–22(e)(2)(iii) would not encompass the interests of participants’ customers and other stakeholders.190 This commenter expressed the belief that the Commission’s proposed approach, in

191See id. (discussing CFTC Rule 39.32(a)(1)(iv) and, as proposed, FRB Rule 234.3(a)(2)(iii)). 192See id. at 5. 193See ISDA at 2; see also infra notes 212, 215 and accompanying text (discussing other concerns raised by the commenter). 194As previously discussed, the Commission has stated that the public interest is a broad concept that includes contributing to the ongoing development of the U.S. financial system, in particular the national clearance and settlement system contemplated by Section 17A of the Exchange Act, protecting investors, and fostering fair and efficient markets. See supra Part II.C.2.a. 195See CFA Institute at 6. 196See supra notes 190–193 and accompanying text. 197See Rule 17Ad–22(e)(2)(vi), infra Part VI; see also infra Part II.C.2.c. 198See 15 U.S.C. 78q–1(b)(3)(C). 199See ICI at 14–15; see also infra Part II.C.2.b.ii below (discussing comments regarding public or independent representation on the board of directors). 200See, e.g., CFA Institute at 6 (noting that those responsible for the operations of a covered clearing agency should be capable of performing the required decision-making in light of the systemic importance of covered clearing agencies); OCC at 5 (believing that covered clearing agencies are well positioned to determine which individuals have the appropriate experience, skills, incentives, and integrity to discharge their duties and responsibilities in a way that reflects the particular needs of each covered clearing agency). 201See Better Markets at 7; Fidelity at 3–4; ICI at 14. 202See Better Markets at 7. 203See ICI at 14. 204See id. 205See id. at 14–15. 206See id. at 15. which the objectives of participants’ customers and other stakeholders are not explicitly stated in Rule 17ad– 22(e)(2)(iii), is consistent with the PFMI.191 The commenter acknowledged that the Commission and other regulators must consider the interests of indirect participants, but the commenter noted that their interests are adequately addressed through participation of a sufficient number of independent directors or through other means.192 A third commenter expressed support for the proposed standards, believing that a principles based-formulation is generally appropriate, but the commenter also expressed the belief that proposed Rule 17Ad–22(e)(2) should provide clear processes for consideration of participants’ views and involvement of participants in the covered clearing agency’s decision￾making process.193 The Commission believes that the first commenter’s concern is addressed by the fact that policies and procedures under Rule 17Ad–22(e)(2) reasonably designed to support the public interest requirements in Section 17A of the Exchange Act generally should consider whether they support the stability of the broader financial system of the United States.194 For example, as noted by the first commenter, a covered clearing agency could consider the public interest in its response to large scale price moves or position changes.195 With
respect to the second and third commenters,196 the Commission is modifying proposed Rule 17Ad–22(e)(2) to include new paragraph (vi), which requires policies and procedures for governance arrangements that consider the interests of participants’ customers, securities issuers and holders, and other relevant stakeholders of the covered clearing agency.197 Under new paragraph (vi), other relevant stakeholders are persons that access the national system for clearance and settlement indirectly (e.g., institutional and retail investors), entities that rely on the national system for clearance and settlement to effectively provide services to investors and market participants, and other market infrastructures. Other relevant stakeholders currently include, for example, transfer agents, liquidity providers, and other linked market infrastructures, including exchanges, matching service providers, and payment systems. This new paragraph complements Section 17A(b)(3)(C), which requires the rules of a clearing agency to assure fair representation of its shareholders and participants in the selection of its directors and the administration of its affairs.198 This requirement for fair representation necessarily applies to policies and procedures adopted and maintained by a covered clearing agency pursuant to Rule 17Ad–22(e)(2). Consistent with this requirement, the Commission believes that a covered clearing agency generally should, in selecting its directors and administering its affairs, consider the interests of owners, participants, participants’ customers, securities issuers and holders, and other relevant stakeholders to, consistent with the public interest requirements in
Section 17A, strike an appropriate
balance among the potentially competing views of such other stakeholders represented within a covered clearing agency. As noted by one commenter below, the inclusion of independent directors on the board may be one mechanism for helping to ensure that the relevant views are presented and considered,199 provided the covered clearing agency’s overall corporate governance structure is consistent with the fair representation and public interest requirements in Section 17A of the Exchange Act. The Commission notes, further, that the approach a covered clearing agency may take in considering such views could vary depending on the ownership structure or organizational form of the covered clearing agency. A covered clearing agency operating under a mutualized utility model where losses are fully mutualized among its participant￾owners may take a different approach to consider the interests of all the relevant stakeholders compared to a covered clearing agency operating under a different model, such as one where it is owned by another organization, is operated as a for-profit entity, and/or is publicly listed and traded.
ii. Representation on the Board of
Directors
Commenters generally supported the requirement in proposed Rule 17Ad– 22(e)(2)(iv) that requires members of the board of directors and senior management to have the skills and experience to perform their duties and responsibilities.200 Multiple commenters, however, advocated for the inclusion of additional requirement related to the board of directors. One commenter urged the Commission to require that covered clearing agencies have public or independent representation on their boards.201 The commenter also urged the Commission to define independent directors to exclude parties with significant business relationships with the covered clearing agency, cross-directorships, or controlling shareholdings, as well as executives, officers, or employees of the covered clearing agency or its affiliate.202 Another commenter recommended that the Commission require a covered clearing agency to include representatives of both buy-side and sell-side market participants on the board.203 The commenter stated that some equities clearing agencies and stock exchanges already include investor representatives on their boards to benefit from a diverse group of market participants.204 The commenter expressed the view that stakeholder involvement at the board level would minimize conflicts of interest by balancing commercial interests of covered clearing agencies with those of other stakeholders.205 The commenter also expressed the view that the risk committee of a covered clearing agency should include a wide range of indirect participants, as the customers of clearing members also have an interest in ensuring adequate and diverse stakeholder representation in the covered clearing agency, in addition to transparency in the decision making process.206

207See Better Markets at 7.
208See id. at 3.
209See Rule 17Ad–22(e)(2)(v), infra Part VI; ; see also infra Part II.C.2.c. 210See Better Markets at 6. 211 In addition, the Commission has solicited comments on proposed rules designed to further address conflicts of interest. See CCA Standards proposing release, supra note 5, at 29589 & n.664; see also Exchange Act Release No. 34–64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (proposing Rule 17Ad–25 to address conflicts of interest and Rule 17Ad–26 to require standards for board members or board committee directors at registered clearing agencies); Exchange Act Release No. 34– 63107 (Oct. 14, 2010), 75 FR 65881 (Oct. 26, 2010) (proposing Regulation MC to mitigate conflicts of interest at security-based swap clearing agencies). 212See ISDA at 2. After careful consideration of the comments, the Commission has determined not to modify Rule 17Ad– 22(e)(2) to include specific requirements related to public or independent representation on the covered clearing agency’s board or risk committee. The Commission believes that new paragraph (vi), previously discussed above, sufficiently addresses the concerns raised by the commenters because it requires specific policies and procedures for governance arrangements that consider the interests of a wide range of market participants. In addition, public representation, combined with clear requirements for the qualifications of the board of directors, could improve the functioning of the board and could be one way to ensure that the covered clearing agency has governance arrangements consistent with the fair representation requirements of Section 17A(b)(3)(C) of the Exchange Act, provided that the covered clearing agency’s governance structure, as a whole, is consistent with the fair representation and public interest requirements in Section 17A of the Exchange Act. The Commission is declining to modify Rule 17Ad–22(e)(2) to further specify that a particular director represent the interests of buy￾side or sell-side market participants. The Commission notes that public or independent representation are one possible approach to governance that can help ensure consistency with the fair representation and public interest requirements in Section 17A of the Exchange Act. In addition, and for the same reasons, the Commission is declining to modify Rule 17Ad–22(e)(2) to provide further specification regarding business relationships and affiliates because these topics, like the above, are already addressed by the fair representation requirement in Section 17A(b)(3)(C) and the public interest requirements of Section 17A of the Exchange Act. Separate from the above, one commenter also encouraged the Commission to specify that independent directors must support the objectives of customers and the public, rather than simply the clearing members.207 The Commission notes that Rule 17Ad– 22(e)(2)(iii) requires policies and procedures that support not only the public interest considerations of Section 17A of the Exchange
Act but also the objectives of both owners and participants. In addition, the Commission generally believes that the governance arrangements of a covered clearing agency should include consideration of the interests of participants’ customers and other stakeholders, and this is why the Commission is modifying proposed Rule 17Ad–22(e)(2), as previously discussed, to include new paragraph (vi), which requires policies and procedures for governance arrangements that consider the interests of participants’ customers and other stakeholders. Further, the Commission notes that the requirements of Section 17A(b)(3)(F) of the Exchange Act, which require that the rules of a clearing agency be designed to, in general, protect investors and the public interest, also address the commenter’s concern.
iii. Accountability of the Board of
Directors and Senior Management One commenter expressed concern that the proposed rules fail to foster accountability by the board and management, and the commenter requested that the Commission require covered clearing agencies to clearly document the roles and responsibilities of the board of directors and management and implement governance arrangements that specify clear and direct lines of responsibility.208 To address this concern, the Commission is modifying proposed Rule 17Ad–22(e)(2) to include new paragraph (v) to require each covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for governance arrangements that specify clear and direct lines of responsibility.209 The Commission believes that such policies and procedures should generally entail documenting the responsibilities of the board of directors and senior management, which could help foster accountability and complement the requirements described above that address the qualifications of the board and management. The Commission believes that this additional requirement will assist a covered clearing agency in formulating its policies and procedures for assessing the qualifications of board members and management by requiring the covered clearing agency to further specify the roles that each individual would fulfill and the lines of responsibility that would exist within the board and within management. The Commission believes that such accountability can help ensure that a covered clearing agency is well￾positioned to fulfill its risk management obligations. For example, the Commission believes that a covered clearing agency should clearly define roles and responsibilities for addressing governance over financial risk (including credit risk, margin, and liquidity risk), operational risk, and other risks reflected in the covered clearing agency’s risk management framework.
iv. Conflicts of Interest
One commenter stated that proposed Rule 17Ad–22(e)(2) does not require covered clearing agencies to resolve conflicts of interests among board members and management and urged the Commission explicitly to require covered clearing agencies to document and maintain policies and procedures governing the resolution of conflicts of interests that may impact certain decisions by the board of directors.210 The Commission notes, as discussed above, that the commenter’s concern is addressed by Section 17A(b)(3)(F) of the Exchange Act, which requires that the rules of a clearing agency be designed, in general, to protect investors and the public interest.211
v. Crisis or Emergency Decision-Making
One commenter stated that governance arrangements should explicitly address decision-making during a crisis or emergency and require the covered clearing agency to obtain the views and approval of member representatives (such as through its risk committee or otherwise) before taking any material action in response to an emergency.212 After careful consideration, the Commission declines to modify Rule 17Ad–22(e)(2) to specifically address decision-making in a crisis or emergency, and the Commission believes that Rule 17Ad– 22(e) addresses such circumstances as proposed. For instance, Rule 17Ad– 22(e)(2) requires policies and procedures for governance that are clear and transparent, clearly prioritize the safety and efficiency of the covered clearing agency, and support the public interest requirements in Section 17A and the objectives of owners and participants. A covered clearing agency

213See Rule 17Ad–22(e)(3)(i), (ii), infra Part VI. 214See CCA Standards proposing release, supra note 5, at 29522. 215See ISDA at 2 n.5 (citing 17 CFR 39.32). 216See OCC at 5. 217See LCH at 4. 218See supra Part I.C.5 (further describing the obligations of a clearing agency with respect to proposed rule changes). 219See supra Part I.A.2. 220See infra Part II.C.23. 221See The Clearing House at 7–8. 222See supra Part II.C.2.a. and note 194 (describing the scope of the public interest requirements under Section 17A of the Exchange Act). 223See supra Parts II.A.2 and II.C.2.b.i (further discussing the risks posed by a covered clearing agency’s ownership structure, organizational form, markets served, and products cleared). 224See The Clearing House at 8. 225See The Clearing House at 2, 9. The commenter further elaborated that the assumption of risk by a CCP must be governed by a risk management committee comprised of persons whose interests are aligned by exposure to the losses associated with such risks (including members and, where a CCP has capital at risk in the waterfall, representatives of the CCP), with those members with the greatest risk exposure within the CCP constituting the majority of such committee. The commenter added that such a structure would ensure that the CCP’s risk management function is appropriately aligned with risk mitigation incentives. See id., annex at 15. should generally consider whether its governance arrangements for decision￾making in the ordinary course are appropriate for a crisis or emergency circumstance in light of the requirements in Rule 17Ad–22(e)(2). In addition, Rule 17Ad–22(e)(3) requires policies and procedures that maintain a sound risk management framework for comprehensively managing risks that arise in or are borne by the covered clearing agency. Such policies and procedures must be designed to identify, measure, monitor, and manage those risks and include plans for the recovery and orderly wind￾down of the covered clearing agency.213 The Commission believes that such a framework for comprehensively managing risk generally should consider the need for decision-making in crisis or emergency circumstances.
vi. Disclosure of Major Board Decisions
Three commenters responded to a question asking whether the Commission should require covered clearing agencies to have policies and procedures that provide for governance arrangements that ensure major decisions are disclosed to the public.214 One commenter recommended that the proposed rule expressly require that major board decisions having a broad market impact be disclosed to all relevant stakeholders and the public, except to the extent that such disclosure is inconsistent with statutory and regulatory confidentiality restrictions. The commenter noted that the CFTC has included this provision in its requirements for SIDCOs.215 Another commenter, however, expressed the belief that such a requirement is unnecessary and that the interests of public stakeholders in having visibility into major decisions are adequately served through the participation of independent directors, through the rule filing process, and the existing voluntary disclosure practices.216 A third commenter expressed the view that publication of board resolutions prior to a determinative decision would be confusing, potentially misleading or market moving, and could deter open discussions amongst members of the board of directors.217 After careful consideration, the Commission declines to modify Rule 17Ad–22(e)(2). The Commission notes that existing requirements for registered clearing agencies under Exchange Act Rule 19b–4 provide a mechanism for publishing notice of proposed rule changes, which in general must be approved by board action or under authority delegated by the board, to clearing members, the relevant stakeholders, the Commission, and the public.218 Designated clearing agencies are further required to submit advance notices under the Clearing Supervision Act, which provides another mechanism for disclosure.219 In addition, the requirements in Rule 17Ad–22(e)(23) regarding disclosure will also provide stakeholders and the public with information regarding certain operations and decisions of covered clearing agencies.220
vii. Incentives and Skin in the Game
One commenter stated that the Commission should enhance or clarify Rule 17Ad–22(e)(2) to ensure that covered clearing agencies have appropriate incentives to oversee and manage risk in a manner consistent with the public interest and objectives of participants. According to the commenter, safeguards should exist to ensure that a covered clearing agency with authority to adopt rules, policies, or procedures governing or affecting risk to participants does not face undue incentives to take on excessive risk in pursuit of increased earnings.221 The Commission believes that Rule 17Ad– 22(e)(2) sufficiently addresses the commenter’s concern by requiring policies and procedures that are clear and transparent, clearly prioritize the safety and efficiency of the covered clearing agency, and support the public interest requirements in Section 17A of the Exchange Act and the objectives of owners and participants.222 Rule 17Ad– 22(e)(3), discussed below, also requires policies and procedures for the comprehensive management of risk, and other requirements in Rule 17Ad–22(e) are specifically designed to establish a risk management framework that sufficiently accounts for a wide spectrum of risks that a covered clearing agency may identify, assess, manage, and mitigate. Further, the Commission believes that, taken as a whole, Rule 17Ad–22(e) requires each covered clearing agency to undertake careful and ongoing consideration of the risks faced and posed by its operations.223 The same commenter also stated that safeguards should exist to ensure that any default management decision￾making body has appropriate incentives.224 The commenter stated that the Commission should require that any decision-making body responsible for administering a covered clearing agency’s default management policies and procedures be composed of constituencies with significant exposure to potential loss as a consequence of the default management process.225 With respect to these comments, the Commission believes, as discussed above, that Rule 17Ad–22(e)(2) includes requirements designed to ensure governance arrangements that clearly prioritize the safety and efficiency of the covered clearing agency, support the public interest requirements in Section 17A of the Exchange Act applicable to clearing agencies, and support the objectives of owners and participants. In addition, the Commission believes that the requirement in Section 17A(b)(3)(F) of the Exchange Act to have rules designed, in general, to protect investors help ensure that a covered clearing agency’s risk management functions are appropriately aligned with the goal of risk mitigation and responsive to the legitimate concerns of the relevant constituents. The Commission does not believe that an approach in which a CCP’s default management process must be governed by a decision-making body composed of constituencies with significant exposure to potential loss as a consequence of the default management process is appropriate.
Instead, the Commission believes that covered clearing agencies should be afforded discretion to structure their default management committees and manage incentives in light of the needs of their unique ownership or governance structures, provided that their governance arrangements are consistent with the requirements of the

226See The Clearing House at 2.
227See id. at 8.
228See id.
229See id.
230See Rule 17Ad–22(e)(2), infra Part VI. 231For these purposes, the relevant public interest considerations are the public interest requirements in Section 17A of the Exchange Act. See Rule 17Ad–22(e)(2)(iii), infra Part VI. Exchange Act and rules and regulations thereunder, including Section 17A(b)(3)(C), concerning the fair representation of shareholders or members and participants in the administration of the covered clearing agency’s affairs. The Commission believes that decisions regarding default management should reside with those who have extensive expertise and expert knowledge of the tools available at the covered clearing agency to manage a default. Further, even if the risk exposures of clearing members are generally stable, they can change, perhaps rapidly, during periods of market stress. Lastly, the commenter stated that, to ensure that a covered clearing agency’s governance arrangements align with the public interest and the interest of constituencies subject to the risk of a clearing agency default, the Commission should require a covered clearing agency to commit its own capital on a pre-funded basis to satisfy its losses arising from the default of one or more participants in an amount that equals or exceeds 10% of the aggregate participant contribution to the clearing or guaranty fund of the covered clearing agency. Further, the commenter stated that the Commission should require that a covered clearing agency provide, in its relevant rules, policies, or procedures, that upon the occurrence of a default or series of defaults and application of all available assets of the defaulting participant(s) to satisfy resulting losses, the covered clearing agency shall apply its own capital contribution to the relevant clearing or guaranty fund in full to satisfy any remaining losses prior to the application of any (a) contributions by non-defaulting participants to the clearing or guaranty fund or (b) assessments that the covered clearing agency require non-defaulting participants to contribute following the exhaustion of such participant’s funded contributions to the relevant clearing or guaranty fund.226 The commenter expressed concern that, absent such a requirement, a CCP’s own exposure to its clearing or guaranty fund(s)—often described as ‘‘skin in the game’’—is generally quite limited and capped at the amount of the CCP’s funded or dedicated contribution.227 The commenter stated that the absence of ‘‘skin-in-the-game’’ insulates a CCP’s owners from losses at the CCP even though they benefit from the fee income associated with increased activity at the CCP, regardless of the incremental risk presented by such activity.228 The commenter stated that, particularly in the case of for-profit CCPs (or CCPs whose owners or risk decision-makers are not subject to default risk assumed by the CCP), this misalignment of risk and reward creates moral hazard and is inconsistent with supporting the public interest and the objectives of
participants.229 After careful consideration, the Commission declines to modify Rule 17Ad–22(e) to specifically include a ‘‘skin-in-the-game’’ requirement. The Commission believes that, taken as a whole, Rule 17Ad–22(e)(2) facilitates robust governance arrangements and the management of competing incentives. The Commission believes it is appropriate to provide covered clearing agencies with flexibility, subject to their obligations and responsibilities as SROs under the Exchange Act, to structure their default management processes to take into account the particulars of their financial resources, ownership structures, and risk management frameworks. The Commission believes that the proper alignment of incentives is an important element of a covered clearing agency’s risk management practices, and notes that ‘‘skin-in-the￾game’’ may play a role in those risk management practices in many instances but in other instances may not be essential to a robust governance framework.
c. Final Rule
As discussed above, the Commission is adopting Rule 17Ad–22(e)(2) with modifications.230 First, the Commission is adopting new paragraph (v), which requires a covered clearing agency’s governance arrangements to specify clear and direct lines of responsibility, as discussed above. Second, the Commission is adopting new paragraph (vi) to require a covered clearing agency’s governance arrangements to consider the interests of participants’ customers, securities issuers and holders, and other relevant stakeholders of the covered clearing agency. The comments received in response to Rule 17Ad–22(e)(2) expressed concern as to whether a covered clearing agency will have governance arrangements sufficiently robust to incorporate the views of the relevant stakeholders and to withstand the influence of potentially improper incentives. The Commission believes that this modification alleviates these concerns by adding a requirement to consider the interests of the relevant stakeholders. Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(2), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining its policies and procedures:

• Whether it has objectives that place
  a high priority on the safety and efficiency of the covered clearing agency and explicitly support financial stability and other relevant public interest considerations; 231
• whether it has documented
  governance arrangements that provide clear and direct lines of responsibility and accountability, and whether these arrangements are disclosed to owners, relevant authorities, participants, and, at a more general level, the public;
• whether the roles and
  responsibilities of its board of directors are clearly specified, and whether there are documented procedures for the functioning of the board of directors, such as procedures for identifying, addressing, and managing member conflicts of interest, and for reviewing the board’s overall performance and the performance of its individual members regularly;
• whether the board of directors
  contains suitable members with the appropriate skills and incentives to fulfill the board’s multiple roles, and whether the board of directors should include non-executive board members;
• whether the roles and
  responsibilities of management have been clearly specified and whether management has the appropriate experience, mix of skills, and the integrity necessary to discharge their responsibilities for the operation and risk management of the covered clearing agency;
• whether the board of directors has
  established a clear, documented risk￾management framework that includes the covered clearing agency’s risk￾tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies, and whether the governance arrangements ensure that the risk-management and internal control functions have sufficient authority, independence, resources, and access to the board; and
• whether the board of directors has
  ensured that the covered clearing

232For a discussion of relevant stakeholders, see
Part II.C.2.b.i.
233See 15 U.S.C. 78q–1(b)(3)(C), (F). 234See CCA Standards proposing release, supra note 5, at 29522–24. 235See id. 236See CFA Institute at 1; SRC at 1–2; OCC at 6. 237See CFA Institute at 1. 238See id. at 1, 7. The Commission notes that it is beyond the scope of this rulemaking to establish new requirements for clearing agencies other than covered clearing agencies. 239See id. at 7. 240See id. 241See SRC at 1–2. agency’s design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders, and whether major decisions have been clearly disclosed to relevant stakeholders and, where this is broad market impact, the public.232 A covered clearing agency also generally should consider the specific qualifications, experience, competence, character, skills, incentives, integrity or other relevant attributes to support a conclusion that an individual nominee can appropriately serve as a board member or on senior management. Policies and procedures under Rule 17Ad–22(e)(2)(iv) could consider, among other things, requirements as to industry experience relevant to the services provided by the covered clearing agency, educational background, the absence of a disciplinary record, or other factors relevant to the qualifications of nominees being considered. With respect to Rules 17Ad–22(e)(2)(iv) and (v), the Commission notes that a covered clearing agency generally should seek to ensure that board members and senior management do not have conflicts of interest because conflicts of interest could undermine the decision-making process within a covered clearing agency or interfere with the ability of board members and senior management to discharge their duties and responsibilities. In addition, the Commission believes that processes concerning decision￾making by a covered clearing agency during a crisis generally should consider the views of member representatives and relevant stakeholders before the covered clearing agency takes any material action. Further any such policies and procedures must be consistent with the fair representation requirement in
Section 17A(b)(3)(C) of the Exchange
Act and the requirement in Section 17A(b)(3)(F) of the Exchange Act that a clearing agency’s rules be designed, in general, to protect investors and the public interest.233 Based on these requirements, the Commission expects that views of members will be well represented in the governance of the covered clearing agency, including in the design of governance processes for crisis or emergency decision-making. In light of the variation of business models across covered clearing agencies, the Commission believes each covered clearing agency generally should consider how best to involve members and other relevant stakeholders in the decision-making of the covered clearing agency, provided that each covered clearing agency’s decision-making process is designed to be consistent with the fair representation, investor protection, and public interest requirements of Section 17A of the Exchange Act.
3. Rule 17Ad–22(e)(3): Framework for
the Comprehensive Management of Risks a. Proposed Rule As proposed, Rule 17Ad–22(e)(3) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, general business, investment, custody, and other risks that arise in or are borne by the covered clearing agency.234 Proposed Rule 17Ad–22(e)(3)(i) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for risk management policies, procedures, and systems designed to identify, measure, monitor, and manage the range of risks that arise in or are borne by the covered clearing agency, and subject them to review on a specified periodic basis and approval by the board of directors annually. Proposed Rule 17Ad– 22(e)(3)(ii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it establishes plans for the recovery and orderly wind-down of the covered clearing agency necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses. Proposed Rule 17Ad–22(e)(3)(iii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide risk management and internal audit personnel with sufficient authority, resources, independence from management, and access to the board of directors. Proposed Rule 17Ad– 22(e)(3)(iv) would also require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide risk management and internal audit personnel with oversight by and a direct reporting line to a risk management committee and an audit committee of the board of directors, respectively. Finally, proposed Rule 17A–22(e)(3)(v) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for an independent audit committee.235 b. Comments Received and Commission Response
i. General Comments
Multiple commenters expressed support for the proposed rule.236 One commenter expressed support for the added attention in the proposed rules to managing the risks faced by clearing agencies, emphasizing in particular the proposed requirements for recovery and wind-down plans.237 The commenter stated that a recovery and wind-down plan is essential to containing wide￾spread contagion and noted that the requirement would be appropriate for all registered clearing agencies.238 The same commenter expressed support for requiring independence for those conducting audits, as such would be necessary for establishing good corporate practices and the integrity of the audit process.239 The commenter, however, also expressed concern that the proposed rule could be insufficient in preventing systemic failure of covered clearing agency systems during a financial panic as a result of new financial products not performing as expected during times of market stress.240 Similarly, a second commenter stated that, given the role CCPs play in, and the risks they pose to, the financial markets, CCPs must benefit from the full panoply of risk-management tools, including strong loss absorbing capital, margin, and regular stress testing requirements (including assessing how the failure of multiple, large clearing members would affect the CCP).241 With respect to the latter two comments, the Commission believes that proposed Rule 17Ad–22(e), taken as a whole, is designed to mitigate the potential for systemic failures and the failures of CCPs more generally by requiring a covered clearing agency to establish policies and procedures relating to their governance and operation. Specifically, requirements in

242See infra Part II.C.15 (describing requirements under Rule 17Ad–22(e)(15)). 243See infra Part II.C.6 (describing requirements under Rule 17Ad–22(e)(6)). 244See infra Parts II.C.4 and 7 (describing requirements under Rules 17Ad–22(e)(4) and (7)). 245See infra Part II.C.5 (describing requirements under Rule 17Ad–22(e)(5)). 246See infra Part II.C.4 (describing requirements under Rule 17Ad–22(e)(4)). 247See infra Part II.C.7 (describing requirements under Rule 17Ad–22(e)(7)). 248See infra Part II.C.20 (describing requirements under Rule 17Ad–22(e)(20)). 249See infra Part II.C.13 (describing requirements under Rule 17Ad–22(e)(13)). 250See OCC at 6. 251See SRC at 2. In addressing comments regarding recovery and wind-down plans, the Commission generally understands that: (i) When a financial company becomes non-viable as a going concern or insolvent, recovery refers to actions taken that allow the financial company to sustain its critical operations and services; (ii) resolution (or wind-down), by contrast, refers to the transferring of the financial company’s critical operations and services to an alternate entity. 252See SRC at 2. 253See id. 254See infra Part II.C.23. 255See DTCC at 6. 256See ISDA at 3. 257See id. 258See id. Rule 17Ad–22(e) address capital,242 margin,243 and stress testing 244—in addition to other areas of risk management, such as collateral,245 credit risk,246 liquidity risk,247 links,248 and participant default 249—to help ensure that covered clearing agencies benefit from a range of risk management tools and can continue operating in times of market stress. Moreover, Rule 17Ad–22(e)(3) includes requirements for policies and procedures that reflect a comprehensive framework for risk management and includes additional requirements for policies and procedures that specifically establish an independent audit committee and recovery and wind-down plans. The Commission discusses these elements of Rule 17Ad–22(e)(3) further in Parts II.C.3.b.ii and iii below.
ii. Independence of the Audit
Committee
One commenter stated that the Commission struck an appropriate balance in requiring policies and procedures that provide for an independent audit committee and permitting the board of directors to establish the criteria for independence.250 The commenter expressed the view that the definition of independence should be judged in the context of the particular covered clearing agency, noting that there is value in having persons with extensive industry experience serving on its audit committee, and it would not want to preclude from service such persons most likely to have the relevant experience.
iii. Recovery and Wind-Down Plans
Multiple commenters expressed views on proposed requirements concerning recovery and wind-down plans.251 One commenter stated that covered clearing agencies should create robust and credible resolution plans to ensure that they and policymakers can plan for and mitigate the potential systemic consequences of a CCP failure without taxpayer support.252 The commenter noted that important portions of these plans, including the size and nature of loss-absorbing buffers, should be made public so that the public and counterparties can assess the risks associated with the CCP and its members.253 With respect to the disclosure of important aspects of these plans, the Commission notes that Rules 17Ad–22(e)(23)(iv) and (v), discussed below,254 would require policies and procedures that provide for a comprehensive public disclosure that describes material rules, policies, and procedures regarding a covered clearing agency’s recovery and wind-down plans, updated every two years or more frequently as necessary so that the disclosure remains accurate in all material respects. Another commenter noted that wind￾down may not be a workable option for critical market infrastructure providers that are the sole providers in a given market. The commenter expressed the view that while covered clearing agencies should analyze the feasibility of an orderly wind-down in their plans and include it when appropriate, recovery strategies (i.e., strategies to allocate losses outside of, and without requiring, an orderly wind-down and before the need to initiate resolution proceedings) are the most effective way to promote financial stability, ensure the continuation of services, and distribute losses in a fair and economically efficient manner.255 The Commission is mindful of this concern and believes that, in conducting its planning, a covered clearing agency generally should consider sole provider status as one of many factors in a range of potential considerations related to recovery or wind-down, including a consideration of which options may be the most feasible or workable. The Commission does not believe, however, that a covered clearing agency’s sole provider status necessarily precludes wind-down and, thus, a covered clearing agency is required to have policies and procedures to establish plans for both recovery and orderly wind-down pursuant to Rule 17Ad– 22(e)(3)(ii). A third commenter stated that, while the CCA Standards proposing release helps draw attention to the importance of recovery and wind-down plans having a sound legal basis, the release provides little guidance with regard to the content of such plans or stakeholder consultation procedures with respect to their adoption.256 The commenter noted that, because the issues surrounding the recovery and resolution of CCPs are novel and complex, new rules, policies, and procedures addressing recovery and resolution that go beyond existing, capped assessment powers would be appropriate subject matter for a
detailed review by the Commission and public comment.257 To facilitate a review and public comment, the commenter expressed the view that the Commission should articulate principles-based standards against which orderly recovery and wind-down plans could be assessed, including limited and predictable liabilities of clearing participants; non-disruption of expectations regarding close-out netting sets; consistency with accounting criteria for the netting of cleared exposures for financial statement and regulatory capital purposes; a requirement that loss-allocation rules not put any non-defaulting clearing member or customer of a clearing member in a worse position than under a liquidation in the event of the insolvency of the covered clearing agency; due consideration of the effects on incentives for participation in the default management process and clearing agency moral hazard risks; and transparency in relation to the default management process, loss allocations, and the decision-making process governing recovery and wind-down.258 First, the Commission believes that the factors described by the commenter, among others, are factors that a covered clearing agency could consider in developing its recovery and wind-down plans, but the Commission is declining to articulate requirements for all recovery and wind-down plans. The Commission believes that, given the nature of recovery and resolution planning, such plans are likely to closely reflect the specific characteristics of the covered clearing agency, including its ownership, organizational, and operational structures, as well as the size, systemic importance, global reach, and/or the risks inherent in the products it

259See supra Parts II.A.2 and II.C.2.b.i (further discussing the differing characteristics of a covered clearing agency related to its ownership structure, organizational form, markets served, and products cleared). 260See supra Part I.C.5 (further describing the obligations of a clearing agency with respect to proposed rule changes under Rule 19b–4 and advance notices under the Clearing Supervision Act). 261See ISDA at 3. Similarly, two other commenters also recommend that the Commission specifically prohibit covered clearing agencies from using variation margin and initial margin haircutting as recovery tools to continue operation in times of financial distress. See Fidelity at 3–4; see also ICI at 13–14. 262See ISDA at 3. 263See id. at 4. 264See ISDA at 4. 265See Better Markets at 8–9. 266See supra Part II.C.2.b.iii. 267See Better Markets at 9. clears.259 In particular, the Commission notes that the available recovery tools will vary depending on the products cleared. Second, the Commission also believes that recovery and wind-down plans should be subject to public comment and Commission review. The Commission believes that recovery and wind-down plans, and material changes thereto, would constitute a proposed rule change under Section 19(b) of the Exchange Act and, for designated clearing agencies, an advance notice under the Clearing Supervision Act because such plans and material changes thereto would constitute changes to a stated policy, practice or interpretation of the covered clearing agency and, for designated clearing agencies, a proposed change to its rules, procedures, or operations that could materially affect the nature or level of risks presented by the designated clearing agency.260 The commenter further stated that recovery tools such as forced allocation, initial margin haircutting of non￾defaulting clearing members, invoicing back, or partial non-voluntary tear-ups should be avoided, and that pro-rata reduction in a covered clearing agency’s payment obligations should be considered only as a loss allocation measure of last resort after all the resources in the clearing waterfall have been exhausted.261 The commenter noted that this method is transparent and predictable, creating incentives for surviving participants to actively engage in the default management process and to bid aggressively in the resulting auction process.262 The commenter acknowledged, however, that the sequencing and application of any recovery mechanisms may vary by product type and the nature of the covered clearing agency’s participants, such as, for example, how certain mechanisms would apply to retail participants.263 As a general matter, the Commission believes it is not productive to apply such requirements for recovery and wind-down plans in a one-size-fits-all approach for covered clearing agencies. The Commission believes that recovery and wind-down plans should be considered holistically, taking into consideration the covered clearing agency’s
governance structure, products cleared, loss allocation rules, and mutualized structure, as applicable, because it is not possible to assess the utility of a particular recovery tool in isolation and without the context of the recovery plan as a whole. The Commission also believes that transparent governance arrangements can help ensure that members, their customers, and, as appropriate, the public have sufficient means to provide input on any recovery tools ultimately included in recovery and wind-down plans. In Part II.C.3.c below, the Commission provides guidance regarding the types of considerations that a covered clearing agency generally should consider in developing its recovery tools. Finally, the commenter suggested that the Commission’s rule should state explicitly that covered clearing agencies’ recovery and wind-down plans must define the quantitative and qualitative criteria that would trigger the implementation of each type of plan.264 The commenter did not specify what types of quantitative or qualitative criteria should trigger implementation. After careful consideration, the Commission declines to establish a requirement that recovery and wind￾down plans have qualitative and quantitate trigger criteria. The Commission believes that such a requirement would not sufficiently take into account the unique characteristics of each covered clearing agency. The Commission believes it is not possible to assess the utility of a particular approach in isolation and without the context of the recovery plan and the covered clearing agency as a whole. Further, the Commission believes that transparent governance arrangements can help ensure that members, their customers, and, as appropriate, the public have sufficient means to provide input on any recovery tools ultimately included in recovery and wind-down plans and therefore believes that consideration of such elements of a covered clearing agency’s recovery and wind-down plan is best left to the applicable rule filings and advance notice processes discussed previously.
iv. Additional Requirements
One commenter supported the proposed requirements in Rule 17Ad– 22(e)(3) but urged the Commission to establish additional requirements in three areas to ensure accountability and independence.265 First, the commenter encouraged the Commission to require the risk management framework at covered clearing agencies to assign responsibilities and accountabilities for risk decisions and address crisis and emergency decision-making. The Commission believes that Rule 17Ad– 22(e)(2), as modified and discussed in
Part II.C.2 above, appropriately
addresses these concerns. Specifically, Rule 17Ad–22(e)(2)(v), as adopted, requires that a covered clearing agency’s policies and procedures document the responsibilities of the board of directors and senior management and specify clear and direct lines of responsibility. In the above discussion, the Commission also specifically noted the importance of clear and direct lines of responsibility in addressing crises and facilitating appropriate decision-making in emergency situations.266 Second, the commenter urged the Commission to require the board of directors to have a risk committee comprised of and led by a majority of independent directors; the risk committee to have a clear mandate and operating procedures; and the risk committee to have access to external expert advice.267 The commenter also encouraged the Commission to implement enhanced measures to ensure that important risk management functions are appropriately insulated from conflicts of interest among board members representing clearing members. The Commission believes that the rule as proposed already addresses these concerns. Rule 17Ad–22(e)(3)(iii) requires a covered clearing agency’s policies and procedures to provide risk management and internal audit personnel with, among other things, sufficient independence from management and access to the board of directors. In addition, proposed Rule 17Ad–22(e)(3)(iv) requires policies and procedures that provide risk management and internal audit personnel with a direct reporting line to, and oversight by, a risk management committee and an audit committee of the board of directors, respectively. With respect to having a risk committee comprised of and led by a majority of independent directors, the Commission

268See Rule 17Ad–22(e)(3), infra Part VI. 269See supra Parts I.A.1 and 2. notes that although it may be appropriate for a risk committee to be comprised of and led by a majority of independent directors, the Commission believes that the covered clearing agency would have to consider its particular facts and circumstances, and that it is inappropriate to prescribe a particular structure for risk committees in Rule 17Ad–22(e)(3). The Commission further notes that the definition of independence should reflect the objective of establishing and maintaining robust risk management. Third, the commenter requested that the Commission require a covered clearing agency to have a chief risk officer responsible for implementing the risk management framework and making recommendations to the risk management committee or board of directors. The Commission believes that establishing a chief risk officer is one way to structure a risk management framework consistent with Rule 17Ad– 22(e)(3) and notes that, currently, each covered clearing agency has a chief risk officer responsible for implementing the covered clearing agency’s risk management framework. The Commission recognizes that these responsibilities are critically important but does not believe it is necessary to prescribe a chief risk officer because other distributions of responsibility among the roles within a covered clearing agency may also be consistent with the requirements of the Exchange Act, provided that the responsibilities are clearly specified, the persons occupying the specified roles have appropriate experience and skills to discharge their duties and responsibilities, and the responsibilities comprehensively encompass the risk management needs of the clearing agency.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(3) with one modification. To make clear that the audit committee described in Rule 17Ad–22(e)(3)(iv) and the independent audit committee described in Rule 17Ad–22(e)(3)(v) are not separate audit committees, the Commission is adding ‘‘independent’’ before audit committee in Rule 17Ad– 22(e)(3)(iv).268 In addition, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(3), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures for its framework for the comprehensive management of risk:

• Whether it has risk management
  policies, procedures, and systems that enable it to identify, measure, monitor, and manage the range of risks that arise in or are borne by the covered clearing agency and whether the risk management frameworks are subject to periodic review;
• whether it provides incentives to
  participants and, where relevant, their customers to manage and contain the risks they pose to the covered clearing agency;
• whether it regularly reviews the
  material risks it bears from and poses to other entities (including other clearing agencies, settlement banks, liquidity providers, and service providers) as a result of interdependencies and develop appropriate risk management tools to address these risks;
• whether it can identify scenarios
  that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down, and whether it has prepared appropriate plans for its recovery or orderly wind-down based on the results of that assessment; and
• whether it has provided relevant
  authorities with the information needed for purposes of recovery and resolution planning. The Commission notes that a comprehensive approach to risk management means policies and procedures should be designed holistically, be consistent with each other, and work effectively together to mitigate the risk of financial losses to a covered clearing agency’s members and participants in the markets it serves. The Commission further notes that each covered clearing agency must have its own policies and procedures encompassing a framework for the ‘‘comprehensive’’ management of risks. For example, if a covered clearing agency’s parent or holding company were to adopt a company-wide risk management framework, the covered clearing agency nevertheless would itself need to adopt or ratify those policies and procedures pursuant to the requirements of the rule filing process under Rule 19b–4 and, if applicable, the advance notice process under the Clearing Supervision Act,269 with respect to its own business to meet the requirements of Rule 17Ad–22(e)(3). With respect to Rule 17Ad–22(e)(3)(i), the board of directors of a covered clearing agency generally should consider whether to subject all material components of the covered clearing agency’s risk management policies and procedures to review due to the critical role that risk management plays in promoting prompt and accurate clearance and settlement. Further, such review generally should take a holistic view of the full range of risk management policies, procedures, and systems, rather than consider each on an individual or case-by-case basis. In addition, a covered clearing agency generally should perform the annual review under Rule 17Ad–22(e)(3)(i) once every twelve months. With respect to recovery and wind￾down plans, each covered clearing agency generally should develop its plans expeditiously to facilitate regulatory review by the Commission and other relevant regulatory bodies. In particular, the Commission believes that a covered clearing agency generally should have policies and procedures to provide the relevant resolution authorities with information needed for the purposes of resolution planning under applicable authority, including any plans prepared pursuant to Rule 17Ad–22(e)(3). The Commission works with the FDIC and other resolution authorities, as appropriate, to help ensure the development of effective resolution strategies for covered clearing agencies; providing the Commission and the FDIC information for resolution planning would promote the ongoing development of these strategies. In addition, with respect to recovery tools, a covered clearing agency generally should consider the following when developing its recovery tools: (i) Whether the set of recovery tools comprehensively addresses how the covered clearing agency would continue to provide critical services in all relevant scenarios; (ii) the extent to which each tool is reliable, timely, and has a strong legal basis; (iii)
  whether the tools are transparent and designed to allow those who would bear losses and liquidity shortfalls to measure, manage, and control their potential losses and liquidity shortfalls; (iv) whether the tools create appropriate incentives for the covered clearing agency’s owners, direct and indirect participants, and other relevant stakeholders; and (v) whether the tools are designed to minimize the negative impact on direct and indirect participants and the financial system more broadly.

4. Rule 17Ad–22(e)(4): Credit Risk
   a. Proposed Rule
   As proposed, Rule 17Ad–22(e)(4) would require a covered clearing agency

270See CCA Standards proposing release, supra note 5, at 29525–27. 271See id. at 29525. The Commission received no comments regarding the proposed definition and is adopting it as proposed. Because of other modifications to Rule 17Ad–22(a), the definition of ‘‘systemically important in multiple jurisdictions’’ is being moved to Rule 17Ad–22(a)(18). See Rule 17Ad–22(a)(18), infra Part VI. 272See id. at 29526–27. 273See id. at 29527. The Commission received no comments regarding the proposed definition and, based on its supervisory experience, is adopting it with modifications, as discussed further below. Because of other modifications to Rule 17Ad–22(a), the definition of ‘‘stress testing’’ is also being moved to Rule 17Ad–22(a)(17). See Rule 17Ad– 22(a)(17), infra Part VI. 274See id. at 29526–27. 275See id. at 29527. 276See id. to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those exposures arising from its payment, clearing, and settlement processes, including by, at a minimum, meeting the seven requirements specified in the rule.270 Proposed Rule 17Ad–22(e)(4)(i) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. Proposed Rule 17Ad–22(e)(4)(ii) would require a covered clearing agency that provides CCP services, and that is ‘‘systemically important in multiple jurisdictions’’ or ‘‘a clearing agency involved in activities with a more complex risk profile,’’ to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain additional financial resources, to the extent not already maintained pursuant to proposed Rule 17Ad–22(e)(4)(i), at a minimum level necessary to enable it to cover a wide range of foreseeable stress scenarios, including but not limited to the default of the two participant families that would potentially cause the largest aggregate credit exposure for the covered clearing agency in extreme but plausible market conditions (hereinafter the ‘‘cover two’’ requirement). The Commission also proposed Rule 17Ad–22(a)(19) to define ‘‘systemically important in multiple jurisdictions’’ to mean a covered clearing agency that has been determined by the Commission to be systemically important in more than one jurisdiction pursuant to Rule 17Ab2–
2.271 Proposed Rule 17Ad–22(e)(4)(iii)
would require a covered clearing agency that is not subject to proposed Rule 17Ad–22(e)(4)(ii) to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain additional financial resources, to the extent not already maintained pursuant to proposed Rule 17Ad–22(e)(4)(i), at the minimum to enable it to cover a wide range of foreseeable stress scenarios, including the default of the participant family that would potentially cause the largest aggregate credit exposure for the covered clearing agency in extreme but plausible market conditions (hereinafter the ‘‘cover one’’ requirement). Proposed Rule 17Ad– 22(e)(4)(iv) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to include prefunded financial resources, excluding assessments for additional guaranty fund contributions or other resources that are not prefunded, when calculating the financial resources available to meet the standards under proposed Rules 17Ad–22(e)(4)(i) through (iii), as applicable. Proposed Rule 17Ad–22(e)(4)(v) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain the financial resources required under proposed Rules 17Ad–22(e)(4)(i) through (iii), as applicable, in combined or separately maintained clearing or guaranty funds. Proposed Rule 17Ad–22(e)(4)(vi) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to test the sufficiency of its total financial resources available to meet the minimum financial resource requirements under proposed Rules 17Ad–22(e)(4)(i) through (iii), as applicable, by conducting a stress test of its total financial resources at least once each day using standard predetermined parameters and assumptions.272 The Commission also proposed Rule 17Ad– 22(a)(18) to define ‘‘stress testing’’ to mean the estimation of credit and liquidity exposures that would result from the realization of extreme but plausible price changes or changes in other valuation inputs and assumptions.273 Proposed Rule 17Ad– 22(e)(4)(vi) would also require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to conduct a comprehensive analysis on at least a monthly basis of the existing stress testing scenarios, models, and underlying parameters and assumptions, and consider modifications to ensure they are appropriate for determining the covered clearing agency’s required level of default protection in light of current market conditions. When the products cleared or markets served by a covered clearing agency display high volatility or become less liquid, and when the size or concentration of positions held by the entity’s participants increases significantly, the proposed rule would require a covered
clearing agency to have policies and procedures for conducting comprehensive analyses of stress testing scenarios, models, and underlying parameters and assumptions more frequently than monthly. Proposed Rule 17Ad–22(e)(4)(vi) would also require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for the reporting of the results of this analysis to the appropriate decision makers at the covered clearing agency, including its risk management committee or board of directors, and to require the use of the results to evaluate the adequacy of and to adjust its margin methodology, model parameters, and any other relevant aspects of its credit risk management policies and procedures, in supporting compliance with the minimum financial resources requirements in proposed Rules 17Ad–22(e)(4)(i) through (iii), as applicable.274 Finally, proposed Rule 17Ad– 22(e)(4)(vii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to require a conforming model validation for its credit risk models to be performed not less than annually or more frequently as may be contemplated by the covered clearing agency’s risk management policies and procedures.275 The Commission also proposed to define ‘‘conforming model validation’’ in Rule 17Ad–22(a)(5) to mean an evaluation of the performance of each material risk management model used by a covered clearing agency, including initial margin models, liquidity risk models, and models used to generate guaranty fund requirements, along with the related parameters and assumptions associated with such models.276 The proposed definition would further require that the model validation be performed by a qualified person who is free from influence from the persons responsible for the development or operation of the models or policies

277The Commission is modifying the definition to strike the word ‘‘conforming,’’ as described in Part II.C.4.c below. Because of this and other modifications to Rule 17Ad–22(a), the Commission is moving the definition of ‘‘model validation’’ to Rule 17Ad–22(a)(9). See infra Part VI. 278See DTCC at 5. 279See id. at 5; id. at A–1 (suggesting drafting clarifications to proposed Rule 17Ad–22(e)(4)). 280See supra Part II.C.4.a. 281See id. at 5. 282See Barnard at 2. 283See CFA Institute at 7–8. 284See SRC at 2. 285See supra Part II.C.3.b.iii. 286See infra Part II.C.5. 287See infra Parts II.C.4.b.iv (discussing stress testing) and II.C.6 (discussing margin). 288See infra Part II.C.18. being validated so that risk models can be candidly assessed.277 b. Comments Received and Commission Response
i. Distinguishing CCPs From CSDs
One commenter stated that proposed Rule 17Ad–22(e)(4) should distinguish between the types of risks faced by CCPs versus central securities depositories (‘‘CSDs’’) (e.g., the requirement that CSDs hold the financial resources they maintain to cover the risk of participant default in a guaranty or clearing fund).278 The commenter recommended that the provision be revised to clarify the portions of proposed Rule 17Ad– 22(e)(4) that are intended to apply to covered clearing agencies that are CCPs, and those that should apply to covered clearing agencies that are CSDs.279 As a general matter, the Commission believes that Rule 17Ad–22(e)(4) appropriately distinguishes between the risks inherent in CCPs and CSDs. For example, Rule 17Ad–22(e)(4)(ii) requires policies and procedures that meet ‘‘cover two’’ for CCPs that are systemically important or engaged in activities with a more complex risk profile, while Rules 17Ad– 22(e)(4)(i) and (iii) require policies and procedures for financial resources for all other covered clearing agencies, including CSDs.280 With respect to Rule 17Ad–22(e)(4)(v), which requires a covered clearing agency to have policies and procedures for maintaining the financial resources required under Rules 17Ad–22(e)(4)(i) through (iii) in combined or separately maintained clearing or guaranty funds, ‘‘clearing or guaranty fund’’ would also include the participant fund of a CSD.281 The Commission believes that this statement clarifies how Rule 17Ad–22(e)(4) would apply to both CCPs and CSDs, and therefore addresses the concern raised by the commenter.
ii. Prefunded Financial Resources
One commenter expressed support for proposed Rule 17Ad–22(e)(4)(iv) but sought clarification on the role of using default insurance to satisfy the rule.282 The Commission is aware that default insurance has been discussed among industry participants as a tool to help CCPs manage credit risk. While the viability of any particular default insurance plan would necessarily depend on the particulars of the underlying insurance agreement, the Commission notes that the financial resource requirements in Rule 17Ad– 22(e)(4) must be prefunded and may not be conditional as is typical with insurance payments. Therefore, the use of default insurance generally would not be consistent with the requirement that certain financial resources be prefunded under Rule 17Ad–22(e)(4)(iv). While generally supportive of the rule, another commenter expressed concern that members of covered clearing agencies may have difficulty meeting their obligations to the covered clearing agency if the covered clearing agency delays in exercising its authority to require members to provide additional guaranty funds after such funds are exhausted following the default of a member.283 To address this concern, the commenter stated that it would be appropriate to ensure that such guaranty funds are properly funded in advance of market stress. The Commission believes that the provisions in proposed Rule 17Ad–22(e)(4) adequately address whether the guaranty fund is properly funded in advance of market stress and is therefore declining to modify the rule. Rule 17Ad–22(e)(4)(i) requires policies and procedures for maintaining sufficient financial resources to cover a covered clearing agency’s credit exposure to each participant fully with a high degree of confidence through its margin system and collateral requirements, while Rules 17Ad–22(e)(4)(ii) and (iii) require a covered clearing agency to have policies and procedures that meet either ‘‘cover two’’ or ‘‘cover one’’ on an ongoing basis. In addition, the Commission notes that Rule 17Ad–22(e)(4)(iv) excludes assessments for additional guaranty fund contributions when calculating the financial resources available, preventing a covered clearing agency from considering among its financial resources contributions that are not prefunded. A third commenter stated that, in addition to pre-funded capital and guaranty funds, it should be clear, in advance, that clearing members (and not the FRB or taxpayers) stand behind the organization should it run into financial trouble.284 The Commission notes that Rule 17Ad–22(e)(3)(ii) requires policies and procedures reasonably designed to ensure that a covered clearing agency establishes plans for the recovery or wind-down of a covered clearing agency necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses. The Commission believes that such recovery and wind-down plans are an effective tool that can help a covered clearing agency establish policies and
procedures for managing losses in excess of its default management and general business risk resources.285 The provisions of Rule 17Ad–22(e)(5), discussed below, are also intended to help ensure that a covered clearing agency is resilient in times of market stress by requiring policies and procedures that limit the assets it accepts as collateral to those with low credit, liquidity, and market risks, and that set and enforce appropriately conservative haircuts and concentration limits on collateral the covered clearing agency accepts to manage its or its participants’ credit exposure.286 Requirements for stress testing in Rule 17Ad–22(e)(4) and margin in Rule 17Ad–22(e)(6) further support the resiliency of a covered clearing agency by requiring the covered clearing agency to have policies and procedures that are designed to appropriately size guaranty fund contributions and margin to market risks.287 In addition, requirements in Rule 17Ad–22(e)(18) for policies and procedures relating to participation in the covered agency require (i) objective and risk-based criteria for participation, (ii) participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the covered clearing agency, and (iii) monitor compliance with such participation criteria on an ongoing basis.288 Taken as a whole, the Commission believes that the requirements in Rule 17Ad–22(e) comprehensively promote the resiliency of a covered clearing agency and, in particular, its ability to withstand periods of market stress.
iii. Segregation of Guaranty Funds
One commenter suggested that, to prevent the spread of losses from one product or asset type to participants or customers participating in another product or asset type, as well as to avoid the inequitable treatment of participants clearing less liquid product or asset types, the Commission should require a covered clearing agency to implement policies and procedures that would,

289See The Clearing House at 3, 17. 290See id. at 17. 291See id. 292See id. (citing 15 U.S.C. 78q–1(b)(3)(D)). 293For purposes of this section, the Commission is assuming that ‘‘clearing fund,’’ in contrast to guaranty fund, refers to a combined pool of both margin collections and guaranty fund contributions. 294See The Clearing House at 3, 17, 18. 295See id. at 17. 296See id. 297See id. at 17, 18. 298See The Clearing House at 18. upon the insolvency of a particular clearing service or the clearing agency as a whole, contain related losses within the particular clearing service.289 The commenter stated that the Commission should require covered clearing agencies to maintain separate clearing or guaranty funds for product or asset types that exhibit materially different liquidity profiles.290 The commenter also stated that combined clearing or guaranty funds, in contrast, transmit losses from one product or asset type to participants and customers participating in another product or asset type in a manner that promotes contagion and systemic risk, which the commenter believes is inconsistent with the PFMI.291 The commenter further argued that combined clearing or guaranty funds are not consistent with the requirement for the equitable treatment of participants in Section 17A(b)(3)(D) of the Exchange Act where the cleared products display materially different liquidity characteristics.292 First, the Commission notes that
Section 17A(b)(3)(D), which sets forth
one of the determinations that the Commission must make in registering a clearing agency, does not concern clearing or guaranty fund contributions; rather Section 17A(b)(3)(D) of the Exchange Act states that the rules of the clearing agency must provide for the equitable allocation of reasonable dues, fees, and other charges among its participants.293 Second, the Commission believes that a clearing agency can use both margin— targeted to the risk profile of the participant and used to satisfy losses attributed to the participant—and guaranty or clearing fund contributions—targeted to the risk profile of the participant and then mutualized in a pooled fund to satisfy losses attributable to the clearing agency—to help mitigate the transmission of losses across participants. The Commission disagrees with the commenter’s suggestion that a pooled fund necessarily promotes contagion and systemic risk; a pooled fund may offer certain benefits. For instance, a pooled fund can help mitigate the possibility that participants in the clearing agency will be called upon to help satisfy losses when a defaulting participant is unable to satisfy those losses, and a clearing agency should carefully assess the structure of its default waterfall to analyze the potential risk mitigation tools that might be employed in the default waterfall, including the use of margin and the use of a guaranty or clearing fund. To the extent that a clearing agency uses guaranty or clearing fund contributions to mutualize risk across participants, the clearing agency generally should value margin and guaranty fund contributions so that the contributions are commensurate to the risks posed by the participants’ activity. The clearing agency also generally should consider the appropriate balance of individualized and pooled elements within its default waterfall, with a careful consideration of whether the balance of those elements mitigates risk and to what extent an imbalance among those elements might encourage moral hazard, in that one participant may take more risks because the other participants bear the costs of those risks. The commenter also suggested that, to facilitate effective risk management and better protect participant/customer collateral, the Commission should require covered clearing agencies to calculate, collect, and maintain clearing or guaranty fund contributions and participants’ initial margin requirements independent of each other, subject to an appropriate transition period.294 The commenter observed that some covered clearing agencies do not maintain separate clearing or guaranty fund requirements and initial margin requirements, making it more difficult for participants to model and manage the risks they face from the covered clearing agency.295 In addition, the commenter stated that commingling the treatment of clearing or guaranty fund contributions with initial margin exposes non-defaulting participants (and potentially their customers) to the risk of
losing their initial margin in the event of another participant’s default, a result inconsistent with the protection of non-defaulting participant/customer collateral.296 The commenter stated that initial margin of non-defaulting participants and their clearing customers should not be at risk as part of the default waterfall.297 Further, the commenter recommended that the Commission modify proposed Rule 17Ad–22(e)(4)(v) to require a covered clearing agency that provides clearing services for two or more product or asset types that have materially different liquidity characteristics to segregate the clearing services for each such product or asset type and organize and structure itself and adopt such rules as shall be necessary to (i) continue operations for other clearing services notwithstanding the need to wind down operations for a particular clearing service and (ii) prevent the use of a particular clearing service’s resources to cover losses that occur in a separate clearing service.298 The Commission is declining to incorporate these specific recommendation into Rule 17Ad– 22(e)(4)(v). To the extent that these types of commingled arrangements are employed, they must be prefunded and therefore agreed to by the participants ex ante, prior to becoming members of the covered clearing agency. The Commission acknowledges that loss mutualization and other pooling-of￾resources arrangements involve trade￾offs that a clearing agency generally should carefully assess and balance. A covered clearing agency may be better able to manage multiple defaults in extreme conditions more efficiently using pooled resources because the pooled resources would be greater than the resources of any single defaulting participant. Further, because the arrangements are prefunded, participants can model and manage the risks they face from the clearing agency while being able to take into account the amount of resources that they have provided to the clearing agency. The pooling of resources, however, can increase interdependencies among, and therefore the potential risks to, participants of the clearing agency. The Commission believes that considering the use of loss mutualization and other pooling-of-resources arrangements generally should, to minimize systemic risk, balance the safety and soundness of the covered clearing agency against the potential for increased exposures among participants that may arise from the manner the covered clearing agency holds financial resources. The Commission further notes that, pursuant to Rule 17Ad–22(e)(23), a covered clearing agency must establish, implement, maintain, and enforce written policies reasonably designed to disclose, among other things, key aspects of its default rules and procedures and the risks, fees, and other material costs participants incur by participating in the covered clearing agency. The availability of these policies and procedures should allow participants to understand in advance a covered clearing
agency’s reliance on

299See infra Parts II.C.18 and II.C.23 (describing requirements under Rule 17Ad–22(e) for access and participation and disclosure of rules, key procedures, and market data). 300See, e.g., CFA Institute at 8; OCC at 9. 301See Barnard at 2. 302See supra note 271; see also Rule 17Ad– 22(a)(18), infra Part VI. 303The Commission notes that this does not alter the coverage requirements in Rules 17Ad– 22(e)(4)(ii) and (iii), which require policies and procedures that enable a covered clearing agency to maintain financial resources at a minimum level necessary to enable it to cover a wide range of foreseeable stress scenarios, including but not limited to the default of the participant family (in the case of ‘‘cover one’’) or two participant families (in the case of ‘‘cover two’’) that would potentially cause the largest aggregate credit exposure for the covered clearing agency in extreme but plausible market conditions. See infra Part VI. 304See supra note 271; see also Rule 17Ad– 22(a)(17), infra Part VI. 305See Rule 17Ad–22(a)(9), infra Part VI. The Commission is also striking ‘‘conforming’’ from Rules 17Ad–22(e)(6)(vii) and (e)(7)(vii) consistent with the new ‘‘model validation’’ term. See infra Parts II.C.6.c and II.C.7.c. 306See Rule 17Ad–22(e)(4), infra Part VI. 307See CCA Standards proposing release, supra note 5, at 29526. 308See id. at 29526 (for Rule 17Ad–22(e)(4)(iv)), 29526–27 (for Rule 17Ad–22(e)(4)(vi)(C)). 309See infra Part II.C.6 (discussing potential future exposures in more detail). either on a defaulter-pays approach or a pooling-of-resources approach.299
iv. Stress Testing
Commenters generally supported the use of stress testing and model validation and the approach taken in Rule 17Ad–22(e)(4),300 but one commenter recommended that the rule also include a requirement for reverse stress testing. In the commenter’s view, reverse stress testing is a useful tool to manage expectations and to help anticipate financial resource requirements in extreme conditions.301 The Commission also believes that reverse stress testing can be a useful tool to evaluate the adequacy of financial resources, but the Commission is declining to modify Rule 17Ad–22(e)(4) to specifically mandate this practice so that each covered clearing agency retains flexibility, subject to its obligations and responsibilities as an SRO under the Exchange Act, to develop its stress testing framework in light of the ever-evolving challenges and risks inherent in the securities markets. Below the Commission provides additional guidance on the requirement that relates to stress testing in the rule.
c. Final Rule
As previously noted, the Commission is adopting the definition ‘‘systemically important in multiple jurisdictions’’ as proposed, but because of other modifications to Rule 17Ad–22(a), the definition is being moved to Rule 17Ad– 22(a)(18).302 The Commission is modifying the definition of ‘‘stress testing’’ to mean the estimation of credit or liquidity exposures that would result from the realization of potential stress scenarios, such as extreme price changes, multiple defaults, or changes in other valuation inputs and assumptions. The Commission believes that this modification, and in particular the removal of ‘‘but plausible,’’ helps ensure that policies and procedures for stress testing comprehensively consider a range of stress scenarios that may be used in sizing the guaranty fund, in light of the variation in markets served and products cleared by covered clearing agencies.303 Because of other modifications to Rule 17Ad–22(a), the definition is being moved to Rule 17Ad– 22(a)(17).304 The Commission is also modifying the definition of ‘‘conforming model validation’’ by striking ‘‘conforming’’ since the Commission has not separately defined ‘‘model validation’’ in Rule 17Ad–22(a). Because of this and other modifications to Rule 17Ad–22(a), the definition of ‘‘model validation’’ has been moved to Rule 17Ad–22(a)(9).305 In addition, the Commission is adopting Rule 17Ad–22(e)(4) with modifications.306 First, the Commission is modifying Rule 17Ad–22(e)(4)(v) so that it references only paragraphs (e)(4)(ii) and (iii) (and not paragraph (e)(4)(i)) because a covered clearing agency may hold financial resources consistent with Rule 17Ad–22(e)(4)(i), such as initial margin, separately from the guaranty or clearing fund.307 Second, the Commission is modifying Rule 17Ad–22(e)(4)(vii) to conform to the revised definition of ‘‘model validation’’ and striking ‘‘to be performed’’ from the rule to be consistent with the corresponding requirement for model validation of liquidity risk models in Rule 17Ad– 22(e)(7)(vii). Third, the Commission is making a technical correction to Rule 17Ad–22(e)(4)(iv) to make clear that prefunded financial resources should be exclusive of assessments for additional guaranty fund contributions or other resources that are not prefunded by modifying Rule 17Ad–22(e)(4)(iv) to state ‘‘exclusive of’’ assessments rather than ‘‘excluding’’ assessments. Fourth, the Commission is modifying Rule 17Ad–22(e)(4)(vi)(A) to refer to ‘‘stress testing’’ rather than ‘‘a stress test’’ to improve consistency with the definition of ‘‘stress testing’’ in Rule 17Ad– 22(a)(17). Fifth, the Commission is revising Rule 17Ad–22(e)(4)(vi)(C) to replace ‘‘and’’ with ‘‘or’’ so that the criteria for conducting analysis more frequently than monthly are disjunctive rather than conjunctive, since the criteria described may not be correlated to each other. This modification is consistent with the Commission’s description of the proposed rule in the CCA Standards
proposing release.308 Sixth, the Commission is correcting a technical error in Rule 17Ad– 22(e)(4)(vi)(D): references to paragraphs (e)(4)(iv)(B) and (C) will be changed to paragraphs (e)(4)(vi)(B) and (C) respectively. Sixth, the Commission is moving requirements proposed in Rule 17Ad–22(e)(13) to Rule 17Ad–22(e)(4) so that all requirements pertinent to a covered clearing agency’s management of credit risk are contained in one rule. This modification and the related rule text are discussed in Part II.C.13.c. Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(4), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address credit risk:

• Whether it has established a robust
  framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing, and settlement processes, mindful that credit exposures may arise from current exposures, potential future exposures,309 or both;
• whether it has identified sources of
  credit risk and can routinely measure and monitor credit exposures, using appropriate risk management tools to control these risks;
• if it provides CCP services, whether
  it has covered its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources, and (i) if it is involved in activities with a more￾complex risk profile or is systemically important in multiple jurisdictions, whether it maintains additional financial resources to cover a wide range of potential stress scenarios including but not limited to the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure for the covered clearing agency in extreme but plausible market conditions, or (ii) in the case of all other covered clearing agencies, whether it maintains additional financial resources sufficient to cover a wide range of potential stress scenarios including but not limited to the default of the participant and its affiliates that would potentially cause

310See, e.g., Arthur S. Goldberger, A Course in Econometrics 122–23 (Harvard Univ. Press, 2003) (defining confidence intervals for parameter estimates). the largest aggregate credit exposure for the covered clearing agency in extreme but plausible market conditions;

• if it provides CCP services, whether
  it has, consistent with Rules 17Ad– 22(e)(2) and (e)(3), documented its supporting rationale for, and has appropriate governance arrangements relating to, the amount of total financial resources it maintains;
• if it provides CCP services: whether
  it determines the amount and regularly tests the sufficiency of its total financial resources available in the event of a default or multiple defaults in extreme but plausible market conditions through rigorous stress testing; whether it has clear procedures to report the result of its stress tests to the appropriate decision makers at the covered clearing agency and can use these results to evaluate the adequacy of and any appropriate adjustments to its total financial resources; whether it performs stress tests daily using standard and predetermined parameters and assumptions; whether it performs, on at least a monthly basis, a comprehensive and thorough analysis of stress testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for determining the covered clearing agency’s required level of default protection in light of current and evolving market conditions; whether it performs this analysis more frequently when the products cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by its participants increases significant; and whether it performs a full validation of its risk management model at least annually;
• if it provides CCP services, whether
  it considers, in conducting stress testing, the effect of a wide range of relevant stress scenarios in terms of both defaulters’ positions and possible price changes in liquidation periods, and whether scenarios include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions; and
• whether it has established explicit
  rules and procedures that address fully any credit losses the covered clearing agency may face as a result of any individual or combined default among its participants with respect to any of their obligations to the covered clearing agency, addressing how potentially uncovered credit losses would be allocated, including the repayment of any funds the covered clearing agency may borrow from liquidity providers, and indicating the covered clearing agency’s process to replenish any financial resources that the covered clearing agency may employ during a stress event so it can continue to operate in a safe and sound manner. With respect to Rule 17Ad–22(e)(4)(i), ‘‘high degree of confidence’’ generally refers to the meaning of the term as it is used in statistical analysis.310 With respect to Rule 17Ad–22(e)(4)(ii) and (iii), a covered clearing agency generally should use statistical methods to develop models that estimate the financial resources required. With respect to the relationship among Rules 17Ad–22(e)(4)(i), (ii), and (iii), the Commission notes that the requirements to examine credit exposure under foreseeable stress scenarios including extreme but plausible market conditions in proposed Rules 17Ad–22(e)(4)(ii) and (iii), as applicable, means a covered clearing agency generally should consider how its credit exposure modeled under such conditions differs from its credit exposure modeled under normal market conditions to positions of such participants, which it would also be required to measure, pursuant to proposed Rule 17Ad–22(e)(4)(i). With respect to Rule 17Ad–22(e)(4)(iv), the Commission notes the following:
• While the ability to assess
  participants for contributions under applicable covered clearing agency governing documents, rules, or agreements could not be included in this calculation until an assessment has been levied and collected, previously paid-in participant contributions to the covered clearing agency’s default fund could be counted, to the extent the covered clearing agency’s rules, policies, or procedures permit such resources to be used in a manner equivalent to other financial resources in the default fund.
• Other sources of prefunded
  resources, such as margin previously posted to the clearing agency by participants, may also be treated in this manner.
• The ability to draw down under a
  revolving loan facility could not be counted towards prefunded resources because funds from such a loan facility would not be in the covered clearing agency’s immediate possession until they were drawn down, but the covered clearing agency could count borrowed funds already drawn down, such as under a term loan or other credit facility. With respect to stress testing under Rule 17Ad–22(e)(4)(vi) as a general matter, the Commission believes that reverse stress testing can be a useful tool to evaluate the adequacy of financial resources. The Commission believes that a covered clearing agency generally should consider incorporating the use of reverse stress testing into its policies and procedures under Rule 17Ad– 22(e)(4)(vi), and if a covered clearing agency determines not to use reverse stress testing, it generally should indicate why in its policies and procedures. With respect to the references to ‘‘high volatility’’ and ‘‘less liquid’’ referenced in Rule 17Ad– 22(e)(4)(vi), the Commission notes that what would constitute such circumstances may vary across asset classes. With respect to the definition of ‘‘model validation’’ and its use in Rule 17Ad–22(e)(4)(vii), a covered clearing agency generally should consider a person free from influence when that person does not perform functions associated with the clearing agency’s models and does not report to a person who performs these functions. The definition of ‘‘model validation’’ does not require policies and procedures for separating model review from model development or for maintaining two separate quantitative teams within the clearing agency. With respect to Rule 17Ad–22(e)(4)(vii) and policies and procedures for performing the model validation not less than annually, a covered clearing agency generally should perform the model validation not less than once every twelve months. With respect to Rule 17Ad– 22(e)(4)(viii), the Commission notes that managing a member default may involve hedging open positions, funding collateral so that the positions can be closed out over time, or both. A covered clearing agency may decide to auction or allocate open positions to its participants, but, to the extent possible, a covered clearing agency generally should allow non-defaulting members to continue to manage their positions in the ordinary course. In developing policies and procedures pursuant to Rule 17Ad–22(e)(4)(ix), a covered clearing agency generally should consider specifying the order of use of different types of resources, including (i) assets provided by the defaulting member (such as margin or other collateral), (ii) the guaranty fund of the covered clearing agency, (iii) capital calls on members, and (iv) credit

311See CCA Standards proposing release, supra note 5, at 29528. 312See CFA Institute at 8; OCC at 9. 313See OCC at 10. 314See The Clearing House at 2–3, 9–11. 315See id. at 10. 316See Rule 17Ad–22(e)(5), infra Part VI. 317Wrong-way risk can be either general or specific. General wrong-way risk arises at a CCP when the potential losses of either a participant’s portfolio or a participant’s collateral is correlated with the default probability of that participant. Specific wrong-way risk arises at a CCP when an exposure to a participant is highly likely to increase when the creditworthiness of that participant is deteriorating. 318 In this context, procyclicality typically refers to changes in risk-management practices that are positively correlated with market, business, or credit cycle fluctuations that may cause or exacerbate financial stability. While changes in collateral values tend to be procyclical, collateral arrangements can increase procyclicality if haircut levels fall during periods of low market stress and increase during periods of high market stress. facilities. A covered clearing agency generally should have policies and procedures that describe (i) how resources that have been depleted as a result of a member default would be replenished over time and (ii) what burdens a non-defaulting member may bear.
5. Rule 17Ad–22(e)(5): Collateral
a. Proposed Rule
As proposed, Rule 17Ad–22(e)(5) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to limit the assets it accepts as collateral to those with low credit, liquidity, and market risks, and set and enforce appropriately conservative haircuts and concentration limits if the covered clearing agency requires collateral to manage its own or its participants’ credit exposures. In addition, Rule 17Ad–22(e)(5) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to include a not￾less-than-annual review of the sufficiency of a covered clearing agency’s collateral haircuts and concentration limits.311 b. Comments Received Commenters were generally supportive of the proposed approach, but two commenters supported further clarification regarding the type of collateral a covered clearing agency can accept.312 One commenter stressed that the ability to accept equity securities as collateral is critically important to its systemic risk mitigation efforts and believes that it should be permitted to continue accepting such securities as collateral within its existing framework.313 The commenter sought to clarify that an appropriately designed portfolio margining system that permits the use of equity collateral complies with the requirements of proposed Rule 17Ad–22(e)(5) with respect to quality of collateral. In response, the Commission believes that, for a portfolio margining system to comply with Rule 17Ad– 22(e)(5), it would necessarily have to consider whether such equity collateral has low credit, liquidity, and market risk. This may require a consideration of whether the collateral carries wrong￾way risk. The Commission provides further guidance on this point in Part II.C.5.c below. One commenter recommended that the Commission consider establishing prescriptive standards for eligible collateral.314 Among other things, the commenter recommended limiting initial margin to cash in highly liquid currencies, obligations guaranteed by a sovereign that are highly liquid, corporate bonds that are highly liquid, equities that are highly liquid, and gold. The commenter further recommended limiting the assets that a covered clearing agency may accept as initial margin to collateral that a central bank would accept under an ordinary-course facility, is deliverable against the collateralized exposure, or is otherwise subject to conservative risk management practices that the Commission has determined to be adequate to mitigate the incremental risks associated with the collateral because a central bank would not accept it under an ordinary￾course facility and it is not deliverable against the collateralized exposure. The commenter further recommended aggregate limits on each type of collateral posted as initial margin. The commenter also recommended that the Commission prohibit a covered clearing agency
from accepting as initial margin securities issued by a participant or any of its affiliates.315 The Commission is mindful of the concerns raised by the commenter but, given the range of products that covered clearing agencies clear, declines to restrict the types of collateral to the assets identified by the commenter. A covered clearing agency should have flexibility, consistent with the requirements in Rule 17Ad–22(e)(5), to react to changing market conditions. The Commission notes that a covered clearing agency is required under Rule 17Ad–22(e)(5) to have policies and procedures that assess what assets have low credit, liquidity, and market risks in light of its broader risk management framework and, likewise, what haircuts and concentration limits are necessary to effectively manage its credit exposure.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(5) as proposed.316 Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(5), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address collateral:

• Whether it has generally limited the
  assets it accepts as collateral to those with low credit, liquidity, and market risks;
• whether it has established prudent
  valuation practices and developed haircuts that are regularly tested and take into account stressed market conditions;
• to reduce the need for procyclical
  adjustments, whether it has established stable and conservative haircuts that have been calibrated to include periods of stressed market conditions, to the extent practical and prudent;
• whether it has avoided
  concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price affects;
• if it accepts cross-border collateral,
  whether it has mitigated the risks associated with the use of cross-border collateral and ensured that the collateral can be used in a timely manner; and
• whether it uses a collateral
  management system that has been well￾designed and is operationally flexible. In assessing what assets have low credit, liquidity, and market risks, a covered clearing agency’s policies and procedures also generally should account for wrong-way risk, such as the risk that arises from accepting as initial margin securities issued by a participant or any of its affiliates.317 Policies and procedures for haircuts and concentration limits generally should account for wrong-way risk by limiting the acceptance of collateral that would likely lose value in the event that the participant providing the collateral defaults. For example, this would be true when accepting equity securities of the participant itself or its affiliates. Further, to reduce the need for procyclical adjustments,318 a covered clearing agency generally should consider establishing stable and

319See CCA Standards proposing release, supra note 5, at 29528–31. 320See id. at 29529. The Commission received no comments regarding the proposed definition and is adopting it as proposed. Because of other modifications to Rule 17Ad–22(a), the definition of ‘‘potential future exposure’’ is being moved to Rule 17Ad–22(a)(13). See infra Part VI. 321See id. at 29530. 322See id. 323See Rule 17Ad–22(a)(1), infra Part VI. 324See CCA Standards proposing release, supra note 5, at 29530. 325See id. 326See CCA Standards proposing release, supra note 5, at 29530. The Commission received no comments regarding the proposed definitions, and the Commission is combining them into one definition of ‘‘sensitivity analysis’’ to avoid the use of both ‘‘sensitivity analysis’’ and ‘‘conforming sensitivity analysis’’ in Rule 17Ad–22, as discussed further below. See infra Part II.C.6.c. conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent. In addition, with respect to policies and procedures for reviewing the sufficiency of its collateral haircuts and concentration limits not less than annually, a covered clearing agency generally should perform the review not less than once every twelve months using persons who are independent from management and have appropriate technical skills.
6. Rule 17Ad–22(e)(6): Margin
a. Proposed Rule
As proposed, Rule 17Ad–22(e)(6) would require a covered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that is monitored by management on an ongoing basis and regularly reviewed, tested, and verified.319 Proposed Rule 17Ad–22(e)(6)(i) would require a covered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to result in a margin system that, at a minimum, considers and produces margin levels commensurate with the risks and particular attributes of each relevant product, portfolio, and market. Proposed Rule 17Ad–22(e)(6)(ii) would require a covered clearing agency that provides CCP services to establish implement, maintain and enforce written policies and procedures reasonably designed to ensure that the margin system would mark participant positions to market and collect margin, including variation margin or equivalent charges if relevant, at least daily, and include the authority and operational capacity to make intraday margin calls in defined circumstances. Proposed Rule 17Ad–22(e)(6)(iii) would require a covered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to calculate margin sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. The Commission also proposed Rule 17Ad– 22(a)(14) to define ‘‘potential future exposure’’ to mean the maximum exposure estimated to occur at a future point in time with an established single￾tailed confidence level of at least 99% with respect to the estimated distribution of future exposure.320 Proposed Rule 17Ad–22(e)(6)(iv) would require a covered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it uses reliable sources of timely price data and procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable. Proposed Rule 17Ad–22(e)(6)(v) would require a covered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure the use of an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products. Proposed Rule 17Ad–22(e)(6)(vi) would require a covered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to regularly review, test, and verify its risk-based margin system by conducting backtests at least once
each day and conducting a conforming sensitivity analysis of its margin resources and its parameters and assumptions for backtesting at least monthly, and considering modifications to ensure the backtesting practices are appropriate for determining the adequacy of its margin resources. Proposed Rule 17Ad–22(e)(6)(vi) would also require a covered clearing agency’s policies and procedures to include conducting a conforming sensitivity analysis more frequently than monthly when the products cleared or markets served display high volatility or become less liquid, and when the size or concentration of positions held by participants increases or decreases significantly. Proposed Rule 17Ad– 22(e)(6)(vi) would also require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to report the results of such conforming sensitivity analysis to appropriate decision makers at the covered clearing agency, including its risk management committee or board of directors, and use these results to evaluate the adequacy of and adjust its margin methodology, model parameters, and any other relevant aspects of its credit risk management policies and procedures.321 With respect to proposed Rule 17Ad– 22(e)(6)(vi), the Commission proposed Rule 17Ad–22(a)(1) to define ‘‘backtesting’’ to mean an ex-post comparison of actual outcomes with expected outcomes derived from the use of margin models.322 The Commission received no comments regarding the proposed definition and is adopting it as proposed.323 The Commission also proposed to define ‘‘sensitivity analysis’’ to mean an analysis that involves analyzing the sensitivity of a model to its assumptions, parameters, and inputs.324 The Commission also proposed to define ‘‘conforming sensitivity analysis’’ to mean a sensitivity analysis that considers the impact on the model of both moderate and extreme changes in a wide range of inputs, parameters, and assumptions, including correlations of price movements or returns if relevant, which reflect a variety of historical and hypothetical market conditions and actual and hypothetical portfolios of proprietary positions and, where applicable, customer positions.325 Under the proposed definition, a conforming sensitivity analysis, when performed by or on behalf of a covered clearing agency involved in activities with a more complex risk profile, would consider the most volatile relevant periods, where practical, that have been experienced by the markets served by the clearing agency. The proposed definition would also require a conforming sensitivity analysis to test the sensitivity of the model to stressed market conditions, including the market conditions that may ensue after the default of a member and other extreme but plausible conditions as defined in a covered clearing agency’s risk policies.326 Finally, proposed Rule 17Ad– 22(e)(6)(vii) would require a covered clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed to require not less than annually a conforming model validation of the

327See CCA Standards proposing release, supra note 5, at 29531; see also supra note 305 and accompanying text (modifying the term ‘‘conforming model validation’’ to ‘‘model validation,’’ and moving it to Rule 17Ad–22(a)(9)). 328See CFA Institute at 1, 8–9. 329See The Clearing House at 14. 330See id. at 3, 14, 15. 331See Better Markets at 9. The Commission notes that this ‘‘free from influence’’ requirement applies to model validation requirements in Rules 17Ad– 22(e)(4), (e)(6), and (e)(7). See Rule 17Ad–22(a)(9), infra Part VI. 332See Better Markets at 9–10. 333See Clearing Agency Standards adopting release, supra note 5, at 66238. 334See The Clearing House at 3, 14. 335See supra notes 320 and 323. Due to modifications to Rule 17Ad–22(a), the definition of ‘‘potential future exposure’’ is being moved to Rule 17Ad–22(a)(13). The definition of ‘‘backtesting’’ remains in Rule 17Ad–22(a)(1). See infra Part VI. covered clearing agency’s margin system and related models.327 b. Comments Received and Commission Response
i. Minimum Liquidation Periods for
Initial Margin
One commenter expressed the view that the requirements in Rule 17Ad– 22(e)(6) are reasonable.328 In contrast, another commenter noted that the proposed rules would address initial margin liquidation period requirements through the Commission’s supervisory process rather than establish a minimum liquidation period as part of the covered clearing agency’s initial margin methodology.329 The commenter stated that, at a minimum, the Commission should establish minimum liquidation period standards that, as a supervisory matter, are transparent to the public. To promote transparency and international consistency, the commenter also stated that the Commission should modify Rule 17Ad– 22(e)(6)(iii) to establish minimum liquidation periods for initial margin calculation that are consistent with international standards.330 The Commission is declining to establish minimum liquidation periods as part of a covered clearing agency’s initial margin methodology. The Commission recognizes that liquidation periods are a critical assumption for any margin methodology and vary by product type. Accordingly, liquidation periods generally should be tailored to the market conditions and risks of the products being cleared. Because market conditions vary and the risks of the products being cleared over time may change, the Commission believes that a rule or rules establishing criteria for minimum liquidation periods may not be sufficiently tailored to changing circumstances as financial markets evolve. A covered clearing agency generally should consider reviewing liquidation periods as part of its regular review, testing, and verification of its margin system under Rule 17Ad– 22(e)(6).
ii. Model Validation
One commenter supported the proposed requirement that a qualified person who is free from influence should perform the annual model validation for credit and margin risk, but the commenter asked the Commission to go further with the ‘‘free from influence’’ requirement.331 The commenter noted the inevitable and indirect pressures employees may face and suggested that the models be validated annually by a qualified and independent organization with no financial stake in the outcome.332 The Commission previously addressed comments on this topic when it adopted Rule 17Ad–22(b)(4). At that time, the Commission stated that it was not persuaded that model validation must be performed by an outside, independent expert.333 The Commission believes that objectivity can be preserved where the person performing the model validation is an employee of the covered clearing agency by a variety of means, including, for example, separating employees responsible for model validation from those in the covered clearing agency responsible for the day-to-day functioning of the model and the business lines that use the model. As a general matter, mechanisms ensuring that any employees responsible for model validation remain independent from those responsible for using the model on a day-to-day basis would satisfy this requirement of the rule.
iii. Intraday Margin on a Net Basis and
Multilateral Netting Across CCPs One commenter supported intraday margin on a net basis and encouraged multilateral netting across CCPs. The commenter stated that, to prevent intraday variation margin calls from having destabilizing effects, the Commission should, pending the development of market-wide solutions, require a covered clearing agency making an intraday margin call to simultaneously net variation margin that is payable to participants.334 After careful consideration, the Commission declines to accept the commenter’s suggestion because it would be inconsistent with the overall approach to Rule 17Ad–22(e). The Commission notes that the circumstances that could give rise to intraday margin calls at a covered clearing agency may vary significantly (e.g., intraday volatility, large changes in participant positions), and may present varied challenges. Although there may be circumstances where it would be appropriate for a covered clearing agency to incorporate policies and procedures such as those suggested by the commenter, the Commission’s approach to Rule 17Ad–22(e) is to provide flexibility to covered clearing agencies, subject to their obligations and responsibilities as SROs under the Exchange Act, to design and structure their policies and procedures to take into account the differences among clearing agencies. With respect to intraday margin as a general matter, Rule 17Ad–22(e)(6)(ii) requires policies and procedures for having the capacity to collect intraday margin in defined circumstances, which generally would include margin calls on both a scheduled and unscheduled basis.
c. Final Rule
As previously discussed, the Commission is adopting the definitions of ‘‘backtesting’’ and ‘‘potential future exposure’’ as proposed.335 As noted above, the Commission is combining the definitions of ‘‘sensitivity analysis’’ and ‘‘conforming sensitivity analysis.’’ In addition, the Commission believes that while hypothetical portfolios are often useful and important in conducting a sensitivity analysis, hypothetical portfolios may not be appropriate in certain cases. The Commission is modifying the definition so that, under new Rule 17Ad–22(a)(16), ‘‘sensitivity analysis’’ means an analysis that involves analyzing the sensitivity of a model to its assumptions, parameters, and inputs that: (i) Considers the impact on the model of both moderate and extreme changes in a wide range of inputs, parameters, and assumptions, including correlations of price movements or returns if relevant, which reflect a variety of historical and hypothetical market conditions. Sensitivity analysis must use actual and, where applicable, hypothetical portfolios that reflect the characteristics of proprietary positions and customer positions; (ii) when performed by or on behalf of a covered clearing agency involved in activities with a more complex risk profile, considers the most volatile relevant periods, where practical, that have been experienced by the markets served by the clearing agency; and (iii) tests the sensitivity of the model to stressed market conditions, including the market conditions that may ensue after the default of a member and other extreme but plausible

336See Rule 17Ad–22(a)(16), infra Part VI. 337See Rule 17Ad–22(e)(6), infra Part VI. 338See CCA Standards proposing release, supra note 5, at 29530–31. 339See id. at 29530. conditions as defined in a covered clearing agency’s risk policies.336 The Commission believes that this reduces the potential for confusion resulting from the use of two separate definitions. The Commission is also adopting modifications to Rule 17Ad–22(e)(6).337 First, the Commission is modifying Rule 17Ad–22(e)(6) to remove references to ‘‘conforming’’ consistent with the modification to the definitions of ‘‘sensitivity analysis’’ discussed above and of ‘‘model validation’’ discussed in
Part II.C.4.c. Second, to improve clarity,
the Commission is modifying Rule 17Ad–22(e)(6)(v) to require policies and procedures that use reliable sources of timely price data and that ‘‘use’’ procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable. Third, because backtests are conducted with respect to the margin model and not the margin resources themselves, the Commission is modifying Rule 17Ad–22(e)(6)(vi)(A) to replace the phrase ‘‘margin resources’’ with ‘‘margin model.’’ Fourth, to avoid conflating sensitivity analysis with backtesting, the Commission is modifying Rules 17Ad–22(e)(6)(vi)(B) and (C) to clarify that a sensitivity analysis should be conducted of the margin model and not of margin resources. Specifically, the rule text will replace the phrase ‘‘margin resources’’ with the phrase ‘‘margin model.’’ The modifications to Rules 17Ad– 22(e)(6)(vi)(A), (B), and (C) are consistent with the discussion of the proposed rule in the CCA Standards proposing release.338 Fifth, the Commission is modifying Rule 17Ad– 22(e)(6)(vi)(C) to replace ‘‘and’’ with ‘‘or’’ so that the criteria for conducting analysis more frequently than monthly are disjunctive rather than conjunctive, since the criteria described may not be correlated to each other. This modification is consistent with the Commission’s description of the proposed rule in the CCA Standards proposing release.339 Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(6), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures for margin:

• Whether its margin system has
  established margin levels commensurate with the risks and particular attributes of each product, portfolio, and market it serves;
• whether it has a reliable source of
  timely price data for its margin system and policies and procedures, including sound valuation models, for addressing circumstances in which pricing data are not readily available or reliable;
• whether it has adopted initial
  margin models and parameters that are risk-based and generate margin requirements sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default;
• whether initial margin meets an
  established single-tailed confidence level of at least 99 percent with respect to the estimated distribution of future exposure; whether, if it calculates margin at the portfolio level, this applies to each portfolio’s distribution of future exposure; whether, if it calculates margin at more granular levels, such as at the sub-portfolio level or by product, this is met for the corresponding distributions of future exposure; and whether the model (i) uses a conservative estimate of the time horizons for the effective hedging or close out of the particular types of products cleared by the covered clearing agency (including in stressed market conditions), (ii) has an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products, and (iii) to the extent practicable and prudent, limits the need for destabilizing, procyclical changes;
• whether it marks participant
  positions to market and collects variation margin at least daily to limit the build-up of current exposures and has the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants;
• in calculating margin requirements,
  whether it allows offsets or reductions in required margin across products that it clears or between products that it and another clearing agency clear, if the risk of one product is significantly and reliably correlated with the risk of the other product; and where two or more clearing agencies are authorized to offer cross-margining, whether they have appropriate safeguards and harmonized overall risk management systems;
• whether it analyzes and monitors
  its model performance and overall margin coverage by conducting rigorous daily backtesting and at least monthly, and more frequent when appropriate, sensitivity analysis; whether it regularly conducts an assessment of the theoretical and empirical properties of its margin model for all products it clears; in conducting sensitivity analysis of the model’s coverage, whether the covered clearing agency has taken into account a wide range of parameters and assumptions that reflect possible market conditions, including the most volatile periods that have been experienced by the markets the covered clearing agency serves and extreme changes in the correlations between prices; and
• whether it regularly reviews and
  validates its margin system.
  With respect to Rule 17Ad– 22(e)(6)(iii), and policies and procedures related to margin calculations, a covered clearing agency generally should consider whether it calculates margin sufficient to cover its potential future exposure to each participant. With respect to Rule 17Ad– 22(e)(6)(iv) and policies and procedures for price data, the Commission notes that in selecting price data sources, a covered clearing agency generally should consider the ability of the provider to provide data in a variety of market conditions, including periods of market stress, and not select data sources based on their cost alone to ensure that such price data sources are reliable. With respect to Rule 17Ad–22(e)(6)(v) and policies and procedures for measuring portfolio effects, the Commission notes that measuring portfolio effects across products means a covered clearing agency generally should take into account netting procedures or offsets through which credit exposure may be reduced in measuring credit exposure, including the use of portfolio margining procedures across products where applicable. With respect to Rule 17Ad– 22(e)(6)(vii) and policies and procedures for performing the model validation not less than annually, a covered clearing agency generally should perform the model validation not less than once every twelve months using persons who are independent from management and have appropriate technical skills.

7. Rule 17Ad–22(e)(7): Liquidity Risk
   a. Proposed Rule
   As proposed, Rule 17Ad–22(e)(7) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne

340See CCA Standards proposing release, supra note 5, at 29531–37. 341See id. at 29531. 342See id. 343See id. 344See 12 U.S.C. 5465(a). 345See CCA Standards proposing release, supra note 5, at 29534. 346See id.; see also supra notes 275–305 and accompanying text (discussing generally the requirements accompanying the definition of ‘‘model validation’’). 347See CCA Standards proposing release, supra note 5, at 29534. by it, by meeting, at a minimum, the ten requirements specified in the rule.340 Proposed Rule 17Ad–22(e)(7)(i) would require that a covered clearing agency’s policies and procedures be reasonably designed to ensure that it maintains sufficient liquid resources in all relevant currencies to effect same￾day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that includes the default of the participant family that would generate the largest aggregate payment obligation for it in extreme but plausible market conditions.341 Proposed Rule 17Ad–22(e)(7)(ii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it holds qualifying liquid resources sufficient to meet the minimum liquidity resource requirement in each relevant currency for which the covered clearing agency has payment obligations owed to clearing members.342 The Commission also proposed Rule 17Ad– 22(a)(15) to define ‘‘qualifying liquid resources,’’ which would include three types of assets, in each relevant currency:

• Cash held either at the central bank
  of issue or at creditworthy commercial banks;
• assets that are readily available and
  convertible into cash through either:
  Æ Prearranged funding arrangements without material adverse change limitations, such as committed lines of credit, foreign exchange swaps, and repurchase agreements, or Æ other prearranged funding arrangements determined to be highly reliable even in extreme but plausible market conditions by the board of directors of the covered clearing agency following a review conducted for this purpose not less than annually; and
• other assets that are readily
  available and eligible for pledging to (or conducting other appropriate forms of transactions with) a relevant central bank, if the covered clearing agency has access to routine credit at such central bank.343 Proposed Rule 17Ad–22(e)(7)(iii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure it uses accounts and services at a Federal Reserve Bank, pursuant to Section 806(a) of the Clearing Supervision Act,344 or other relevant central bank, when available and where determined to be practical by the board of directors of the covered clearing agency, to enhance its management of liquidity risk. Proposed Rule 17Ad–22(e)(7)(iv) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure it undertakes due diligence to confirm that it has a reasonable basis to believe each of its liquidity providers, whether or not such liquidity provider is a clearing member, has sufficient information to understand and manage the liquidity provider’s liquidity risks, and the capacity to perform as required under its commitments to provide liquidity. Proposed Rule 17Ad–22(e)(7)(v) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that the covered clearing agency maintains and, on at least an annual basis, tests with each liquidity provider, to the extent practicable, its procedures and operational capacity for accessing each type of relevant liquidity resource. Proposed Rule 17Ad–22(e)(7)(vi)(A) through (C) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to determine the amount and regularly test the sufficiency of the liquid resources held for purposes of meeting the minimum liquid resource requirement of proposed Rule 17Ad–22(e)(7)(i) by (A) conducting a stress test of its liquidity resources at least once each day using standard and predetermined parameters and assumptions; (B) conducting a comprehensive analysis of the existing stress testing scenarios, models, and underlying parameters and assumptions used in evaluating liquidity needs and resources, and considering modifications to ensure they are appropriate for determining the covered clearing agency’s identified liquidity needs and resources in light of current and evolving market conditions at least once each month; and (C) conducting a comprehensive analysis of the existing stress testing scenarios, models, and underlying parameters and assumptions used in evaluating liquidity needs and resources more frequently when products cleared or markets served display high volatility or become less liquid, when the size or concentration of positions held by participants increases significantly, or in other circumstances described in the covered
  clearing agency’s policies and procedures. Proposed Rule 17Ad– 22(e)(7)(vi)(D) would also require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to result in reporting the results of the analyses performed under proposed Rule 17Ad– 22(e)(7)(vi)(B) and (C) to appropriate decision makers, including the risk management committee or board of directors, at the covered clearing agency for use in evaluating the adequacy of and adjusting its liquidity risk management framework.345 Proposed Rule 17Ad–22(e)(7)(vii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to result in performing an annual or more frequent conforming model validation of its liquidity risk models.346 Proposed Rule 17Ad–22(e)(7)(viii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to address foreseeable liquidity shortfalls that would not be covered by its liquid resources and seek to avoid unwinding, revoking, or delaying the same-day settlement of payment obligations. Proposed Rule 17Ad–22(e)(7)(ix) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to describe its process for replenishing any liquid resources that it may employ during a stress event.347 Finally, proposed Rule 17Ad– 22(e)(7)(x) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it, at least once a year, evaluates the feasibility of maintaining sufficient liquid resources at a minimum in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of foreseeable stress scenarios that includes, but is not limited to, the default of the two participant families that would potentially cause the largest

348See, e.g., Barnard at 1 (supporting the proposal, especially as to its proposed financial risk management and liquidity risk requirements); CFA Institute at 9; CME at 4; DTCC at 6; The Clearing House at 3, 13; OCC at 11. 349See CFA Institute at 9. 350See CME at 4; DTCC at 6 (noting the appropriate balance in the proposed rule between the need to have sufficient reliable liquidity resources to meet ongoing settlement obligations in the event of participant default, and the realities of the availability and costs of committed liquidity funding); OCC at 11 (supporting the expansion of qualifying liquid resources beyond committed funding arrangements); The Clearing House at 3, 13 (noting that the proposed rule’s use of highly reliable funding arrangements, in addition to committed arrangements, provides needed flexibility and is consistent with the PFMI). 351See DTCC at 7; LCH at 4. 352See DTCC at 7. 353See id. 354See infra Part II.C.7.b.iii (further discussing such repurchase agreement facilities). 355See LCH at 4. 356See The Clearing House at 13. 357See id. at 3. 358See supra Part II.B. 359See The Clearing House at 3. aggregate payment obligation for the covered clearing agency in extreme but plausible market conditions if the covered clearing agency provides CCP services and is either systemically important in multiple jurisdictions or a clearing agency involved in activities with a more complex risk profile. b. Comments Received and Commission Response
i. General Approach
Six commenters expressed general support for the proposed rule.348 Of these, one commenter stated that proposed Rule 17Ad–22(e)(7) was prudent and appropriate in light of the need for covered clearing agencies to maintain adequate liquidity to minimize systemic risks and that, by requiring ongoing testing and monitoring of underlying assumptions, covered clearing agencies should be able to identify potential problems with sufficient time to respond without significant disruptions.349 Four commenters expressed support for the Commission’s proposed approach to qualifying liquid resources other than committed funding arrangements,350 which is discussed further below in Part II.C.7.b.iii.
ii. Due Diligence for Liquidity Providers
Two commenters stated that the requirement in proposed Rule 17Ad– 22(e)(7)(iv) regarding policies and procedures to perform due diligence of liquidity providers must take into account the context of the due diligence being performed.351 One of these commenters stated that commercial lenders are not likely to provide their borrowers with non-public information on their internal policies and controls,352 and that accordingly covered clearing agencies should not be expected to evaluate a commercial lender’s internal risk controls.353 First, in the experience of Commission staff, liquidity facilities may not consist only of traditional commercial loans. For example, a covered clearing agency may seek out committed repurchase agreement facilities with counterparties other than traditional commercial lenders. In such a circumstance, the commenter’s experience with such counterparties may be different than with a traditional commercial lender.354 Accordingly, in contrast to the commenter’s assertion, a covered clearing agency may engage in a relationship with a liquidity provider that is not a typical commercial lender and therefore may be more willing to facilitate due diligence. Second, while the Commission acknowledges that a lender may choose not to provide their borrowers with non-public information on certain internal policies and controls, the proposed rule does not require a covered clearing agency’s policies and procedures regarding due diligence for liquidity providers to specifically review all internal policies and controls. Rather, it requires due diligence policies and procedures that confirm the covered clearing agency has a reasonable basis to believe that a liquidity provider understands and manages the liquidity provider’s liquidity risks and the capacity to perform as required under its commitments to provide liquidity to the covered clearing agency. If, in performing due diligence consistent with its policies and procedures formulated in accordance with the rule, a covered clearing agency cannot confirm that it has a reasonable basis to believe both of the required criteria, then the covered clearing agency would not have a liquidity provider consistent with Rule 17Ad–22(e)(7)(iv). The second commenter stated that it is not appropriate to require a covered clearing agency to perform due diligence on a central bank acting as its liquidity provider and requests that the rules clarify that the requirements under Rule 17Ad–22(e)(7)(iv) do not apply where a central bank is a liquidity provider for a covered clearing agency.355 The Commission does not believe that the rule needs to be modified to account for this circumstance, however, as the policies and procedures of the covered clearing agency could account for the different circumstances that arise when a central bank is acting as a liquidity provider. A third commenter expressed the view that the Commission should clarify the due diligence requirements of proposed Rule
17Ad–22(e)(7)(iv) to expressly require a covered clearing agency to take into account the potential wrong-way risk associated with reliance on participants or their affiliates as liquidity providers.356 The commenter further stated that the Commission should take additional steps to mitigate wrong-way risk by requiring a covered clearing agency to ensure the appropriate diversification of its liquidity providers and limit its reliance on its participants or their affiliates as potential sources of liquidity.357 The Commission believes that diversifying liquidity providers may be helpful because such diversification would result in less concentrated, and potentially more manageable, financial commitments among a covered clearing agency’s liquidity providers. For example, a covered clearing agency generally should conduct an assessment of the liquidity provider’s business in light of both the covered clearing agency’s own business and the composition of its existing liquidity providers. In turn, a covered clearing agency could assess the likelihood that a liquidity provider might be unable to meet its own liquidity demands at the same time as the covered clearing agency was facing a liquidity shortfall and attempting to draw on liquidity from its liquidity provider, allowing the covered clearing agency to account for the potential wrong-way risk associated with reliance on participants or their affiliates as liquidity providers. Although there may be circumstances where it would be appropriate for a covered clearing agency to incorporate the policies and procedures such as those suggested by the commenter, the Commission’s approach to Rule 17Ad– 22(e) focuses on principles. The circumstances may vary, and a covered clearing agency should appropriately manage its risks as they arise, considering the full set of tools available and its risk management framework. Accordingly, after careful consideration, the Commission declines to accept the commenter’s suggestion with respect to wrong-way risk because it would be inconsistent with the overall approach to Rule 17Ad–22(e).358 In addition, the commenter stated that the reliance on committed funding arrangements in proposed Rule 17Ad– 22(a)(15) may lead to this overreliance on participants or their affiliates for liquidity.359 The Commission addresses

360See CME at 4.
361See OCC at 11.
362See id. at 11–12.
363See The Clearing House at 13. 364See ISDA at 4. 365See id. 366Such policies and procedures should also address the due diligence of the liquidity provider, as discussed above. See supra Part II.C.7.b.ii. 367See ISDA at 5. 368See id. 369See id. 370See CME at 4. this aspect of the comment below in
Part II.C.7.b.iii.
iii. Qualifying Liquid Resources
Commenters generally supported the Commission’s proposed approach to determining qualifying liquid resources. One commenter supported the Commission’s overall approach and, in particular, the inclusion of assets that are readily available and convertible into cash through repurchase agreements.360 Another commenter supported the Commission’s approach to the definition of ‘‘qualifying liquid resources,’’ and expressed the view that expansion of qualifying liquid resources beyond committed funding arrangements is necessary to ensure the proper functioning of covered clearing agencies.361 The commenter noted that a committed liquidity facility would generally be preferable over a non￾committed facility, but the commenter also acknowledged that other aspects of a facility (e.g., size or cost of the facility) may tip the balance toward selection of the non-committed facility. In particular, the commenter emphasized the unique liquidity needs of clearing entities, the limited number and capacity of liquidity providers in the market that are willing and able to participate in committed liquidity facilities for clearing entities, and the commercial and regulatory realities that could constrain the availability of committed facilities for covered clearing agencies.362 The Commission is mindful of these concerns, but notes that policies and procedures providing for the use of uncommitted facilities must also satisfy the terms of Rule 17Ad–22(e)(15) to address general business and operational risk that could arise from such uncommitted facilities. One commenter stated that requiring covered clearing agencies to rely on committed funding arrangements in all cases could increase a covered clearing agency’s reliance on its participants or their affiliated banks and potentially exacerbate a liquidity crisis by transferring the risk of a covered clearing agency to its liquidity providers and vice versa.363 However, the comment assumes that the rule prohibits reliance on other types of facilities or prearranged funding arrangements, which is not the case. To some degree, the purpose of a liquidity facility is to transfer risk from the covered clearing agency to its liquidity providers. Further, the resources described in the definition of ‘‘qualifying liquid resources’’ should be viewed as part of a hierarchy, where cash should be the primary source of liquid resources, followed first by prearranged funding arrangements and last by other assets readily available and eligible for pledging to a relevant central bank in a jurisdiction that permits such pledges. In addition, within the class of prearranged funding arrangements, available committed arrangements without material adverse change (‘‘MAC’’) provisions generally should be obtained before seeking to obtain other prearranged funding arrangements determined to be highly reliable even in extreme but plausible market conditions by the covered clearing agency’s board of directors. The Commission believes that a
covered clearing agency generally should consider having policies and procedures that establish a preference for cash and prearranged funding arrangements, but the Commission acknowledges that a covered clearing agency’s policies and procedures may need to account for the extent to which such resources are available to them given the size of their liquidity demands. With respect to whether and how repurchase agreements might fit within the definition of qualifying liquid resources, one commenter stated that prearranged and highly reliable funding arrangements may be demonstrated through non-committed repurchase agreement facilities with major bank￾dealers.364 According to the commenter, a covered clearing agency relying on such a facility would need to ensure that it is structured appropriately to be highly reliable, taking into account the fact that a facility may be used in a clearing member default scenario in extreme market circumstances. The commenter also stated that a covered clearing agency’s procedures for making draws on uncommitted repurchase facilities should specifically contemplate the timing of close-out arrangements for defaulted clearing members and should provide for draws on such facilities to be made by specified times during business day mornings to ensure that dealer banks have sufficient time to facilitate liquidation of the U.S. Treasury securities. The commenter believed this approach would be fully consistent with the PFMI.365 The Commission notes that this type of approach, reflected in the policies and procedures of a covered clearing agency as part of a broader attempt to define qualifying liquid resources comprehensively, could be consistent with the Commission’s definition of prearranged funding arrangements determined to be highly reliable even in extreme but plausible market conditions by the board of directors of the covered clearing agency, assuming it was subject to a not less than annual review.366 The Commission believes that the board of directors of a covered clearing agency generally should rely on rigorous analysis of the properties of a prearranged funding arrangement, in making a determination that it was highly reliable in extreme but plausible market conditions. With respect to the rule’s reference to ‘‘material adverse change provisions,’’ two commenters recommended that the reference be removed. One commenter noted that the proposed rule text appears to be in tension with the preamble of the CCA Standards proposing release because it includes, among qualifying liquid resources, prearranged funding arrangements other than committed arrangements, but only where such arrangements have no MAC provisions.367 The commenter stated that, by definition, a non-committed facility is uncommitted and therefore MAC provisions are inapplicable.368 The commenter further noted that this is a liquidity standard not set forth in the PFMI, which will lead to confusion and inconsistency in attempting to apply the
standard. The commenter recommended that the reference to MAC clauses in the proposed definition of ‘‘qualifying liquid resources’’ be removed.369 The second commenter similarly recommended that the Commission remove the reference to MAC clauses in the definition of qualifying liquid resources for prearranged funding arrangements other than committed arrangements, noting that Master Repurchase Agreements do not have MAC clauses because they are uncommitted facilities.370 In response to the comments, the Commission is modifying the proposed definition of ‘‘qualifying liquid resources’’ so that only paragraph (A) includes a prohibition on MAC clauses. For uncommitted facilities, because they are by their terms uncommitted, the party providing an uncommitted facility generally would have no need to include a MAC clause. In contrast, a party providing a committed facility could choose to contract into an

371See Rule 17Ad–22(a)(14), infra Part VI. 372See Rule 17Ad–22(e)(7), infra Part VI. 373See CCA Standards proposing release, supra note 5, at 29534. 374See id. arrangement with or without a MAC clause, at the party’s discretion. As noted above, the Commission believes that a covered clearing agency generally should consider having policies and procedures that establish a preference for cash and prearranged funding arrangements. Within the category of prearranged funding arrangements, the Commission also believes that a covered clearing agency generally should preference committed arrangements over other types of prearranged funding arrangements, and that within the category of committed arrangements, a covered clearing agency generally should preference those without MAC clauses over those with MAC clauses. The Commission notes that a covered clearing agency would, when relying on a committed funding arrangement with a MAC clause pursuant to the definition of ‘‘qualifying liquid resources,’’ also need to have policies and procedures demonstrating that such committed facility was a prearranged funding arrangement determined to be highly reliable even in extreme but plausible market conditions by the board of directors following a review conducted for this purpose no less than annually. The Commission also believes that, as a general matter, policies and procedures regarding qualifying liquid resources, including those related to prearranged funding arrangements, would constitute a proposed rule change under Section 19(b) of the Exchange Act and, for designated clearing agencies, an advance notice under the Clearing Supervision Act.
c. Final Rule
The Commission is adopting two modifications to the definition of ‘‘qualifying liquid resources’’ and, because of other modifications to Rule 17Ad–22(a), moving the definition to Rule 17Ad–22(a)(14).371 The Commission is modifying paragraph (ii) so that the reference to MAC clauses is tied to committed arrangements rather than prearranged funding arrangements more generally, as previously described in Part II.C.7.b.iii. In addition, because not all central banks permit pledging certain assets that are readily available and eligible for pledging, the Commission is modifying paragraph (iii) to clarify that practices with respect to routine credit at a central bank may vary across jurisdictions. The Commission is also adopting Rule 17Ad–22(e)(7) with modifications.372 First, the Commission is modifying Rule 17Ad–22(e)(4)(vi)(A) to refer to ‘‘stress testing’’ rather than ‘‘a stress test’’ to improve consistency with the definition of ‘‘stress testing’’ in Rule 17Ad– 22(a)(17). Second, the Commission is modifying Rule 17Ad–22(e)(7)(vi)(C) in two ways. To improve consistency with Rule 17Ad–22(e)(4)(vi)(C), the Commission is adding ‘‘or’’ to link ‘‘display high volatility’’ with ‘‘become less liquid’’ because these concepts are intended to describe events related to the products cleared or markets served. This change corrects a typographical error in the CCA Standards proposing release.373 The Commission is also replacing ‘‘and’’ with ‘‘or’’ in Rule 17Ad–22(e)(7)(vi)(C) so that the criteria for conducting analysis more frequently than monthly are disjunctive rather than conjunctive, since the list of criteria is open to other appropriate circumstances described in a covered clearing agency’s policies and procedures and may not be correlated. Third, the Commission is making two modifications in adopting Rule 17Ad–22(e)(7)(vi)(D) to correct technical errors in the proposed rule text: (i) References to paragraphs (e)(6)(vii)(B) and (C) will be changed to paragraphs (e)(7)(vi)(B) and (C) respectively; and (ii) the rule will refer to the covered clearing agency’s ‘‘liquidity’’ risk management framework, rather than its ‘‘credit’’ risk management framework. These modifications are consistent with the Commission’s discussion of the proposed rule in the CCA Standards proposing release.374 Fourth, the Commission is striking ‘‘conforming’’ from Rule 17Ad–22(e)(7)(vii) to be consistent with the modifications to the definition of ‘‘model validation’’ discussed in Part II.C.4.c. Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(7), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address liquidity risk:

• Whether it has a robust framework
  to manage its liquidity risks from its participants, settlement banks, nostro agents, custodian banks, liquidity providers, and other entities;
• whether it has effective operational
  and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity;
• whether it maintains sufficient
  liquid resources in all relevant currencies to settle securities-related payments, make required variation margin payments, and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios, including but not limited to the default of the participant and its affiliates that would generate the largest aggregate payment obligation to the covered clearing agency in extreme but plausible market conditions;
• for the purpose of meeting its
  minimum liquid resource requirement, whether its qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps, and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions;
• whether it supplements its
  qualifying liquid resources with other forms of liquid resources and, if so, whether these liquid resources are in the form of assets likely to be saleable or acceptable as collateral for lines of credit, swaps, or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions;
• if it does not have access to routine
  central bank credit, whether it takes account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances, and does not assume the availability of emergency central bank credit as a part of its liquidity plan;
• whether it obtains a high degree of
  confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the FMI or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment;
• where relevant to assessing a
  liquidity provider’s performance reliability with respect to a particular currency, whether a liquidity provider’s potential access to credit from the central bank of issue may be taken into account;
• whether it regularly tests its
  procedures for accessing its liquid resources at a liquidity provider;

375The Commission notes that while Rule 17Ad– 22(e)(7)(viii) requires policies and procedures to address foreseeable liquidity shortfalls, a covered clearing agency also generally should consider how best to identify unforeseen and potentially uncovered liquidity shortfalls. For example, a covered clearing agency may be able to identify unforeseen liquidity shortfalls using hypothetical stress scenarios and reverse stress testing of liquid resources. 376For purposes of complying with Rule 17Ad– 22(e)(7)(ii), factors that may be relevant for a covered clearing agency to consider when defining its qualifying liquid resources could include (i) the portion of its default fund that is held as cash, (ii) the portion of its default fund that is held as securities, (iii) the portion of any excess default fund contributions held as cash that could be used by the covered clearing agency to meet liquidity needs, (iv) the portion of any excess default fund contributions held as securities that could be used by the covered clearing agency to meet liquidity needs, (v) the amount at any given time of securities or cash delivered by members that a covered clearing agency may be able to use to meet liquidity needs upon the default of a member, and (vi) the borrowing limits under any committed funding arrangement. 377The Commission notes that the term ‘‘central bank’’ is not limited to a Federal Reserve Bank. A covered clearing agency based in or operating outside of the United States that has access to routine credit at other central banks would be able to take this into consideration when assessing the amount of its qualifying liquid resources.

• if it has access to central bank
  accounts, payment services, or securities services, whether it uses these services, where practical, to enhance its management of liquidity risk;
• whether it determines the amount
  and regularly tests the sufficiency of its liquid resources through rigorous stress testing; whether it has clear procedures to report the results of its stress tests to appropriate decision makers at the covered clearing agency and to use these results to evaluate the adequacy of and adjust its liquidity risk-management framework;
• in conducting stress testing,
  whether it considers a wide range of relevant scenarios, including relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions;
• whether such scenarios take into
  account the design and operation of the covered clearing agency, include all entities that might pose material liquidity risks to the covered clearing agency (such as settlement banks, nostro agents, custodian banks, liquidity providers, and linked clearing agencies), and where appropriate, cover a multiday period, and, whether, in all cases, it documents its supporting rationale for, and has appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains;
• whether it has explicit rules and
  procedures that enable the covered clearing agency to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants;
• whether these rules and procedures
  address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking, or delaying the same-day settlement of payment obligations; 375 and
• whether these rules and procedures
  indicate the covered clearing agency’s process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner. In addition, with respect to creditworthy commercial banks under Rule 17Ad–22(a)(14), a covered clearing agency generally should assess the creditworthiness of its commercial banks, such as by considering their particular circumstances in which they operate and the markets which they service. With respect to assets convertible into cash under Rule 17Ad–22(a)(14), the Commission notes that the mere ownership of assets that a covered clearing agency may consider readily available and convertible into cash— based on factors such as the historical volume of trading in a particular market for such asset—depending on the circumstances may not count towards its ‘‘qualifying liquid resources’’ unless one of the prearranged funding arrangements in place would allow the covered clearing agency to receive cash in a timely manner. With respect to the requirements for qualifying liquid resources more generally, the Commission notes that a covered clearing agency generally should consider the lower of the value of the assets capable of being pledged and the amount of the commitment (or the equivalent availability under a highly reliable prearranged facility) as the amount that counts towards qualifying liquid resources in the event there is any expected difference between the two.376 With respect to Rule 17Ad– 22(e)(7)(ii), the Commission notes that, for example, if payment obligations were denominated in U.S. dollars, the minimum liquidity resource requirement would refer to a U.S. dollar amount. With respect to Rule 17Ad– 22(e)(7)(iii) and access to routine credit at a central bank, the Commission notes that a covered clearing agency is not required to use central bank account services but, rather, is required to establish, implement, maintain and enforce written policies and procedures reasonably designed facilitate such use when available and practical. As noted above, whether the services are available or considered to be practical may vary across jurisdictions.377 Access to routine credit at a relevant central bank, and the collateral required by such central bank to be posted to secure a loan, may be determined at the discretion of the central bank. With respect to Rule 17Ad– 22(e)(7)(iv) and the policies and procedures for due diligence required thereunder, ‘‘due diligence’’ has the same meaning as is commonly understood by market participants. A covered clearing agency generally should not rely solely on representations made by a liquidity provider but instead should conduct an assessment of the liquidity provider’s business, in light of the covered clearing agency’s own business and the composition of its existing liquidity providers. Policies and procedures to develop a reasonable basis under Rule 17Ad–22(e)(7)(iv) could include interviewing the liquidity provider’s
  staff and reviewing both public and non-public documents that would allow the covered clearing agency to gather information about relevant factors, including but not limited to the strength of the liquidity provider’s financial condition, its risk management capabilities, and its internal controls. With respect to Rule 17Ad– 22(e)(7)(v), a covered clearing agency generally should test its access to liquidity resources by verifying that a liquidity provider is able to provide the relevant liquidity resources in the manner intended under the terms of a funding arrangement and without undue delay by, for example, promptly funding a draw on the covered clearing agency’s credit facility. The Commission recognizes that testing procedures also could include test draws funded by the liquidity provider or tests of electronic connectivity between the covered clearing agency and the liquidity provider. Testing with liquidity providers may not always be practicable in the absence of committed liquidity arrangements. In addition, a covered clearing agency generally should conduct the testing not less than once every twelve months.

378See supra note 375.
379See CCA Standards proposing release, supra note 5, at 29537–38. 380See Rule 17Ad–22(e)(8), infra Part VI. 381See CCA Standards proposing release, supra note 5, at 29538–39. 382See Rule 17Ad–22(e)(9), infra Part VI. With respect to Rule 17Ad– 22(e)(7)(vii) and policies and procedures for performing the model validation not less than annually, a covered clearing agency generally should perform the model validation not less than once every twelve months. With respect to Rule 17Ad– 22(e)(7)(viii) and foreseeable liquidity shortfalls, foreseeable liquidity shortfalls could include potential shortfalls that can be identified through testing a covered clearing agency’s financial resources.378 The Commission recognizes that foreseeable liquidity shortfalls could occur even when a covered clearing agency is in compliance with the proposed requirements of Rule 17Ad–22(e)(7), such as when the covered clearing agency is unable to obtain liquidity pursuant to prearranged funding arrangements that are uncommitted. With respect to Rule 17Ad– 22(e)(7)(x), a covered clearing agency is not required to adopt a ‘‘cover two’’ standard for liquidity risk but is responsible for undertaking such an analysis at least once a year, pursuant to the covered clearing agency’s policies and procedures under Rule 17Ad– 22(e)(7)(x). In making any determination regarding the sizing of a covered clearing agency’s liquid resources to exceed ‘‘cover one,’’ a covered clearing agency could consider, among other things, (i) the business model of the covered clearing agency, such as a utility model (which may be also referred to as an ‘‘at cost’’ model) versus a for-profit model; (ii) diversification of its members’ business models as they impact the members’ ability to supply liquidity to the covered clearing agency; (iii) concentration of membership of the covered clearing agency, as the breadth of the membership may affect the ability to draw liquidity from members; (iv) levels of usage of the covered clearing agency’s services by members, as the concentration of demand on the covered clearing agency’s services may bear upon potential liquidity needs; (v) the relative concentration of members’ market share in the cleared products; (vi) the degree of alignment of interest between member ownership of the covered clearing agency and the provision of funding to the covered clearing agency; and (vii) the nature of, and risks associated with, the products cleared by the covered clearing agency.
8. Rule 17Ad–22(e)(8): Settlement
Finality a. Proposed Rule As proposed, Rule 17Ad–22(e)(8) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to define the point at which settlement is final no later than the end of the day on which the payment or obligation is due and, where necessary or appropriate, intraday or in real time.379 b. Comments Received The Commission received no comments regarding the proposed rule.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(8) with one modification.380 To remove potential ambiguity as to the timing of settlement finality under the rule, the Commission is modifying Rule 17Ad–22(e)(8) to state that the point at which settlement is final is ‘‘to be’’ no later than the end of the day on which the payment or obligation is due and, where necessary or appropriate, intraday or in real time. As modified, Rule 17Ad–22(e)(8) identifies the point at which settlement is final, which must be defined in a covered clearing agency’s written policies and procedures, and removes the potential ambiguity that could have allowed an alternative interpretation of the rule that did not clearly link the concept of settlement finality to ‘‘no later than the end of the day on which the payment or obligation is due and, where necessary or appropriate, intraday or in real time.’’ Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(8), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address settlement finality:

• Whether its policies and procedures
  clearly define the point at which settlement is final;
• whether it completes final
  settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk; and
• whether it clearly defines the point
  after which unsettled payments, transfer instructions, or other obligations may not be revoked by a participant. In addition, clearly defining the point at which settlement is final might include adopting policies and procedures (i) establishing that a cut-off point after which unsettled payments, transfer instructions, or other obligations may not be revoked by a clearing member and (ii) providing clearing members with guidance regarding extensions for members with operating problems, such as the approval or duration of such extensions. Policies or procedures creating material uncertainty regarding when final settlement will occur or that permit the back-dating or ‘‘as of’’ dating of a transaction that settles after the end of the day on which the payment or obligation is due generally would not comply with Rule 17Ad–22(e)(8). With respect to policies and procedures requiring intraday or real-time finality to reduce risk, such efforts would be necessary and appropriate when, for example, the risks in question are material or when the opportunity to require intraday or real-time finality is available and would be reasonable, whether in economic or other terms, to implement.

9. Rule 17Ad–22(e)(9): Money
   Settlements
   As proposed, Rule 17Ad–22(e)(9) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to conduct its money settlements in central bank money, where available and determined to be practical by the board of directors of the covered clearing agency, and minimizes and manages credit and liquidity risk arising from conducting its money settlements in commercial bank money if central bank money is not used by the covered clearing agency.381 The Commission received no comments regarding the proposed rule and is adopting it as proposed.382 Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad– 22(e)(9), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address money settlements:

• Whether it conducts its money
  settlements in central bank money, where practical and available, to avoid credit and liquidity risks;
• if it does not use central bank
  money, whether it conducts its money settlements using a settlement asset with little or no credit or liquidity risk;

383See CCA Standards proposing release, supra note 5, at 29539–40. 384See Rule 17Ad–22(e)(10), infra Part VI. 385See CCA Standards proposing release, supra note 5, at 29540–43.

• if it settles in commercial bank
  money, whether it monitors, manages, and limits its credit and liquidity risks arising from commercial settlement banks by, for example, establishing and monitoring adherence to strict criteria for its settlement banks that take account of, among other things, their regulation and supervision, creditworthiness, capitalization, access to liquidity, and operational reliability, and whether it monitors and manages the concentration of credit and liquidity exposures to its commercial settlement banks;
• if it conducts money settlements on
  its own books, whether it minimizes and strictly controls its credit and liquidity risks; and
• whether its legal agreements with
  any settlement banks state clearly when transfers on the books of individual settlement banks are expected to occur, that transfers are to be final when effected, and that funds received are transferable as soon as possible at a minimum by the end of the day, and ideally intraday, to enable the covered clearing agency and its participants to manage credit and liquidity risks. While Rule 17Ad–22(e)(9) would permit a covered clearing agency to use multiple settlement banks to monitor and manage concentration of payments among its commercial settlement banks, in such circumstances its policies and procedures generally should consider the degree to which concentration of a covered clearing agency’s exposure to a commercial settlement bank is affected or increased by multiple relationships with the settlement bank, including (i) where the settlement bank is also a participant in the covered clearing agency, or (ii) where the settlement bank provides back-up liquidity resources to the covered clearing agency. In addition, the Commission believes that a covered clearing agency generally should consider using commercial bank money only when central bank money is not practicable or available. In some cases, the use of central bank money may not be practical because direct access to central bank accounts and payment services may not be available to all clearing agencies or members in all circumstances. For example, when a covered clearing agency operates in multiple currencies, certain central bank accounts may not be operational at the time money settlements occur.

10. Rule 17Ad–22(e)(10): Physical
    Delivery Risks
    As proposed, Rule 17Ad–22(e)(10) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to establish and maintain transparent written standards that state its obligations with respect to the delivery of physical instruments and operational practices that identify, monitor, and manage the risk associated with such physical deliveries.383 The Commission received no comments regarding the proposed rule and is adopting it as proposed.384 Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad– 22(e)(10), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address physical delivery risks:

• Whether its rules clearly state its
  obligations with respect to the delivery of physical instruments or commodities; and
• whether it has identified,
  monitored, and managed the risks and costs associated with the storage and delivery of physical instruments or commodities. The Commission notes that practices regarding physical delivery vary based on the types of assets that a covered clearing agency settles. Nevertheless, a covered clearing agency generally should consider having policies and procedures that state clearly which asset classes it accepts for physical delivery and the procedures surrounding the delivery of each. In addition, physical delivery may require the involvement of multiple parties, including the clearing agency itself, its members, customers, custodians, and transfer agents. In particular, a covered clearing agency generally should consider having policies and procedures that address its relationship with transfer agents generally and, in particular, with respect to instructions for deposit and withdrawal at a custodian. A covered clearing agency could employ several different arrangements pursuant to the requirements of Rule 17Ad–22(e)(10). For example, if a covered clearing agency takes physical delivery of securities from its members in return for payments of cash, then it generally should inform its members of the extent of the clearing agency’s obligations to make payment. A covered clearing agency generally should employ policies and procedures that clearly state any obligations it incurs to members for losses incurred in the delivery process. Policies and procedures generally should also clearly state rules or obligations regarding definitions for acceptable physical instruments, the location of delivery sites, rules for storage and warehouse operations, and the timing of delivery. Such policies and procedures can help mitigate operational risks associated with physical deliveries by including provisions to review and assess the qualifications of potential employees, including, among other things, reference and background checks and employee training. Such policies and procedures could also relate to theft, loss, counterfeiting, deterioration of or damage to assets, and employee duties for the recordkeeping for and holding of physical assets.

11. Rule 17Ad–22(e)(11): CSDs
    a. Proposed Rule
    As proposed, Rule 17Ad–22(e)(11)(i) would require a covered clearing agency that provides CSD services to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain securities in an immobilized or dematerialized form for their transfer by book entry, ensure the integrity of securities issues, and minimize and manage the risks associated with the safekeeping and transfer of securities. Proposed Rule 17Ad–22(e)(11)(ii) would require a covered clearing agency that provides CSD services to establish, implement, maintain and enforce written policies and procedures reasonably designed to implement internal auditing and other controls to safeguard the rights of securities issuers and holders, prevent the unauthorized creation or deletion of securities, and conduct periodic and at least daily reconciliation of securities issues it maintains. Finally, proposed Rule 17Ad–22(e)(11)(iii) would require a covered clearing agency that provides CSD services to establish, implement, maintain and enforce written policies and procedures reasonably designed to protect assets against custody risk through appropriate rules and procedures consistent with relevant laws, rules, and regulations in jurisdictions where it operates.385 b. Comment Received and Commission Response The Commission received one comment regarding proposed Rule 17Ad–22(e)(11). The commenter expressed concern that the language in proposed Rule 17Ad–22(e)(11)(i), which requires the policies and procedures of a covered clearing agency providing

386See DTCC at 7 (emphasis in original). 387See id. at 7. 388See id. at 8. 389See id. 390See Rule 17Ad–22(e)(11), infra Part VI. 391For example, the Commission understands that, in the United States, CSD services currently include the provision of custody-only services, in addition to book-entry transfer and related services that may also include providing custody. 392An American depositary receipt (‘‘ADR’’), whether in a program sponsored or unsponsored by a foreign issuer, is the physical certificate that evidences American depositary shares, which represent an ownership interest in a specified number of securities of a foreign issuer that have been deposited with a depositary. See Securities Act Release No. 33–6894 (May 23, 1991) 56 FR 24420, 24421 n.5 (May 30, 1991). The shares of a foreign issuer that underlie an ADR are usually held by a custodian appointed by the depositary in the country of incorporation of the foreign issuer, may be in paper certificate form, and may be in the ultimate custody of the CSD. 393See CCA Standards proposing release, supra note 5, at 29543–44. 394See LCH at 4. CSD services to be reasonably designed to ensure the integrity of securities issues, differs materially from PFMI Principle 11 and FRB’s Regulation HH, both of which require that an entity ‘‘help’’ ensure the integrity of securities issues.386 The commenter also expressed the concern that no covered clearing agency is in a position to guarantee the integrity of the securities.387 As a result, the commenter urged the Commission to include the words ‘‘to help’’ before ‘‘ensure,’’ to avoid any interpretation that clearing agencies providing CSD services are held to a materially higher standard than the commenter believes is the Commission’s intention.388 In the alternative, the commenter proposed the substitution of another phrase (e.g., ‘‘to promote’’ or ‘‘to protect’’) that accurately characterized the cooperative nature of CSDs.389 In response to the comment received, the Commission notes that the rule text does not require a covered clearing agency to ensure or guarantee the integrity of securities issues; rather, Rule 17Ad–22(e)(11) requires policies and procedures reasonably designed to ensure the integrity of securities issues. The Commission believes that the policies and procedures nature of the rule mitigates the concern raised by the commenter because the rule requires a covered clearing agency to ensure that its policies and procedures are reasonably designed to ensure the integrity of securities issues and it does not require a covered clearing agency to ensure the integrity of securities issues. The Commission is not modifying proposed Rule 17Ad–22(e)(11) to add the words ‘‘to help’’ before ‘‘ensure’’ because, in the Commission’s view, such an addition would inappropriately weaken the rule. Although the rule does not require a guarantee of the integrity of securities issues, the rule does require reasonably designed policies and procedures.
Rule 17Ad–22(e)(11) recognizes that reasonably designed policies and procedures with respect to the integrity of securities issues is important for investor protection. In this regard, the Commission believes that such policies and procedures generally should be designed to prohibit overdrafts and debit balances in securities accounts, which can create unauthorized issuances of securities that undermine the integrity of the covered clearing agency’s services.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(11) as proposed.390 Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(11), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address CSD services:

• Whether it has appropriate rules,
  procedures, and controls, including robust accounting practices, to safeguard the rights of securities issuers and holders, to prevent the unauthorized creation or deletion of securities, and to conduct periodic and at least daily reconciliation of the securities it maintains;
• whether it prohibits overdrafts and
  debit balances in securities accounts;
• whether it maintains securities in
  an immobilized or dematerialized form for their transfer by book entry and, where appropriate, whether it provides incentives to immobilize or dematerialize securities;
• whether it protects assets against
  custody risk through appropriate rules and procedures consistent with its legal framework;
• whether it employs a robust system
  that ensures segregation between its own assets and the securities of its participants and segregation among the securities of participants; and
• whether it identifies, measures,
  monitors, and manages its risks from other activities that it may perform and whether additional tools may be necessary to address such risks. In addition, the Commission notes that Rule 17Ad–22(e)(11)(i) is not intended to prohibit a covered clearing agency from continuing to hold physical certificates on behalf of its members where such securities currently exist in paper form or from providing other custody-only services.391 The Commission’s rules do not prohibit, and in some respects contemplate, the issuance of securities certificates. For example, Rule 17Ad–22(e)(11)(i) would not prohibit a covered clearing agency from holding American depositary shares in custody.392 The Commission also notes that the custody risk described in Rule 17Ad– 22(e)(11)(iii) may be related to both physical delivery risk and operational risk, the latter including risks such as theft, loss, counterfeiting, and deterioration or damage to assets. To mitigate such risks, a covered clearing agency could consider obtaining insurance coverage to help ensure that (i) records of securities held in custody accurately reflect holdings, and (ii) employee duties for the recordkeeping and holding of securities are separate and discrete duties. The Commission notes that dematerialization of securities alone does not eliminate the applicability of any requirements to protect against custody risk and instead may create new sources of risk, such as hacking or digital piracy.

12. Rule 17Ad–22(e)(12): Exchange-of￾Value Settlement Systems
    As proposed, Rule 17Ad–22(e)(12) would require a covered clearing agency, for transactions that involve the settlement of two linked obligations, to establish, implement, maintain and enforce written policies and procedures reasonably designed to eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other, regardless of whether the covered clearing agency settles on a gross or net basis and when finality occurs.393 In response to a request for comment as to whether there are circumstances where it is not feasible or practicable, in an exchange-of-value settlement context, to ensure that the settlement of one obligation is final if and only if the settlement of the corresponding obligation is final, the Commission received one comment. The commenter stated that such a situation occurs when the settlement of a CDS contract occurs following a credit event.394 In this case, the commenter stated that there may be some non-delivery versus payment obligations to be settled, such as loans, and that at least one CCP has policies and procedures to address this situation to secure settlement. The commenter expressed the belief that Rule 17Ad–

395See id. at 4–5.
396See Rule 17Ad–22(e)(12), infra Part VI. 397See CCA Standards proposing release, supra note 5, at 29544–46. 398See ISDA at 4. 399See infra Part III.B.3.a.viii (discussing the economic effects of Rule 17Ad–22(e)(13)). 400See supra Part II.B. 401See supra Part II.C.3.b.iii. 402See The Clearing House at 4; Vanguard at 6– 7. 403See The Clearing House at 4. With respect to these comments, the Commission understands an ‘‘end of waterfall’’ scenario to be a scenario where a covered clearing agency suffers losses that, due to the default of one or more participants, exceed in the aggregate the loss-absorbing resources in the covered clearing agency’s default risk management waterfall. 22(e)(12) should encompass this situation.395 In response, the Commission notes that the commenter has not described a linked obligation as contemplated under Rule 17Ad–22(e)(12), such as the delivery of securities against payment of either cash or securities in connection with the purchase or sale of a security, because the commenter has described a non-delivery versus payment obligation. The Commission therefore believes that the comment is not within the scope of the settlement mechanisms contemplated by Rule 17Ad–22(e)(12). While the Commission believes that a covered clearing agency generally should have policies and procedures to address ‘‘free-of-payment’’ deliveries or the settlement of non-delivery versus payment obligations if it accepts non￾delivery versus payment obligations, Rule 17Ad–22(e)(12) addresses settlement mechanisms that eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation occurs. The Commission also notes that Rule 17Ad–22(e)(8) requires a covered clearing agency to have policies and procedures to define the point at which settlement is final. Where a covered clearing agency’s policies and procedures for ensuring settlement finality apply only when settlement of the corresponding obligation is final, the covered clearing agency may wish to consider corresponding policies and procedures that address legal, contractual, operational, and other risks. The Commission is adopting Rule 17Ad–22(e)(12) as proposed.396
13. Rule 17Ad–22(e)(13): Participant￾Default Rules and Procedures
a. Proposed Rule
As proposed, Rule 17Ad–22(e)(13) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that the covered clearing agency has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meet its obligations in the event of a participant default. Proposed Rule 17Ad–22(e)(13)(i) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to address the allocation of credit losses it may face if its collateral and other resources are insufficient to fully cover its credit exposures, including the repayment of any funds the covered clearing agency may borrow from liquidity providers. Proposed Rule 17Ad–22(e)(13)(ii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to describe its process to replenish any financial resources it may use following a member default or other event in which use of such resources is contemplated. Finally, proposed Rule 17Ad– 22(e)(13)(iii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to require the covered clearing agency’s participants and, when practicable, other stakeholders to participate in the testing and review of its default procedures, including any close-out procedures, at least annually and following material changes thereto.397 b. Comments Received and Commission Response
i. Limitations on Replenishment of
Resources
One commenter stated that the Commission’s rule should explicitly require that replenishment of resources through compulsory means (such as assessments on clearing members) be subject to a well-defined cap.398 The Commission is declining to modify Rule 17Ad–22(e)(13) to impose a ‘‘cap’’ on the replenishment of resources by a covered clearing agency. Consideration of whether a cap is appropriate depends on a number of factors related to the covered clearing agency’s recovery plan as a whole and cannot be viewed in isolation, including, in particular, what measures a covered clearing agency could implement in the event that a covered clearing agency experienced losses that exceeded the ‘‘cap.’’ Given this uncertainty and that each covered clearing agency is structured and operated differently, and that collectively they clear different products with different risk profiles and employ different default management procedures, the Commission believes that a cap may not be appropriate in all circumstances and could potentially increase, rather than decrease, systemic risk because it may impede the covered clearing agency’s ability to replenish resources to cover losses in the event of a participant default.399 As a general matter, the Commission also believes that the commenters’ recommendation would be inconsistent with the principles-based approach set forth in Rule 17Ad–22(e).400 The Commission believes that establishing prescriptive standards (such as a cap) that, on an absolute and ex ante basis, prohibit a covered clearing agency’s use of particular tools for replenishment would make it more difficult for a covered clearing agency to maintain an appropriate balance between affording its participants predictability and certainty, and ensuring that the covered clearing agency can effectively manage risk. The Commission also notes that policies and procedures related to such caps or other alternative approaches to limitations on the replenishment of resources would be related to the development of a covered clearing agency’s recovery and wind–down plans under Rule 17Ad–22(e)(3).401 The Commission has previously stated in
Part II.C.3.b.iii above that, given the
nature of recovery planning—as here with caps—such plans are likely to closely reflect the unique characteristics of the covered clearing agency and will vary depending on the products cleared. The Commission believes that these mechanisms under Rule 17Ad–22(e) would help a covered clearing agency to appropriately consider, review, and address the need for a cap on replenishment, pursuant to its governance arrangements.
ii. Risks of Certain Loss Allocation and
Limiting Participant Liability Two commenters recommended models for loss allocation to non￾defaulting customers of clearing members.402 One of these commenters urged the Commission to provide clarification and guidance that Rule 17Ad–22(e)(13) would (i) ensure participant liability is limited, ascertainable, and manageable and (ii) require a covered clearing agency to adopt rules specifying and providing risk disclosure regarding so-called ‘‘end of waterfall’’ scenarios.403 The commenter stated that guidance is necessary to ensure that Rule 17Ad– 22(e)(13) complements the requirements

404See 17 CFR 240.17Ad–22(b)(1). Rule 17Ad– 22(b)(1) states that a clearing agency that performs CCP services shall establish, implement, maintain and enforce written policies and procedures reasonably designed to measure its credit exposures to its participants at least once a day and limit its exposures to potential losses from defaults by its participants under normal market conditions so that the operations of the clearing agency would not be disrupted and non-defaulting participants would not be exposed to losses that they cannot anticipate or control. 405See supra note 126. 406See The Clearing House at 4. 407See The Clearing House at 5. 408See id. at 6. The commenter has also sought clarification and guidance regarding emergency authority or decision-making at covered clearing agencies and disclosures regarding such decision￾making and participant-default rules and procedures. See The Clearing House at 6–7. These comments have been addressed separately in Parts II.C.2.b and II.C.23.b. 409See id. at 7. 410See Vanguard at 6–7. 411See id. at 7. 412See supra Part II.B. of Rule 17Ad–22(b)(1),404 certain guidance in the Consultative Recovery Report,405 and a number of risk management practices relevant for participants of covered clearing agencies.406 In this regard, the commenter noted that participants are subject to single counterparty credit limits, certain accounting criteria for netting their positions cleared at a CCP, and regulatory capital requirements.407 The commenter also noted that such guidance is necessary to ensure that a covered clearing agency does not become a transmission mechanism for systemic risk. As a general matter, the commenter expressed opposition to any CCP risk management practice that constitutes an unpredictable and uncontrollable loss allocation arrangement or a restriction on participant withdrawal. For this purpose, the commenter asked the Commission to adopt the following clarification and guidance that: (i) A covered clearing agency must address the consequences of circumstances in which the covered clearing agency’s credit losses upon the default of one or more participants exceed the resources designated to absorb such losses; (ii) a covered clearing agency may not provide for (1) the forced allocation of a defaulted portfolio to a non-defaulting participant other than through a successfully completed auction process or otherwise with the participant’s agreement, (2) invoicing to non￾defaulting participants of losses on cleared positions in the portfolio(s) of one or more defaulting participants or (3) non-voluntary tear-ups of previously matched and cleared positions; and (iii) a covered clearing agency must clearly specify the process for, and effective time of, withdrawal from participant status such that a participant may withdraw upon the later of (1) the closeout or transfer of all its positions and (2) a reasonable prior notice period, without subjecting such withdrawal to a discretionary or
subjective approval requirement or subjecting the withdrawing participant to liability for increased exposures after the effective time of withdrawal.408 The remainder of the requested clarification and guidance would entail affording participants increased certainty regarding what exposures and obligations might arise where a CCP encounters an ‘‘end of waterfall’’ scenario. For this reason, the commenter also asked the Commission to clarify that a covered clearing agency may not redefine the economic terms of outstanding cleared contracts without a reasonable prior notice and transition period prior to effectiveness.409 The second commenter urged the Commission to prohibit the use of non￾defaulting customer initial, variation and excess margin to aid in the recovery of a covered clearing agency in the event of financial stress, such as from credit losses, liquidity shortfalls, or other losses.410 According to the commenter, in such a case losses would effectively be allocated to participants who have not contributed to the loss. The commenter contended that such exposure is not present in the OTC swaps market, where customer assets are protected in segregated custody accounts. The commenter also stated that participants have no means to assess and mitigate such risk, since they do not have transparency into the financial health and risk management practices of their fellow participants, security-based swap dealers, or the covered clearing agency itself. The commenter instead urged the Commission to consider the development of enhanced recordkeeping and reporting, enhanced oversight and compliance, enhanced risk management and mitigation, increased contributions by SBSDs and increased contributions to, and management of, the covered clearing agency guaranty fund.411 Much of the clarification and guidance sought by the commenters, in the Commission’s view, would entail broad, ex ante prohibitions on a number of specific default management practices of CCPs, including the use of uncapped assessment authority, prohibitions on the use of non￾defaulting customer initial, variation, and excess margin to aid in recovery, forced allocations of defaulted clearing portfolios, invoicing back of losses arising from a defaulting participant’s positions, and partial non-voluntary tear-ups of previously matched and cleared positions. As discussed further above,412 Rule 17Ad–22(e) does not prescribe a specific tool or arrangement to achieve its requirements. The Commission believes that when determining the content of its policies and procedures with respect to default management, each covered clearing agency must have the ability to enhance its policies and procedures to meet the evolving challenges and risks in the securities market that the covered clearing agency serves. Consistent with the goals sought by the commenters, the Commission has developed through the amendments to Rule 17Ad–22 and new Rule 17Ab2–2, an enhanced oversight and compliance framework
that includes enhanced requirements for the policies and procedures of a covered clearing agency that govern financial risk management generally and, in particular, the risk management of guaranty or clearing funds. The Commission therefore is not adopting the changes sought by these commenters. The Commission believes that each covered clearing agency generally should consider evaluating the strengths and weaknesses of respective tools so that the covered clearing agency can choose the set most appropriate for each relevant recovery scenario, including the sequence in which they should be used. As previously noted in Part II.C.13.b.i, ensuring that a covered clearing agency does not become a transmission mechanism for systemic risk means, in part, striking an appropriate balance between affording its participants predictability and certainty, on the one hand, and ensuring that the covered clearing agency can effectively manage risk so that it can effectively continue its risk mitigating function within the broader financial system, on the other. As a general matter, the Commission believes that striking such a balance can be difficult using broadly prescriptive standards that, on an absolute and ex ante basis, prohibit a covered clearing agency’s application of certain risk management tools. Furthermore, particular requirements under Rule 17Ad–22(e) should not be viewed in isolation but instead should be considered holistically and in light of other requirements under the Exchange Act and the Clearing Supervision Act. The Commission believes that policies and procedures for participant default generally should be established,

413See DTCC at 8–9.
414See id.
415See supra Part III.B.3.a.viii (discussing the economic effect of Rule 17Ad–22(e)(13)(iii)). 416See Regulation SCI adopting release, supra note 30, at 72349. 417See Rule 17Ad–22(e)(13), infra Part VI. 418See supra Part II.C.4.c. 419See Clearing Agency Standards, supra note 5, at 29544. An operational default may occur when a participant is not able to meet its obligations due to an operational problem, such as a failure in information technology systems. Rule 17Ad– 22(e)(17) includes requirements related to operational risk management. See infra Part II.C.17. In addition, the Commission has also adopted Regulation SCI, which establishes requirements for SROs, among other entities, with respect to operational risk management. See supra note 30 and accompanying text. maintained, and enforced pursuant to the covered clearing agency’s governance process, which must be consistent with the requirements of
Section 17A of the Exchange Act,
Section 19 of the Exchange Act, and the
rules and regulations thereunder, including Rule 19b–4. The individual topics raised by the commenters would have implications for the development of a covered clearing agency’s recovery and wind–down plans; however, as noted in Part II.C.3.b.iii above in connection with the Commission’s prior discussion of recovery and wind–down plans, the impact of such recovery tools the covered clearing agency’s recovery and wind–down plan can only be considered in the context of the plan as a whole and not in isolation. The organizational and governance structures of covered clearing agencies vary, as do the composition of their members and the products they clear, and each is relevant to consideration of potential loss allocation mechanisms.
iii. Stakeholder Participation in Periodic
Testing
One commenter expressed concern that the requirement in proposed Rule 17Ad–22(e)(13)(iii) for policies and procedures to require participants and, where practicable, other stakeholders in the covered clearing agency to participate in periodic testing and review of its default procedures may be read to require a covered clearing agency to mandate the participation of all its participants in such tests.413 The commenter expressed concern that such a requirement would not be realistically achievable, of sufficient benefit to outweigh the time and costs, or appropriate given the sensitive nature of information involved in such tests. The commenter expressed the belief that covered clearing agencies can accomplish the objective of proposed Rule 17Ad–22(e)(13)(iii) by methods other than mandating participation in annual closeout tests and requested discretion and flexibility to achieve such objective.414 First, the Commission notes that the commenter provided no estimate of the time or costs of testing.415 More generally, the Commission notes that the testing requirements in proposed Rule 17Ad–22(e)(13)(iii) are similar to requirements for members or participants to participant in business continuity and disaster recovery plans testing under Regulation SCI, and therefore registered clearing agencies are already subject to requirements for members to participate in such testing and have had to consider how to treat sensitive material in such testing. As with Rule 1004 of Regulation SCI, the Commission continues to believe that participation rates by members and participants in voluntary industry-led testing has generally been low, and that mandatory participation is the best means to achieve effective and coordinated testing with assured participation by the more significant members and participants.416 The Commission notes, however, that proposed Rule 17Ad–22(e)(13)(iii) does not specify that all participants in the clearing agency participate in every periodic test and review of its default procedures. A covered clearing agency may designate in its policies and procedures that certain participants, or certain categories of participants, be designated for participation in certain tests.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(13) with one modification.417 As previously noted,418 the Commission is moving the requirements in proposed Rules 17Ad– 22(e)(13)(i) and (ii) to Rules 17Ad– 22(e)(4)(viii) and (ix), respectively, to consolidate requirements for management of a covered clearing agency’s default waterfall within a single rule. The Commission believes this modification improves consistency between Rules 17Ad–22(e)(4) and (7). Specifically, Rule 17Ad–22(e)(4) includes requirements intended to facilitate the management of credit risk, and proposed Rules 17Ad–22(e)(13)(i) and (ii) include requirements to address the allocation of credit losses and the replenishment of funds. Similarly, Rule 17Ad–22(e)(7) includes requirements intended to facilitate the management of liquidity risk, and Rules 17Ad– 22(e)(7)(viii) and (ix) include requirements to address liquidity shortfalls and replenish liquid resources. In contrast, Rule 17Ad– 22(e)(13) requires a covered clearing agency to have policies and procedures addressing its authority and operational capacity to take timely action to contain losses and liquidity demands, and proposed Rule 17Ad–22(e)(13)(iii) included requirements for the testing of default procedures. Accordingly, the rules have been reorganized. Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(13), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address participant-default rules and procedures:

• Whether it has default rules and
  procedures that enable it to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default;
• whether it is well prepared to
  implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules;
• whether it publicly discloses key
  aspects of its default rules and procedures;
• whether it involves its participants
  and other stakeholders in the testing and review of its default procedures, including any close-out procedures; and
• whether such testing and review is
  conducted at least annually or following material changes to the rules and procedures to ensure that the testing and review are practical and effective. In addition, a covered clearing agency that has financial and operational triggers for default generally should clearly define these triggers.419 Where triggers are not automatic through the application of objective standards or thresholds, the Commission believes the discretion afforded a covered clearing agency to declare defaults should be clearly defined. For example, a clear definition may include defining which person or group exercises discretionary authority in the event of default and providing specific examples of when the exercise of discretion is appropriate. With respect to policies and procedures related to managing a participant default, the Commission believes that such policies and procedures generally should address, among other things (i) accessing credit facilities, (ii) managing (which may include hedging open positions and

420See CCA Standards proposing release, supra note 5, at 29546–47. 421See OCC at 12. 422See Fidelity at 1. 423See id. at 4–5 (noting CFTC requirements); LCH at 5 (noting both CFTC requirements and requirements under EMIR); Vanguard at 2 (noting CFTC requirements). 424See Fidelity at 1–4; Vanguard at 2. 425See Vanguard at 4. 426See id. (referencing the objectives and principles for the risk management standards prescribed under 12 U.S.C. 5464(b)); see also supra note 18. 427See Fidelity at 1–4; ICI at 4, 6; Vanguard at 2. 428See ICI at 4; Fidelity at 3–4. 429See ICI at 12–13. 430See id. at 4–5. funding collateral positions it is not prudent to close out immediately), transferring (such as through allocation or auction to other members) and/or closing out a defaulting member’s positions; and (iii) transferring and/or liquidating applicable collateral. Based on its supervisory experience, the Commission believes that default procedures would generally set forth (i) the action that may be taken (e.g., exercising mutualization of losses); (ii) who may take those actions (e.g., the division of responsibilities when clearing agencies operate links to other clearing agencies); (iii) the scope of the actions that may be taken (e.g., any limits on the total losses that would be mutualized); (iv) potential changes to the normal settlement practices, should these changes be necessary in extreme circumstances, to ensure timely settlement; (v) the management of transactions at different stages of processing; (vi) the sequencing of actions; (vii) the roles, obligations, and responsibilities of the various parties, including non-defaulting members; (viii) the mechanisms to address a covered clearing agency’s obligations to non-defaulting members (e.g., the process for clearing trades guaranteed by the covered clearing agency to which a defaulting member is a party); and (ix) the mechanisms to address the defaulting member’s obligations to its customers (e.g., the process for dealing with a defaulting member’s accounts). With respect to the operational capacity necessary to comply with requirements to contain losses, the Commission believes that the following measures could help promote operational capacity: (i) Establishing training programs for employees involved in default matters to ensure policies are well implemented; (ii) developing a communications strategy for communicating with stakeholders, including the Commission, concerning defaults; and (iii) making sure the proper tools and resources (whether these are personnel or other) required are available to close out, transfer, or hedge open positions of a defaulting member promptly even in the face of rapid market movements. With respect to the policies and procedures for testing and review of default procedures, including any close￾out procedures, a covered clearing agency generally should perform the testing and review not less than once every twelve months. In addition, a covered clearing agency
generally should make efforts to secure the participation of all stakeholders in testing and review of default procedures, but the Commission recognizes that a covered clearing agency may have limited ability to require said participation by all such stakeholders in all circumstances.
14. Rule 17Ad–22(e)(14): Segregation
and Portability a. Proposed Rule As proposed, Rule 17Ad–22(e)(14) would apply only to a covered clearing agency that is either a security-based swap clearing agency or a complex risk profile clearing agency. Rule 17Ad– 22(e)(14) would require such a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to enable the segregation and portability of positions of a member’s customers and the collateral provided to the covered clearing agency with respect to those positions, and effectively protect such positions and related collateral from the default or insolvency of that member.420 b. Comments Received and Commission Response The Commission received multiple comments on Rule 17Ad–22(e)(14) and, more generally, the Commission’s regime for segregation and portability in the U.S. securities markets. While some commenters supported the Commission’s proposed principles￾based approach, a number of commenters expressed a preference for an approach that would prescribe, and in some instances mandate, a specific segregation and portability framework. In addition, two commenters sought clarification on certain aspects of the proposal relating to portability and protection of customer assets held at a common covered clearing agency participant. The Commission discusses these three groups of comments in turn below. One commenter strongly supported efforts to improve the protection of customer positions and collateral.421 Another commenter also expressed general support for the Commission’s objective of protecting customer collateral posted in connection with clearing security-based swaps, and stated that the implementation of a regulatory structure that provided for appropriate protection of collateral would reduce systemic risk by bolstering confidence that losses related to counterparty risk would be manageable.422 Several commenters, however, urged the Commission to modify the proposed rule’s approach to the treatment of customer positions, particularly with respect to security-based swaps. Three commenters noted the importance of coordinating efforts with other regulators to ensure that the Commission’s rules are consistent with other regulatory regimes.423 Two commenters expressed related concerns that the proposal could result in significantly weaker protections for security-based swaps than exist in the OTC market or in the rules for cleared swaps adopted by the CFTC.424 Of these, one commenter opposed the Commission’s approach of providing covered clearing agencies with discretion to adopt policies and procedures regarding holding of margin for security-based swaps.425 The commenter stated that the Commission should instead adopt a mandatory threshold level of protection for customer margin for security-based swaps that is consistent with the protections afforded to swaps and that is appropriate to the breadth and depth of the security-based swap market.426 Moreover, the same
commenter, along with two other commenters, recommended that the Commission explicitly adopt the LSOC model as a framework for the segregation and portability of customer positions,427 and two of the three commenters also urged that the Commission’s LSOC regime be mandatory and uniform.428 In addition, one commenter that urged the Commission to adopt a specific LSOC mandate also expressed several other related comments. The commenter expressed the need for covered clearing agencies to provide individual segregation as an option for customers.429 The commenter also recommended that both initial and variation margin be passed on to the covered clearing agency, with all excess margin held in a segregated account (the ‘‘LSOC with excess’’ model).430 The commenter further expressed the belief that security-based swap dealers and broker-dealers should not be authorized to rehypothecate or use customer margin or excess margin in its

431See id. at 5. Because the commenter’s recommendation would govern the activities of security-based swap dealers and broker-dealers, the Commission notes that it is beyond the scope of Rule 17Ad–22. 432See AMG–ICI at 8–12. The commenter also noted that the adoption of a sound and workable segregation regime is essential to ensure that counterparties are protected in bankruptcy. See ICI at 11–12. The Commission agrees that the development of a covered clearing agency’s segregation and portability regime should consider the operational and bankruptcy implications of such a regime. The Commission also notes that the tools available to a covered clearing agency considering such implications will necessarily depend on the legal regime applicable to the covered clearing agency. The commenter recommended that the Commission articulate in a proposal the operational and bankruptcy implications of such a structure to provide market participants the opportunity to comment on these issues. See id. at 4. The Commission believes, however, that the operational and bankruptcy implications will depend on the particular tools that a covered clearing agency employs in its segregation and portability regime and also on the legal regimes within which the covered clearing agency operates. Because the Commission is taking a principles-based approach in Rule 17Ad–22(e), the Commission is not making such a proposal under Rule 17Ad–22(e). 433See supra Part II.A.4. 434Exchange Act Rule 15c3–3 requires broker￾dealers that maintain custody of customer securities and cash (a ‘‘carrying broker-dealer’’) to take two primary steps to safeguard these assets. The steps are designed to protect customers by segregating their securities and cash from the broker-dealer’s proprietary business activities. If the broker-dealer fails financially, the securities and cash should be readily available to be returned to customers. In addition, if the failed broker-dealer is liquidated in a formal proceeding under the Securities Investor Protection Act of 1970, the securities and cash would be isolated and readily identifiable as ‘‘customer property’’ and, consequently, available to be distributed to customers ahead of other creditors. The first step required by Rule 15c3–3 is that a carrying broker must maintain physical possession or control of all fully paid and excess margin securities of their customers. See 17 CFR 240.15c3–
3. Physical possession or control means the broker￾dealer must hold these securities in one of several
locations specified in Rule 15c3–3 and free of liens or any other interest that could be exercised by a third party to secure an obligation of the broker￾dealer. Permissible locations include a bank, as defined in section 3(a)(6) of the Exchange Act, and a clearing agency. As described herein, holding jumbo/global positions in the record name and custody of a clearing agency is a fundamental part of current U.S. market structure in which many holders hold indirectly through ‘‘street name.’’ The second step is that a carrying broker-dealer must maintain a reserve of cash or qualified securities in an account at a bank that is at least equal in value to the net cash owed to customers, including cash obtained from the use of customer securities. The account must be titled ‘‘Special Reserve Bank Account for the Exclusive Benefit of Customers.’’ The amount of net cash owed to customers is computed pursuant to a formula set forth in Exhibit A to Rule 15c3–3. Under the customer reserve formula, the broker-dealer adds up customer credit items (e.g., cash in customer securities accounts and cash obtained through the use of customer margin securities) and then subtracts from that amount customer debit items (e.g., margin loans). If credit items exceed debit items, the net amount must be on deposit in the customer reserve account in the form of cash and/ or qualified securities. A broker-dealer cannot make a withdrawal from the customer reserve account until the next computation and then only if the computation shows that the reserve requirement has decreased. The broker-dealer must make a deposit into the customer reserve account if the computation shows an increase in the reserve requirement. See 17 CFR 240.15c3–3. In addition, records of customer positions are subject to broker-dealer recordkeeping rules. Exchange Act Rules 17a–3 and 17a–4 require records be kept for certain periods of time, such as three or six year periods depending upon the type of record. See 17 CFR 240.17a–3, 17a–4. See also 15 U.S.C. 78c–5 (providing for segregation with respect to security-based swaps); Exchange Act Release No. 34–68071 (Oct. 18, 2012), 77 FR 70213, (Nov. 23, 2012) (proposing Rule 18a– 4 under the Exchange Act for segregation with respect to security-based swaps). The Commission has also granted conditional relief under Sections 3E(b), (d), and (e) of the Exchange Act to, among others, clearing entities dually registered with the Commission and the CFTC as registered clearing agencies and DCOs, respectively. See Exchange Act Release No. 34–68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012). 435See LCH at 5. 436See Exchange Act Release No. 34–68433 (Dec. 14, 2012), 77 FR 75211 (Dec. 19, 2012) (‘‘Portfolio Margining order’’). business.431 Finally, in conjunction with another commenter, this commenter also submitted a second comment letter noting that, to implement LSOC for security-based swap positions, the Commission would need to undertake several initiatives in
addition to revising Rule 17Ad– 22(e)(14), including amending rules under SIPA, revising proposed Rule 18a–4 under the Exchange Act, amending Rule 15c3–3 under the Exchange Act, and permanently extending the relief provided in the Portfolio Margining order.432 After careful consideration, the Commission declines to modify Rule 17Ad–22(e)(14) to explicitly prescribe or mandate the segregation and portability frameworks described immediately above. The Commission notes that Rule 17Ad–22(e)(14) provides covered clearing agencies with flexibility, subject to their obligations and responsibilities as SROs under the Exchange Act, to determine policies and procedures with respect to the means of segregation and portability consistent with the rule. Furthermore, in contrast with the views expressed by the commenters above, the Commission believes that Rule 17Ad–22(e)(14) already requires a mandatory threshold level of protection for customer margin for security-based swaps similar to the threshold level of protection for swaps because it requires policies and procedures reasonably designed to both (i) enable the segregation and portability of positions of a participant’s customers and the collateral provided to the covered clearing agency with respect to those positions, and (ii) protect such positions and related collateral from the default or insolvency of that participant. The Commission believes that prescribing the particular frameworks identified by the commenters would be inconsistent with the Commission’s principles-based approach to Rule 17Ad–22(e).433 Although a tool or method like LSOC might be appropriate for a covered clearing agency operating in certain domestic markets to meet the requirements of Rule 17Ad–22(e)(14), in other markets other tools or methods, such as an individual segregation method, may also provide the threshold level of protection sought by the commenters while being consistent with the rule. Moreover, in contrast to the markets for cash and listed options in the United States, where the structure for segregation and portability is primarily maintained at the broker￾dealer level,434 in the market for security-based swaps the segregation and portability structure resides in CCPs, and those entities have taken different approaches reflective of the needs of their different structures, members, markets served, and products cleared. For example, the Commission notes that one commenter understood Rule 17Ad–22(e)(14) to permit a covered clearing agency to employ either an LSOC model, consistent with the requirements set forth by the CFTC, or an individual segregation model, consistent with EMIR.435 Accordingly, the Commission does not believe, as requested by the commenters, that the Commission should mandate LSOC on a uniform basis across security-based swap and complex risk profile clearing agencies. Notwithstanding its decision not to adopt an approach that prescribes or mandates a specific portability and segregation
framework, the Commission notes that it has been mindful of the existing structures for segregation and portability for security-based swaps in the United States, and has granted relief intended to allow investors to participate in the market for security￾based swaps. Notably, the Commission has issued an order granting conditional exemptive relief from compliance with certain provisions of the Exchange Act in connection with a program to commingle and portfolio margin customer positions in cleared credit default swaps, which include both swaps and security-based swaps, in a segregated account established and maintained in accordance with Section 4d(f) of the Commodity Exchange Act.436 In this regard, the Commission observes that the individual segregation method is one tool that provides a

437See OCC at 12.
438See id.
439See ISDA at 5.
440See id. at 5–6.
441See CCA Standards proposing release, supra note 5, at 29546. 442A customer of a member also would not have an account at the clearing agency where holding in record name (rather than through street name ownership). This is the case even where such record name owner-customer does not receive a paper security certificate but holds in book-entry form through the direct registration system, as direct registration system accounts are maintained by a transfer agent and not by the clearing agency. See Exchange Act Release No. 34–63320 (Nov. 16, 2010), 75 FR 71473, 71474 (Nov. 23, 2010) (discussing the ability of registered owners to hold their assets on the records of transfer agents in book-entry form through the direct registration system). 443See CCA Standards proposing release, supra note 5, at 29546. 444See 15 U.S.C. 78eee et seq. Pursuant to SIPA, when a broker-dealer that is a member of the Securities Investor Protection Corporation (‘‘SIPC’’) fails and customer assets are missing, SIPC seeks to return customer cash and securities, and supplements the distribution of the remaining customer assets at the broker-dealer with SIPC reserve funds of up to $500,000 per customer, including a maximum of $250,000 for cash claims. threshold level of protection to customers and may be a tool that a covered clearing agency determines to employ consistent with the requirements of Rule 17Ad–22(e)(14). The Commission also observes that under the ‘‘LSOC with excess’’ model, customer margin is segregated from clearing member margin, and therefore that framework, like LSOC and individual segregation as previously described, is also a tool that may also be relevant to a covered clearing agency’s consideration of how to implement a framework consistent with the requirements of Rule 17Ad–22(e)(14). In addition, the Commission received two comments that asked the Commission to clarify certain aspects of Rule 17Ad–22(e)(14). One commenter noted that there could be tension between the competing goals of (i) customer portability and (ii) the need for a covered clearing agency to ensure the safety and soundness of itself and the markets.437 The commenter urged the Commission to recognize the need for a covered clearing agency to balance these competing priorities and to avoid any interpretation of proposed Rule 17Ad–22(e)(14) that prohibits a covered clearing agency from liquidating positions, including customer positions, where liquidation is reasonably necessary for the protection of the covered clearing agency.438 In response, the Commission believes that efforts to enable portability at security-based swap clearing agencies should be encouraged, but the Commission also recognizes that non-defaulting clearing members should not be required to take on customer positions to avoid putting the non-defaulting clearing member at risk, exceeding the member’s ability to risk manage the customer’s portfolio, or existing or creating inconsistencies with the member’s risk
profile. If a customer’s positions cannot be ported, they will instead be liquidated. Therefore, the Commission does not believe the comment is inconsistent with either current practice or Rule 17Ad–22(e)(14), which does not prohibit the liquidation of customer positions in the event porting would be impracticable, contrary to the customer’s preferences, or pose increased risk to the markets or non￾defaulting members. A second commenter stated that the proposed rule is silent on the issue of protections from fellow-customer risk (i.e., protecting the positions and related collateral of a participant’s customers from losses associated with the positions of other customers of that participant), and that Section 3E(e) of the Exchange Act prohibits clearing agencies from using deposited property as belonging to any person other than the swaps customer of the depositing broker, dealer, or security-based swap dealer.439 The commenter recommended that the Commission make explicit that a covered clearing agency’s policies and procedures must give effect to Section 3E(e) and that the covered clearing agency should publicly disclose the manner in which its procedures do so.440 In response, the Commission notes that Section 3E(e) of the Exchange Act already prohibits such activity and, therefore any proposed rule change under Rule 19b–4 would need to be consistent with Section 3E(e).
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(14) as proposed. The Commission is applying Rule 17Ad– 22(e)(14) only to security-based swap clearing agencies and complex risk profile clearing agencies because existing rules for the cash securities and listed options markets applicable to broker-dealers already promote segregation and portability to protect customer positions and funds in those markets. In proposing Rule 17Ad– 22(e)(14), the Commission noted that it intended to avoid requiring changes to the existing structure of cash securities and listed options markets in the United States where registered clearing agencies that provide CCP or CSD services play a central role.441 This approach is consistent with the PFMI. Transactions in the U.S. cash security and listed options markets are characterized by the following features:
(i) Customers of members generally do not have an account at a clearing agency; 442 (ii) the clearing agency is not able to identify which participants’ customers beneficially own the street name positions registered in the record name of the clearing agency (or its nominee); and (iii) the clearing agency has no recourse to funds of customers of members. Therefore, neither portability nor segregation occur as a practical matter at the CCP level under the current market structure for cash securities and listed options.443 Further, customer positions and funds in the cash securities and listed options markets are protected under the Securities Investor Protection Act of 1970 (‘‘SIPA’’).444 With respect to portability, the Commission notes the portability requirement in Rule 17Ad–22(e)(14) would not apply only upon a member default; instead, a covered clearing agency to which Rule 17Ad–22(e)(14) applies generally should have policies and procedures that facilitate porting in the normal course of business, such as when a customer ends its relationship with a member to start a new relationship with a different member, or as a result of other events, such as a merger involving the member. Under Rule 17Ad–22(e)(14), a security-based swap clearing agency or complex risk profile clearing agency generally should structure its portability arrangements in a way that makes it highly likely that the positions and collateral of a defaulting member’s customers could be effectively transferred to one or more other members. Consistent with its response to the commenters discussed above, the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(14). Therefore, the Commission is providing the following guidance that a covered clearing agency subject to Rule 17Ad– 22(e)(14) generally should consider in establishing and maintaining policies and procedures for segregation and portability:

• Whether it has, at a minimum,
  segregation and portability arrangements that effectively protect a participant’s customers’ positions and related collateral from the default or insolvency of that participant;
• if it additionally offers protection of
  such customer positions and collateral against the concurrent default of the participant and a fellow customer, whether it takes steps to ensure that such protection is effective;

445See CCA Standards proposing release, supra note 5, at 29547–48. 446See id. at 29548–49. 447See id. at 29549. 448See CFA Institute at 1–2. 449See id. at 10. 450See DTCC at 9. 451See OCC at 13. 452See CFA Institute at 10. 453See OCC at 15 (noting that it would be in a position to comply with such requirement by no later than January 1, 2015). 454See CFA Institute at 10. 455See SRC at 2; see also supra note 284 and accompanying text.

• whether it employs an account
  structure that enables it readily to identify positions of a participant’s customers and to segregate related collateral, and whether it maintains customer positions and collateral in individual customer accounts or in omnibus customer accounts;
• whether it structures its portability
  arrangements in a way that makes it highly likely that the positions and collateral of a defaulting participant’s customers will be transferred to one or more other participants;
• whether it discloses its rules,
  policies, and procedures relating to the segregation and portability of a participant’s customers’ positions and related collateral, and, in particular, whether it discloses whether customer collateral is protected on an individual or omnibus basis; and
• whether it discloses any
  constraints, such as legal or operational constraints, that may impair its ability to segregate or port a participant’s customers’ positions and related collateral.

15. Rule 17Ad–22(e)(15): General
    Business Risk a. Proposed Rule As proposed, Rule 17Ad–22(e)(15) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that the covered clearing agency can continue operations and services as a going concern if those losses materialize.445 Proposed Rule 17Ad– 22(e)(15)(i) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to determine the amount of liquid net assets funded by equity based upon its general business risk profile and the length of time required to achieve a recovery or orderly wind-down, as appropriate, of its critical operations and services if such action is taken. Proposed Rule 17Ad–22(e)(15)(ii) would require a clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for holding liquid net assets funded by equity equal to the greater of either six months of its current operating expenses or the amount determined by the board of directors to be sufficient to ensure a recovery or orderly wind-down of critical operations and services of the covered clearing agency, as contemplated by the plans established under proposed Rule 17Ad–22(e)(3)(ii). Additionally, proposed Rule 17Ad– 22(e)(15)(ii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for monitoring its business operations and reducing the likelihood of losses.446 Finally, proposed Rule 17Ad–22(e)(15)(iii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for maintaining a viable plan, approved by the board of directors and updated at least annually, for raising additional equity should its equity fall close to or below the amount required by the proposed rule as discussed above.447 b. Comments Received Most commenters expressed general support for the Rule 17Ad–22(e)(15), but a number of commenters also raised specific areas of concern and encouraged the Commission to adopt specific, and in some cases prescriptive, requirements under the rule. The Commission addresses each of these comments in turn below.
    i. General Comments
    One commenter expressed support for the proposed requirements for clearing agencies to identify and monitor general business risk, manage liquid assets, and maintain a viable plan for raising additional equity when needed.448 The commenter believed that such requirements contribute to avoiding disruptions in the operations of clearing agencies, as well as the broader market. The commenter also expressed support for the proposed rule’s requirements to identify, monitor and manage general business risk and to hold sufficient liquid assets in a manner allowing for a recovery or orderly wind-down if necessary.449 A second commenter expressed support for the proposed requirement that covered clearing agencies hold sufficient capital to cover potential general business and operational losses and to enable continuation of business operations and noted a belief that six months of operating expenses is an appropriate base level of funding.450 A third commenter generally endorsed the Commission’s proposal to require a covered clearing agency to maintain liquid net assets sufficient to allow the covered clearing agency to continue to operate for no less than six months.451 A fourth commenter also generally supported the Commission’s proposal.452 Finally, one commenter requested that the Commission phase-in implementation of Rule 17Ad– 22(e)(15),453 and that comment is addressed in Part II.G above.
    ii. Application to Derivatives Clearing
    One commenter expressed concern that the proposed requirement would be inadequate to address the potential for general business losses incurred by a covered clearing agency that clears large quantities of bespoke swap and derivative instruments, and therefore the commenter urged the Commission to reassess whether clearing of bespoke instruments is appropriate in light of the potential problems in predicting the performance of such instruments during times of stress.454 The Commission notes that the purpose of proposing Rule 17Ad–22(e) was not to reassess whether the clearing of bespoke instruments is appropriate, but to focus on the regulatory framework for the regulation of covered clearing agencies and address, among other things, governance and financial risk management. Therefore, the Commission believes that the comment is beyond the scope of this rulemaking.
    iii. Liquid Net Assets
    The Commission received multiple comments related to the liquid net assets required under Rule 17Ad– 22(e)(15)(ii). One commenter stated that, in addition to pre-funded capital and guaranty funds, it should be clear, in advance, that clearing members (and not the FRB or taxpayers) stand behind the organization should it run into financial trouble.455 The Commission believes that Rule 17Ad–22(e), taken as a whole, already contemplates and addresses the commenter’s concern. As previously noted, the rule requires policies and procedures reasonably designed to promote in a comprehensive way the resiliency of a covered clearing agency and, in particular, its ability to

456See supra notes 284–288 and accompanying text (discussing similar position from commenter regarding Rule 27Ad–22(e)(5)). 457See DTCC at 10; OCC at 13. 458See OCC at 14. 459See id. 460See DTCC at 10; OCC at 14. 461See DTCC at 10–11. 462See id. at 10. 463See id. 464See supra Part II.C.3.c. 465See CFA Institute at 10. 466See id. withstand periods of market stress.456 The Commission notes as a general matter that the liquid net assets described in the rule should not be confused with the accounting term ‘‘net liquid assets.’’ For purposes of Rule 17Ad–22(e)(15)(ii), a covered clearing agency generally should consider liquid net assets to mean cash or highly liquid securities. When liquid net assets are funded by equity, a covered clearing agency generally should consider equity to mean common stock, disclosed reserves, and other related earnings. In addition, the Commission notes that Rule 17Ad–22(e)(3)(ii) separately requires policies and procedures for plans for recovery or orderly wind￾down. Two commenters urged the Commission not to take too narrow a view of what sources of funding would be considered liquid net assets funded by equity under the proposed rule.457 The first commenter believed that in calculating its six-month liquid asset coverage, a CCP should be allowed to include projected revenues of the CCP over the same six-month period, subject to an appropriate haircut.458 The commenter also requested that the Commission clarify that a buffer, such as a contingent capital arrangement requiring clearing members to contribute funds, should be considered an appropriate source of equity funding under the rule.459 On these two issues, the Commission believes that the commenter has identified policies and procedures that would not satisfy Rule 17Ad–22(e)(15). Among other things, Rule 17Ad–22(e)(15)(ii) requires policies and procedures for holding liquid net assets funded by equity. If a covered clearing agency is relying on projected revenues or on obtaining liquid net assets through contingent arrangements, then the covered clearing agency is not holding liquid net assets funded by equity. The focus of Rule 17Ad–22(e)(15)(ii) is mitigating the risk that a covered clearing agency would be unable to perform its obligations as a going concern; to minimize such performance risk, the covered clearing agency must necessarily have assets that are readily available, such as cash reserves or cash equivalents. Projected revenues, like contingent funding mechanisms, do not provide certainty that a covered clearing agency can continue to perform its obligations when general business losses arise because the assets may be unavailable to satisfy business losses. The same commenter and a second commenter also urged the Commission to clarify and broadly construe what constitutes equity capital to include noncumulative perpetual preferred stock, which would be permanently available.460 One of these commenters noted that such preferred stock constitutes
additional tier 1 capital under the BCBS capital framework and expressed the belief that the elements of capital that constitute tier 1 capital should be permitted to count as equity under the proposed rule.461 In response, the Commission believes that the question of whether a particular noncumulative preferred stock would constitute equity capital would depend on the terms and conditions of each instrument and therefore such instruments would need to be assessed on a case-by-case basis. The Commission therefore declines to adopt the position urged by the commenter. The same commenter further expressed an expectation that liquid net assets funded by equity would be calculated by comparing the clearing agency’s shareholders equity to proprietary cash and liquid marketable securities and deducting unaffiliated third-party debt.462 The commenter believed that it is appropriate for a covered clearing agency, where it has significant shareholder equity, to be able to liquefy that equity via intercompany funding so long as the requisite amount of cash and/or liquid securities is held and maintained at the covered clearing agency level. The commenter also emphasized the role that holding company structures play in funding their affiliates, noting that the holding company may have broader access to financial markets to liquefy the equity base of their subsidiaries.463 The commenter argued that such financing would provide a high level of flexibility to meet a covered clearing agency’s needs. In response to the commenter, the Commission is unable to opine on these particular calculations of the commenter’s liquid net assets because the determination of whether a particular liquid net asset calculation meets the requirements of Rule 17Ad– 22(e)(15)(ii) would need to be made on a detailed, case-by-case basis. The Commission would need to understand and evaluate, for example, the covered clearing agency’s particular capital structure, the types of securities being held, the nature and extent of the covered clearing agency’s debt holdings, the structure and elements of the intercompany funding arrangement described by the commenter, and the nature of the access that the holding company has to the relevant markets for the purposes of liquefying any subsidiary equity and how that access differs from that of the covered clearing agency. In response to the commenter’s position regarding the role that a holding company structure may play in addressing the requirement of Rule 17Ad–22(e)(15), the Commission reiterates prior statements made above that the requirements of Rule 17Ad– 22(e) apply to each covered clearing agency registered with the Commission. Therefore, for example, if a covered clearing agency’s parent or holding company were to adopt a company-wide framework addressing the issues covered in Rule 17Ad–22(e)(15), the covered clearing agency nevertheless would itself need to adopt or ratify those policies and procedures with respect to its own business
to meet the requirements of Rule 17Ad–22(e)(15).464 As adopted, pursuant to Rule 17Ad– 22(e)(15)(ii) each covered clearing agency is required to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for holding liquid net assets funded by equity equal to the greater of either six months of its current operating expenses or the amount determined by the board of directors to be sufficient to ensure a recovery or orderly wind-down of critical operations and services of the covered clearing agency.
iv. Viable Plan To Raise Additional
Equity
With respect to the requirement for a covered clearing agency’s policies and procedures to be reasonably designed to have a viable plan, updated annually, for raising additional equity when the covered clearing agency’s equity falls below or close to the amount required by the proposed rule, one commenter believed that the proposed rule should require capital-raising to occur prior to a covered clearing agency approaching the required equity threshold.465 Otherwise, the commenter stated, the covered clearing agency may be unable to raise the needed equity due to market conditions.466 In response, the

467See DTCC at 11.
468See The Clearing House at 3, 11–12. 469See id. at 3, 11. 470See id. at 11. 471See id. Commission notes that Rule 17Ad– 22(e)(15)(iii), as proposed, addresses the commenter’s concern by requiring that the plan be viable when the covered clearing agency’s equity falls below or close to the amount required by the proposed rule. However, the Commission is providing further guidance below to clarify its position further. Another commenter expressed the belief that an annual review of the plan for raising additional equity is unnecessary and that a biannual review is sufficient, provided that the plan is reviewed sooner should changes occur.467 The Commission continues to believe, however, that an annual review is an appropriate interval to help ensure that each covered clearing agency is mindful of changing market conditions. The Commission believes that, in a two￾year window between biannual reviews, so much time passes that a covered clearing agency may find that market conditions have changed so significantly that a once-viable plan to raise additional equity is no longer viable. A yearly review cycle helps ensure that the covered clearing agency remains aware of changing market conditions, facilitating on an annual basis incremental updates to the plan in response to said changing market conditions. Further, the Commission believes that a covered clearing agency could adopt policies and procedures that provide for more frequent review in response to changing market conditions, and that such policies and procedures would help a covered clearing agency better react to periods of market stress. Therefore, the Commission has determined not to adopt the commenter’s suggested approach.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(15) as proposed. Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(15), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address general business risk:

• Whether it has robust management
  and control systems to identify, monitor, and manage general business risks, including losses from poor execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses;
• whether it holds liquid net assets
  funded by equity (such as common stock, disclosed reserves, or other retained earnings) so that it can continue operations and services as a going concern if it incurs general business losses;
• whether the amount of liquid net
  assets funded by equity it holds is determined by its general business risk profile and the length of time required to achieve a recovery or orderly wind￾down, as appropriate, of its critical operations and services if such action is taken;
• whether it maintains a viable
  recovery or orderly wind-down plan and holds sufficient liquid net assets funded by equity to implement this plan that, at a minimum, are funded by equity equal to at least six months of current operating expenses, in addition to resources held to cover participant defaults or other risks addressed by its financial resources;
• whether assets held to cover general
  business risk are of high quality and sufficiently liquid to allow the covered clearing agency to meet its current and projected operating expenses under a range of scenarios, including in adverse market conditions; and
• whether it maintains a viable plan,
  approved by the board of directors and updated no less than annually, for raising additional equity should its equity fall close to or below the amount needed. With respect to Rule 17Ad– 22(e)(15)(iii) and the policies and procedures for maintaining a viable plan, the Commission believes that a viable plan generally should enable the covered clearing agency to hold sufficient liquid net assets to achieve recovery or orderly wind-down. Therefore, the Commission believes that a covered clearing agency’s policies and procedures generally should define when a covered clearing agency’s equity falls close to the amount required by the rule, so that the covered clearing agency has policies and procedures that clearly define when the covered clearing agency should initiate the plan to raise additional equity. In developing such policies and procedures, a covered clearing agency generally should consider and account for circumstances that may require a certain length of time before any plan can be implemented. For example, before obtaining shareholder approval to issue new shares, a covered clearing agency may need to call a special meeting subject to a notice period. In addition, with respect to the plan under Rule 17Ad–22(e)(15)(iii) being approved by the board of directors and updated at least annually, the board of a covered clearing agency generally should perform the approval not less than once every twelve months.

16. Rule 17Ad–22(e)(16): Custody and
    Investment Risks a. Proposed Rule As proposed, Rule 17Ad–22(e)(16) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to safeguard its own and its participants’ assets and minimize the risk of loss and delay in access to these assets. Proposed Rule 17Ad–22(e)(16) would also require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to invest such assets in instruments with minimal credit, market, and liquidity risks. b. Comments Received and Commission Response The Commission received one comment on proposed Rule 17Ad– 22(e)(16), which generally sought consideration of more prescriptive or granular aspects to the Commission’s approach.468 The commenter made several points about the proposed rule. First, the commenter noted that to mitigate the risks to participants from current CCP practices for participant collateral, including commingling, rehypothetication or title transfer arrangements, and investment practices, the Commission should provide additional guidance regarding the specific protections a covered clearing agency must employ to safeguard participants’ collateral and invest such collateral in instruments with minimal credit, market, and liquidity risks.469 Moreover, the commenter stated its belief that house collateral is inadequately segregated, current investment practices expose members to unnecessary risk of loss, and CCP investment policies and practices expose members to interest rate and credit risk through investments in higher-risk and longer-term instruments, putting member principal at risk.470 The commenter stated that, due to commingling and inadequate traceability, participants’ rights to the return of their collateral upon the insolvency of a CCP are often uncertain and could be impaired.471 The commenter also noted that some CCPs are permitted to rehypothecate participant securities collateral or to secure their investments using title

472See id.
473See id. at 11–12.
474See id. at 12.
475See id.
476See id.
477See id.
478See id. 479See supra Part II.B. 480See CCA Standards proposing release, supra note 5, at 29551. transfer arrangements, each of which exposes participants to potential loss due to the unavailability of participant collateral (or its liquidation value) in the CCP’s insolvency.472 For the purpose of minimizing investment risk and the risk of loss of participant collateral, the commenter recommended that the Commission confirm the applicability of the following protections with respect to a covered clearing agency’s treatment of participant collateral:

• Limit a CCP’s ability to encumber or
  impair participants’ rights in guaranty fund contributions and initial margin posted to the CCP in support of proprietary positions.473
• Specify standards for the
  establishment, designation, and maintenance of accounts for the safekeeping of participant collateral, and related requirements to ensure the treatment of such funds as belonging to the relevant participants in the event of the insolvency of the covered clearing agency and otherwise; 474
• Further specify the types of highly
  liquid investments (and, as applicable, eligible counterparties and issuers), and related concentration and weighted average maturity limits, applicable to the investment of participant collateral, as well as the capital of the covered clearing agency committed to the default waterfall; 475
• Prohibit the rehypothecation of
  non-cash collateral of non-defaulting participants and limit such rehypothecation in the case of a defaulting participant to circumstances where an immediate liquidation of the non-cash collateral would lead to severe asset value depreciation; 476 and
• Require to use pledged
  arrangements when taking collateral, except where title transfer arrangements are necessitated by applicable law.477 The commenter also recommended that the Commission specify a covered clearing agency’s disclosure obligations with respect to its collateral investment activities, including the extent of reuse of participant collateral, eligible counterparties for collateral rehypothecation, the covered clearing agency or participant’s rights to the collateral posted to it and the covered clearing agency’s investment policies, balances, and concentrations.478 Much of the clarification and guidance sought by the commenter, in the Commission’s view, would entail the imposition of prescriptive and granular requirements on covered clearing agencies with respect to their custody and investment risks. Such ex ante requirements would be inconsistent with the Commission’s principles-based approach to Rule 17Ad–22(e).479 Although it is possible that the commenter’s suggestions could be appropriate in certain circumstances, the Commission believes that these comments do not take into account the variation among covered clearing agencies with respect to the different markets served, products cleared, and risk management needs. Nevertheless, the Commission believes that Rule 17Ad–22(e)(16) already encompasses the commenter’s suggestions, and that many covered clearing agencies already employ and can continue to consider these suggestions when designing or revising policies and procedures under the rule. The Commission therefore believes that no modifications to Rule 17Ad–22(e)(16) are necessary.
  c. Final Rule
  The Commission is adopting Rule 17Ad–22(e)(16) as proposed. Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(16), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address custody and investment risk:
• Whether it holds its own and its
  participants’ assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures, and internal controls that fully protect these assets;
• whether it has prompt access to its
  assets and the assets provided by participants, when required;
• whether it evaluates and
  understands its exposures to its custodian banks, taking into account the full scope of its relationships with each;
• whether its investment strategy is
  consistent with its overall risk management strategy and fully disclosed to its participants; and
• whether its investments are secured
  by, or claims on, high-quality obligors, allowing for quick liquidation with little, if any, adverse price effect. The Commission also notes that failure by a clearing agency to hold assets in instruments with minimal credit, market, and liquidity risk may limit the clearing agency’s ability to access these assets promptly. The Commission therefore believes that covered clearing agencies, in seeking to satisfying the requirements of Rule 17Ad–22(e)(16), generally should seek to minimize the risk of loss or delay in access by holding assets that are highly liquid (e.g., cash, U.S. Treasury securities, or securities issued by a U.S. government agency) and by using only supervised and regulated entities such as banks to act as custodians for the assets and to facilitate settlement. The Commission further notes that the rule does not require that a covered clearing agency invest its own and its participants’ assets but that it have policies and procedures for investing such assets in instruments with minimal credit, market, and liquidity risks when it determines to so invest.

17. Rule 17Ad–22(e)(17): Operational
    Risk Management a. Proposed Rule As proposed, Rule 17Ad–22(e)(17) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to manage the covered clearing agency’s operational risk. In proposing Rule 17Ad–22(e)(17), the Commission noted that operational risk involves, among other things, the likelihood that deficiencies in information systems or internal controls, human errors or misconduct, management failures, unauthorized intrusions into corporate or production systems, or disruptions from external events such as natural disasters, would adversely affect the functioning of a clearing agency.480 Proposed Rule 17Ad–22(e)(17)(i) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Proposed Rule 17Ad–22(e)(17)(ii) would require a covered clearing agency to establish, implement, maintain, and enforce written policies and procedures reasonably designed to ensure that systems have a high degree of security, resiliency, operational reliability, and adequate, scalable capacity. Finally, proposed Rule 17Ad–22(e)(17)(iii) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a

481See id.
482See CFA Institute at 11.
483See CCA Standards proposing release, supra note 5, at 29551; see also infra Part IV.C.17 (also discussing the similar provisions between Rules 17Ad–22(e)(17) and (d)(4)); Clearing Agency Standards, supra note 5, at 66248 (discussing Rule 17Ad–22(d)(4)). 484See CCA Standards proposing release, supra note 5, at 29551–52. 485See CFA Institute at 11. business continuity plan that addresses events posing a significant risk of disrupting operations.481 b. Comments Received and Commission Response The Commission received one comment that generally supported the Commission’s approach in Rule 17Ad– 22(e)(17). The commenter expressed a belief that most, if not all, businesses of the size and significance of a covered clearing agency must commit to and undertake plans to manage operations in the event of a disruption, including through the adoption of a formal business continuity plan.482 The commenter also argued that anything less risks major repercussions and the loss of investor trust. In response, the Commission notes that Rule 17Ad– 22(e)(17) addresses the commenter’s concerns by including requirements for policies and procedures with respect to a business continuity plan.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(17) with one modification:
Because the text in Rule 17Ad– 22(e)(17)(ii) for ‘‘establishing and maintaining policies and procedures reasonably designed’’ is duplicative of the requirement under Rule 17Ad–22(e) to have policies and procedures reasonably designed to establish, maintain, implement, and enforce the requirements thereunder, the Commission is removing the duplicative text. In addition, the Commission notes that Rule 17Ad–22(e)(17) includes similar provisions to Rule 17Ad– 22(d)(4), and that, like Rule 17Ad– 22(d)(4), Rule 17Ad–22(e)(17) concerns operational risks that stem from deficiencies in internal controls, human errors, and management failures.483 The Commission also notes that Rule 17Ad– 22(e)(17) includes requirements related to operational risk management in addition to the requirements in Regulation SCI, previously discussed in
Part I.A.4. The Commission therefore
notes that a covered clearing agency, in seeking to address the requirements of Rule 17Ad–22(e)(17), generally should remain mindful of related requirements under other Commission rules and regulation. Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(17), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address operational risk:

• Whether it establishes a robust
  operational risk-management framework with appropriate systems, policies, procedures, and controls to identify, monitor, and manage operational risks;
• whether its board of directors
  clearly define the roles and responsibilities for addressing operational risk and whether it endorses the covered clearing agency’s operational risk-management framework;
• whether it clearly defines
  operational reliability objectives and whether it has policies in place that are designed to achieve its service-level objectives;
• whether the covered clearing
  agency ensures that it has scalable capacity adequate to handle increasing stress volumes and to achieve its service-level objectives;
• whether it has comprehensive
  physical and information security policies that address all potential vulnerabilities and threats;
• whether it has a business continuity
  plan that addresses events posing a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption; and
• whether it identifies, monitors, and
  manages the risks that key participants, other covered clearing agencies, and service and utility providers might pose to its operations. With respect to ‘‘adequate, scalable capacity’’ under Rule 17Ad– 22(e)(17)(ii), the Commission believes that a covered clearing agency generally should have operational systems that can be extended or expanded based on its anticipated business needs. Further, the Commission believes that, to help limit disruptions that may impede the proper functioning of a covered clearing agency, covered clearing agencies generally should review their operations for potential weaknesses and develop appropriate systems, controls, and procedures to address weaknesses the rule seeks to mitigate.

18. Rule 17Ad–22(e)(18): Access and
    Participation Requirements As proposed, Rule 17Ad–22(e)(18) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to establish objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access by direct and, where relevant, indirect participants and other FMUs. Proposed Rule 17Ad–22(e)(18) also would require that a covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency and to monitor compliance with participation requirements on an ongoing basis.484 The Commission received one comment regarding Rule 17Ad– 22(e)(18). The commenter expressed support for the fair and open participation requirements under the proposed rule, the public disclosure of such participation criteria under the proposed rule, and the proposed requirement that such criteria be risk￾based.485 The Commission is adopting Rule 17Ad–22(e)(18) as proposed. Moreover, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad– 22(e)(18), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address access and participation requirements:

• Whether it allows for fair and open
  access to its services, including by direct and where relevant, indirect participants and other covered clearing agencies, based on reasonable risk￾related participation requirements;
• whether its participation
  requirements are justified in terms of the safety and efficiency of the covered clearing agency and the markets it serves, are tailored to and commensurate with its specific risks, and are publicly disclosed; and
• whether it monitors compliance
  with its participation requirements on an ongoing basis and clearly defines and publicly discloses procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements. The Commission also notes that, in contrast to other requirements in Rule 17Ad–22(e) where the term ‘‘transparent’’ is used in the context of facilitating disclosure ‘‘where appropriate,’’ the requirement here for policies and procedures reasonably

486See CCA Standards proposing release, supra note 5, at 29553. 487See CFA Institute at 11–12. 488See LCH at 5. 489See id. 490See id. 491See, e.g., 17 CFR 240.15c3–1, 15.c3–3 (setting forth net capital and customer protection requirements for broker-dealers); 17 CFR 240.17h– 1T, 17h–2T (setting forth requirements that certain broker-dealers maintain, preserve, and file a quarterly summary of certain information regarding those affiliates, subsidiaries and holding companies whose business activities are reasonably likely to have a material impact on their own financial and operating condition); 17 CFR 240.17a–3, 17a–4, 17a–5, 17a–11 (setting forth requirements for broker-dealers to maintain books and records, file periodic reports including quarterly and annual financial statements, and report to the Commission and the appropriate SRO regarding net capital, recordkeeping, and other operational problems, within certain time periods). 492See OCC at 15. designed to establish ‘‘publicly disclosed’’ criteria for participation would necessarily require that the relevant policies and procedures be reasonably designed to provide for disclosure of such criteria for participation. The Commission also notes that membership standards at covered clearing agencies generally should seek to limit the potential for member defaults and, as a result, losses to non-defaulting members in the event of a member default. Using risk-based criteria helps to protect investors by limiting the participants of a covered clearing agency to those for which the covered clearing agency has assessed the likelihood of default.
19. Rule 17Ad–22(e)(19): Tiered
Participation Arrangements a. Proposed Rule As proposed, Rule 17Ad–22(e)(19) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage the material risks to the covered clearing agency arising from arrangements in which firms that are indirect participants in the covered clearing agency rely on the services provided by direct participants in the covered clearing agency to access the covered clearing agency’s payment, clearing, or settlement facilities (hereinafter ‘‘tiered participation arrangements’’). In addition, proposed Rule 17Ad–22(e)(19) would require that a covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to regularly review the material risks to the covered clearing agency arising from such tiered participation arrangements.486 b. Comments Received and Commission Response The Commission received several comments regarding tiered participation arrangements under Rule 17Ad– 22(e)(19). One commenter believed that regular reviews of tiered participation arrangements are an important part of a covered clearing agency’s ability to perform prompt and accurate clearance and settlement, to protect investors, and to safeguard securities and funds.487 However, some commenters focused on particular aspects of the proposal in seeking to have the Commission consider a specific approach or issue. Comments directed to these particular substantive aspects of Rule 17Ad– 22(e)(19) are discussed below.
i. Need for Due Diligence of Indirect
Participants
One commenter believed that the Commission did not provide sufficient guidance regarding who would be indirect participants of a covered clearing agency and, as a result, cannot ascertain whether it is correctly reading the proposed rule.488 The commenter further expressed the view that it is not appropriate for a covered clearing agency to perform due diligence on the clients of its clearing members for the following reasons:

• The covered clearing agency has no
  direct, contractual relationship to these clients;
• Performing due diligence on what
  may be a very large number of clients could be very burdensome for the covered clearing agency; and
• Clients may object to due diligence
  inquiries from a covered clearing agency and choose to move their business to another CCP that is not required to perform such due diligence.489 Instead, the commenter expressed a view that a covered clearing agency can reasonably rely on the due diligence that its clearing members perform on their clients and should not have to perform its own due diligence on these indirect participants.490 In response, the Commission first notes that the scope of Rule 17Ad– 22(e)(19) does not only contemplate clients of clearing members. Instead, the rule also contemplates situations where other parties may enter into a contractual arrangement with a clearing member, particularly arrangements that create credit exposures to the clearing member, such as where a third party acts as guarantor to an obligation on behalf of the clearing member, may be indirect participants in the covered clearing agency. The Commission therefore believes that the alternative approach suggested by the commenter above does not entirely contemplate the scope of indirect participants addressed by the Rule 17Ad–22(e)(19). The Commission acknowledges that there are limits on the extent to which a covered clearing agency can, in practice, observe or influence a direct participant’s commercial or contractual relationships, and that these limits will, in turn, affect the appropriateness of a covered clearing agency performing due diligence on its indirect participants. However, a clearing agency will often have access to information, including through the due diligence that a member performs on its clients as well as information on transactions undertaken on behalf of indirect participants. A clearing agency can also set direct participation requirements that may include criteria relating to how direct participants manage relationships with their customers in-so-far as these criteria are relevant for the safe, efficient, and effective operation of the clearing agency. Accordingly, a covered clearing agency generally should have the ability to identify the types of risk that could arise from tiered participation and should monitor concentrations of such risk. Further, the Commission notes that some direct and indirect participants of the covered clearing agency will be registered with the Commission as, for example, a broker-dealer, and therefore be subject to their own requirements for reporting and financial responsibility,491 which a covered clearing agency could use in developing policies and procedures for tiered participation arrangements. In light of the availability of the tools described above, the Commission does not believe that the commenter’s suggestion for a covered clearing agency to rely on due diligence performed by its clearing members is an appropriate alternative for the purposes of addressing the requirements a covered clearing agency must satisfy under Rule 17Ad–22(e)(19).
  ii. Need To Obtain Information From
  Clearing Members
  One commenter expressed concern that proposed Rule 17Ad–22(e)(19) could be interpreted as requiring a covered clearing agency to obtain information from its clearing members identifying with specificity each of the customers attached to each cleared transaction and to routinely monitor customer-level risk with respect to each such customer.492 The commenter acknowledged that covered clearing agencies should have the ability to gather certain information from its

493See id. 494See supra note 491 (describing examples of such information that is available for certain participants that are separately registered with the Commission). 495See DTCC at 11. 496See id. 497See id. 498See supra notes 491, 494, and accompanying text. direct participants and that some circumstances may require clearing agencies to monitor the systemic risk created by one or more significant indirect participants, but the commenter believed it is inappropriate for a covered clearing agency to routinely police the systemic risks created by each indirect participant.493 In response, the Commission notes that Rule 17Ad– 22(e)(19) requires a covered clearing agency to have policies and procedures governing risk management that considers a clearing member’s customer relationships, but it does not require a covered clearing agency to actively risk manage those customer relationships on behalf of each clearing member. Instead, Rule 17Ad–22(e)(19) requires policies and procedures that identify, monitor, and manage the material risks to the covered clearing agency arising from tiered participation arrangements. Such policies and procedures would require a covered clearing agency to account for the range of risks stemming from each clearing member, which necessarily includes risks resulting from the clearing member’s relationships with its customers, as previously described above. To engage in effective risk management of a clearing member, the covered clearing agency would need a complete picture of cleared transactions attributed to each clearing member, but it may require less specific information from the clearing member with respect to customers so long as the information it does receive provides the covered clearing agency with a comprehensive understanding of the material risks posed to the covered clearing agency by each clearing member.494
iii. Recommendation for a Risk-Based
Approach
One commenter expressed the belief that covered clearing agencies should use a risk-based approach when developing policies and procedures to implement the requirement that a covered clearing agency have policies and procedures reasonably designed to identify, monitor, and manage the risks to the clearing agency arising from indirect participants.495 The commenter expressed the belief that a covered clearing agency should provide direct participants with information relevant to their activities (both direct and indirect) that is available to the clearing agency, thus enabling direct participants to use such information to evaluate and manage its correspondent customer relationships.496 The commenter also expressed a view that a covered clearing agency should evaluate the risks presented to it by indirect relationships in the context of a direct participant’s overall risk management policies and procedures.497 The commenter expressed the belief that such policies will need to take into account the level of information available to the covered clearing agency and that there needs to be a distinction between the supervisory oversight of the direct participant by its primary supervisor and the type of oversight that a clearing agency can be expected to provide. The Commission agrees that such a risk-based approach could be one approach to achieving compliance with Rule 17Ad–22(e)(19), but believes that each covered clearing agency should determine the appropriate approach for determining compliance with Rule 17Ad–22(e)(19) in light of the composition of its members and the products they clear, as well as its risk management framework. Policies and procedures at a covered clearing agency for managing risks from indirect participants will necessarily be constrained to some degree by the lack of a direct contractual agreement between the covered clearing agency itself and the indirect participant. The Commission notes, however, that evaluating and managing the risk from direct participants, pursuant to Rule 17Ad–22(e)(19), would require policies and procedures consistent with the Commission’s statements in Parts II.C.19.b.i and ii above. As noted there, the Commission acknowledges that direct and indirect participants in a covered clearing agency may be regulated entities themselves subject to reporting and other requirements that may help facilitate the covered clearing agency’s management of risk from tiered participation arrangements.498
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(19) as proposed. Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(19), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address tiered participation arrangements:

• Whether a covered clearing agency
  ensures that its rules, procedures, and agreements allow it to gather sufficient information about indirect participation to identify, monitor, and manage any material risks to the covered clearing agency arising from such tiered participation arrangements;
• whether it identifies material
  dependencies between direct and indirect participants that might affect the covered clearing agency;
• whether it identifies indirect
  participants responsible for a significant proportion of transactions processed by the covered clearing agency and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the covered clearing agency to manage the risks arising from these transactions; and
• whether it regularly reviews risks
  arising from tiered participation arrangements and takes mitigation action when appropriate. In addition to the guidance above, the Commission notes that, when addressing its compliance with Rule 17Ad–22(e)(19), a covered clearing agency could consider whether its rules, policies, procedures, and agreements with direct participants allow it to gather basic information about indirect participants to identify, monitor, and manage any material risks to the covered clearing agency arising from such tiered participation arrangements. This information should help enable the covered clearing agency to identify (i) the proportion of activity that direct participants conduct on behalf of indirect participants, (ii) direct participants that act on behalf of a material number of indirect participants, (iii) indirect participants with significant volumes or values of transactions in the system, and (iv) indirect participants whose transaction volumes or values are large relative to those of the direct participants through which they access the covered clearing agency. In this vein, a covered clearing agency could consider an indirect participant’s status as a designated market maker or supplemental liquidity provider in identifying material risks to the covered clearing agency. A covered clearing agency could also consider different trading strategies or changes in trading strategies used by indirect participants in identifying, monitoring, and managing material risks to the covered clearing agency. The Commission also notes that Rule 17Ad–22(e)(19) is intended to promote the ongoing management of risks associated with tiered participation arrangements stemming from the

499See CCA Standards proposing release, supra note 5, at 29553. 500See id. at 29554. The Commission received no comments regarding the definition of ‘‘link’’ and is adopting it with one modification, as discussed in
Part II.C.20.c. Because of other modifications to
Rule 17Ad–22(a), the definition of ‘‘link’’ is also being moved to Rule 17Ad–22(a)(8). See infra Part VI. 501See DTCC at 13–14 & n.46. 502See Rule 17Ad–22(e)(20), infra Part VI. 503See supra note 500. 504See Rule 17Ad–22(a)(8), infra Part VI. 505See supra Part II.B.3.c. 506See CCA Standards proposing release, supra note 5, at 29554. 507See CFA Institute at 12. dependencies and risk exposures that such arrangements can create. However, because proposed Rule 17Ad–22(e)(19) only addresses the situation where indirect participants in the covered clearing agency rely on direct participants, the Commission notes that Rule 17Ad–22(e)(19) would not apply in the circumstance where a covered clearing agency providing CSD services has members that are broker-dealers maintaining accounts for retail customers.
20. Rule 17Ad–22(e)(20): Links
a. Proposed Rule
As proposed, Rule 17Ad–22(e)(20) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage risks related to any link with one or more other clearing agencies, FMUs, or trading markets.499 In proposing the rule, the Commission proposed to define ‘‘link’’ in Rule 17Ad–22(a)(10) to mean any set of contractual and operational arrangements between a covered clearing agency and one or more other clearing agencies, FMUs, or trading venues that connect them directly or indirectly for the purposes of participating in settlement, cross margining, expanding its services to additional instruments and participants, or for any other purposes material to their business.500 b. Comments Received and Commission Response The Commission received no comments regarding the substance of the proposed rule. One comment requested that the Commission phase-in implementation of Rule 17Ad– 22(e)(20),501 and that comment is addressed in Part II.G below.
c. Final Rule
The Commission is adopting Rule 17Ad–22(e)(20) as proposed.502 The Commission is adopting the definition of ‘‘link’’ with one modification and moving it to Rule 17Ad–22(a)(8), as previously discussed.503 Specifically, in the definition of ‘‘link,’’ the Commission is replacing the word ‘‘venues’’ with ‘‘markets’’ to improve consistency with Rule 17Ad–22(e)(20).504 Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(20), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address links:

• Whether it identifies, monitors, and
  manages all potential sources of risk arising from the link arrangement, before entering into a link arrangement and on an ongoing basis once the link is established;
• whether a link has a well-founded
  legal basis, in all relevant jurisdictions, that support its design and provides adequate protection to the covered clearing agencies involved in the link;
• whether linked CSDs measure,
  monitor, and manage the credit and liquidity risk arising from each other;
• whether provisional transfers of
  securities between linked CSDs are prohibited or, at a minimum, the retransfer of provisionally transferred securities are prohibited prior to the transfer becoming final.
• whether an investor CSD can only
  establish a link with an issuer CSD if the arrangement provides a high level of protection for the rights of the investor CSD’s participants;
• whether an investor CSD that uses
  an intermediary to operate a link with an issuer CSD measures, monitors, and manages the additional risks arising from the use of the intermediary.
• before entering into a link with a
  CCP, whether it identifies and manages the potential spill-over effects from the default of the linked CCP; and
• when in a CCP link arrangement,
  whether it is able to cover, at least on a daily basis, its current and potential future exposures to the linked CCP and its participants, if any, fully with a high degree of confidence without reducing the covered clearing agency’s ability to fulfill its obligations to its own participants at any time. In addition, the Commission reiterates that the requirements for policies and procedures for linkages must be addressed by each covered clearing agency at the level of the covered clearing agency.505 Therefore, each covered clearing agency under Rule 17Ad–22(e) would itself need to adopt or ratify policies and procedures for linkages with respect to its own business, even if it is a member of a group or under a holding company that has group-level policies and procedures.

21. Rule 17Ad–22(e)(21): Efficiency and
    Effectiveness
    As proposed, Rule 17Ad–22(e)(21) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it is efficient and effective in meeting the requirements of its participants and the markets it serves. Proposed Rule 17Ad– 22(e)(21)(i) through (iv) would require a covered clearing agency’s management to regularly review the efficiency and effectiveness of its (i) clearing and settlement arrangements; (ii) operating structure, including risk management policies, procedures, and systems; (iii) scope of products cleared, settled, or recorded; and (iv) use of technology and communication procedures.506 The Commission received one comment in support of the proposed approach. The commenter expressed support for the requirement that a covered clearing agency review its efficiency and effectiveness in meeting the requirements of its participants and the markets it serves and for the specific areas to be reviewed as set forth in proposed Rule 17Ad–22(e)(21).507 The Commission is adopting Rule 17Ad–22(e)(21) with one modification:
    The Commission is removing reference to ‘‘recorded’’ products under Rule 17Ad–22(e)(21)(iii) because recording products is not a function of covered clearing agencies. In addition, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(21), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address efficiency and effectiveness:

• Whether its design meets the needs
  of its participants and the markets it serves, particularly with regard to choice of a clearance and settlement arrangement, operating structure, scope of products cleared, settled, or recorded, and use of technology and procedures;
• whether it clearly defines goals and
  objectives that are measurable and achievable, such as in the areas of minimum service levels, risk￾management expectations, and business priorities; and

508See CFA Institute at 12.
509See DTCC at 11–12.
510Relevant internationally accepted communication procedures and standards could include messaging standards such as SWIFT, FIX, and FpML. 511See id. at 29556. 512See id. at 29557.

• whether it establishes mechanisms
  for the regular review of its efficiency and effectiveness.

22. Rule 17Ad–22(e)(22):
    Communication Procedures and Standards a. Proposed Rule As proposed, Rule 17Ad–22(e)(22) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it uses, or at a minimum accommodates, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, and settlement. b. Comments Received and Commission Response Two commenters expressed views regarding Rule 17Ad–22(e)(22). The first commenter supported the Commission’s proposed rules requiring the use of internationally accepted communication procedures and standards. The commenter expressed the belief that such a requirement will result in more effective communication with direct and indirect participants and will result in a more prompt and accurate process.508 The second commenter noted that users of its systems that process transactions only in a particular market typically rely on long-standing, highly automated communications methods and messaging formats that are viewed as industry-standard, regardless of international standards. The commenter urged that these users not be required to retool their communication systems in such a market to comply with international communication standards and that such a requirement may impose substantial costs devoid of any material benefits. The commenter noted that the proposed rule permits a covered clearing agency to accommodate international standards as an equally appropriate means of satisfying the requirement as is the exclusive use of a standard (e.g., a clearing agency providing such an accommodation can permit users who wish to use international standards exclusively to do so, without forcing those users who do not wish (and have no need to) use the international standards to convert to them). Additionally, the commenter read the proposed provision as intending to provide sufficient flexibility to enable a covered clearing agency, when evaluating systems upgrades or new services, to take into account several factors to select the protocol that it deems most appropriate for the circumstances.509 In response to the second commenter, the Commission notes that Rule 17Ad– 22(e)(22) requires policies and procedures that at a minimum accommodate international standards. A covered clearing agency that does not rely on existing international standards as part of its own communication protocols could comply with Rule 17Ad–22(e)(22) by having policies and procedures that require its systems to be able to receive communications from and transmit communications to a system that uses the international standards. However, the Commission also believes that accommodating international standards does not require implementing international standards as the only or primary communication protocol, particularly if other automated messaging formats exist that are widely used and considered industry standard in the
    United States.
    c. Final Rule
    The Commission is adopting Rule 17Ad–22(e)(22) as proposed.510 The Commission notes that the ability of participants to communicate with a covered clearing agency in a timely, reliable, and accurate manner is important to achieving prompt and accurate clearance and settlement.
23. Rule 17Ad–22(e)(23): Disclosure of
    Rules, Key Procedures, and Market Data a. Proposed Rule As proposed, Rule 17Ad–22(e)(23) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain clear and comprehensive rules and procedures that provide for the specific disclosures enumerated in the rule, as discussed below. Proposed Rule 17Ad– 22(e)(23)(i)–(iii) would require such policies and procedures to specifically require a covered clearing agency to (i) publicly disclose all relevant rules and material procedures, including key aspects of its default rules and procedures; (ii) provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency; and (iii) publicly disclose relevant basic data on transaction volume and values. Proposed Rule 17Ad–22(e)(23)(iv) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain clear and comprehensive rules and procedures that provide for a comprehensive public disclosure of its material rules, policies, and procedures regarding governance arrangements and legal, financial, and operational risk management, accurate in all material respects at the time of publication, including (i) a general background of the covered clearing agency, including its function and the market it serves, basic data and performance statistics on its services and operations, such as basic volume and value statistics by product type, average aggregate intraday exposures to its participants, and statistics on the covered clearing agency’s operational reliability, and a description of its general organization, legal and regulatory framework, and system design and operations; (ii) a standard-by-standard summary narrative for each applicable standard set forth in proposed Rules 17Ad– 22(e)(1) through (22) with sufficient detail and context to enable the reader to understand its approach to controlling the risks and addressing the requirements in each standard; (iii) a summary of material changes since the last update of the disclosure; and (iv) an executive summary of the key points regarding each.511 Proposed Rule 17Ad– 22(e)(23)(v) would also require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure the comprehensive public disclosure required under proposed Rule 17Ad– 22(e)(23)(iv) is updated not less than every two years, or more frequently following changes to its system or the environment in which it operates to the extent necessary, to ensure statements previously provided remain accurate in all material respects.512 b. Comments Received and Commission Response One commenter expressed support for the Commission’s proposed requirements regarding the disclosures set forth in proposed Rule 17Ad–
    22(e)(23). The commenter expressed the belief that such disclosures are necessary to enhance transparency and allow investors and other participants to obtain the information necessary to evaluate covered clearing agencies and also believes that such an approach may

513See CFA Institute at 13.
514See The Clearing House at 15. 515See DTCC at 13. 516See CCA Standards proposing release, supra note 5, at 29557. 517See ISDA at 6; see also supra note 41 (providing a citation for the PFMI disclosure framework). 518See supra Part I.A.5. (discussing the relevant international standards). 519See supra note 41 (providing a citation for the PFMI quantitative disclosures). 520A covered clearing agency independently prepares and publishes these disclosure documents, and the Commission does not review, opine on, or approve them. add to market discipline.513 A second commenter expressed support for strong and effective transparency requirements for covered clearing agencies.514 However, a number of commenters requested that the Commission consider amending the rule to incorporate more granular or prescriptive guidance and requirements, with a particular focus on achieving consistency with international standards and enhanced disclosures regarding emergency actions by covered clearing agencies. The Commission discusses these particular comments below.
i. Comprehensive Public Disclosure
One commenter read the leading language in proposed Rule 17Ad– 22(e)(23)(iv) to imply a requirement to create a comprehensive document that should address how the clearing agency’s governance arrangements, legal structure, approach to risk management, and financial arrangements operate, as opposed to implying a separate obligation to publicly disclose all such policies and procedures, irrespective of whether they relate to internal operational policies or are otherwise comprehended within the requirements of 17Ad–22(e)(23)(i).515 The Commission believes that the commenter’s interpretation of the leading language in proposed Rule 17Ad–22(e)(23)(iv) is consistent with the requirements of the rule. In the CCA Standards proposing release, the Commission made several statements regarding the requirements under Rule 17Ad–22(e)(23):

• With respect to the basic data and
  performance statistics envisioned by the rule, the Commission identified, as relevant to the requirement, statistics on the covered clearing agency’s operational reliability so that the relevant stakeholders and the general public have data regarding, for example, performance targets for systems and the actual performance thereof over specified periods, as well as targets for recovery.
• With respect to the standard-by￾standard summary narrative, the
  Commission sought to elicit a summary discussion of the covered clearing agency’s implementation of policies and procedures that would need to be established, implemented, maintained and enforced by a covered clearing agency in response to proposed Rules 17Ad–22(e)(1) through (22).
• With respect to material changes to
  the disclosure, the Commission stated that it would expect a covered clearing agency to consider its particular circumstances, such as, for example, changes in the scope of services provided by the covered clearing agency, in satisfying this requirement.516 The Commission further notes that the comprehensive public disclosure is intended to elicit all material information that would address compliance with each of the requirements in Rule 17Ad–22(e), along with information such as its function and the markets it serves and basic data and performance statistics. Moreover, in proposing Rule 17Ad–22(e)(23), the Commission also stated that two purposes of Rule 17Ad–22(e)(23) were to (i) provide participants with the information necessary to, at a minimum, identify and evaluate the risks and costs associated with the use of a covered clearing agency, thereby promoting transparency and enhancing competition and market discipline, and (ii) provide other stakeholders, including regulators and the public, with information that facilitates informed oversight and decision-making regarding each covered clearing agency. The Commission is modifying Rule 17Ad–22(e)(23)(iv) so that the language more closely tracks the categories of requirements in Rule 17Ad–22(e) and the statements immediately above. The purpose of this modification is to make clear that the comprehensive public disclosure is intended to describe the material rules, policies and procedures of the covered clearing agency related to compliance with Rule 17Ad–22(e), rather than require a complete disclosure of all rules, policies, and procedures. As adopted, the leading language of Rule 17Ad–22(e)(23)(iv) will require policies and procedures providing for a comprehensive public disclosure that describes the covered clearing agency’s material rules, policies, and procedures regarding its legal, governance, risk management, and operating framework, accurate in all material respects at the time of publication.
  ii. Consistency With International
  Standards
  One commenter recommended that the Commission provide guidance that it will interpret and administer Rule 17Ad–22(e)(23) as being consistent with PFMI disclosure framework to ensure that clearing participants have sufficient information to conduct diligence and assess the risks of exposure to a covered clearing agency and to maintain consistency with evolving international standards.517 In response, and as previously noted, the Commission intends to interpret and administer Rule 17Ad–22(e)(23) consistent with Section 17A of the Exchange Act and, to the extent consistent with Section 17A, with relevant international standards such as the PFMI and the PFMI disclosure framework.518 Additionally, the Commission notes that a covered clearing agency could consider the PFMI quantitative disclosures to develop its policies and procedures in compliance with Rule 17Ad– 22(e)(23).519 The Commission believes that the PFMI, the PFMI disclosure framework, and the PFMI quantitative disclosures can be useful tools to help a covered clearing agency consider how to disclose information to its participants, other relevant stakeholders, or the public. However, the Commission also notes that publishing the PFMI disclosure framework or the PFMI quantitative disclosures does not, in and of itself, constitute compliance with Rule 17Ad– 22(e)(23).520 As previously discussed, Rule 17Ad–22(e)(23) requires that a covered clearing agency (i) publicly disclose all relevant rules and material procedures, including key aspects of its default rules and procedures; (ii) provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency; and (iii) publicly disclose relevant basic data on transaction volume and values. It also requires, as discussed in Part II.C.23.b.i, a comprehensive public disclosure consistent with Rule 17Ad–22(e)(23)(iv). The Commission believes that covered clearing agencies may use a number of different approaches to make disclosures under Rule 17Ad–22(e)(23), and the Commission notes that policies and procedures for such disclosures must be in compliance with Rule 17Ad– 22(e)(23).
  iii. Disclosures Regarding Emergency
  Actions
  One commenter stated that, when taking emergency actions, CCPs must consider the interests of members and

521See The Clearing House, annex, at 24. 522See id. 523See id. at 25. 524See The Clearing House at 7. 525See supra Part II.C.23.b.i. 526See The Clearing House at 7. 527See id. at 7 n.16. 528See id. 529See id. 530See id. 531See The Clearing House at 3, 15. The commenter further stated that, based on current disclosure practices, members are unable to effectively measure or manage their risk exposure to CCPs, and that disclosure to a CCP’s risk committee is generally insufficient due to confidentiality restrictions, which prevents the risk committee from being able to share relevant information with their employer clearing member (and, further, not all clearing members even have employees on the CCP’s risk committee). See id.,
annex at 26, 27.
532See supra Parts II.C.4 (discussing requirements for guaranty fund contributions, allocation of losses pursuant to the default waterfall, and stress testing for credit risk under Rule 17Ad–22(e)(4)), II.C.5 (discussing requirements for collateral under Rule 17Ad–22(e)(5)), II.C.6 (discussing requirements for margin under Rule 17Ad–22(e)(6)), II.C.7 (discussing requirements for stress testing for liquidity risk under Rule 17Ad–22(e)(7)), II.C.13 (discussing requirements for participant-default market stability in addition to those of CCP owners.521 The commenter identified the following concerns:

• Changes to CCP rules and
  procedures and other actions taken during emergencies can affect the economic position of members, imposing unexpected losses and liquidity demands, and can thus have spillover effects in the broader market.522
• Unchecked and unbounded
  discretion could permit a CCP to alter the fundamental economic relationship between it and its members without notice or a chance for members to evaluate the consequences of such changes.523 In response, the Commission notes that the above comments are most directly relevant to the Commission’s discussion of crisis and emergency decision-making with respect to Rule 17Ad–22(e)(2). The Commission has previously addressed comments regarding crisis or emergency decision￾making in Part II.C.2.b.v.
  iv. Disclosures Regarding Participant￾Default Rules and Procedures
  One commenter recommended that the Commission make some clarifications to the requirement in proposed Rule 17Ad–22(e)(23)(ii) that a covered clearing agency provide sufficient detail to enable participants to identify and evaluate the risks they incur by participating in the covered clearing agency. Specifically, the commenter recommended that the Commission require the covered clearing agency to disclose (i) to its participants the policies and procedures established by the covered clearing agency pursuant to proposed Rule 17Ad–22(e)(13), and (ii) to its participants and their customers, the financial risks to which they would be subject in a scenario in which the covered clearing agency’s credit losses upon the default of one or more participants exceed the resources designated to absorb such losses.524 As discussed above in connection with the requirements for the comprehensive public disclosure, the two purposes of proposing Rule 17Ad–22(e)(23) were to (i) provide participants with the information necessary to, at a minimum, identify and evaluate the risks and costs associated with the use of a covered clearing agency, and (ii) provide other stakeholders, including regulators and the public, with information that facilitates informed oversight and decision-making regarding each covered clearing agency.525 Pursuant to Rule 17Ad–22(e)(23)(iv), the comprehensive public disclosure is intended to provide participants with the information necessary to, at a minimum, identify and evaluate the risks and costs associated with the use of a covered clearing agency. In addition, a covered clearing agency’s recovery and wind￾down plans consistent with Rule 17Ad– 22(e)(3) would also provide further insight into the financial risks to which participants and their customers may be subject in a scenario in which the covered clearing agency’s credit losses exceed the resources designated to absorb such losses. Accordingly, the Commission believes that the required public disclosure will encompass the information that the commenter seeks. The same commenter also recommended that the Commission clarify that a covered clearing agency may not, pursuant to emergency authority or otherwise, modify its rules, policies, or procedures in a manner that would materially increase a non￾defaulting participant’s exposure to loss or the extent of the covered clearing agency’s recourse to a non-defaulting participant’s assets, or redefine the economic terms of outstanding cleared contracts, without a reasonable prior notice and transition period prior to effectiveness.526 The commenter further stated that a reasonable prior notice period for such a modification would be one that is sufficient to enable a non￾defaulting participant to complete the process of withdrawal from participant status, in accordance with the rules of the covered clearing agency, under reasonable assumptions that take into account the demonstrated liquidity of the relevant product or asset type.527 In
  addition, the commenter stated that any such modification that takes place following the occurrence of a default or series of defaults involving one or more participants and prior to expiration of the covered clearing agency’s ‘‘cooling￾off period’’ should not take effect until after the expiration of that period.528 For the commenter’s purposes, the term ‘‘cooling-off period’’ referred to the period following the default of one or more participants during which losses accrued by the covered clearing agency may be satisfied by recourse to the clearing or guaranty fund contributions of non-defaulting participants, notwithstanding the intervening withdrawal from participant status of one or more such participants.529 The commenter’s recommendations contemplated that cooling-off periods will continue to be specified in the rules of a covered clearing agency, subject to Commission review. According to the commenter, although appropriate cooling-off periods may vary by product or asset type, the commenter believed that the Commission should, in reviewing a covered clearing agency’s rules, ensure that its cooling-off period(s) are of sufficient duration following a participant default (or the last in a series of substantially contemporaneous participant defaults) to allow the relevant market to return to stability under reasonable assumptions.530 In response, the Commission notes that the above comments are beyond the scope of Rule 17Ad–22(e)(23), which pertains to disclosures, but instead are relevant to crisis and emergency decision-making, which are discussed above in Part II.C.2.b.v.
  v. Additional Disclosures
  One commenter believed that, to enhance participants’ ability to evaluate their risks, the Commission should require a covered clearing agency to provide their participants with additional, more specific disclosures regarding its default rules and procedures, custody and collateral investment activities, methodologies for determining initial margin requirements and clearing or guaranty fund contributions, stress testing methodologies, and the covered clearing agency’s treatment of participant initial margin and clearing or guaranty fund contributions.531 The Commission notes that each of these topic areas are addressed by requirements under Rule 17Ad–22(e),532 and therefore these topic

rules and procedures under Rule 17Ad–22(e)(13)), and II.C.16 (discussing requirements for custody and investment policies under Rule 17Ad– 22(e)(16)). 533See supra Part II.C.23.b.i. 534See The Clearing House at 15; see also Payments Risk Committee, Recommendations for Supporting Participant Due Diligence of Central Counterparties (Feb. 5, 2013). 535See The Clearing House at 15. 536See id. 537See The Clearing House at 16. 538See id. The commenter stated that stress frameworks mandated by the Commission should form the baseline set of assumptions/scenarios for a covered clearing agency, and those frameworks should be based on sufficiently severe stressed macroeconomic conditions to provide a consistent initial baseline from which covered clearing agencies can begin to estimate the extent of their need for loss-absorbing resources. These baseline assumptions/scenarios should be bolstered by specific scenarios unique to the particular asset class and should include idiosyncratic stresses on basis and higher order risk exposures embedded in the covered clearing agency’s portfolio. See id. at 16 n.44. 539See The Clearing House at 16. 540See The Clearing House at 16. 541See id. areas are also the types of material information that would constitute elements of the comprehensive public disclosure required under Rule 17Ad– 22(e)(23)(iv).533 To facilitate sufficient disclosure, the commenter recommended that the Commission adopt the recommendations developed by the FRB of New York’s Payments Risk Committee for participant due diligence of CCPs in these and other areas.534 The commenter stated that obtaining information in these areas is necessary for participants to adequately identify and evaluate the risks they incur by participating in a CCP. Like the PFMI disclosure framework and the PFMI quantitative disclosures, the framework set forth by the FRB Payments Risk Committee may be another useful tool to help a covered clearing agency consider how best to disclose information to its participants, other relevant stakeholders, or the public, but, as noted above, should not be viewed as a substitute for compliance with Rule 17Ad–22(e)(23) and the requirements of
Section 17A of the Exchange Act. The
Commission further notes that the disclosure required by Rule 17Ad– 22(e)(23) marks a significant increase in the level and detail of disclosure that a covered clearing agency will be required to provide to its participants and the public, and that such disclosure will also encompass much of the information covered in the framework established by the FRB Payments Risk Committee. Therefore, the Commission declines to further modify Rule 17Ad–22(e)(23). The commenter further stated that because a CCP’s internal models are not usually disclosed at a sufficient level of detail, participants are often unable to predict initial margin requirements, clearing or guaranty fund contributions, or possible loss allocations accurately and, as a result, cannot anticipate exposures or hedge resulting risks.535 The commenter also stated that participants typically do not have sufficient insight into the stress framework and stress scenarios that are intended to ensure sufficiency of total financial resources and as such are unable to determine the CCP’s ability to withstand multiple participants’ failures or market stress.536 As noted above, the disclosure required by policies and procedures under Rule 17Ad–22(e)(23) marks a significant increase in the level and detail of disclosure that a covered clearing agency will be required to provide to its participants and the public and addresses in significant portion the commenter’s concerns. In addition, to promote participants’ ability to identify and evaluate their risks, the commenter recommended that the Commission clarify that a covered clearing agency must provide to its participants each fiscal quarter, or at any time upon request, the following minimum information:

• The methodologies for determining
  initial margin requirements and clearing or guaranty fund contributions, at a level of detail adequate to enable participants to replicate the covered clearing agency’s calculations; 537
• The methodologies for stress testing
  the adequacy of the clearing or guaranty fund, including the assumptions and scenarios that formed the basis of the stress test and the results of the stress test, which shall include but not be limited to an analysis of the adequacy of the defaulting participant’s resources available to cover losses arising from the liquidation, transfer or termination of the positions in its portfolio; 538 and
• The covered clearing agency’s
  treatment and segregation of participant initial margin and clearing or guaranty fund contributions.539 In suggesting that such information be required to be disclosed, the commenter suggested that members of CCPs should also be able to accurately predict the fees, margin requirements and guaranty fund contribution requirements associated with participation in the CCP and changes to the member’s portfolio or clearing activity. Where the above disclosure is not possible, the commenter stated that the Commission should instead require a covered clearing agency to develop computational solutions that provide its participants with the ability to determine the costs, initial margin, clearing or guaranty fund contributions, clearing or guaranty fund performance and loss allocations associated with changes to each respective participant’s portfolio or hypothetical portfolio, participant defaults and other relevant information.540 Mandating disclosure of this frequency and granularity would be inconsistent with the principles-based approach the Commission is taking in Rule 17Ad–22(e), and Rule 17Ad– 22(e)(23) addresses in significant portion the commenter’s concerns. The commenter also stated that CCPs should be required to provide advance notice to members of any proposed changes to policies, procedures, models, or other elements of the CCPs’ operations that could have a material adverse economic effect on members. According to the commenter, such advance notice is necessary to protect members’ ability to manage their risk by withdrawal from the CCP if necessary, and further CCPs should seek member input on any such changes through a formal consultation process to the extent possible.541 The Commission believes that the rule filing process under Section 19(b) of the Exchange Act and Rule 19b–4 thereunder, as well as the process for advance notices under
  Section 806(e) of the Clearing
  Supervision Act, address this comment, including by providing the opportunity for member input upon the proposed rule change.
  c. Final Rule
  The Commission is adopting Rule 17Ad–22(e)(23) with modifications. First, the Commission is striking the language ‘‘maintain clear and comprehensive rules and procedures’’ under Rule 17Ad–22(e)(23) because Rule 17Ad–22(e) already requires that a covered clearing agency have written policies and procedures reasonably designed to establish, implement, maintain and enforce the requirements thereunder. Consistent with this change, the Commission is also striking ‘‘providing’’ from Rule 17Ad– 22(e)(23)(iv). Second, the Commission is modifying paragraph (iv) as described in
  Part II.C.23.b.i. Third, the Commission
  is also modifying paragraph (iv)(D) to correct technical errors in the proposed rule text so that it refers to the standards set forth in paragraphs (e)(1) through (23) (rather than (e)(1) through (22)). The Commission believes that providing a summary narrative for Rule 17Ad– 22(e)(23) is appropriate because Rule 17Ad–22(e)(23) requires policies and

542See CCA Standards proposing release, supra note 5, at 29557–58. 543See id. at 29558. 544The Commission notes that this provision of proposed Rule 17Ab2–2(b) parallels the definition of systemic importance in Section 803(9) of the Clearing Supervision Act, which states that systemic importance means a situation where the failure of or a disruption to the functioning of an FMU could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the financial system of the United States. See 12 U.S.C. 5462(9). 545See CCA Standards proposing release, supra note 5, at 29558. 546See id. at 29559. 547See CFA Institute at 5, 14; OSEC at 2. procedures to (i) publicly disclose all relevant rules and material procedures, including key aspects of its default rules and procedures; (ii) provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency; and (iii) publicly disclose relevant basic data on transaction volume and values, in addition to requiring the standard-by-standard summary narrative required by Rule 17Ad–22(e)(23)(iv)(D). A summary narrative for Rule 17Ad–22(e)(23) would allow for a better understanding of a covered clearing agency’s policies and procedures for compliance with this rule. Further, because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad–22(e)(23), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures that address disclosure of rules, key procedures, and market data:

• Whether it adopts clear and
  comprehensive rules and procedures that are fully disclosed to participants;
• whether it discloses clear
  descriptions of the system’s design and operations, as well as its and participants’ rights and obligations, so that participants can assess the risks they would incur by participating in the covered clearing agency;
• whether it provides all necessary
  and appropriate documentation and training to facilitate participants’ understanding of the covered clearing agency’s rules and procedures and the risks they face from participating in the covered clearing agency;
• whether it publicly discloses its
  fees at the level of individual service it offers as well as its policies on any available discounts; and
• whether it completes regularly and
  discloses publicly responses to the PFMI disclosure framework. In addition, the Commission notes that, as with public disclosures contemplated in conjunction with Rule 17Ad–22(e)(23), a covered clearing agency could comply with the proposed requirement by posting the relevant documentation to its Web site. D. Rule 17Ab2–2

1. Proposed Rule
   The Commission proposed Rule 17Ab2–2 to establish procedures for the Commission to make determinations affecting covered clearing agencies. Under the proposed rule, the Commission would make determinations in three cases, as discussed below. In each case, under proposed Rule 17Ab2–2(d), the Commission would publish notice of its intention to consider such determinations, together with a brief statement of the grounds under consideration, and provide at least a 30- day public comment period prior to any determination. The Commission may provide the clearing agency subject to the proposed determination opportunity for hearing regarding the proposed determination. Under proposed Rule 17Ab2–2(e), notice of determinations in each case would be given by prompt publication thereof, together with a statement of written reasons supporting the determination. In proposing Rule 17Ab2–2, the Commission noted that determinations could be made as part of the registration process upon receiving an application for registration as a clearing agency or at some point after registration, if the Commission determines that a clearing agency does not meet the definition of a covered clearing agency upon registration but does so at a later date, as either market conditions or the characteristics of the clearing agency itself change.542 As proposed, Rule 17Ab2–2 provides the Commission with procedures for making determinations in the following three cases:

• Pursuant to Rule 17Ab2–2(a), the
  Commission may, if it deems appropriate, upon application by any registered clearing agency or member thereof or on its own initiative, determine whether a registered clearing agency should be considered a covered clearing agency. In determining whether a registered clearing agency should be considered a covered clearing agency, the Commission may consider characteristics such as the clearing of financial instruments that are characterized by discrete jump-to￾default price changes or that are highly correlated with potential participant defaults or other such factors as it deems appropriate in the circumstances.543
• Pursuant to Rule 17Ab2–2(b), the
  Commission may, if it deems appropriate, upon application by any clearing agency or member thereof, or on its own initiative, determine whether a covered clearing agency meets the definition of ‘‘systemically important in multiple jurisdictions.’’ In determining whether a covered clearing agency is systemically important in multiple jurisdictions, the Commission may consider (i) whether the covered clearing agency is a designated clearing agency; (ii) whether the clearing agency has been determined to be systemically important by one or more jurisdictions other than the United States through a process that includes consideration of whether the foreseeable effects of a failure or disruption of the designated clearing agency could threaten the stability of each relevant jurisdiction’s financial system; 544 or (iii) such other factors as the Commission may deem appropriate in the circumstances. The Commission also noted that analysis of other factors could include whether foreign regulatory authorities have designated the covered clearing agency as systemically important and whether any findings were made in anticipation of that designation.545
• Pursuant to Rule 17Ab2–2(c), the
  Commission may, if it deems appropriate, determine whether any of the activities of a clearing agency providing CCP services, in addition to clearing agencies registered with the Commission for the purpose of clearing security-based swaps, have a more complex risk profile. In determining whether a clearing agency’s activity has a more complex risk profile, the Commission may consider (i) characteristics such as the clearing of financial instruments that are characterized by discrete jump-to￾default price changes or that are highly correlated with potential participant defaults; or (ii) such other characteristics as it deems appropriate in the circumstances. 546

2. Comments Received and Commission
   Response
   The Commission received two comments that generally supported the Commission’s approach in Rule 17Ab2– 2 547 However, a number of commenters also raised concerns about particular procedural and substantive aspects of the Rule 17Ab2–2, and the Commission discusses each of these in turn below.

548See CME at 3.
549See CCA Definition proposing release, supra note 82, at 25–26. 550See ICEEU at 4–5. 551See id. at 5. 552See id. 553See OCC at 7. 554See id. 555See id. at 8. 556See Joyce. 557 In addition, as noted in Part II.D.2.a, the Commission has determined not to adopt proposed Rule 17Ab2–2(a). The Commission is therefore renumbering Rule 17Ab2–2 so that proposed Rule 17Ab2–2(c) is being moved to Rule 17Ab2–2(b). See infra Part VI. 558As discussed in Part II.D.2.a above, the Commission has determined not to adopt proposed Rule 17Ab2–2(a), and therefore, in adopting proposed Rule 17Ab2–2(b), the Commission is moving it to Rule 17Ab2–2(a). See infra Part VI. 559See CME at 3. 560See id. a. Determinations Regarding ‘‘Covered Clearing Agency’’ Status Generally One commenter argued that Rule 17Ab2–2 lacks clear standards for determining when and according to which standards a registered clearing agency would be found to be a covered clearing agency, and further stated that such determinations are based upon factors that may be entirely defined by the Commission during the determinations process itself.548 In response to this comment, and in light of the Commission’s separate proposal to amend the definition of ‘‘covered clearing agency,’’ 549 the Commission has determined not to adopt Rule 17Ab2–2(a). Because the Commission had determined not to adopt Rule 17Ab2–2(a), the subsequent paragraphs in Rule 17Ab2–2 will be renumbered accordingly. b. Determinations Regarding ‘‘Covered Clearing Agency’’ Status for Dually Registered Entities In another commenter’s view, any decision to apply the enhanced standards for covered clearing agencies should take into account whether, and the extent to which, the clearing agency is already subject to similar or comparable standards under other regulation.550 The commenter noted that the proposed rules take this approach with respect to dually registered SIDCOs for which the CFTC is the supervisory agency under the Clearing Supervision Act and believed a similar exclusion would be appropriate for clearing agencies subject to other regulatory frameworks.551 The commenter cited as examples regulation by the Bank of England under existing U.K. legislation and, for those clearing agencies that have been granted authorization as a CCP under EMIR, the regulations under EMIR.552 Because the Commission has determined not to adopt Rule 17Ab2– 2(a), the commenter’s concerns regarding determinations under Rule 17Ab2–2(a) for dually registered clearing agencies have been addressed.
c. Determinations Regarding ‘‘Complex
Risk Profile’’
One commenter expressed concern about the proposed criteria for determining whether a clearing agency is involved in activities with a more complex risk profile under proposed Rule 17Ab2–2(c), which triggers enhanced requirements for policies and procedures related to credit and liquidity risk management.553 The commenter believed that it is necessary to consider additional factors, including the proportion of the covered clearing agency’s clearing activities involving higher risk products as well as the manner in which it manages those risks. In the absence of considering such additional factors, the commenter expressed concern that a trivial amount of clearing of credit default options, in comparison to more standardized options, could trigger a cover two requirement, when a clearing agency may have other means to address the added risk, such as through an enhanced margin system.554 The commenter suggested that the Commission clarify that it is not its intention to interpret the rules in such a manner.555 A second commenter believed that the proposed wording of paragraphs (1) and (2) under proposed Rule 17Ab2–2(c) is vague.556 The commenter believed it is unclear whether ‘‘characteristics such as the clearing of financial instruments that are characterized by discrete jump-to￾default price changes or that are highly correlated with potential participant defaults’’ and ‘‘such other characteristics as it deems appropriate in the circumstances’’ are independent analyses by which a clearing agency may be judged or whether they should be considered jointly. In response to these comments, the Commission is modifying the proposed criteria to be considered in determining whether any of the activities of a clearing agency providing CCP services have a more complex risk profile in Rule 17Ab2–2 to remove the reference to ‘‘[s]uch other characteristics as it may deem appropriate in the circumstances, as factors supporting a finding of a more complex risk profile.’’ 557 Further, the Commission notes that it could, as part of its analysis under the rule, also consider the extent to which a clearing agency clears financial instruments that are characterized by discrete jump-to￾default price changes or that are highly correlated with potential participant defaults. The Commission believes that this approach mitigates the concern raised by the commenter that a clearing agency clearing only a trivial amount of credit default options could be subject to the ‘‘cover two’’ requirement in Rule 17Ad–22(e)(4). In addition, in light of the concerns regarding the scope of such other characteristics as the Commission may deem appropriate in the circumstances, the Commission is also removing the similar criteria—‘‘such other factors as it may deem appropriate in the circumstances’’—from proposed Rule 17Ab2–2(b).558 d. Sufficiency of Procedures Generally One commenter stated that proposed Rule 17Ab2–2 does not provide the subjected clearing agency with an opportunity for a
hearing.559 The commenter further stated that it is not apparent under the proposed framework that a registered clearing agency would be able to meaningfully impact any proceeding in which the Commission seeks to determine that it should be subject to the requirements for covered clearing agencies, exacerbating regulatory uncertainty.560 As discussed above, the Commission has determined not to adopt Rule 17Ab2–2(a), and therefore no process would exist under Rule 17Ab2–2 by which the Commission could designate a registered clearing agency as a covered clearing agency. The Commission notes, nonetheless, that the procedures set forth in Rule 17Ab2–2, as previously discussed, include provisions for publishing notice of the Commission’s intention to consider determinations under Rule 17Ab2–2, including a brief statement of the grounds under consideration, and for providing at least a 30-day public comment period. The Commission believes that this should provide a clearing agency with ample opportunity to present data, views, and arguments supporting why it should not be subject to the requirements for covered clearing agencies. Nevertheless, the rule also provides that the clearing agency subject to the proposed determination may be provided an opportunity for hearing, which provides the possibility of an opportunity for additional input. e. Procedures for Removing ‘‘Covered Clearing Agency’’ Status One commenter believed that the Commission should establish a process,

561See ISDA at 2.
562See 12 U.S.C. 5466(c); see also 12 U.S.C. 1818 (relevant provisions under the Federal Deposit Insurance Act). 563See DTCC at 13. 564See id. at 13–14 & n.46. 565See OCC at 15. The Commission has since issued an order approving a proposed rule change by OCC concerning a proposed capital plan. See Exchange Act Release No. 34–74452 (Mar. 6, 2015), 80 FR 13058 (Mar. 12, 2015) (order approving proposed rule change by OCC concerning a proposed capital plan for raising additional capital that would support its function as a SIFMU). 566See supra note 565. 567See DTCC at 14. 568See LCH at 3. including a public comment period, for determinations regarding covered clearing agency status and recommends that a process for removing that status (due to, for example, a change in circumstances such that the clearing agency no longer meets the criteria for designation) also be established. The commenter stated that it should include a public comment period and advance notice to clearing members of at least 180 days prior to the effectiveness of such change in status.561 The Commission believes that such procedures will ensure that each clearing agency is subject to the appropriate rule set on an ongoing basis. In response to this comment, the Commission is adding new paragraph (d) to Rule 17Ab2–2 to provide for a process to rescind any determination made pursuant to Rule 17Ab2–2(a), (b), or (c). This new rule includes the same procedural elements as for determinations under Rules 17Ab2–2(b) and (c), including publication with a 30- day comment period. The commenter requested that clearing members be provided notice at least 180 days prior to the effectiveness of a change in status. The Commission believes that the effective date for any such determination should be based on the facts and circumstances of the clearing agency for which removal of covered clearing agency status is being considered.
3. Final Rule
The Commission has determined not to adopt proposed Rule 17Ab2–2(a), as discussed above. The Commission is adopting proposed Rules 17Ab2–2(b) through (g) with the modifications described above. Because the Commission is not adopting proposed Rule 17Ab2–2(a), the Commission is renumbering the remaining paragraphs under Rule 17Ab2–2 accordingly. E. Rule 17Ad–22(f) As proposed, Rule 17Ad–22(f) would codify the Commission’s special enforcement authority over designated clearing agencies for which the Commission acts as the supervisory agency, pursuant to the Clearing Supervision Act. Under Section 807(c) of the Clearing Supervision Act, for purposes of enforcing the provisions of the Clearing Supervision Act, a designated clearing agency is subject to, and the Commission has authority under, the provisions of subsections (b) through (n) of Section 8 of the Federal Deposit Insurance Act in the same manner and to the same extent as if a designated clearing agency were an insured depository institution and the Commission were the appropriate Federal banking agency for such insured depository institution.562 The Commission received no comments regarding the proposed rule and is adopting Rule 17Ad–22(f) as proposed. F. Amendment to Rule 17Ad–22(d) To facilitate consistency between existing Rule 17Ad–22(d) and proposed Rule 17Ad–22(e), the Commission proposed to amend the first paragraph of Rule 17Ad–22(d) so that it would not apply to covered clearing agencies. Rule 17Ad–22(d) provides that a registered clearing agency shall establish, implement, maintain and enforce written policies and procedures reasonably designed to fulfill the requirements of Rules 17Ad–22(d)(1) through (15), as applicable. As proposed, the amended Rule 17Ad– 22(d) would instead apply only to a registered clearing agency other than a covered clearing agency. The Commission received general comments regarding the overall structure and application of Rule 17Ad– 22 in light of proposed Rule 17Ad–22(e) and the existing requirements under Rule 17Ad–22(d), and has addressed those comments in Part I.C.2. The Commission did not receive any comments addressed to the proposed amendment to the first paragraph of Rule 17Ad–22(d), and the Commission is adopting the amendment as proposed. G. Effective and Compliance Dates One commenter believed that a phase￾in of Rule 17Ad–22(e) is necessary and appropriate.563 The commenter suggested that the implementation phase-in extend to at least one year following publication of Rule 17Ad– 22(e), citing in particular the requirements related to linkages in Rule 17Ad–22(e)(20) and views that compliance with such rules will require extensive cooperation and coordination among the relevant entities.564 Another commenter specifically requested sufficient time for covered clearing agencies to implement the requirements with respect to equity capital funding pursuant to proposed Rule 17Ad– 22(e)(15).565 The amendments to Rule 17Ad–22 and new Rule 17Ab2–2 will
become effective 60 days after publication in the Federal Register (‘‘effective date’’). As proposed, a covered clearing agency would have been required to meet the requirements of Rule 17Ad–22(e) on the effective date. However, after consideration of the views of the commenters, the Commission has determined to adopt a compliance date of 120 days after the effective date (‘‘compliance date’’). The Commission believes it is important to establish enhanced requirements for covered clearing agencies given the potentially significant risks posed by their size, systemic importance, global reach, and/ or the risks inherent in the products they clear, and therefore continues to believe that implementation of the requirements in Rule 17Ad–22(e) should be prompt. The Commission notes that one commenter requesting a phase-in approach for Rule 17Ad– 22(e)(15) stated it would be in compliance with the proposed requirements no later than January 1, 2015,566 which has already passed. The other commenter raised several concerns regarding the need to review existing policies and procedures, develop and draft new policies and procedures, submit, where appropriate, proposed rule changes and advance notices for Commission review, raise additional capital or qualifying liquid resources, and hire and train additional personnel.567 The Commission believes that the additional time it is providing with the compliance date of 120 days after the effective date addresses this concern. In addition, one commenter requested that the Commission clarify how it intends to apply the rules to applications for registration as a clearing agency that are pending when the rules are finalized.568 The Commission intends to review any application for registration as a clearing agency pursuant to the requirements of Section 17A of the Exchange Act and the rules and regulations thereunder, including Rule 17Ad–22 and any amendments thereto, and notes that the compliance date would apply to all covered clearing agencies, including an applicant for registration as a clearing agency whose application is pending upon the compliance date that would, if registered, meet the definition of a

569See 15 U.S.C. 78q–1(b)(3). 570Section 807 annual examinations of designated clearing agencies are conducted in order to determine: (1) The nature of the operations of, and the risks borne by, the designated financial market utility; (2) the financial and operational risks presented by the designated market utility to financial institutions, critical markets, or the broader financial system; (3) the resources and capabilities of the designated financial market utility to monitor and control such risks; (4) the safety and soundness of the designated financial market utility; and (5) the designated financial market utility’s compliance with the Clearing Supervision Act and the rules and orders prescribed under the Clearing Supervision Act. See 12 U.S.C. 5466(a). 571See supra Part I.A.1. 572The Commission is using ‘‘central clearing’’ here and below to refer to both the clearance and settlement of securities transactions. In this regard, ‘‘clearing’’ is performed by a CCP, and ‘‘settlement’’ is performed for certain securities transactions by a CSD, which then holds those securities in its role as the central depository. Because clearing agencies can provide either CCP or CSD services, the Commission uses ‘‘clearing agencies’’ here and below to refer to CCPs and CSDs collectively. ‘‘Registered clearing agencies’’ are those CCPs and CSDs that are registered with the Commission. 573See DTCC, 2015 Annual Report, available at http://www.dtcc.com/annuals/2015/index.php. 574See OCC, 2015 Annual Report, available at http://www.theocc.com/components/docs/about/ annual-reports/occ-2015-annual-report.pdf. 575See generally Dietrich Domanski, Leonardo Gambacorta, and Cristina Picillo, Central Clearing:
Trends and Current Issues, BIS Quarterly Review (Dec. 2015), available at https://www.bis.org/publ/ qtrpdf/r_qt1512g.pdf (describing links between CCP financial risk management and systemic risk); Darrell Duffie, Ada Li & Theo Lubke, Policy Perspectives on OTC Derivatives Market Infrastructure, at 9 (Fed. Reserve Bank N.Y. Staff Reps., Mar. 2010), available at http:// www.newyorkfed.org/research/staff_reports/ sr424.pdf (‘‘If a CCP is successful in clearing a large quantity of derivatives trades, the CCP is itself a systemically important financial institution. The failure of a CCP could suddenly expose many major market participants to losses. Any such failure, moreover, is likely to have been triggered by the failure of one or more large clearing members, and therefore to occur during a period of extreme market fragility.’’); Pirrong, The Inefficiency of Clearing Mandates, Policy Analysis, No. 655, at 11– 14, 16–17, 24–26 (2010), available at http:// www.cato.org/pubs/pas/PA665.pdf, at 11–14, 16– 17, 24–26 (stating, among other things, that ‘‘CCPs are concentrated points of potential failure that can create their own systemic risks,’’ that ‘‘[a]t most, creation of CCPs changes the topology of the network of connections among firms, but it does not eliminate these connections,’’ that clearing may lead speculators and hedgers to take larger positions, that a CCP’s failure to effectively price counterparty risks may lead to moral hazard and adverse selection problems, that the main effect of clearing would be to ‘‘redistribute losses consequent to a bankruptcy or run,’’ and that clearing entities have failed or come close to failing in the past, including in connection with the 1987 market break); Froukelien Wendt, Central Counterparties: Addressing Their Too Important to Fail Nature (IMF Working Paper, Jan. 2015), available at http://papers.ssrn.com/sol3/ Delivery.cfm/wp1521.pdf (assessing the potential channels for contagion arising from CCP interconnectedness); Manmohan Singh, Making OTC Derivatives Safe—A Fresh Look, at 5–11 (IMF Working Paper, Mar. 2011), available at http:// www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing factors that could lead central counterparties to be ‘‘risk nodes’’ that may threaten systemic disruption). 576See supra Part I.A.2. covered clearing agency. In reviewing such an application, Section 17A(b)(3) of the Exchange Act requires that a clearing agency shall not be registered unless the Commission determines that an applicant’s rules and operations satisfy each of the requirements set forth in Section 17A(b)(3).569 Following registration, any registered clearing agency that falls within the definition of a covered clearing agency would need to address compliance with each of the requirements in Rule 17Ad–22(e) no later than the compliance date. The Commission also notes that the staff regularly conducts examinations, including those required under Section 807 of the Clearing Supervision Act,570 and
supervisory reviews of registered clearing agencies that are covered clearing agencies.571 Accordingly, the staff will periodically evaluate the results of these reviews and examinations of covered clearing agencies to evaluate the extent to which covered clearing agencies have achieved and maintained compliance with Rule 17Ad–22(e); the various outcomes observed in how the covered clearing agencies seek to implement the requirements of Rule 17Ad–22(e), and possible reasons for such variations; and any other observations relevant to implementation of Rule 17Ad–22(e).
III. Economic Analysis
As noted above, registered clearing agencies have become an essential part of the infrastructure of the U.S. securities markets. Many securities transactions are centrally cleared by clearing agencies, and central clearing has become more prevalent in the market for security-based swaps.572 For example, in the cash markets, DTCC processed $1.508 quadrillion in financial transactions in 2015. Within DTCC, NSCC processed an average daily value of $976.6 billion in equity securities, FICC cleared $917.1 trillion of transactions in government securities and $48.2 trillion of transactions in agency mortgage-backed securities, and DTC settled $112.3 trillion of securities and held securities valued at $45.4 trillion.573 In the listed options markets, OCC cleared more than 4.1 billion contracts and held margin of $98.3 billion at the end of 2015.574 While central clearing generally benefits the markets in which it is available, clearing agencies can pose substantial risk to the financial system as a whole, due in part to the fact that central clearing concentrates risk in the clearing agency. Disruption to a clearing agency’s operations, or failure on the
part of a clearing agency to meet its
obligations, could therefore serve as a potential source of contagion, resulting in significant costs not only to the clearing agency itself or its members but also to other market participants or the broader U.S. financial system.575 As a result, proper management of the risks associated with central clearing is necessary to ensure the stability of the U.S. securities markets and the broader U.S. financial system. The mandate in Title VII of the Dodd-Frank Act for central clearing of security-based swaps, wherever possible and appropriate, further reinforces this need.576 When a clearing agency provides CCP services, central clearing replaces bilateral counterparty exposures with exposures against the clearing agency. Consequently, a move from voluntary clearing to mandatory clearing of security-based swaps, holding the volume of security-based swap transactions constant, would increase economic exposures against clearing agencies that centrally clear security￾based swaps. Increased exposures in turn raise the possibility that these clearing agencies may serve as a transmission mechanism for systemic events. Clearing agencies have incentives to implement a risk management framework that can effectively manage the risks posed by central clearing. First, the ongoing viability of a clearing agency depends on its reputation and the confidence that market participants have in its services. Clearing agencies therefore have an incentive to reduce the likelihood that a member default or operational outage would disrupt settlement of a particular transaction or set of transactions. Second, some clearing agencies operate as member￾owned utilities and mutualize default risk across their members, and thus non￾defaulting participants are subject to losses that occur above the defaulter’s margin and clearing fund. Clearing agencies that operate under such models thus have an economic interest in sound risk management to reduce the expected level of losses that must be mutualized. Other clearing agencies are publicly traded and therefore could have different incentives because non￾member-owners may have a lower economic stake in the clearing agency than member-owners under a mutualized structure. Such an ownership structure could increase the incentive for owners, particularly those that are non-members, to take risks, though these incentives may be tempered by rules of the clearing agency

577See 15 U.S.C. 78q–1(b)(3)(C). 578See 15 U.S.C. 78q–1(b)(3)(F). 579See supra Parts I.A.1 and 2 (describing the requirements under the Exchange Act and the Clearing Supervision Act). 580See Daron Acemoglu, Asuman Ozdaglar & Alireza Tahbaz-Salehi, Systemic Risk and Stability in Financial Networks (NBER Working Paper No. 18727, Jan. 2013), available at http://www.nber.org/ papers/w18727. 581See 15 U.S.C. 78c(f). 582See supra Part I.A.1. 583See 15 U.S.C. 78w(a)(2). 584See Part II.B. that are consistent with Section 17A(b)(3)(C) of the Exchange Act, which requires that the clearing agency’s rules assure fair representation of its shareholders and participants in the selection of the clearing agency’s directors and administration of its affairs.577 Further, Section 17A of the Exchange Act requires that the rules of a clearing agency protect investors and the public interest.578 Nevertheless, incentives for sound risk management may be tempered by pressures to reduce costs and maximize profits that are distinct from goals set forth in governing statutes.579 This tension may result in a clearing agency making decisions that result in tradeoffs between the costs and benefits of risk management that are not socially efficient because a clearing agency’s decision-making process may not fully reflect the costs and benefits that accrue to other financial market participants as a result of its decisions. Further, even if clearing agencies do internalize costs that they impose on their clearing members, they may fail to internalize the consequences of their risk management decisions on other entities within the financial system that are connected to them through relationships with their clearing members.580 Such a failure represents a financial network externality imposed by clearing agencies on the broader financial system and suggests that financial stability, as a public good, may be under-produced in equilibrium. As discussed in more detail below, the amendments to Rule 17Ad–22 and Rule 17Ab2–2 represent a strengthening of the Commission’s regulation of registered clearing agencies. In particular, Rule 17Ad–22(e) establishes requirements for the operation and governance of registered clearing agencies that meet the definition of ‘‘covered clearing agency.’’ The Commission believes that the more specific requirements imposed by Rule 17Ad–22(e) will further mitigate the potential for moral hazard associated with risk management at a covered clearing agency. For instance, in the absence of policies and procedures that require periodic stress-testing and validation of credit and liquidity risk models, a covered clearing agency could potentially choose to recalibrate models in periods of low volatility and avoid recalibration in periods of high volatility, causing it to underestimate the risks that it faces during periods of market stress. The Commission believes that the specific requirements in Rule 17Ad–22(e) with respect to stress testing and validation of
credit and liquidity models would be more effective at mitigating these particular manifestations of incentive misalignments than the requirements in Rules 17Ad–22(b) or (d). The Commission believes, as a result, that Rule 17Ad–22(e) provides a general benefit of reducing the likelihood of a clearing agency failure. This general benefit accrues to the extent that clearing agencies do not already conform to the requirements in Rule 17Ad–22(e). Despite the potential incentive problems noted above, and perhaps in anticipation of regulatory efforts, some registered clearing agencies have already taken steps to update their policies and procedures in manners that may be consistent with the requirements in Rule 17Ad–22(e). The Commission also notes that, in some instances, the practices that Rule 17Ad– 22(e) codifies as minimum requirements are current practices at some registered clearing agencies. In these cases, the Commission believes that imposing these requirements on covered clearing agencies will have the effect of imposing consistent, higher minimum risk management standards across all covered clearing agencies. In adopting these rules, the Commission is also mindful of the benefits that would accrue by adopting regulatory approaches that are generally consistent with those of the CFTC and FRB. The Commission is sensitive to the economic consequences and effects of the amendments to Rule 17Ad–22 and Rule 17Ab2–2, including their benefits and costs. The Commission acknowledges that, since many of these rules require a covered clearing agency to adopt new policies and procedures, the economic effects and consequences of these rules include those flowing from the substantive results of those new policies and procedures. Under
Section 3(f) of the Exchange Act,
whenever the Commission engages in rulemaking under the Exchange Act and is required to consider or determine whether an action is necessary or appropriate in the public interest, it must consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.581 Further, as noted above, Section 17A of the Exchange Act directs the Commission to have due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents when using its authority to facilitate the establishment of a national system for clearance and settlement transactions in securities.582 Section 23(a)(2) of the Exchange Act also prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.583 The Commission has attempted to quantify the benefits and costs anticipated to flow from the amendments to Rule 17Ad–22 and Rule 17Ab2–2. In the CCA Standards proposing release, the Commission requested comment on all aspects of the economic analysis of the proposed rules, including their benefits and costs, as well as any effect the proposed rules may have on competition, efficiency, and capital formation, and encouraged commenters to provide data and analysis to help further quantify or estimate the potential benefits and costs of the proposed rules. Although it did not receive comments specifically directed at the economic analysis, the Commission has considered the comments, and, as in some cases indicated below, certain data needed to quantify the costs and benefits associated with the rules remains unavailable. For example, implementing policies and procedures that require stress testing of financial resources available to a covered clearing agency at least once each day may require additional investment in infrastructure, but the particular infrastructure requirements will depend on existing systems and a covered clearing agency’s choice of modeling techniques. As discussed above,584 the Commission believes that Rule 17Ad– 22(e), in requiring reasonably designed policies and procedures strikes an appropriate balance between directing covered clearing agencies to engage in specific conduct or practices and allowing each covered clearing agency to design its own policies and procedures without any framework. In adopting Rule 17Ad–22(e), the Commission is providing guidance to help covered clearing agencies identify and develop reasonable policies and

585See supra notes 573–574 and accompanying text. 586Membership statistics are taken from the Web sites of each of the listed clearing agencies as of March 2016. See DTCC, DTC Member Directories, available at http://www.dtcc.com/client-center/dtc￾directories; DTCC, FICC–GOV Member Directories, available at http://www.dtcc.com/client-center/ficc￾gov-directories; DTCC, FICC–MBS Member Directories, available at http://www.dtcc.com/ client-center/ficc-mbs-directories; DTCC, NSCC Member Directories, available at http:// www.dtcc.com/client-center/nscc-directories; ICE, ICE Clear Credit Participants, available at https:// www.theice.com/clear-credit/participants; ICE, ICE Clear Europe Membership, available at https:// www.theice.com/clear-europe/membership; OCC, Member Directory, http:// www.optionsclearing.com/membership/member￾information. 587See infra Part III.B.2 (discussing the effect of the adopted rules on competition, efficiency, and capital formation). 588See supra Part I.A.1. 589See supra notes 11–16 and accompanying text. 590See supra note 17 and accompanying text. 591See supra notes 18–25 and accompanying text. procedures. The guidance outlines key issues and building blocks that a covered clearing agency generally should consider as it develops policies and procedures in compliance with Rule 17Ad–22(e). While this guidance provides covered clearing agencies with additional information about the types of considerations that may be relevant to meeting requirements under Rule 17Ad–22(e), the Commission does not believe that considering these issues will entail substantial costs beyond the estimates presented below. Overall, the Commission believes that the amendments to Rule 17Ad–22 and Rule 17Ab2–2 should result in improvements in risk management with respect to systemic risk, as well as with respect to legal, credit, liquidity, general business, custody, investment, and operational risk. Further, the Commission believes that the amendments to Rule 17Ad–22 should result in an increase in financial stability insofar as they result in minimum standards at covered clearing agencies that are higher than those standards implied by current practices at covered clearing agencies. In particular cases, such as requirements for the management of liquidity risk and general business risk, an increase in financial stability may occur as a result of higher risk management standards at covered clearing agencies that lower the probability that either covered clearing agencies or their members default. As explained in Part III.B.2, reduced default probabilities for covered clearing agencies may, in turn, improve efficiency and capital formation. A. Economic Baseline To consider the effect of the amendments to Rule 17Ad–22 and Rule 17Ab2–2 on market activity, including possible effects on efficiency, competition, and capital formation, the Commission is using an economic baseline that considers the current market for central clearing, including the number of
registered clearing agencies, the distribution of members across these clearing agencies, and the volume of transactions these clearing agencies process. As noted above, there are currently five registered clearing agencies that provide CCP services and one that provides CSD services, and these entities processed and cleared a large number of contracts and securities. For example, for 2015 DTCC reported processing over $1.5 quadrillion in financial market transactions, DTCC cleared over 4.1 billion in contract volume, and ICE cleared over 6 million futures and OTC contracts each day.585 With respect to the distribution of members across clearing agencies, Table 1 shows that membership rates vary.
TABLE 1—MEMBERSHIP STATISTICS
FOR REGISTERED CLEARING AGEN￾CIES 586 Number DTC ..... Full Service Mem￾bers. 255
FICC .... GSD Members ........ 106
MBSD Members ...... 77
ICE ...... Clear Credit Mem￾bers. 30 Clear Europe Mem￾bers. 80 —Clear Europe Members that clear CDS. 21 NSCC .. Full Service Mem￾bers. 163
OCC .... Total Members ........ 114
The Commission notes that registered clearing agencies are currently characterized by specialization and limited competition. Central clearing exhibits high barriers to entry and economies of scale. These features of the existing market, and the resulting concentration of central clearing within a handful of entities, informs the Commission’s examination of the effects of the amendments to Rule 17Ad–22 and Rule 17Ab2–2 on competition, efficiency, and capital formation, as discussed further below.587 To further assess the economic effects of the amendments to Rule 17Ad–22 and Rule 17Ab2–2, including possible effects on efficiency, competition, and capital formation, the Commission is also considering as part of the baseline (i) the current regulatory framework for registered clearing agencies, and (ii) the current practices of registered clearing agencies that relate to Rule 17Ad–22(e). Each is discussed further below.

1. Regulatory Framework for Registered
   Clearing Agencies
   As previously discussed, the current regulatory framework for registered clearing agencies begins with Section 17A of the Exchange Act, which directs the Commission to facilitate the establishment of (i) a national system for the prompt and accurate clearance and settlement of securities transactions and (ii) linked or coordinated facilities for clearance and settlement of securities transactions. Further, Section 17A and Rule 17Ab2–1 require an entity that meets the definition of a clearing agency to register with the Commission or obtain from the Commission an exemption from registration prior to performing the functions of a clearing agency.588 After registration, the Commission supervises registered clearing agencies using various tools, including (i) the rule filing process for SROs set forth in Section 19(b) of the Exchange Act and rules thereunder, (ii) examinations of clearing agencies, and (iii) other provisions of the Exchange Act.589 Titles VII and VIII of the Dodd￾Frank Act have expanded the Commission’s role with respect to the regulation of clearing agencies. Specifically, Title VII amended Section 17A of the Exchange Act by adding, among other provisions, new paragraphs (g) through (j), which provide the Commission with authority to adopt rules governing security-based swap clearing agencies.590 The Clearing Supervision Act, adopted in Title VIII, provides for enhanced regulation of SIFMUs and, more generally, for enhanced coordination between the Commission and FRB by facilitating regulator on-site examinations and information sharing. It further provides that the Commission and CFTC shall coordinate with the FRB to jointly develop risk management supervision programs for SIFMUs and that the Commission and CFTC can each prescribe risk management standards governing the operations related to the PCS activities of SIFMUs for which each is the supervisory agency, in consultation with the FSOC and FRB and taking into consideration relevant international standards and existing prudential requirements.591 In 2012, the Commission adopted Rule 17Ad–22 under the Exchange Act to strengthen the substantive regulation

592See supra note 26 and accompanying text. 593See CCA Standards proposing release, supra note 5, at 29579. 594See supra note 29 and accompanying text. 595See supra Part II.D. 596See supra note 44 and accompanying text. 597Since the BCBS capital framework applies lower capital requirements only to bank exposures related to OTC and exchange-traded derivatives activity and securities financing transactions, the Commission currently expects that, among all registered clearing agencies, FICC, ICEEU, and OCC would be those affected by the BCBS capital framework. Each would meet the definition of ‘‘covered clearing agency.’’ 598The BCBS capital framework, as well as the rules adopted by the FRB and Office of the Comptroller of the Currency consistent with that framework, applies lower risk weights of two or four percent to indirect exposures of banks to QCCPs. See BCBS capital framework, supra note 44, paras. 114–15; Regulatory Capital Rules, supra note 45, at 62103. 599See BCBS, Tenth progress report on adoption of the Basel regulatory framework, at 1 (Apr. 2016), available at https://www.bis.org/bcbs/publ/ d354.pdf. 600See 12 CFR 217.2 (defining ‘‘qualifying central counterparty’’); see also Regulatory Capital Rules, supra note 45, at 62166. 601See 12 CFR 217.2. 602See Eur. Comm’n, Practical Implementation of the EMIR Framework to Non-EU Central Counterparties (CCPs) (May 13, 2013), available at http://ec.europa.eu/internal_market/financial￾markets/docs/derivatives/130513_equivalence￾procedure_en.pdf. 603These three clearing agencies agreed to have their names publicly disclosed and do not necessarily represent the full set of registered of registered clearing agencies, promote the safe and reliable operation of registered clearing agencies, and improve efficiency, transparency, and access to registered clearing agencies.592 In its economic analysis of the Clearing Agency Standards release, the Commission noted that the economic characteristics of clearing agencies, including economies of scale, barriers to entry, and the particulars of their legal mandates, may limit competition and confer market power on such clearing agencies, which may lead to lower levels of service, higher prices, or under-investment in risk management systems.593 The requirements in Rule 17Ad–22 establish an enhanced regulatory framework for clearing agencies that raise systemic risk concerns due to, among other things, their size, systemic importance, global reach, or the risks inherent in the products they clear.594 a. Determinations by the Commission Among other things, the Commission makes determinations regarding the registration of clearing agencies and proposed rule changes. Rule 17Ad– 22(d) has applied to registered clearing agencies since January 2013, and no mechanism exists under Rule 17Ad–22 for the Commission to make determinations of the type that appear in Rule 17Ab2–2.595 b. BCBS Capital Framework In addition to requirements under the Exchange Act, the
Dodd-Frank Act, and Rule 17Ad–22, other regulatory efforts are relevant to the Commission’s analysis of the economic effects of Rule 17Ad–22(e). In 2012, the BCBS first published the capital framework, which sets forth rules governing the capital charges arising from bank exposures to CCPs related to OTC derivatives, exchange-traded derivatives, and securities financing transactions, and the BCBS finalized the framework in
2014.596 The BCBS capital framework is
designed to create incentives for banks to clear derivatives and securities financing transactions with CCPs licensed in a jurisdiction where the relevant regulator has adopted rules or regulations consistent with the PFMI. Specifically, the BCBS capital framework introduces new capital charges based on counterparty risk for banks conducting derivatives transactions or securities financing transactions through a CCP.597 Capital charges under the BCBS capital framework relate to a bank’s trade exposure and default fund exposure to a CCP and are a function of multiplying these exposures by a corresponding risk weight. Historically, these exposures have carried a risk weight of zero. These weights have increased as banking regulators have adopted rules consistent with the BCBS capital framework. The risk weight assigned under the BCBS capital framework varies depending on whether the counterparty is a QCCP. For example, risk weights for trade exposures to a CCP generally would vary between twenty and 100 percent depending on the CCP’s credit quality, while trade exposures to a QCCP would carry only a two-percent risk weight.598 In addition, bank exposures to CCP default funds would carry a risk weight of 1250 percent. While bank exposures to QCCP default funds will also carry a 1250 percent risk weight at low levels, under the BCBS capital framework, default fund exposures’ contribution to a bank’s risk weighted assets will be limited to at most eighteen percent of the bank’s trade exposures to a given QCCP. Many jurisdictions have already adopted rules that implement requirements under the BCBS capital framework. For example, the BCBS reports that, as of March 2016, all twenty-seven member jurisdictions have risk-based capital rules in force, twenty￾four have rules for countercyclical capital buffers, and twenty-three have implemented or drafted rules related to systematically important banks.599 In the United States, the FRB and Office of the Comptroller of the Currency jointly issued regulatory capital rules for U.S. banks consistent with the BCBS capital framework effective January 1, 2014. The rules subject bank exposures to CCPs and QCCPs to increased risk weights as specified in the BCBS capital framework.600 In addition to specifying risk weights, the rules define the term QCCP for banks supervised by the FRB and the Office of the Comptroller of the Currency. According to these rules, QCCP status applies to any CCP that is a SIFMU or, if not located in the United States, any CCP that is regulated and supervised in a manner equivalent to a SIFMU.601 In addition, a CCP can become a QCCP if it meets the following standards: It requires all parties to contracts cleared by the CCP to be fully collateralized on a daily basis; and it is regulated by the FRB and demonstrates to the satisfaction of the FRB that the CCP is (i) in sound financial condition, (ii) subject to supervision by the Commission, CFTC, or FRB or, if not located in the United
States, subject to effective oversight by a national supervisory authority in its home country, and (iii) meets or exceeds the risk management standards for CCPs established under the Dodd-Frank Act or, if not located in the United States, meets or exceeds similar risk￾management standards established under the law of its home country that are consistent with international standards for CCP risk management as established by the relevant standard setting body. Under this definition, each covered clearing agency would be a QCCP either because it is a SIFMU or because it is a CCP that is regulated and supervised in a manner equivalent to a SIFMU, and therefore U.S. bank clearing members would be subject to the lower capital requirements on exposures to QCCPs under the BCBS capital framework. Within the European Union, EMIR permits legal persons incorporated under the law of an EU member state to use non-EU CCPs only if those CCPs have been recognized under EMIR. Further, only non-EU CCPs recognized under EMIR will meet the conditions necessary to be considered a QCCP for EU bank clearing members. Article 25 of EMIR outlines a recognition procedure for non-EU CCPs and Article 89 provides a timeline for recognition.602 FICC, NSCC, and OCC have applied for recognition under EMIR.603 In February

clearing agencies that applied for recognition under EMIR. See ESMA, List of CCPs Established in Non￾EEA Countries Which Have Applied for Recognition Under Article 25 of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC Derivatives, CCPs and TRs (EMIR) (Dec. 16, 2013), available at https:// www.esma.europa.eu/sites/default/files/library/list_ of_applicants_tc-ccps.pdf. 604See ESMA, ESMA resumes U.S. CCP recognition process following EU–U.S. agreement available at https://www.esma.europa.eu/sites/ default/files/library/2016-278_eu-us_approach_ ccp_equivalence.pdf. 605See Regulatory Capital Rules, supra note 45, at 62169. 606See id. at 62284. The Regulatory Capital Rules require compliance no later than 2018. 607See supra note 43. 608See 17 CFR 240.17Ad–22(d)(1); CCA Standards proposing release, supra note 5, at 29580. 609The rule book of each registered clearing agency, as well as select policies and procedures, are publicly available on each registered clearing agency’s Web site. 610See 17 CFR 240.17Ad–22(d)(8); see also CCA Standards proposing release, supra note 5, at 29581. 611See, e.g., Exchange Act Release No. 34–77042 (Feb. 3, 2016), 81 FR 6915 (Feb. 9, 2016) (order approving the adoption by OCC of a charter of a new committee of the board of directors, the technology committee); Exchange Act Release No. 34–74026 (Jan. 9, 2015), 80 FR 2160 (Jan. 15, 2015) (order approving proposed rule change related to ICE Clear Europe’s board risk committee). 612See Exchange Act Release No. 34–72564 (July 8, 2014), 79 FR 40824 (July 14, 2014) (order approving a proposed rule change by OCC Continued 2016, the European Commission and CFTC announced that they will follow a common approach for CCPs. The European Commission plans to adopt an equivalence decision that will allow ESMA to recognize U.S. CCPs regulated by the CFTC, such that these entities can provide services in the EU while complying primarily with CFTC rules and regulations.604 Additionally, the BCBS capital framework, as adopted by the FRB, Office of the Comptroller of the Currency, and banking regulators in other jurisdictions, impose capital requirements related to unconditionally cancellable commitments and other off￾balance sheet exposures. For example, the FRB and Office of the Comptroller of the Currency require banks to include ten percent of the notional amount of unconditionally cancellable commitments in their calculation of total leverage exposure.605 The rules place a floor of three percent on the ratio of tier one capital to total assets for banks subject to advanced approaches to risk-based capital rules.606 To the extent that clearing agencies rely on financial resources from banks as part of their risk management activities, these constraints on off-balance sheet exposures could raise the cost of such activities.
c. Other Regulatory Efforts
Efforts by the CFTC and FRB to adopt rules that are consistent with the PFMI are also relevant to the economic analysis of the amendments to Rule 17Ad–22. Both the CFTC and FRB have indicated publicly that they have completed all measures necessary to incorporate fully the PFMI into their regulatory frameworks.607
2. Current Practices
Current industry practices are a critical element of the economic baseline for registered clearing agencies. Registered clearing agencies must operate in compliance with Rule 17Ad– 22, though they may vary in the particular ways they achieve such compliance. Some variation in practices across registered clearing agencies derives from the products they clear and the markets they serve. The Commission also understands that, since it published the CCA Standards proposing release, some registered clearing agencies have amended their rules with the aim of achieving consistency with some of the standards in the PFMI. Because the Commission believes that the requirements in Rule 17Ad–22(e) are consistent with the PFMI and further the objectives of Section 17A of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act, the Commission also believes that Rule 17Ad–22(e) represents, where it imposes higher minimum standards on covered clearing agencies, an additional step towards improved risk management. An overview of current practices is set forth below and includes discussion of covered clearing agency policies and procedures regarding general organization and risk management, including the management of legal, credit, liquidity, business, custody, investment, and operational risk. This discussion is based on the Commission’s general understanding of current practices as of the date of this adoption and reflects the Commission’s experience supervising registered clearing agencies. a. Legal Risk Legal risk is the risk that a registered clearing agency’s rules, policies, or procedures may not be enforceable and concerns, among other things, its contracts, the rights of members, netting arrangements, discharge of obligations, and settlement finality. Cross-border activities of a registered clearing agency may also present elements of legal risk. Rule 17Ad–22(d)(1) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a well-founded, transparent, and enforceable legal framework for each aspect of its activities in all relevant jurisdictions.608 Each registered clearing agency makes a large portion of these policies and procedures available to members and participants. In addition, each also publishes their rule books and other key procedures publicly to promote the transparency of their legal frameworks.609 b. Governance Rule 17Ad–22(d)(8) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to have governance arrangements that are clear and transparent to fulfill the public interest requirements in Section 17A of the Exchange Act applicable to clearing agencies, to support the objectives of owners and participants, and to promote the effectiveness of the clearing agency’s risk management procedures.610 Important elements of a registered clearing
agency’s governance arrangements include its ownership structure; its charter, bylaws, and charters for committees of its board and management committees; its rules, policies, and procedures; the composition and role of its board, including the structure and role of board committees; reporting lines between management and the board; and the processes that provide for management accountability with respect to the registered clearing agency’s performance. Each registered clearing agency has a board that governs its operations and supervises senior management. Each registered clearing agency also has an independent audit committee of the board and has established a board committee or committee of members tasked with overseeing the clearing agency’s risk management functions. The boards of registered clearing agencies that would be subject to Rule 17Ad–22(e) as covered clearing agencies currently include non-management members. Since the Commission proposed Rule 17Ad–22(e), certain registered clearing agencies have revised their governance policies. For example, some clearing agencies have established additional committees of the board to focus on risk management and technology issues,611 and one clearing agency has modified its nomination process for directors and increased the number of public directors on its board of directors.612

concerning the consolidation of the governance committee and nominating committee into a single committee, changes to the nominating process for directors, and increasing the number of public directors on board of directors). 613See 17 CFR 240.17Ad–22(b) and (d); see also Clearing Agency Standards adopting release, supra note 5. 614See 17 CFR 240.17Ad–22(d)(4); see also Clearing Agency Standards adopting release, supra note 5, at 66248–49. 615See 17 CFR 240.17Ad–22(d)(11). 616See David Elliot, Central Counterparty Loss￾Allocation Rules, at tbl. 1A (Bank of England Financial Stability Paper No. 20, Apr. 2013), available at http://www.bankofengland.co.uk/ research/Documents/fspapers/fs_paper20.pdf (noting the loss-allocation rules applied at the end of a clearing agency waterfall). 617See Exchange Act Release No. 34–72266 (May 28, 2014), 79 FR 32008 (June 3, 2014) (notice of filing and immediate effectiveness of proposed rule change by OCC to require that intraday margin be collected and margin assets not be withdrawn when a clearing member’s reasonably anticipated settlement obligations to the clearing agency would exceed the clearing agency’s liquidity resources available to satisfy such obligations). 618See, e.g., CFTC–SEC Staff Roundtable on Clearing of Credit Default Swaps, at 123 (Oct. 2010), available at http://www.cftc.gov/ucm/groups/ public/@swaps/documents/dfsubmission/ dfsubmission7_102210-transcrip.pdf (Stan Ivanov of ICE stating, ‘‘[A]t ICE we look at two simultaneous defaults of the two biggest losers upon extreme conditions . . . .’’); see also ICE, CDS Client Clearing Overview, at 8 (Aug. 2013), available at https://www.theice.com/publicdocs/ clear_credit/ICE_Clear_Credit_Client_Clearing_ Overview.pdf (noting that the guaranty fund covers the simultaneous default of the two largest clearing members); CME Rulebook, Ch. 8H, Rule 8H07, available at http://www.cmegroup.com/rulebook/ CME/I/8H/8H.pdf. 619See 17 CFR 240.17Ad–22(b)(1). 620See 17 CFR 240.17Ad–22(b)(2). 621See id.
c. Framework for the Comprehensive
Management of Risks
Rules 17Ad–22(b) and (d) require registered clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to measure and mitigate credit exposures, identify operational risks, evaluate risks arising in connection with cross-border and domestic links for the purpose of clearing or settling trades, achieve DVP settlement, and implement risk controls to cover the clearing agency’s credit exposures to participants.613 Rule 17Ad–22(d)(4) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to establish business continuity plans setting forth procedures for the recovery of operations in the event of a disruption.614 Rule 17Ad–22(d)(11) further requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to make key aspects of the clearing agency’s default procedures publicly available and establish default procedures that ensure that the clearing agency can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default.615 In addition to meeting these requirements, the Commission understands that registered clearing agencies also specify actions to be taken when their resources are insufficient to cover their losses.616 These actions may include assessment rights on clearing members, forced allocation, and contract termination. Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have modified policies and procedures that address how resources are collected from members to manage financial risks. For example, one clearing agency has revised its rules to require that intraday margin be collected and margin assets not withdrawn when a member’s reasonably anticipated settlement obligations would exceed the liquidity resources available to the clearing agency to satisfy those clearing obligations.617 d. Financial Risk Management Registered clearing agencies that provide CCP services have a variety of options available to mitigate the financial risks to which they are exposed. While the manner in which a CCP chooses to mitigate these financial risks depends on the precise nature of the CCP’s obligations, a common set of procedures have been implemented by many CCPs to manage credit and liquidity risks. Broadly, these procedures enable CCPs to manage their risks by reducing the likelihood of member defaults, limiting potential losses and liquidity pressure in the event of a member default, implementing mechanisms that allocate losses across members, and providing adequate resources to cover losses and meet payment obligations as required. Registered clearing agencies that provide CCP services must be able to effectively measure their credit exposures to properly manage those exposures. A CCP faces the risk that its exposure to a member can change as a
result of a change in prices, positions, or both. CCPs can ascertain current credit exposures to each member by, in some cases, marking each member’s outstanding contracts to current market prices and, to the extent permitted by their rules and supported by law, by netting any gains against any losses. Rule 17Ad–22 includes certain requirements related to financial risk management by CCPs, including requirements to measure credit exposures to members and to use margin requirements to limit these exposures. These requirements are general in nature and provide registered clearing agencies flexibility to measure credit risk and set margin. Within the bounds of Rule 17Ad–22, CCPs may employ models and choose parameters that they conclude are appropriate to the markets they serve. The current practices of registered clearing agencies that provide CCP services generally include the following procedures: (1) Measuring credit exposures at least once a day; (2) setting margin coverage at a 99% confidence level over some set period; (3) using risk-based models; (4) establishing a fund that mutualizes losses of defaults by one or more participants that exceed margin coverage; (5) maintaining sufficient financial resources to withstand the default of at least the largest participant family; and (6) in the case of security-based swap transactions, maintaining enough financial resources to be able to withstand the default of their two largest participant families.618
i. Credit Risk
Rule 17Ad–22(b)(1) requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to measure their credit exposures at least once per day.619 Several CCPs have policies and procedures designed to require measuring credit exposures multiple times per day. Rule 17Ad–22(b)(3) requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain sufficient financial resources to withstand, at a minimum, a default by the participant family to which it has the largest exposure in extreme but plausible market conditions.620 It further requires CCPs for security-based swaps to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain additional financial resources sufficient to withstand, at a minimum, a default by the two participant families to which it has the largest exposures in extreme but plausible market conditions, in its capacity as a CCP for security-based swaps.621 Accordingly, the Commission notes that Rule 17Ad– 22(b)(3) imposes a ‘‘cover two’’ requirement on CCPs for security-based swaps to protect such CCPs from the

622See supra Part II.C.4.a (discussing the requirements for ‘‘cover one’’ and ‘‘cover two’’). 623See id. 624See Exchange Act Release No. 34–69890 (June 28, 2013), 78 FR 40538 (July 5, 2013) (order approving NSCC’s proposed rule change to require that all locked-in trade data submitted to it for trade recording be submitted in real-time). 625See Exchange Act Release No. 34–77982 (June 2, 2016), 81 FR 36979 (June 8, 2016) (order approving ICE Clear Credit’s proposed rule change to update and formalize its stress testing framework). 626See 17 CFR 240.17Ad–22(b)(2). 627See id. 628See 17 CFR 240.17Ad–22(a)(4). The Commission notes that because of modifications to Rule 17Ad–22(a), the definition of ‘‘normal market conditions’’ is being moved to Rule 17Ad–22(a)(11). The Commission is not altering the definition of ‘‘normal market conditions.’’ See Rule 17Ad– 22(a)(11), infra Part VI. 629See BCBS, International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2004), available at http:// www.bis.org/publ/bcbs107.pdf; see also Darryll Hendricks & Beverly Hirtle, New Capital Rule Signals Supervisory Shift (Secondary Mortgage Mkts, Sept. 1998), available at http:// www.freddiemac.com/finance/smm/july98/pdfs/ hen_hirt.pdf. Prior to this standard, banks measured value-at￾risk using a range of confidence intervals from 90– 99%. See BCBS, An Internal Model-Based Approach to Market Risk Capital Requirements, at 12 (Apr. 1995), available at http://www.bis.org/ publ/bcbs17.pdf. When determining the minimum quantitative standards for calculating risk measurements, the BCBS noted then the importance of specifying ‘‘a common and relatively conservative confidence level,’’ choosing the 99% confidence interval over other less conservative measures. See id. Continued extreme jump-to-default risk and nonlinear payoffs associated with the nature of the financial products they clear and the participants in the markets they serve. Meanwhile, CCPs that clear products other than security-based swaps are subject to a ‘‘cover one’’ requirement.622 Rule 17Ad–22(b)(3) also states that such policies and procedures may provide that additional financial resources be maintained by the CCP in combined or separately maintained funds.623 Under existing rules, CCPs collect contributions from their members for the purpose of establishing guaranty or clearing funds to mutualize losses under extreme but plausible market conditions. Currently, the guaranty funds or clearing funds consist of liquid assets and their sizes vary depending on a number of factors, including the products the CCP clears and the characteristics of CCP members. In particular, the guaranty funds for CCPs that clear security-based swaps are relatively larger, as measured by the size of the fund as a percentage of the total and largest exposures, than the guaranty or clearing funds maintained by CCPs for other financial instruments. CCPs generally take the liquidity of collateral into
account when determining member obligations. Applying haircuts to assets posted as margin, among other things, mitigates the liquidity risk associated with selling margin assets in the event of a participant default. Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have amended some of their policies with regards to credit risk. Such modifications include, for example, provisions that require real-time submission of all locked-in trade data submitted for trade recording and prohibit pre-netting and other practices that prevent real-time trade submission.624 Another clearing agency has made modifications to its policies and procedures for stress testing frameworks.625
ii. Collateral and Margin
Rule 17Ad–22(b)(2) requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit their exposures to participants.626 This margin can also be used to reduce a CCP’s losses in the event of a participant default. Registered clearing agencies that provide CCP services take positions as substituted counterparties once their trade guarantee goes into effect. Therefore, if a counterparty whose obligations the registered clearing agency has guaranteed defaults, the covered clearing agency may face market risk, which can take one of two forms. First, a covered clearing agency is subject to the risk of movement in the market prices of the defaulting member’s open positions. Where a seller defaults and fails to deliver a security, the covered clearing agency may need to step into the market to buy the security to complete settlement and deliver the security to the buyer. Similarly, where a buyer defaults, the covered clearing agency may need to meet payment obligations to the seller. Thus, in the interval between when a member defaults and when the covered clearing agency must meet its obligations as a substituted counterparty to complete settlement, market price movements expose the covered clearing agency to market risk. Second, the covered clearing agency may need to liquidate non-cash margin collateral posted by the defaulting member. The covered clearing agency is therefore exposed to the risk that erosion in market prices of the collateral posted by the defaulting member could result in the covered clearing agency having insufficient financial resources to cover the losses in the defaulting member’s open positions. To manage their exposure to market risk resulting from fulfilling a defaulting member’s obligations, registered clearing agencies compute margin requirements using inputs such as portfolio size, volatility, and sensitivity to various risk factors that are likely to influence security prices. Moreover, since the size of price movements is, in
part, a function of time, registered
clearing agencies may limit their exposure to market risk by marking participant positions to market daily and, in some cases, more frequently. CCPs also use similar factors to determine haircuts applied to assets posted by members in satisfaction of margin requirements. To manage market risk associated with collateral liquidation, CCPs consider the current prices of assets posted as collateral and price volatility, asset liquidity, and the correlation of collateral assets and a member’s portfolio of open positions. Further, because CCPs need to value their margin assets in times of financial stress, their rulebooks may include features such as market-maker domination charges that increase clearing fund obligations regarding open positions of members in securities in which the member serves as a dominant market maker. The reasoning behind this charge is that, should a member default, liquidity in products in which the member makes markets may fall, leaving these positions more difficult to liquidate for non-defaulting participants. Rule 17Ab–22(b)(2) also requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to use risk-based models and parameters to set margin requirements.627 The generally recognized standard for such models and parameters is, under normal market conditions, price movements that produce changes in exposures that are expected to breach margin requirements or other risk controls only 1% of the time (i.e., at a 99% confidence interval) over a designated time horizon.628 Currently, CCPs use margin models to ensure coverage at a single￾tailed 99% confidence interval. Losses beyond this level are typically covered by the CCP’s guaranty fund. This standard comports with existing international standards for bank capital requirements, which require banks to measure market risks at a 99% confidence interval when determining regulatory capital requirements.629

Since its adoption in 1998, the standard has become a generally recognized practice of banks to quantify credit risk as the worst expected loss that a portfolio might incur over an appropriate time horizon at a 99% confidence interval. See Kenji Nishiguchi, Hiroshi Kawai & Takanori Sazaki, Capital Allocation and Bank Management Based on the Quantification of Credit Risk, at 83 (FRBNY Econ. Policy Rev., Oct. 1998), available at http:// www.newyorkfed.org/research/epr/98v04n3/ 9810nish.pdf; Jeff Aziz & Narat Charupat, Calculating Credit Exposure and Credit Loss: A Case Study, at 34 (Sept. 1998), available at http:// www.bis.org/bcbs/ca/alrequse98.pdf. 630See 17 CFR 240.17Ad–22(b)(2). 631See 17 CFR 240.17Ad–22(b)(4). 632See Exchange Act Release No. 34–72266 (May 28, 2014), 79 FR 32008 (June 3, 2014) (notice of filing and immediate effectiveness of OCC’s proposed rule change to require that intraday margin be collected and margin assets not be withdrawn when a clearing member’s reasonably anticipated settlement obligations would exceed the clearing agency’s liquidity resources available to satisfy such settlement obligations). 633See, e.g., Exchange Act Release No. 34–72756 (Aug. 4, 2014), 79 FR 46479 (Aug. 8, 2014) (order approving ICE Clear Europe’s proposed rule change to credit default swap risk policies); Exchange Act Release No. 34–76781 (December 28, 2015), 81 FR 135 (order approving OCC’s proposed rule change to modify its margin methodology by incorporating variations in implied volatility). 634See, e.g., Exchange Act Release No. 34–75290 (June 24, 2015), 80 FR 37323 (June 30, 2015) (notice of no objection to OCC’s advance notice concerning modifications to backtesting procedures in order to enhance monitoring of margin coverage and model risk exposure). 635See Exchange Act Release No. 34–76077 (Oct. 5, 2015), 80 FR 61256 (Oct. 9, 2015) (notice of no objection to NSCC’s proposed rule change to enhance its margining methodology as applied to family-issued securities of certain members). 636See, e.g., Exchange Act Release No. 34–75887 (Sept. 10, 2015), 80 FR 55672 (Sept. 16, 2015) (order approving ICE Clear Credit’s proposed rule change to revise its risk management framework). 637See, e.g., Exchange Act Release No. 34–72944 (Aug. 28, 2014), 79 FR 52789 (Aug. 28, 2014) (order approving ICE Clear Credit’s proposed rule change related to its authority to use guaranty fund and house initial margin as an internal liquidity resource). Rule 17Ad–22(b)(2) also requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to review such margin requirements and the related risk-based models and parameters at least monthly.630 CCPs are accordingly required to establish a model validation process that evaluates the adequacy of margin models, parameters, and assumptions. Additionally, CCPs are required to establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for an annual model validation consisting of evaluating the performance of the CCPs’ margin models and the related parameters and assumptions associated with such models by a qualified person who is free from influence from the persons responsible for the development or operation of the models being validated.631 Certain clearing agencies have amended their policies and procedures governing collateral and margin requirements since the Commission proposed Rule 17Ad–22(e). For example, one clearing agency has amended its rules to require that intraday margin be collected and to prohibit margin from being withdrawn if the agency anticipates that the settlement obligations would exceed the liquidity resources available to the agency to satisfy such settlement obligations.632 Other revisions include modifications to risk models to monitor margin coverage and risk exposure. For example, modifications include accounting for factors such as procyclicality or implied volatility of certain options to reflect future market fluctuations.633 Amendments to backtesting procedures are designed to assist clearing agencies in determining the amount of margin to collect from clearing members.634 Additionally, certain modifications address exposure to wrong-way risk. For example, one clearing agency revised its margin methodology as applied to the family-issued securities of certain members to exclude these securities from the volatility component and then by charging an amount calculated, in
part, by applying a haircut rate to the
absolute value of the long net unsettled positions in the member’s family-issued securities.635 Other clearing agencies have adjusted their risk models to account for accumulation of general wrong-way risk at the portfolio level, while others have modified their policies with respect to the assets accepted as permitted cover, as well as limits on the value of the collateral that may be accepted as permitted cover.636
iii. Liquidity Risk
In addition to credit risk and the aforementioned market risk, registered clearing agencies also face liquidity or funding risk. Currently, covered clearing agencies have varying degrees of formality with respect to their standards and practices relating to liquidity shortfalls. To complete the settlement process, registered clearing agencies that employ netting rely on incoming payments from participants in net debit positions to make payments to participants in net credit positions. If a participant does not have sufficient funds or securities in the form required to fulfill a payment obligation immediately when due (even though it may be able to pay at some future time), or if a settlement bank is unable to make an incoming payment on behalf of a participant, a registered clearing agency may face a funding shortfall. Such funding shortfalls may occur due to a lack of financial resources necessary to meet delivery or payment obligations, however even registered clearing agencies that do hold sufficient financial resources to meet their obligations may not carry those in the form required for delivery or payments to participants. A registered clearing agency that provides CCP services may hold additional financial resources to cover potential funding shortfalls in the form of collateral. As noted above, CCPs may take the liquidity of collateral into account when determining member obligations. Applying haircuts to illiquid assets posted as margin mitigates the liquidity risk associated with selling margin assets in the event of participant default. Some registered CCPs also arrange for liquidity provision from other financial institutions using lines of credit. Additionally, some registered clearing agencies enter into prearranged funding agreements with their members pursuant to their rules. For example, members of one registered clearing agency are obligated, under certain pre-defined circumstances, to enter into repurchase agreements against securities that would have been delivered to a defaulting member. No rule under the Exchange Act currently requires a registered clearing agency through its written policies and procedures to address liquidity risk. Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have amended their policies and procedures regarding liquidity risk including, for example, through sources such as committed credit facilities, private placements of debt, and committed securities repurchase agreements. Such provisions can assist the ability of clearing agencies to complete settlement obligations, particularly in the instances where a clearing member defaults. Additionally, certain clearing agencies have clarified certain rules by which they manage liquidity, including how they will access and use internal liquidity resources.637 e. Settlement Rule 17Ad–22(d)(5) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to
employ money settlement arrangements that eliminate

638See 17 CFR 240.17Ad–22(d)(5). 639See 17 CFR 240.17Ad–22(d)(12). 640See 17 CFR 240.17Ad–22(d)(15). 641See Exchange Act Release No. 34–74456 (March 6, 2015), 80 FR 13055 (Mar. 12, 2015) (order approving ICE Clear Credit’s proposed rule change to revise its Treasury operations policies and procedures). 642See 17 CFR 240.17Ad–22(d)(13); see also Clearing Agency Standards adopting release, supra note 5, at 66256. 643See supra note 434 (discussing existing rules applicable to registered broker-dealers that address customer security positions and funds in cash securities and listed option markets, thereby Continued or strictly limit the clearing agency’s settlement bank risks and require funds transfers to the clearing agency to be final when effected.638 Rule 17Ad– 22(d)(12) further requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that final settlement occurs no later than the end of the settlement day.639 Accordingly, for example, certain registered clearing agencies provide for final settlement of securities transfers no later than the end of the day of the transaction. Rule 17Ad–22(d)(15) also requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to state to its participants the clearing agency’s obligations with respect to physical deliveries and identify and manage the risks from these obligations.640 Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have amended their policies and procedures governing money settlements. These include, for example, provisions to convert U.S. Treasuries into cash when the sale of pledged securities cannot be settled on a same￾day basis.641 f. CSDs Rule 17Ad–22(d)(10) requires a registered clearing agency that provides CSD services to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain securities in an immobilized or dematerialized form for transfer by book entry to the greatest extent possible. Currently, some securities, such as mutual fund securities and government securities, are issued primarily or solely on a dematerialized basis. Dematerialized shares do not exist as physical certificates but are held in book entry form in the name of the owner (which, where the master security holder file is not maintained on paper due to the use of technology, is also referred to as electronic custody). Other types of securities may be issued in the form of one or more physical security certificates, which could be held by the CSD to facilitate immobilization. Alternatively, securities may be held by the beneficial owner in record name, in the form of book-entry positions, where the issuer offers the ability for a security holder to hold through the direct registration system. Whether immobilization occurs at the CSD or through direct registration depends on what is
provided for by the issuer. When a trade occurs, the depository’s accounting system credits one participant account and debits another participant account. Transactions between counterparties in dematerialized shares are recorded by the registrar responsible for maintaining the paper or electronic register of security holders, such as by a transfer agent, and reflected in customer accounts. Registered CSDs currently reconcile ownership positions in securities against CSD ownership positions on the security holders list daily, mitigating the risk of unauthorized creation or deletion of shares. g. Exchange-of-Value Settlement Systems Rule 17Ad–22(d)(13) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to eliminate principal risk by linking securities transfers to funds transfers in a way that achieves delivery versus payment,642 which serves to link obligations by conditioning the final settlement of one upon the final settlement of the other. One registered clearing agency, for example, operates a Model 2 DVP system that provides for gross securities transfers during the day followed by an end-of-day net funds settlement. Under the rules governing the clearing agency’s system, the delivering party in a DVP transaction is assured that it will be paid for the securities once they are credited to the receiving party’s securities account. DVP eliminates the risk that a buyer would lose the purchase price of a security purchased from a defaulting seller or that a seller would lose the sold security without receiving payment for a security acquired by a defaulting buyer. For example, one registered clearing agency has rules governing its continuous net settlement (‘‘CNS’’) system, under which it becomes the counterparty for settlement purposes at the point its trade guarantee attaches, thereby assuming the obligation of its members that are receiving securities to receive and pay for those securities, and the obligation of members that are delivering securities to make the delivery. Unless the clearing agency has invoked its default rules, it is not obligated to make those deliveries until it receives from members with delivery obligations deliveries of such securities; rather, deliveries that come into CNS ordinarily are promptly redelivered to parties that are entitled to receive them through an allocation algorithm. Members are obligated to take and pay for securities allocated to them in the CNS process. These rules also provide mechanisms to allow receiving members a right to receive high priority in the allocation of deliveries, and also permit a member to buy-in long positions that have not been delivered to it by the close of business on the scheduled settlement date. h. Participant-Default Rules and Procedures Rule 17Ad–22(d)(11) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably
designed to make key aspects of its default procedures publicly available and establish default procedures that ensure it can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default. The rules of registered clearing agencies typically state what constitutes a default, identify whether the board or a committee of the board may make that determination, and describe what steps the clearing agency may take to protect itself and its members. In this regard, registered clearing agencies typically attempt, among other things, to hedge and liquidate a defaulting member’s positions. Rules of registered clearing agencies also include information about the allocation of losses across available financial resources.
i. Segregation and Portability
No rule under the Exchange Act currently requires a registered clearing agency through its written policies and procedures to enable the portability of positions of a member’s customers and the collateral provided in connection therewith. Additionally, no rule under the Exchange Act currently requires a registered clearing agency through its written policies and procedures to protect the positions of a member’s customers from the default or insolvency of the member.643

promoting segregation and portability at the broker￾dealer level). 644See, e.g., Exchange Act Release Nos. 34–72755 (Aug. 4, 2014), 79 FR 46481 (Aug. 8, 2014), 34– 72754 (Aug. 4, 2014), 79 FR46477 (Aug. 8, 2014) (approval orders related to ICE Clear Europe’s proposed rule changes related to segregation and portability), and 34–73344 (Oct. 14, 2014), 76 FR 62694 (Oct. 20, 2014) (notice of filing and immediate effectiveness of proposed rule change related to segregation and portability). 645See, e.g., Exchange Act Release No. 34–75657 (Aug.10, 2015), 80 FR 48937 (Aug. 14, 2015) (notice of filing and immediate effectiveness of ICE Clear Europe’s proposed rule change to adopt revised fee
schedule).
646See Exchange Act Release No. 34–74142 (Jan. 27, 2015), 80 FR 5188 (Jan. 30, 2015) (notice of no objection to NSCC and FICC advance notices to amend and restate the third and amended restated shareholders agreement). 647See 17 CFR 240.17Ad–22(d)(3). 648See supra Part II.C.7 (discussing the requirements under Rule 17Ad–22(e)(7)(iii)). 649See Exchange Act Release No. 34–72551 (July 8, 2014), 79 FR 16361 (July 14, 2014) (order approving ICE Clear Europe’s proposed rule change regarding investment losses and non-default losses). 650See 17 CFR 240.17Ad–22(d)(4). 651See id. 652Many of these practices had been previously developed pursuant to prior Commission guidelines. See supra Part I.A.1 (discussing related requirements under Regulation SCI). 653See, e.g., NSCC, Assessment of Compliance with the CPSS/IOSCO Recommendations for Central Counterparties (Nov. 2011), available at http://www.dtcc.com/legal/policy-and￾compliance.aspx. Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have modified their policies and procedures on segregation and portability. These amendments include implementing changes to the structure of customer accounts to enhance segregation options for customers and establishing new types of individually segregated accounts and omnibus accounts for cleared transactions, as well as modifications to these frameworks, as well as adopting an individual client segregation framework and modifications related to the omnibus client segregation model.644 There have also been changes specifying certain fees applicable to segregated customer accounts, margin flow comingled accounts, and individually segregated sponsored accounts.645 j. General Business Risk Business risk refers to the risks and potential losses arising from a registered clearing agency’s administration and operation as a business enterprise that are neither related to member default nor separately covered by financial resources designated to mitigate credit or liquidity risk. While Rule 17Ad–22 sets forth requirements for registered clearing agencies to identify, monitor, and mitigate or eliminate a broad array of risks through written policies and procedures, no rule under the Exchange Act expressly requires a registered clearing agency through its written policies and procedures to identify, monitor, and manage general business risk or to meet a capital requirement. Nonetheless, registered clearing agencies currently have certain internal controls in place to mitigate business risk. Some clearing agencies, for instance, have policies and procedures that identify an auditor who is responsible for examining accounts, records, and transactions, as well as other duties prescribed in the audit program. Other registered clearing agencies allow members to collectively audit the books of the clearing agency on an annual basis, at their own expense. Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have revised their policies and
procedures related to general business risk. Such modifications include amendments to a shareholder agreement that are intended to increase the working capital available to conduct the business of the operating subsidiaries and allow the clearing agencies to maintain operations for a longer period during times of financial stress.646 k. Custody and Investment Risks Registered clearing agencies face default risk from commercial banks that they use to effect money transfers among participants, to hold overnight deposits, and to safeguard collateral. Rule 17Ad–22(d)(3) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to (i) hold assets in a manner that minimizes risk of loss or delay in its access to them; and (ii) invest assets in instruments with minimal credit, market, and liquidity risks.647 Registered clearing agencies currently seek to minimize the risk of loss or delay in access by holding assets that are highly liquid (e.g., cash, U.S. Treasury securities, or securities issued by a U.S. government agency) and by engaging banks to custody the assets and facilitate settlement. Typically, registered clearing agencies take steps to ensure that assets held in custody are protected from claims from the custodian’s creditors using trust accounts or equivalent arrangements. Additionally, a designated clearing agency may have or gain access to a Federal Reserve account and services.648 Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have made modifications to the procedures and policies related to custody and investment risks. For example, one clearing agency adopted rules addressing certain investment losses on margin and guaranty fund contributions provided by clearing members.649
l. Operational Risk
Operational risk refers to a broad category of potential losses arising from deficiencies in internal processes, personnel, and information technology. Registered clearing agencies face operational risk from both internal and external sources, including human error, system failures, security breaches, and natural or man-made disasters. Rule 17Ad–22(d)(4) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify sources of operational risk and to minimize those risks through the development of appropriate systems, controls and procedures.650 It also requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to (i) implement systems that are reliable, resilient, and secure, and have adequate, scalable capacity; and (ii) have business continuity plans that allow for timely recovery of operations and fulfillment of a clearing agency’s obligations.651 As a result, registered clearing agencies have developed and currently maintain plans to ensure the safeguarding of securities and funds, the integrity of automated data processing systems, and the recovery of securities, funds, or data under a variety of loss or destruction scenarios.652 These plans may include turning operations over to a secondary site that is located a sufficient distance from the primary location to ensure a distinct geographic risk profile. In addition, registered clearing agencies generally maintain an internal audit department to review the adequacy of their internal controls, procedures, and records with respect to operational risks. Some registered clearing agencies also engage independent accountants to perform an annual study and evaluation of the internal controls relating to their operations.653 As discussed above, the Commission adopted Regulation SCI in November 2014, in part, to help reduce the occurrence of systems issues, and improve resiliency when systems problems do occur at certain SROs, such as registered clearing agencies and to enhance the Commission’s oversight and enforcement of securities market technology infrastructure. Regulation

654See supra note 37 and accompanying text. 655See Exchange Act Release No. 34–76278 (Oct. 27, 2015), 80 FR 67450 (Nov. 2, 2015) (notice of filing and immediate effectiveness of FICC’s proposed rule change to provide additional details regarding the requirement that members participate in annual testing of business continuity and disaster recovery plans). 656See 17 CFR 240.17Ad–22(b)(5). 657See 17 CFR 240.17Ad–22(b)(6). 658See 17 CFR 240.17Ad–22(b)(7). 659See 17 CFR 240.17Ad–22(d)(2). 660See supra Part III.A. SCI requires that registered clearing agencies, as SCI entities, have policies and procedures that include business continuity and disaster recovery plans that include maintaining backup and recovery capabilities sufficiently resilient and geographically diverse and that are reasonably designed to achieve two-hour resumption of critical SCI systems following a wide-scale disruption. In particular, as discussed above, in the Regulation SCI adopting release the Commission explained its view that for clearance and settlement systems a return to ‘‘normal operations’’ following a systems disruption would include all steps necessary to effectuate timely and accurate end of day settlement.654 Since the Commission proposed Rule 17Ad–22(e), certain clearing agencies have revised aspects of their operational risk policies and procedures, including for the purposes of complying with Regulation SCI. For example, one clearing agency revised its policies and procedures for testing of business continuity and disaster recovery plans, including with respect to a member’s requirement to participate in such testing.655 m. Access and Participation Requirements Rule 17Ad–22(b)(5) requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide the opportunity for a person that does not perform any dealer or security-based swap dealer services to obtain membership on fair and reasonable terms at the clearing agency to clear securities for itself or on behalf of other persons.656 Rule 17Ad–22(b)(6) requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to have membership standards that do not require participants to maintain a portfolio of any minimum size or a minimum transaction volume.657 Rule 17Ad–22(b)(7) requires a registered clearing agency that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide a person that maintains net capital equal or greater than $50 million with the ability to obtain membership at the clearing agency, provided such persons are able to comply with reasonable membership standards, with higher net capital requirements permissible subject to Commission approval.658 In addition, Rule 17Ad–22(d)(2) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and procedures reasonably designed to require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency, have procedures in place to monitor that participation requirements are met on an ongoing basis, and have participation requirements that are objective and publicly disclosed, and permit fair and open access.659 Typically, a registered clearing agency’s rulebook requires applicants for membership to provide certain financial and operational information prior to being admitted as a member and on an ongoing basis as a condition of continuing membership. Registered clearing agencies review this information to ensure that the applicant has the operational capability to meet the other demands of interfacing with the clearing agency. In particular, registered clearing agencies typically require that an applicant demonstrate that it has adequate personnel capable of handling transactions with the clearing agency and adequate physical facilities, books and records, and procedures to fulfill its anticipated commitments to, and to meet the operational requirements of, the clearing agency and other members with necessary promptness and accuracy. As a result, an applicant needs to demonstrate that it has adequate personnel capable of handling transactions with the clearing agency and adequate physical facilities, books and records, and procedures to conform to conditions or requirements in these areas that the clearing agency reasonably may deem necessary for its protection. Registered clearing agencies have published these requirements on their Web sites. Registered clearing agencies use an ongoing monitoring process to help them understand relevant changes in the financial condition of their members and to mitigate credit risk exposure of the clearing agency to its members. The risk management staff analyzes financial statements filed with regulators, as well as information obtained from other SROs and gathered from various financial publications, so that the clearing agency may evaluate, for instance, whether members maintain sufficient financial resources and robust operational capacity to meet their obligations as participants in the clearing agency pursuant to existing Rule 17Ad–22(d)(2)(i).
Table 1 contains membership
statistics for registered clearing agencies.660 Current membership generally reflects features of cleared markets. The decision to become a clearing member depends on the products being cleared and the structure of these asset markets, as well as the current state of regulation for cleared markets. For example, the structure of security-based swap markets and the payoffs to security-based swap contracts differs markedly from that of equity markets and common stock, which may explain some of the differences between the concentrated membership of certain clearing agencies and the relatively broader membership of others. n. Tiered Participation Arrangements Tiered participation arrangements occur when clearing members (direct participants) provide access to clearing services to third parties (indirect participants). No rule under the Exchange Act currently requires a registered clearing agency through its written policies and procedures to identify, monitor, and manage material risks arising from tiered participation arrangements. The Commission understands, however, that certain registered clearing agencies have policies and procedures currently in place to identify, monitor, or manage such arrangements. Specifically, such clearing agencies rely on information gathered from, and distributed by, direct participants to manage these tiered participation arrangements. For example, under some covered clearing agencies’ rules, direct participants generally have the responsibility to indicate to the clearing agency whether a transaction submitted for clearing represents a proprietary or customer position. Such rules further require direct participants to calculate, and notify the clearing agency of the value of, each customer’s collateral. Direct participants also communicate with indirect participants regarding the clearing agency’s margin and other requirements.

661See 17 CFR 240.17Ad–22(d)(7). 662See Exchange Act Release No. 52784 (Nov. 16, 2005), 71 FR 70902 (Nov. 23, 2005); Exchange Act Release No. 55239 (Feb. 5, 2007), 72 FR 6797 (Feb. 13, 2007). 663See 17 CFR 240.17Ad–22(d)(6). 664See 17 CFR 240.17Ad–22(d)(9). 665See supra Part I.A.1. 666See supra notes 12–13. 667See supra note 41. o. Links Rule 17Ad–22(d)(7) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to evaluate the potential sources of risks that can arise when the clearing agency establishes links either cross-border or domestically to clear or settle trades, and ensure that the risks are managed prudently on an ongoing basis.661 Each registered clearing agency is linked to other clearing organizations, trading platforms, and service providers. For instance, a link between U.S. and Canadian clearing agencies allows U.S. members to clear and settle valued securities transactions with participants of a Canadian securities depository. The link is designed to facilitate cross-border transactions by allowing members to use a single depository interface for U.S. and Canadian dollar transactions and eliminate the need for split inventories.662 Registered clearing agencies that provide CCP services currently establish links to allow members to realize collateral and other operational efficiencies. p. Efficiency and Effectiveness Rule 17Ad–22(d)(6) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to require the clearing agency to be cost-effective in meeting the requirements of participants while maintaining safe and secure operations.663 Registered clearing agencies have procedures to control costs and to regularly review pricing levels against operating costs. These clearing agencies may use a formal budgeting process to control expenditures, and may review pricing levels against their costs of operation during the annual budget process. Registered clearing agencies also analyze workflows to make recommendations to improve their operating efficiency. q. Communication Procedures and Standards Although no rule under the Exchange Act expressly requires a registered clearing agency through its written policies and procedures to use or accommodate relevant internationally accepted communication procedures and standards, the Commission believes that registered clearing agencies already use these standards. Registered clearing agencies typically rely on electronic communication with market participants, including members. For example, some registered clearing agencies have rules in place stating that clearing members must retrieve instructions, notices, reports, data, and other items and information from the clearing agency through electronic data retrieval systems. Some registered clearing agencies have the ability to rely on signatures transmitted, recorded, or stored through
electronic, optical, or similar means. Other clearing agencies have policies and procedures that provide for certain emergency meetings using telephonic or other electronic notice. r. Disclosure Disclosures by registered clearing agencies serve to limit the size of potential information asymmetries between registered clearing agencies, their members, and market participants. Rule 17Ad–22(d)(9) requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide market participants with sufficient information for them to identify and evaluate risks and costs associated with using the clearing agency’s services.664 Information regarding the operations and services of each registered clearing agency can be viewed publicly either on the clearing agency’s Web site or a Web site maintained by an affiliate of the clearing agency. Because a registered clearing agency is an SRO,665 it must file with the Commission any proposed rule or any proposed change in, addition to, or deletion from its rules, and the Commission reviews all proposed rule changes and publishes them for comment.666 Proposed rule changes also are available for public viewing on each clearing agency’s Web site. Besides providing market participants with information on the risks and costs associated with their services, registered clearing agencies regularly provide information to their members to assist them in managing their risk exposures and potential funding obligations. Some of these disclosures may be common to all members—such as information about the composition of clearing fund assets—while other disclosures that concern particular positions or obligations may only be made to individual members. Finally, the Commission notes that most registered clearing agencies currently publish on their Web sites their responses to the PFMI quantitative disclosures.667 These disclosures are to be updated semi-annually. B. Consideration of Benefits, Costs, and the Effect on Competition, Efficiency, and Capital Formation The discussion below sets forth the potential economic effects stemming from the adopted rules. The section begins by framing more general economic issues related to the amendments to Rule 17Ad–22 and Rule 17Ab2–2. The discussion that follows considers the effects of the rules on efficiency, competition, and capital formation. The section ends with a discussion of the benefits and costs flowing from specific provisions of the amendments to Rule 17Ad–22 and Rule 17Ab2–2.

1. General Economic Considerations
   This section considers potential impacts of the amendments, as a whole, through their effects on systemic risk, the discretion with which covered clearing agencies operate, market integrity, concentration in the market for clearing services and among clearing members, and QCCP status. a. Systemic Risk A large portion of financial activity in the United States ultimately flows through one or more registered clearing agencies that would become covered clearing agencies under the amendments to Rule 17Ad–22. These clearing agencies have direct links to members and indirect links to the customers of members. They are also linked to each other through common members, operational processes, and in some cases cross-margining and cross￾guaranty agreements. These linkages allow covered clearing agencies to provide opportunities for risk-sharing but also allow them to serve as potential conduits for risk transmission. Covered clearing agencies play an important role in fostering the proper functioning of financial markets. If they are not effectively managed, however, they may transmit financial shocks to other financial market participants through their responses to clearing member default. The centralization of clearance and settlement activities at covered clearing agencies allows market participants to reduce costs, increase operational

668Cf. PFMI, supra note 2, at 9. 669See e.g., Itzhak Gilboa & David Schmeidler, Maxmin Expected Utility with Non-Unique Prior, 18 J. Mathematical Econ. 141 (1989) (proposing an axiomatic foundation of a decision rule based on maximizing expected minimum payoff of a strategy). 670Specifically, by performing key roles in the transaction process, clearing agencies serve to maintain higher minimum payoffs in poor states of the world, by, for example, immobilizing securities or adopting DVP systems. 671See e.g., David Easley & Maureen O’Hara, Microstructure and Ambiguity, 65 J. Fin. 1817 (2010) (using a theoretical model of trade on venues that differ in rules, the authors show how rules that reduce market-related ambiguity may induce a participatory equilibrium). 672See, e.g., Arnoud W.A. Boot, Silva Dezo˜elan, & Todd T. Milbourn, Regulatory Distortions in a Competitive Financial Services Industry, 16 J. Fin. Serv. Res. 249 (2000) (showing that, in a simple industrial organization model of bank lending, a change in the cost of capital resulting from regulation results in a greater loss of profits when regulated banks face competition from non￾regulated banks than when regulations apply equally to all competitors); Victor Fleischer, Regulatory Arbitrage, 89 Tex. L. Rev. 227 (2010) (discussing how, when certain firms are able to choose their regulatory structure, regulatory costs are shifted onto those entities that cannot engage in regulatory arbitrage). 673See BCBS capital framework, supra note 44. efficiency, and manage risks more effectively.668 While providing benefits to market participants, the concentration of these activities at a covered clearing agency implicitly exposes market participants to the risks faced by covered clearing agencies themselves, making risk management at covered clearing agencies a key element of systemic risk mitigation. b. Discretion The Commission recognizes that the degree of discretion permitted by the amendments to Rule 17Ad–22 partially determines their economic effect. Even where current practices at covered clearing agencies would not need to change significantly to comply with the rules, as adopted, covered clearing agencies could still potentially face costs associated with the limitations on discretion that will result from the rules, including costs related to limiting a clearing agency’s flexibility to respond to changing economic environments. For example, to the extent that covered clearing agencies currently in compliance with Rule 17Ad–22(e) value the ability to periodically allow net liquid assets to drop below the minimum level specified by the rules, they may incur additional costs because under Rule 17Ad–22(e) they lose the option to do so. Although there may be costs to limiting the degree of discretion covered clearing agencies have over risk management policies and procedures, the Commission believes there are also potential benefits. As discussed above, clearing agencies may not fully
internalize the social costs of poor internal controls and thus, given additional discretion, may not craft appropriate risk management policies and procedures. For example, even if existing regulation provides clearing agencies with the incentives necessary to manage risks appropriately in a static sense, they may not provide clearing agencies with incentives to update their risk management programs in response to dynamic market conditions. Additionally, efforts at cost reduction or profit maximization could encourage clearing agencies to reduce the quality of risk management by, for example, choosing to update parameters and assumptions rapidly in periods of low volatility while maintaining stale parameters and assumptions in periods of high volatility. By reducing covered clearing agencies’ discretion over their policies and procedures, the amendments to Rule 17Ad–22 may reduce the likelihood that risk management practices lag behind changing market conditions by requiring periodic analysis of model performance while paying particular attention to periods of high volatility or low liquidity. Subjecting covered clearing agencies to more specific requirements may have other benefits for cleared markets as well. Academic research has explored the ways in which regulation affects liquidity in financial markets when participants are ‘‘ambiguity averse,’’ where ambiguity is defined as uncertainty over the set of payoff distributions for an asset.669 Such investors may heavily weigh worst-case scenarios when they decide whether to hold the asset. The Commission believes that regulation aimed at enhancing standards for covered clearing agencies while reducing their discretion may reduce the ambiguity associated with holding cleared assets in the presence of credit risk and settlement risk 670 and thus may allow investors to rule out worst-case states of the world. In this regard, more specific rules may encourage participation in cleared markets by investors that benefit from resulting risk-sharing opportunities.671
c. Market Integrity
The Commission believes that the amendments to Rule 17Ad–22 could provide the benefit of reduced potential for market fragmentation that may arise from different requirements across regulatory regimes. These benefits would flow to markets that are also supervised by the CFTC and FRB, and internationally, since cleared markets are global in nature and linked to one another through common participants. Failure to maintain consistency with other regulators may disrupt cleared markets in a number of ways. Significant differences across regulatory regimes may encourage participants to restructure their operations to avoid a particular regulatory regime.672 Such differences may reduce the liquidity of cleared products in certain markets if they result in an undersupply of clearing services. Further, inconsistency in regulation across jurisdictions may increase the likelihood that restructuring by market participants in response such inconsistency results in concentrating clearing activity in regimes with a weaker commitment to policies and procedures for sound risk management. Differences across regulatory regimes could also affect the products that a clearing agency chooses to clear. In turn, a shift in product choice could result in more concentrated liquidity for certain markets. In the case of clearing agency standards, there are additional motivations for consistency with other regulatory requirements. The Commission believes that such consistency would prevent the application of inconsistent regulation and thereby reduce the likelihood that participants in cleared markets would restructure and operate in less-regulated markets. Additionally, such consistency would allow foreign bank clearing members and foreign bank customers of clearing members of covered clearing agencies to be subject to lower capital requirements under the BCBS capital framework.673 Based on its consultation and coordination with other regulators, the Commission believes Rule 17Ad–22(e) is consistent and comparable, where possible and appropriate, with the rules and policy statement adopted by the FRB and the rules adopted by the CFTC, as well as the headline principles in the PFMI. The Commission’s rules differ from those requirements adopted by the CFTC and FRB in terms of the specific portions of the key considerations and explanatory text in the PFMI that are, or are not, referenced or emphasized. Further, CPMI–IOSCO members are also in various stages of implementing the standards in the PFMI into their own regulatory regimes, and the Commission believes that adopting a set of requirements generally consistent with the relevant international standards would result in diminished

674See supra note 43.
675See supra notes 44–45 and infra Part III.B.1.e (discussing the BCBS capital framework and the economic effect of QCCP status under the BCBS capital framework, respectively). 676See supra note 39 (defining ‘‘financial market infrastructure’’). 677Cf. PFMI, supra note 2, at 11. 678The Commission notes that this result depends on the relationship between the cost of innovations in risk management and the private benefits to a clearing agency in terms of reduced default risk. Absent competitive pressures, a clearing agency may nevertheless invest in the development of risk management practices so long as the marginal benefits of risk reduction exceed the marginal cost. 679See Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention 609–626, in The Rate and Direction of Inventive Activity:
Economic and Social Factors (NBER, 1962), available at http://www.nber.org/chapters/ c2144.pdf. 680See CPSS, Market Structure Development in the Clearing Industry: Implications for Financial Stability, at sec. 5 (Nov. 2010), available at http:// www.bis.org/publ/cpss92.pdf; see also Siyi Zhu, Is There a ‘Race to the Bottom’ in Central Counterparties Competition?—Evidence from LCH.Clearnet SA, EMCF and EuroCCP, DNB Occasional Studies, Vol. 9, No. 6 (2011); John Kiff et al., Credit Derivatives: Systemic Risks and Policy Options (IMF Working Paper No. 254, Nov. 2009), available at http://www.imf.org/external/pubs/ft/ wp/2009/wp09254.pdf. 681See generally Nadia Linciano, Giovanni Siciliano & Gianfranco Trovatore, The Clearing and Settlement Industry: Structure Competition and Regulatory Issues (Italian Secs. & Exch. Comm’n Research Paper 58, May 2005), available at http:// www.ssrn.com/abstract=777508 (concluding in part that the core services offered by the clearance and settlement industry tend toward natural monopolies because the industry can be characterized as a network industry, where consumers buy systems rather than single goods, consumption externalities exist, costs lock-in consumers once they choose a system, and production improves with economies of scale); Heiko Schmiedel, Markku Malkama¨ki & Juha Tarkka, Economies of Scale and Technological Development in Securities Depository and Settlement Systems, at 10 (Bank of Fin. Discussion Paper 26, Oct. 2002), available at http:// www.suomenpankki.fi/en/julkaisut/tutkimukset/ keskustelualoitteet/Documents/0226.pdf (‘‘The overall results of this study reveal the existence of substantial economies of scale among depository and settlement institutions. On average, the centralized U.S. system is found to be the most cost effective settlement system and may act as the cost saving benchmark.’’). 682See, e.g., Mark J. Roe, Clearinghouse Overconfidence, 101 Cal. L. Rev. 1641 (2013), available at http://scholarship.law.berkeley.edu/ californialawreview/vol101/iss6/3 (arguing that counterparty risk concentrated within CCPs may be transferred to the broader financial system through links between clearing members and their clients). 683See supra notes 44–45 and accompanying text (discussing the BCBS capital framework). likelihood that participants in cleared markets would restructure and operate in less-regulated markets.674 Additionally, international standards such as the BCBS capital framework could create complications for U.S. clearing agencies not subject to regulations based on the PFMI as a result of the BCBS capital framework’s treatment of QCCPs. In particular, if U.S. clearing agencies do not obtain QCCP status from foreign banking regulators who have adopted rules conforming to the BCBS capital framework because, for instance, the regulatory framework is not consistent with the PFMI, foreign bank members of U.S. clearing agencies may have incentives to move their clearing business to clearing
agencies in jurisdictions where they might obtain lower capital requirements under the BCBS capital framework.675 d. Concentration The economic effects associated with the amendments to Rule 17Ad–22 may also be partially determined by the economic characteristics of clearing agencies. Generally, the economic characteristics of FMIs, including clearing agencies, include specialization, economies of scale, barriers to entry, and a limited number of competitors.676 Such characteristics, coupled with the particulars of an FMI’s legal mandate, could result in market power, leading to lower levels of service, higher prices, and under￾investment in risk management systems.677 The centralization of clearing activities in a relatively small number of clearing agencies somewhat insulated from market forces may result in a reduction in their incentives to innovate and to invest in the development of appropriate risk management practices on an ongoing basis,678 particularly when combined with the cost reduction pressures noted previously.679 However, the Commission notes that the inverse may not necessarily hold. In other words, additional competition in the market for clearing services may not necessarily result in improved risk management. For instance, aggressive price-cutting in a ‘‘race to the bottom’’ may result in clearing agencies accepting lower-quality collateral, requiring lower margin and default fund contributions, lowering access requirements, or holding lower reserves, potentially undermining their risk management efforts.680 Market power may raise particular issues with respect to the allocation of benefits and costs flowing from these amendments to Rule 17Ad–22 and precipitate changes in the structure of the financial networks that are served by covered clearing agencies. For example, as a result of limited competition,681 existing covered clearing agencies may easily pass the incremental costs associated with enhanced standards on to their members, who may share these costs with their customers, potentially resulting in increased transaction costs in cleared securities. If incremental increases in costs lead clearing agencies to charge higher prices for their services, then certain clearing members may choose to terminate membership and cease to clear transactions for their customers. Should this situation occur, the result may be further concentration among clearing members, where each remaining member clears a higher volume of transactions. In this case, clearing agencies and the financial markets they serve would be more exposed to these larger clearing members. Moreover, customers would have fewer resources or options for obtaining such services, clearing agencies would have fewer non-defaulting members to take on defaulting members portfolios, and clearing agencies that rely on clearing members to participate in default auctions would hold auctions with fewer participants. The remaining clearing members may, however, each internalize
more of the costs their activity in cleared markets imposes on the financial system. The increased importance of a small set of clearing members, in turn, may result in firms not previously systemically important increasing in systemic importance. This is particularly true for clearing members that participate in multiple markets, both cleared and not cleared.682 However, adequate regulation of capital levels and margin amounts at surviving clearing members could mean that, though shocks to these members may be larger, the propagation of shocks may be limited to a smaller set of entities and their equity holders. e. QCCP Status and Externalities on Clearing Members An effect of the amendments to Rule 17Ad–22 is that covered clearing agencies required to comply with the adopted rules may be more likely to qualify as QCCPs in non-U.S. jurisdictions that have adopted the BCBS capital framework’s QCCP definition. Under the BCBS capital framework, a QCCP is defined as an entity operating as a CCP that is prudentially supervised in a jurisdiction where the relevant regulator has established, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the PFMI.683 Because the amendments to Rule 17Ad– 22 are consistent with the PFMI, the Commission believes that foreign bank clearing members of certain covered clearing agencies and foreign banks

684See infra Part III.B.1.e. 685The Commission notes that benefits to banks that may arise as a result of the rules may be contingent upon regulators in other jurisdictions taking action to recognize the QCCP status of covered clearing agencies. 686For a discussion of the effects of QCCP status on competition between bank and non-bank clearing members, see Part III.B.2.a. 687See supra note 597 (noting that the Commission currently expects the lower capital treatment under the BCBS capital framework to affect registered clearing agencies FICC, ICEEU, and OCC, each of which would meet the definition of a ‘‘covered clearing agency’’). 688As discussed above, the FRB and Office of Comptroller of the Currency have adopted rules implementing capital requirements under the BCBS capital framework that make capital treatment for exposures to CCPs independent of the adopted rules for U.S. banks regulated by these two agencies, and therefore the Commission believes no benefits would accrue to U.S. bank clearing members of FICC and OCC. 689Under the BCBS capital framework, ICCEU and FICC’s repurchase agreement segment would also be eligible for QCCP status. However, FICC does not report counterparties to repo agreements, and ICEEU does not separately report exposures related to security-based swap clearing, so we are currently unable to quantify potential benefits related to QCCP status for these entities. 690The Commission used the set of entities it identified as banks on OCC’s member list, available at http://www.optionsclearing.com/membership/ member-information/. For U.S. bank holding companies, 2015 total assets, risk weighted assets, net income, and tier 1 capital ratios were collected from Y–9C reports available at the National Information Center, https://www.ffiec.gov/ nicpubweb/nicweb/nichome.aspx. For non-U.S. bank holding companies, Commission staff obtained corresponding data from financial statements and supplementary financial materials posted to bank Web sites. Where necessary, values were converted back to U.S. dollars at December 31, 2015 exchange rates obtained from the Federal Reserve, available at http://www.federalreserve.gov/ releases/h10/hist/. 691For example, one bank in the sample, with 5.53% of total risk-weighted assets, was assigned 5.53% of the total trade and default fund exposures while another bank in the sample, with 4.21% of total risk weighted assets, was assigned 4.21% of these exposures. Because trade exposures of OCC members against OCC are nonpublic, the Commission used the balance of OCC margin deposits and deposits in lieu of margin held at OCC, $73.54 billion, as a proxy for trade exposures. OCC’s 2015 clearing fund deposits were valued at $12.08 billion. See OCC, 2015 Annual Report, available at http://www.optionsclearing.com/ components/docs/about/annual-reports/occ-2015- annual-report.pdf. 692The BCBS capital framework allows banks to compute default fund exposures in two ways. Method 1 involves computing capital
requirements for each member proportional to its share of an aggregate capital requirement for all clearing members in a scenario where to average clearing members default. The Commission currently lacks data necessary to compute default fund exposures under this approach, instead we use Method 2, which caps overall exposure to a QCCP at 20% of trade exposures. See BCBS capital framework, supra note 44, Annex 4, paras. 121–25 (outlining two methods for computing default fund exposures). clearing indirectly through clearing members of covered clearing agencies may benefit from covered clearing agencies obtaining QCCP status. In particular, bank clearing members and bank indirect participants of covered clearing agencies that could attain QCCP status would face lower capital requirements with respect to cleared derivatives and repurchase agreement transactions because, under the BCBS capital framework, capital requirements for bank exposures to QCCPs are lower than capital requirements for bank exposures to non-qualifying CCPs for these products. Although the FRB and the Office of the Comptroller of the Currency have already adopted rules implementing the BCBS capital framework that would identify all covered clearing agencies (with the exception of ICEEU) as QCCPs for the purposes of applying risk weights to assets at U.S. banks,684 the adopted amendments to Rule 17Ad–22 may result in non-U.S. bank clearing members experiencing lower capital requirements related to exposures against covered clearing agencies relative to a baseline scenario in which foreign banking regulators do not determine that a covered clearing agency is a QCCP.685 The BCBS capital framework affects capital requirements for bank exposures to central counterparties in two important ways. The first relates to trade exposures, defined under the BCBS capital framework as the current and potential future exposure of a clearing member or indirect participant in a CCP arising from OTC derivatives, exchange￾traded derivatives transactions, and securities financing transactions. If these exposures are held against a QCCP, they will be assigned a risk weight of 2%. In contrast, exposures against non-qualifying CCPs do not receive lower capital requirements relative to bilateral exposures and are assigned risk weights between 20% and 100%, depending on counterparty credit risk. Second, the BCBS capital framework imposes a cap on risk weights applied to default fund contributions, limiting risk-weighted assets (subject to a 1250% risk weight) to a cap of 20% of a clearing member’s trade exposures against a QCCP. This is in contrast to treatment of exposures against non-qualifying CCPs, which are uncapped and subject to a 1250% risk weight. Because QCCP status generally impacts capital treatment, any benefits of attaining QCCP status will likely accrue, at least in part, to foreign clearing members or foreign indirect participants subject to the BCBS capital framework.686 As a result of
lower risk weights applied to exposures and a cap on capital requirements against default fund obligations, clearing members of QCCPs subject to BCBS capital framework may experience an improved capital position relative to bank members of non-QCCPs. This may lower funding costs for bank members of QCCPs.687 Non-U.S. banks that are constrained by BCBS tier one capital requirements would face a shock to risk-weighted assets once capital rules come into force.688 The size of the shock depends on regulators’ determinations with regard to QCCP status. Regardless of the size of the shock and to come into compliance with capital rules, however, affected banks will have to raise capital or reduce leverage. In the absence of perfect markets, these banks may incur ongoing costs as a result. In quantifying the benefits of achieving QCCP status, the Commission based its estimate on publicly available information with regard to OCC.689 To estimate the upper bound for the potential benefits accruing to bank clearing members at OCC as a result of QCCP status, the Commission identified a sample of 28 bank clearing members at OCC and, for each bank, collected information about total assets, risk weighted assets, net income and tier one capital ratio at the holding company level for 2015.690 The Commission then allocated trade exposures and default fund exposures across the sample of bank clearing members based on the level of risk-weighted assets.691 The Commission measured the impact on risk-weighted assets for non-U.S. bank clearing members under two different capital treatment regimes. The first regime is in the absence of QCCP status, assuming a 100% risk weight applied to trade exposures and 1250% risk weight applied to default fund exposures for non-U.S. members. In the second regime, OCC obtains QCCP status, and banks are allowed to apply a 2% risk weight applied to trade exposures and a 1250% risk weight to default fund exposures up to a total exposure cap of 20% of trade exposures.692 If OCC is determined to be a QCCP, then the increase in risk weighted assets will be smaller in magnitude, implying a smaller adjustment at lower cost. The Commission estimates that benefits associated with OCC obtaining QCCP status stemming from lower capital requirements against trade exposures to QCCPs as a result of the adopted rules to have an upper bound of $1.2 billion per year, or approximately 0.73% of the total 2015 net income reported by the sample of bank clearing members at OCC. The Commission’s analysis is limited in several respects and relies on several

693The Commission notes that, at present, no bank in its sample of bank clearing members of OCC is bound by capital requirements under the BCBS capital framework. For U.S. bank holding companies, tier 1 capital ratios were collected from Y–9C reports available at the National Information Center, https://www.ffiec.gov/nicpubweb/nicweb/ nichome.aspx. For non-U.S. bank holding companies, Commission staff obtained corresponding data from financial statements and supplementary financial materials posted to bank Web sites. The Commission used data from 2013– 2016 for its sample of U.S. bank clearing members, and from 2012–2015 for its sample of non-U.S. bank clearing members and assumed no bank-specific countercyclical capital buffers for these banks. This suggests a minimum tier 1 capital ratio of 10.1%, exceeding the BCBS minimum by 1.6%. 694This data has been taken from Compustat and from publicly available financial statements. Due to data limitations, for certain banks a shorter window was used for this calculation. The minimum sample window was six years. 695See supra note 45 and accompanying text (noting that banks supervised by the FRB and Office of the Comptroller of the Currency would treat covered clearing agencies as QCCPs for the purposes of calculating regulatory capital ratios). assumptions. First, a limitation of our proxy for trade exposures and our use of OCC’s clearing fund is that the account balances include deposits by bank clearing members, who would experience lower capital requirements under the BCBS capital framework, and non-bank clearing members who would not. The Commission assumes, for the purposes of establishing an upper bound for the benefits to market participants that are associated with QCCP status for OCC under the adopted rules, that the balance of both OCC’s margin account and OCC’s default fund are attributable only to bank clearing members. Additionally, we assume an extreme case where, in the absence of QCCP status, trade exposures against a CCP would be assigned a 100% risk weight, causing the largest possible shock to risk-weighted assets for affected banks. Lower capital requirements on trade exposures to OCC would produce effects in the real economy only under certain conditions. First, agency problems, taxes, or other capital market imperfections could result in banks targeting a particular capital structure. Second, capital constraints on bank clearing members subject to the BCBS capital framework must bind so that higher capital requirements on bank clearing members subject to the BCBS capital framework in the absence of QCCP status would cause these banks to exceed capital constraints if they chose to redistribute capital to shareholders or invest capital in projects with returns that exceed their cost of capital. Using publicly available data, however, it is not currently possible to determine whether capital constraints will bind for bank clearing members when rules applying the BCBS capital framework
come into force, so to estimate an upper bound for the effects of QCCP status on bank clearing members we assume that tier one capital constraints for all bank clearing members of OCC would bind in an environment with zero weight placed on bank exposures to CCPs.693 For the purposes of quantifying potential benefits from QCCP status, the Commission has also assumed that banks choose to adjust to new capital requirements by deleveraging. In particular, the Commission assumed that banks would respond by reducing risk-weighted assets equally across all risk classes until they reach the minimum tier one capital ratio under the Basel framework of 8.5%. We measure the ongoing costs to each non￾U.S. bank by multiplying the implied change in total assets by each bank’s return on assets, estimated using up to 14 years of annual financial statement data.694 The BCBS capital requirements for exposures to CCPs yield additional benefits for QCCPs that the Commission is currently unable to quantify due to lack of data concerning client clearing arrangements by banks. For client exposures to clearing members, the BCBS capital framework allows participants to reflect the shorter close￾out period of cleared transactions in their capitalized exposures. The BCBS framework’s treatment of exposures to CCPs also applies to client exposures to CCPs through clearing members. This may increase the likelihood that bank clients of bank clearing members that are subject to the BCBS capital framework share some of the benefits of QCCP status. Furthermore, the fact that the BCBS capital framework applies to bank clearing members may have important implications for competition and concentration. While Rule 17Ad–22(e) may extend lower capital requirements against exposures to CCPs to non-U.S. bank clearing members of covered clearing agencies,695 the benefits of QCCP status will still be limited to bank clearing members. However, the costs associated with compliance with Rule 17Ad–22(e) may be borne by all clearing members, regardless of whether or not they are supervised as banks. A potential consequence of this allocation of costs and benefits may be ‘‘crowding out’’ of members of QCCPs that are not banks and will not experience benefits with respect to the BCBS capital framework. This may result in an unintended consequence of increased concentration of clearing activity among bank clearing members. As noted in Part III.B.1.d, this increased concentration could mean that each remaining clearing member becomes more important from the standpoint of systemic risk transmission. In addition to benefits for bank clearing members, certain benefits resulting from QCCP status may also accrue to covered clearing agencies. If banks value lower capital requirements attributable to QCCP status, bank clearing members may prefer membership at QCCPs to membership at CCPs that are not QCCPs. A flight of clearing members from covered clearing agencies in the absence of QCCP status would
result in default-related losses being mutualized across a narrower member base. Additionally, if the flight from covered clearing agencies results in lower transactional volume at these clearing agencies, then economies of scale may be lost, resulting in higher clearing fees and higher transaction costs in cleared products.
2. Effect on Competition, Efficiency, and
Capital Formation
The amendments to Rule 17Ad–22 and Rule 17Ab2–2 have the potential to affect competition, efficiency, and capital formation. As with the rest of the benefits and costs associated with the amendments to Rule 17Ad–22, the Commission believes that several of the effects described below only occur to the extent that covered clearing agencies do not already have operations and governance mechanisms that conform to the requirements in Rule 17Ad–22(e). Additionally, the Commission believes that consistency with international regulatory frameworks, as embodied by the PFMI, which may promote the integrity of cleared markets, could have substantial effects on competition, efficiency, and capital formation. a. Competition Two important characteristics of the market for clearance and settlement services are high fixed costs and economies of scale. Large investments in risk management and information technology infrastructure costs, such as financial data database and network maintenance expenses, are components of high fixed costs for clearing agencies. Consequently, the clearance and settlement industry exhibits economies of scale in that the average total cost per transaction, which includes fixed costs, diminishes with the increase in transaction volume as high fixed costs are spread over a larger number of transactions. Furthermore, high fixed costs translate into barriers to entry that