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Proposed Rule2023-14457

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

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Published

July 28, 2023

Issuing agencies

Commodity Futures Trading Commission

Abstract

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

Full Text

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

[[Page 48967]]

Vol. 88

Friday,

No. 144

July 28, 2023

Part II

Commodity Futures Trading Commission

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17 CFR Parts 39 and 190

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

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

[[Page 48968]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 190

RIN 3038-AF16

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

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Proposed Rulemaking.

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

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

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

FOR FURTHER INFORMATION CONTACT: Robert Wasserman, Chief Counsel and
Senior Advisor, 202-418-5092, <a href="/cdn-cgi/l/email-protection#483a3f293b3b2d3a252926082b2e3c2b662f273e">[email&#160;protected]</a>; Megan Wallace,
Senior Special Counsel, 202-418-5150, <a href="/cdn-cgi/l/email-protection#98f5eff9f4f4f9fbfdd8fbfeecfbb6fff7ee">[email&#160;protected]</a>; Eric
Schmelzer, Special Counsel, <a href="/cdn-cgi/l/email-protection#4a2f392922272f26302f380a292c3e29642d253c">[email&#160;protected]</a>, 202-418-5967; Division
of Clearing and Risk, Commodity Futures Trading Commission, Three
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Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

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

I. Background

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

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

[[Page 48969]]

make and promulgate such rules and regulations as, in the judgment of
the Commission, are reasonably necessary to effectuate any of the
provisions or to accomplish any of the purposes of the CEA.
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\5\ Section 725(c) of Title VII of the Dodd-Frank Act, 124 Stat.
at 1687 (2010), 7 U.S.C. 7a-1(c)(2)(A)(i).
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For SIDCOs in particular, Title VIII of the Dodd-Frank Act grants
the Commission explicit authority to prescribe risk management
standards, taking into consideration relevant international standards
and existing prudential requirements governing operations related to
payment, clearing and settlement activities and the conduct of
designated activities by such financial institutions.\6\ Under Title
VIII, the objectives and principles for those risk management standards
are to (1) promote risk management; (2) promote safety and soundness;
(3) reduce systemic risks; and (4) support the stability of the broader
financial system.\7\ Combined, Titles VII and VIII of the Dodd-Frank
Act address one of Dodd-Frank's fundamental goals: to reduce systemic
risk through properly regulated central clearing.\8\
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\6\ Title VIII, Payment, Clearing, and Settlement Supervision
Act of 2010, Section 805, 124 Stat. 1802, 1809, 12 U.S.C.
5464(a)(2)(A), (B).
\7\ Enhanced Risk Management Standards for Systemically
Important Derivatives Clearing Organizations, 78 FR 49663, 49665
(Aug. 15, 2013).
\8\ See Customer Clearing Documentation, Timing of Acceptance
for Clearing, and Clearing Member Risk Management, 77 FR 21278,
21278 (Apr. 9, 2012).
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DCOs are subject to a number of risks that could threaten their
viability and financial strength, including risks from the default of
one or more clearing members (including credit and liquidity risk) as
well as non-default risk (including general business risk, operational
risk, custody risk, investment risk, and legal risk). The realization
of these risks has the potential to result in the DCO's financial
failure.\9\
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\9\ CPMI-IOSCO, Recovery of financial market infrastructures
(July 5, 2017) (hereinafter CPMI-IOSCO Recovery Guidance) at ]
2.1.1.
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In light of the central role DCOs perform in the markets that they
serve, the disorderly failure of a DCO would likely cause significant
disruption in such markets. In particular, SIDCOs play an essential
role in the financial system, and thus the disorderly failure of such a
DCO could lead to severe systemic disruptions if it caused the markets
it serves to cease to operate effectively. Ensuring that DCOs can
continue to provide critical operations and services as expected, even
in times of extreme stress, is therefore central to financial
stability. Maintaining provision of the critical operations and
services that clearing members and others depend upon should allow DCOs
to serve as a source of strength and continuity for the financial
markets they serve.\10\
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\10\ Id. at ] 2.1.2.
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Core Principle D requires each DCO to ensure that it possesses the
ability to manage the risks associated with discharging its
responsibilities through the use of appropriate tools and
procedures.\11\ Recovery planning is inherently integrated into that
risk management, and concerns those aspects of risk management and
contingency planning which address the extreme circumstances that could
threaten the DCO's viability and financial strength. To manage these
risks as required by Core Principle D, a DCO needs to identify in
advance, to the extent possible, such extreme circumstances and
maintain an effective plan to enable it to continue to provide its
critical operations and services if these circumstances were to occur.
The recovery plan needs to address circumstances that may give rise to
any default loss, including uncovered credit losses, liquidity
shortfalls or capital inadequacy, as well as any structural weaknesses
that these circumstances reveal. Similarly, the recovery plan needs to
address DCOs' potential non-default losses. The recovery plan also
needs to address the need to replenish any depleted pre-funded
financial resources and liquidity arrangements so that the DCO can
remain viable as a going concern and continue to provide its critical
operations and services. The existence of the recovery plan further
enhances the resilience of the DCO, and will provide market
participants with confidence that the DCO will be able to function
effectively even in extreme circumstances.\12\
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\11\ 7 U.S.C. 7a-1(c)(2)(D)(i).
\12\ CPMI-IOSCO Recovery Guidance, at ] 2.2.1.
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Given the systemic importance of SIDCOs, each SIDCO must have a
comprehensive and effective recovery plan designed to permit the SIDCO
to continue to provide its critical operations and services. Subpart C
DCOs, being held to similar standards as SIDCOs, also need to have such
recovery plans. However, where a recovery plan proves, in a particular
circumstance, to be ineffective, it is important that the DCO have a
plan to wind down in an orderly manner. A plan for an orderly wind-down
is not a substitute for having a comprehensive and effective recovery
plan.\13\
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\13\ Id. at ] 2.2.2.
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The purpose of a recovery plan is to provide, with the benefit of
thorough planning during business-as-usual operations, such information
and procedures that will allow a DCO to effect recovery such that it
can continue to provide its critical operations and services when its
viability as a going concern is threatened. A recovery plan enables the
DCO, its clearing members, their clients, and other relevant
stakeholders, to prepare for such extreme circumstances, increases the
probability that the most effective tools to deal with a specific
stress will be used and reduces the risk that the effectiveness of
recovery actions will be hindered by uncertainty about which tools will
be used. The recovery plan will also assist the Federal Deposit
Insurance Corporation (FDIC) as resolution authority under Dodd-Frank
Title II \14\ in preparing and executing their resolution plans for a
DCO.\15\
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\14\ 12 U.S.C. 5381 et. seq. (``Orderly Liquidation
Authority''). While orderly wind-down as discussed here proceeds
under the authority of the DCO, FDIC would act as receiver in
conducting an orderly liquidation under Title II.
\15\ CPMI-IOSCO Recovery Guidance at ] 2.3.1.
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While the implementation of the recovery plan is the responsibility
of the DCO itself, which accordingly also has to have the power to make
decisions and take action in accordance with its rules, under Title II
resolution, that responsibility and power will pass to the FDIC as
receiver instead. Many recovery tools will also be relevant to a DCO
under Title II resolution, not least because FDIC would ``step into the
shoes'' of the DCO \16\ and accordingly would be able to enforce
implementation of contractual loss or liquidity shortfall allocation
rules, to the extent that any such rules exist, and have not been
exhausted before entry into resolution.\17\
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\16\ 12 U.S.C. 5390(a)(1)(A)(i) (upon appointment as receiver
for a covered financial company, FDIC succeeds to all rights,
titles, powers, and privileges of the covered financial company and
its assets, and of any stockholder, member, officer, or director of
such company).
\17\ CPMI-IOSCO Recovery Guidance at ] 2.2.3.
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To accomplish these ends, this Notice of Proposed Rulemaking (NPRM)
is proposing, among other things: (1) for SIDCOs and Subpart C DCOs,
that they should incorporate certain subjects and analyses in their
viable plans for recovery and orderly wind-down; and (2) for all other
DCOs, that they should maintain viable plans for orderly wind-down that
incorporate substantially similar subjects and analyses as the proposed
requirements for SIDCOs and Subpart C DCOs.

B. Regulatory Framework for DCOs

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

[[Page 48970]]

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

The Commission established regulations for the recovery and wind-
down of a SIDCO and Subpart C DCO in 2013 with the promulgation of
Sec. 39.39.\26\ Regulation 39.39 \27\ was codified to protect the
members of a SIDCO or Subpart C DCO, as well as their customers, and
the financial system more broadly, from the consequences of a
disorderly failure of a DCO consistent with Principles 3 and 15 of the
PFMI.\28\ Regulation 39.39 also promotes the concepts in Core
Principles B (Financial Resources), D (Risk Management), G (Default
Rules and Procedures), I (System Safeguards), L (Public Information), O
(Governance Fitness Standards), and R (Legal Risk) of Section 5b(c)(2)
of the CEA.\29\
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\26\ Derivatives Clearing Organizations and International
Standards, 78 FR 72476, 72494 (Dec. 2, 2013).
\27\ 17 CFR 39.39. References in the remainder of this section
are to the existing regulations.
\28\ See 78 FR 72476 at 72494-95. Principle 3 of the PFMI
requires an FMI to have a sound risk management framework ``for
comprehensively managing legal, credit, liquidity, operational, and
other risks.'' PFMI Principle 3, at 32. Principle 15 of the PFMI
requires an FMI to ``identify, monitor, and manage its general
business risk and hold sufficient liquid net assets funded by equity
to cover potential general business losses so that it can continue
operations and services as a going concern if those losses
materialize. Further, liquid net assets should at all times be
sufficient to ensure a recovery or orderly wind-down of critical
operations and services.'' PFMI Principle 15, at 88.
\29\ See generally 78 FR 72476.
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Regulation 39.39(a) defines the terms ``general business risk,''
``wind-down,'' ``recovery,'' ``operational risk,'' and ``unencumbered
liquid financial assets.'' \30\
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\30\ 17 CFR 39.39(a)(1)-(5).
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Regulation 39.39(b) requires SIDCOs and Subpart C DCOs to maintain
viable plans for (1) recovery or orderly wind-down, necessitated by
uncovered credit losses or liquidity shortfalls; and separately, (2)
recovery or orderly wind-down necessitated by general business risk,
operational risk, or any other risk

[[Page 48971]]

that threatens the DCO's viability as a going concern.\31\
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\31\ 17 CFR 39.39(b)(1) and (2).
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Regulation 39.39(c)(1) requires a SIDCO or Subpart C DCO to
identify scenarios that may potentially prevent it from being able to
meet its obligations, provide its critical operations and services as a
going concern and assess the effectiveness of a full range of options
for recovery and orderly wind-down.\32\ Regulation 39.39(c)(1) further
requires the plans to include procedures for informing the Commission
when the recovery plan is initiated or wind-down is pending.\33\
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\32\ 17 CFR 39.39(c)(1). The identification of scenarios and
analysis by the DCO allows the DCO to more effectively and
efficiently meet its obligations promptly, and may provide a DCO
with a better understanding of its clearing members' obligations,
the extent to which the DCO would have to perform its obligations to
its clearing members in times of stress, and the ability to better
plan for doing so. The scenarios and analysis in the wind-down plan
are necessary in the event that recovery is not possible and
resolution is not available.
\33\ Id.
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Regulation 39.39(c)(2) requires a SIDCO or Subpart C DCO to have
procedures for providing the Commission and the FDIC with information
needed for resolution planning.\34\
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\34\ 17 CFR 39.39(c)(2).
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Regulation 39.39(d) requires that the recovery and wind-down plans
of SIDCOs and Subpart C DCOs be supported by resources sufficient to
implement those recovery or wind-down plans. This paragraph is not
being amended.\35\
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\35\ 17 CFR 39.39(d).
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Regulation 39.39(e) requires SIDCOs and Subpart C DCOs to maintain
viable plans, approved by the SIDCO's or Subpart C DCO's board of
directors and updated regularly, for raising additional financial
resources in a scenario in which it is unable to comply with any
financial resource requirements set forth in part 39.\36\ This
paragraph is not being amended.
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\36\ 17 CFR 39.39(e).
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Regulation 39.39(f) allows the Commission, upon request, to grant a
SIDCO and Subpart C DCO up to one year to comply with any provision of
Sec. 39.39 or of Sec. 39.35 (default rules and procedures for
uncovered credit losses or liquidity shortfalls).\37\
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\37\ 17 CFR 39.39(f).
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For DCOs that neither have been designated systemically important
nor elected to become Subpart C DCOs, no regulation currently requires
that they maintain viable recovery plans or orderly wind-down plans.
This NPRM is proposing that all DCOs be required to maintain viable
orderly wind-down plans.

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

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

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

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

[[Page 48972]]

Recovery Guidance updated the 2014 CPMI-IOSCO Recovery Guidance to
provide clarification on the implementation of recovery plans,
replenishment of financial resources, non-default related losses, and
transparency with respect to recovery tools and their application.
Similarly, the FSB issued further guidance on CCP resolution and
resolution planning.\48\ The 2017 FSB Resolution Guidance sets out
recommended powers for resolution authorities to maintain the
continuity of critical CCP functions, details on the use of loss
allocation tools, and provides steps that resolution authorities should
take to implement crisis management groups and develop resolution
plans. In August 2022, CPMI-IOSCO published a discussion paper on CCP
practices to address non-default losses in which the paper noted
positively, among other things, the practice of testing and reviewing a
CCP's recovery plan at least annually.\49\
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\47\ Supra fn. 9. The guidance as revised in 2017 is referred to
herein as the CPMI-IOSCO Recovery Guidance. CPMI-IOSCO also issued
guidance on the resilience of CCPs. CPMI-IOSCO, Resilience of
central counterparties: further guidance on the PFMI (July 5, 2017)
(providing guidance on governance, stress testing for both credit
and liquidity exposures, coverage, margin, and a CCP's contribution
of its financial resources to losses).
\48\ FSB, Guidance on Central Counterparty Resolution and
Resolution Planning (July 5, 2017) (hereinafter 2017 FSB Resolution
Guidance).
\49\ CPMI-IOSCO, A discussion paper on central counterparty
practices to address non-default loses (Aug. 4, 2022) (NDL
Discussion Paper).
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G. Requirement To Submit Recovery and Wind-Down Plans to the
Commission--Sec. 39.19(c)(4)(xxiv)

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

In 2013, the Commission promulgated broad rules for a SIDCO's and
Subpart C DCO's recovery and wind-down plans, including a rule that
each SIDCO and Subpart C DCO must have procedures for providing the
Commission and the FDIC with information needed for purposes of
resolution planning.\53\ At that time, practice with respect to
recovery and wind-down planning was in a nascent state of development,
and the relevant global standard-setting bodies, CPMI-IOSCO and the
FSB, had not completed work establishing guidance for implementing
international standards addressing recovery and resolution for
FMIs.\54\
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\53\ 78 FR 72476, 72494 (codifying Sec. 39.39(c)(2)).
\54\ See, e.g., CPMI-IOSCO, Consultative report, Recovery of
financial market infrastructures, at ] 1.2.1 (Aug. 2013)
(distinguishing recovery planning from resolution planning and
noting that ``[a]spects of the consultation report concerning FMI
resolution have been included in a new draft annex and will be
included in an assessment methodology for the [FSB's] Key
Attributes''). CPMI-IOSCO, Consultative report, Recovery and
resolution of financial market infrastructures, at ] 1.4 (July 2012)
(outlining the features for effective recovery and resolution
regimes for FMIs in accordance with the FSB's ``Key Attributes for
Effective Resolution Regimes for Financial Institutions'').
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The Commission is proposing to further align the rules under Sec.
39.39 with the international standards and guidance promulgated since
2013,\55\ and to codify certain of the related guidance in CFTC Letter
No. 16-61. The proposed amendments to Sec. 39.39 include specifying
the required elements of a SIDCO's or Subpart C DCO's recovery and
orderly wind-down plans, amending the requirement to have procedures to
provide information needed for purposes of resolution planning, and
specifying the types of information that should be provided to the
Commission for resolution planning. Additionally, the Commission
proposes to change the title of the regulation, amend and add
definitions, and to delete certain provisions.
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\55\ The Commission actively participated in the development of
those standards and guidance in its role as a member of the relevant
working groups (the CPMI-IOSCO Policy Standing Group and Steering
Group and the Financial Stability Board Financial Market
Infrastructure Cross-Border Crisis Management Group and Resolution
Steering Group), and of the Board of IOSCO, one of the parent
committees of CPMI-IOSCO.
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These proposed revisions and amendments to Sec. 39.39 are
consistent with the Commission's obligation under Sec. 805(a) of the
Dodd-Frank Act to consider international standards in prescribing risk
management standards pursuant to its authority under that provision
with respect to SIDCOs.\56\ Moreover, the Commission views the relevant
international standards under the PFMI, as well as the related
guidance, including the CPMI-IOSCO Recovery Guidance, as helpful in
informing its approach with respect to other DCOs in the context of
recovery and orderly wind-down. These proposed revisions and amendments
are reasonably necessary to effectuate Core Principle D \57\ (Risk
Management) and to accomplish the purposes of the CEA, in particular,
to ensure the financial integrity of all transactions subject to [the
CEA] and the avoidance of systemic risk.\58\ The proposed changes also
respond to comments received from SIDCOs and Subpart C DCOs over time.
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\56\ See Section 805(a) of the Dodd-Frank Act, 12 U.S.C.
5464(a).
\57\ Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(i).
\58\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
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As set forth in section III, the Commission is additionally
proposing to require that all other DCOs maintain and submit to the
Commission an orderly wind-down plan that incorporates substantially
similar information and procedures. With respect to DCOs broadly, these
proposed revisions and amendments should lead to more effective DCO
compliance and risk management, provide greater clarity and
transparency for registered DCOs and DCO applicants, and increase
overall confidence and efficiency in the swaps and futures markets.\59\
Among the risks associated with discharging the risk management
responsibilities of a DCO \60\ is the risk that, due to either default
losses or non-default losses, the DCO will be unable to meet its
obligations or provide its critical functions and will need to wind
down. In such an event, an effective orderly wind-down plan should
facilitate timely decision-making and the continuation of critical
operations and services so that the orderly wind-down may occur in an
orderly and expeditious manner.
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\59\ See 76 FR at 69334-35 (a legally enforceable regulatory
framework ``provides assurance to market participants and the public
that DCOs are meeting minimum risk standards'' which ``can serve to
increase market confidence,'' free up resources that market
participants might otherwise hold,'' and ``reduce search costs that
market participants would otherwise incur).
\60\ See Core Principle D(i), Section 5b(c)(2)(D)(i) of the CEA,
7 U.S.C. 7a-1(c)(2)(D)(i).
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A DCO needs to prepare for circumstances--especially those that are
sudden, unexpected, and on too large a scale for the DCO to timely
recover--for which a DCO may not have the resources to continue as a
going concern. A viable orderly wind-down plan promotes the goal of
ensuring, at a minimum, that the DCO has sufficient resources,
capabilities and legal authority to implement the tools and procedures
for orderly wind-down activities. To the extent that the Commission's
bankruptcy regulations look to a DCO's orderly wind-down

[[Page 48973]]

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

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

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

[[Page 48974]]

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

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

Under the fourth group, losses arising from legal risk, the
international guidance is less helpful. The CPMI-IOSCO Recovery
Guidance does not define ``legal risk;'' the FSB guidance simply notes
that ``legal, regulatory or contractual penalties could lead to
significant losses or uncertainty for the CCP and can take a long time
to materialise fully.'' Losses from legal risk can arise from causes
other than ``penalties'': For example, in the realm of contract or
tort, a DCO may be responsible for compensating a plaintiff for the
DCO's breach of contract, or for the plaintiff's damages caused by,
e.g., the DCO's negligence. In the realm of regulatory litigation,
there may be remedies other than penalties, including, e.g.,
restitution or disgorgement. Accordingly, the Commission is proposing
to broadly include (4) losses from adverse judgments, or other losses,
arising from legal, regulatory, or contractual obligations, including
damages or penalties, and the possibility that contracts that the
derivatives clearing organization relies upon are wholly or partly
unenforceable.
Finally, under the fifth group, losses arising from operational
risk, the Commission is proposing to draw from the prior definition of
operational risk, adding a few additional important categories.
Specifically, the Commission is proposing to add references to (1) the
actions of malicious actors and (2) the possibility of disruption from
internal events. Cyber risk is increasing, and organizations'
operations are exposed to risk from malicious (threat) actors, who
might include employees and third-party providers, criminals,
terrorists, and nation-states. Thus, the Commission proposes to
recognize explicitly the peril from what has been described as
malicious action by third parties intent on creating systemic harm or
disruption, with concomitant financial losses.\70\ Including a
reference to ``malicious actions (whether by internal or external
threat actors)'' should help protect market participants and the public
by potentially improving the DCO's ability to identify vulnerabilities
from malicious actors, safeguard its systems from such actors, and
address possible losses that might occur if, despite the DCO's system
safeguards, malicious actors detect and act upon any cyber
vulnerabilities.
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\70\ CPMI, Cyber resilience in financial market infrastructures,
at 7 (Nov. 2014); see also CPMI-IOSCO, Guidance on cyber resilience
for financial market infrastructures (June 2016). See generally
Executive Order No. 14028, Improving the Nation's Cybersecurity, 86
FR 26633 (May 12, 2021), available at: <a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/12/executive-order-on-improving-the-nations-cybersecurity/">https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/12/executive-order-on-improving-the-nations-cybersecurity/</a>.
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The Commission is also proposing to add a reference to the
possibility of disruption from internal events (the current definition
of operational risk refers only to ``disruptions from external
events''). Examples of these internal events include fire as well as
flooding (due to, e.g., malfunctions of sprinkler systems). This
expansion to the definition should also help protect market
participants and the public, by potentially improving the DCO's ability
to identify vulnerabilities to its systems and operations from internal
events, mitigate those vulnerabilities, and address possible losses
that might occur if, despite the DCO's efforts, such vulnerabilities
disrupt its systems or operations.
Accordingly, the Commission is proposing to refer specifically to
non-default losses (5) as occasioned by deficiencies in information
systems or internal processes, human errors, management failures,
malicious actions (whether by internal or external threat actors),
disruptions to services provided by third parties, or disruptions from
internal or external events that result in the reduction,
deterioration, or breakdown of services provided by the derivatives
clearing organization.

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

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

[[Page 48975]]

raising additional financial resources where they are unable to comply
with any financial resources requirements provided in Part 39.
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\73\ Regulation 39.39(d)(2) provides, in part that each SIDCO
and Subpart C DCO shall maintain sufficient unencumbered liquid
financial assets, funded by the equity of its owners, to implement
its recovery or wind-down plans. The SIDCO or Subpart C DCO shall
analyze its particular circumstances and risks and maintain any
additional resources that may be necessary to implement the plans.
The plan shall include evidence and analysis to support the
conclusion that the amount considered necessary is, in fact,
sufficient to implement the plans.
Regulation 39.39(e) provides, in part that all SIDCOs and
Subpart C DCOs shall maintain viable plans for raising additional
financial resources, including, where appropriate, capital, in a
scenario in which the SIDCO or Subpart C DCO is unable, or virtually
unable, to comply with any financial resources requirements set
forth in this part.
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1. Submission of Plans for Recovery and Orderly Wind-Down--Sec.
39.39(b)(1)
The Commission is proposing to amend Sec. 39.39(b)(1) and (2) by
combining the paragraphs into one paragraph, Sec. 39.39(b)(1), and
cross-referencing the reporting requirement in Sec. 39.19(c)(4)(xxiv).
Proposed Sec. 39.39(b)(1) would require each SIDCO and Subpart C DCO
to maintain and, consistent with Sec. 39.19(c)(4)(xxiv), submit to the
Commission, viable plans for recovery and orderly wind-down, and
supporting information, due to, in each case, default losses and non-
default losses.\74\ The Commission is not proposing to require that the
recovery plan and orderly wind-down plan be submitted as separate
documents. However, the analysis for the recovery portion and wind-down
portion must be set forth clearly.
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\74\ In Section IV below, discussing the reporting requirement
in Sec. 39.19(c)(4)(xxiv), the Commission explains the reason for
adding the term ``and supporting information.''
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The Commission requests comment on these proposed revisions.
2. Notice of Initiation of the Recovery Plan and of Pending Orderly
Wind-Down--Sec. 39.39(b)(2), Sec. 39.13(k)(1), and Sec.
39.19(c)(4)(xxv)
Current Sec. 39.39(c)(1) includes, in part, the requirement that
recovery plans and wind-down plans include procedures for informing the
Commission, as soon as practicable, when the recovery plan is initiated
or wind-down is pending.\75\ The Commission proposes to move this
requirement to Sec. 39.39(b)(2) and to amend the requirement to state
explicitly that in addition to having procedures in place for informing
the Commission that the recovery plan is initiated or that orderly
wind-down is pending, the SIDCO or Subpart C DCO must notify the
Commission, as soon as practicable, when the recovery plan is initiated
or orderly wind-down is pending. This is not a substantive change since
the requirement to have procedures in place to provide notice
necessarily implies that such notice to the Commission will occur;
however, the Commission believes that explicitly stating this
requirement will ensure that the SIDCO or Subpart C DCO understands
this requirement.
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\75\ 17 CFR 39.39(c)(1).
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Additionally, the Commission proposes to require that these DCOs'
notice that the recovery plan is initiated or orderly wind-down is
pending also be provided to clearing members.\76\ Timely notification
of events to clearing members is essential to enable them to prepare
for a transition by the DCO into recovery or orderly wind-down. The
Commission proposes that each SIDCO and Subpart C DCO that files a
recovery plan and orderly wind-down plan under this section must notify
clearing members (in addition to the Commission) that recovery is
initiated or that orderly wind-down is pending as soon as practicable.
As discussed below in Section III, the Commission proposes that DCOs
that are neither SIDCOs nor Subpart C DCOs notify the Commission and
clearing members as soon as practicable when recovery \77\ is initiated
or orderly wind-down is pending.
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\76\ CFTC Letter No. 16-61, at 14 (referencing Sec. 39.21,
``Public information,'' which requires a DCO to make information
concerning the rules and the operating and default procedures
governing the clearing and settlement systems of the DCO available
to market participants).
\77\ While, under the proposal, a DCO that is neither a SIDCO
nor a subpart C DCO is not required to have a recovery plan, if such
a DCO does initiate recovery, it will be required to notify the
Commission and clearing members.
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The Commission proposes to add new Sec. 39.19(c)(4)(xxv) to
require that each DCO notify the Commission and clearing members as
soon as practicable when the DCO has initiated its recovery plan or
orderly wind-down is pending.
The Commission requests comment on these proposed changes.
3. Establishment of Time To File Recovery Plan and Orderly Wind-Down
Plan--Sec. 39.39(b)(3)
The Commission is proposing to establish the timing of the filing
of recovery plans and orderly wind-down plans. In 2013, the Commission
acknowledged commenters' concerns that additional time may be required
to comply with Sec. 39.39 because relevant global standards were still
in the consultative phase. The Commission promulgated Sec. 39.39(f) to
allow a SIDCO or Subpart C DCO to apply for up to one year to comply
with Sec. 39.39. Regulation 39.39(f) therefore created various dates
for SIDCOs and Subpart C DCOs to file the plans required by Sec.
39.39(b).
Commenters again requested a specific date to submit recovery plans
and wind-down plans in response to the May 2019 notice of proposed
rulemaking codifying Sec. 39.19(c)(4)(xxiv).\78\ In the January 2020
final rule, the Commission noted the date by which a SIDCO or new
Subpart C DCO is required to maintain a recovery plan and wind-down
plan depends upon when the DCO is designated as systemically important
or elects Subpart C status, whether it requests relief under Sec.
39.39(f), and whether the Commission grants such relief.\79\ The
Commission determined that Sec. 39.39(f) prevented the establishment
of a date certain for submitting plans to the Commission.\80\ This
proposal will, if adopted and finalized by the Commission, codify the
elements of a recovery plan and wind-down plan required under paragraph
(b) of Sec. 39.39, and remove the uncertainty concerning the filing
deadline. The need to request an extension of time for up to one year
to comply with the requirements of Sec. 39.39 (and Sec. 39.35) will
be obviated by the fixed deadline for newly designated SIDCOs to
develop and maintain a recovery plan and a wind-down plan.\81\ The
Commission is proposing to require a DCO to submit a recovery plan and
orderly wind-down plan and supporting information (to the extent it has
not already done so) as required by proposed Sec. 39.39(b) within six
months of the date the DCO is designated as a SIDCO, or as part of its
election to become subject to the provisions of Subpart C set forth in
Sec. 39.31, and annually thereafter.\82\
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\78\ See, e.g., Comment letter filed by the Futures Industry
Association and the International Swaps and Derivatives Association
(ISDA), at 21 (Sept. 13, 2019), available at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2985&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=2">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2985&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=2</a>.
\79\ 85 FR at 4822.
\80\ Id.
\81\ Regulation 39.35 covers the default rules and procedures
for uncovered credit losses or liquidity shortfalls (recovery) for
SIDCOs and Subpart C DCOs.
\82\ As discussed in section III below, it is being proposed
that all DCOs will be required to maintain orderly wind-down plans
on and after the effective date of this rule with respect to that
requirement. As discussed further below, it is proposed that the
effective date of that orderly wind-down plan requirement will be
six months after this rule may be finalized. To address the
possibility that a DCO may be designated a SIDCO or may elect
Subpart C status during that intervening period, such a DCO will be
required to maintain and file an orderly wind-down plan to the
extent it has not already done so.
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The Commission has preliminarily determined to require that a newly
designated SIDCO should file a complete recovery plan and (to the
extent it has not already done so) orderly wind-down plan consistent
with part 39 within six months of the date of designation for the
following reasons. First, in order to be designated as a SIDCO, the DCO
must be a DCO registered with the CFTC. All DCOs must comply with, and
demonstrate compliance as requested by the Commission, applicable
provisions of the CEA and the Commission's regulations, including
Subparts A and B

[[Page 48976]]

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

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

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

\86\ See, e.g., Comment letter of ISDA at 2-3 (Sept. 16, 2013),
filed in response to the Notice of Proposed Rulemaking, Derivatives
Clearing Organizations and International Standards, 78 FR 50260
(Aug. 16, 2013), available at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391</a>.
---------------------------------------------------------------------------

The Commission proposes to replace Sec. 39.39(c) in its entirety.
Proposed Sec. 39.39(c) would reflect, to the extent the Commission
considers appropriate, the guidance on international standards related
to recovery plans and orderly wind-down plans adopted by the global
standard-setting bodies since 2013,\87\ and certain of the DCR staff
guidance set forth in CFTC Letter No. 16-61.\88\
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\87\ E.g., CPMI-IOSCO Recovery Guidance.
\88\ See 17 CFR 39.39(c)(1).
---------------------------------------------------------------------------

As a general matter, the Commission believes that a DCO's recovery
plan and orderly wind-down plan required by Sec. 39.39(b) should
include summaries that provide an overview of the plans, and
descriptions of how the plans will be implemented, in order to enhance
both the understanding of the persons who need to use the plans and the
Commission's ability to evaluate the plans as part of its supervisory
program. Proposed Sec. 39.39(c) would also require that the
description of each plan include the identification and description of
the DCO's critical operations and services, interconnections and
interdependencies, resilient staffing arrangements, obstacles to
success, stress scenario analyses, potential triggers for recovery and
orderly wind-down, available recovery and orderly wind-down tools,
analysis of the effect of any tools identified, lists of agreements to
be maintained during recovery and orderly wind-down, descriptions of
governance arrangements, and testing. These proposed plan requirements
are necessary for the plan to be viable, i.e., capable of working
successfully, are consistent with the international guidance discussed
above, and should be considered the minimum that a SIDCO or Subpart C
DCO must include in its recovery plan and orderly wind-down plan. The
Commission proposes to add these requirements as new proposed Sec.
39.39(c). For clarity and completeness, specific requirements will be
set forth in paragraphs (c)(1) through (c)(8), as discussed below.
The Commission requests comment on this approach, and on each of
the proposed specific requirements.
1. Critical Operations and Services, Interconnections and
Interdependencies, and Resilient Staffing--Sec. 39.39(c)(1)
The Commission is proposing to add new Sec. 39.39(c)(1) requiring
recovery plans and orderly wind-down plans to identify and describe the
SIDCO's and Subpart C DCO's critical operations and services, including
internal and external service providers; ancillary services providers;
financial and operational interconnections and interdependencies;
aggregate cost estimates for the continuation of services; plans for
resilient staffing arrangements for continuity of operations into
recovery or orderly wind-down; plans to address the risks that the
failure of each critical operation and service poses to the DCO, and a
description of how such failures would be addressed; and a description
of how the SIDCO and Subpart C DCO will

[[Page 48977]]

ensure that the services continue through recovery and orderly wind-
down.
In developing a viable plan, both the CPMI-IOSCO Recovery Guidance
and CFTC Letter No. 16-61 stress the importance of identifying the
critical operations and services that the DCO provides, and the
financial and operational interconnections and interdependencies among
the DCO and its relevant affiliates, internal and external service
providers, and other relevant stakeholders.\89\ The Commission agrees
that each recovery plan and orderly wind-down plan should identify and
describe the critical operations and services that the DCO provides to
clearing members and other financial market participants. As CPMI-IOSCO
stated in its guidance, ``[t]he purpose of identifying critical
services is to focus the recovery plan on the FMI's ability to continue
to provide these services on an ongoing basis, even when it comes under
extreme stress.'' \90\ The Commission agrees that for purposes of
recovery planning in Sec. 39.39, when determining whether a service is
``critical,'' the DCO must consider ``the importance of the service to
the [DCO]'s participants and other FMIs, and to the smooth functioning
of the markets the [DCO] serves and, in particular, the maintenance of
financial stability.'' \91\
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\89\ CPMI-IOSCO Recovery Guidance, at section 2.4; CFTC Letter
No. 16-61, at 10-11.
\90\ CPMI-IOSCO Recovery Guidance, at section 2.4.2.
\91\ Id.
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The Commission anticipates that the DCO's ability to provide
critical services may also be affected by issues relating to certain
services that are ancillary to the critical service, and thus issues
relating to these ancillary services should be included in the recovery
and orderly wind-down plan. The Commission agrees with the analysis in
the CPMI-IOSCO Recovery Guidance that, ``even if a specific service is
judged not to be critical, a systemically important FMI needs to take
account of the possibility that losses or liquidity shortfalls relating
to the provision of that noncritical service could threaten its
viability and thus necessitate implementation of its recovery plan so
that it can continue to provide those services that are judged to be
critical. An FMI needs to have a recovery plan that covers all the
scenarios that could threaten its viability.'' \92\
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\92\ Id. at section 2.4.4. n.13.
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The Commission believes that a DCO's recovery plan and orderly
wind-down plan should identify and analyze a DCO's financial and
operational interconnections and interdependencies. Such an analysis is
important to foster, and to provide transparency into, the ability of
the DCO to implement each of its recovery plan and orderly wind-down
plan. For instance, the recovery plan should account for the
possibility that an affiliated entity in the financial sector may fail,
resulting in a cascade of failures and resultant defaults on all
obligations to the DCO, including with respect to services that the DCO
depends upon to complete its operations. A DCO's recovery plan and
orderly wind-down plan should also identify the DCO's critical internal
and external service providers, the risks that the failure of each
provider poses to the DCO, how such failures would be addressed, and
how the DCO would ensure that the services would continue into recovery
and orderly wind-down.\93\ Similarly, the DCO should consider the
impact of any disruption in services or operations it provides to
clearing members and financial market participants. In this regard,
CFTC Letter No. 16-61 recommended that a DCO's recovery plan include
the identification and analysis of ``the financial and operational
interconnections and interdependencies among the DCO and its relevant
affiliates, internal and external service providers and other relevant
stakeholders.'' \94\
---------------------------------------------------------------------------

\93\ Id.
\94\ CFTC Letter No. 16-61, at 10.
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In considering and analyzing the magnitude of the costs that it
needs to plan for associated with recovery or orderly wind-down, the
DCO should consider the likely increase in certain of its expenses
compared to its business-as-usual operating budget, including, for
example, legal fees, accounting fees, financial advisor fees, the costs
associated with employee retention programs, and other incentives in
order to maintain critical staff. Other costs, such as marketing or
those associated with the development of new products, may decrease.
For purposes of orderly wind-down planning in particular, the DCO shall
proceed under the conservative assumption that any resources consumed
during recovery will not be available to fund critical operations and
services in wind-down.
The DCO's analysis of its critical operations and services should
also describe the impact of the multiple roles and relationships that a
single financial entity may have with respect to the DCO including
affiliated entities and external entities.\95\ For instance, a single
external entity (including a set of affiliated entities) may act as a
clearing member, a settlement bank, custodian or depository bank,
liquidity provider or counterparty. If such a single external entity
defaults in one of its roles e.g., as a clearing member, it will likely
default in all of them.\96\ An entity affiliated with the DCO may be
relied upon for a variety of services, such as those related to
information technology, human resources, or facilities. In order to
support the viability of its recovery or orderly wind-down plan, the
DCO should address the contingency that its affiliate may not be able
to perform those services.
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\95\ Id.
\96\ A financial conglomerate/bank holding company structure may
operate through a set of legal entities (e.g., a broker-dealer/
futures commission merchant separate from a bank separate from an
information technology service provider), each of which has
different relationships with the DCO. Based on past experience with
insolvencies of financial firms (e.g., Refco, Lehman, MF Global),
once one of these affiliates fails, the others are likely to follow
it into bankruptcy or receivership proceedings quickly.
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Consistent with the CPMI-IOSCO Recovery Guidance, the Commission
believes that a DCO's recovery plan should consider how its design and
implementation may affect another FMI, and coordinate the relevant
aspects of their plans.\97\ Given the interconnected nature of the
financial services ecosystem, supporting financial stability requires
the recovery plan and orderly wind-down plan of each DCO to identify
and address contingencies and consequences.
---------------------------------------------------------------------------

\97\ CPMI-IOSCO Recovery Guidance, at section 2.4.14.
---------------------------------------------------------------------------

Recovery and orderly wind-down planning must also identify
potential risks that may arise in recovery and orderly wind-down if
financial weakness or failure in one of the DCO's business lines or
affiliated legal entities spreads to others. The recovery and orderly
wind-down plans must describe how the DCO has planned for resilient
staffing arrangements for continuity of operations since it is not
feasible to maintain a critical service without the concomitant
personnel. As part of planning for recovery, each SIDCO and Subpart C
DCO should also explain how the DCO will retain, and address the
potential loss of, the services of personnel filling mission-critical
roles during extreme stress. The DCO may additionally be vulnerable to
key person risk; accordingly, plans for resilient staffing arrangements
should identify, to the extent applicable, key person risk within the
DCO or (as relevant) affiliated legal entities that the DCO relies upon
to provide its critical

[[Page 48978]]

operations and services, and how the DCO has planned for this risk.
The Commission requests comment on this aspect of the proposal.
2. Recovery Scenarios and Analysis--Sec. 39.39(c)(2)
The Commission is proposing to add new Sec. 39.39(c)(2) to specify
scenarios that must be addressed in the SIDCO's or Subpart C DCO's
recovery plan, to the extent, in each case, that such scenario is
possible. The Commission believes that the current requirement that a
SIDCO or Subpart C DCO shall identify scenarios that may potentially
prevent it from being able to meet its obligations is too broad and
allows for planning gaps.
To support a systematic planning process that will foster these
DCOs' ability to recover effectively from situations of unprecedented
stress, the Commission is proposing to adopt portions of CFTC Letter
No. 16-61 describing the analysis that should take place for each
scenario considered in the recovery plan; namely: (1) a description of
the scenario; (2) the events that are likely to trigger the scenario;
(3) the DCO's process for monitoring events triggering the scenario;
(4) the market conditions, operational and financial difficulties and
other relevant circumstances that are likely to result from the
scenario; (5) the potential financial and operational impact of the
scenario on the DCO and on its clearing members, internal and external
service providers and relevant affiliated companies, both in an orderly
market and in a disorderly market; and (6) the specific steps the DCO
would anticipate taking when the scenario occurs or appears likely to
occur including, without limitation, any governance or other procedures
in order to implement the relevant recovery tools and to ensure that
such implementation occurs in sufficient time for the recovery tools to
achieve their intended effect.\98\ The Commission believes that this
six-part analysis is integral to viability of a SIDCO's and Subpart C
DCO's recovery plan and orderly wind-down plan. The Commission expects
that each of these DCOs will undertake such analysis for each scenario
described in its recovery plan and its orderly wind-down plan. The
Commission is proposing in Sec. 39.39(c)(2) that each recovery plan
and orderly wind-down plan contain the described analysis.
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\98\ CFTC Letter No. 16-61, at 6-7.
---------------------------------------------------------------------------

In order to promote the comprehensiveness of these DCOs' recovery
plans, the Commission is also proposing to require that each recovery
plan describe certain ``commonly applicable scenarios,'' most of which
are described in CFTC Letter No. 16-61, to the extent such scenarios
are possible in light of the DCO's activities.\99\ Those scenarios
include: (1) settlement bank failure; (2) custodian or depository bank
failure; (3) scenarios resulting from investment risk; (4) poor
business results; (5) the financial effects from cybersecurity events;
(6) fraud (internal, external, and/or actions of criminals or of public
enemies); (7) legal liabilities, including liabilities related to the
DCO`s obligations with respect to cleared transactions and those not
specific to its business as a DCO (e.g., tort liability); (8) losses
resulting from interconnections and interdependencies among the DCO and
its parent, affiliates, and/or internal or external service providers
(e.g., the financial effects of the inability of a service provider to
provide key systems or services); \100\ and (9) any other risks
relevant to the DCO's activities. In addition to these scenarios, the
Commission is proposing to require SIDCOs and Subpart C DCOs to include
in their recovery plan the following additional scenarios: (1) credit
losses or liquidity shortfalls created by single and multiple clearing
member defaults in excess of prefunded resources required by law; (2)
liquidity shortfall created by a combination of clearing member default
and a failure of a liquidity provider to perform; (3) depository bank
failure; and (4) losses resulting from interconnections and
interdependencies with other CCPs (whether or not those CCPs are
registered with the Commission as DCOs). For any of those scenarios
enumerated above that the DCO determines are not possible in light of
its activities, the DCO should provide its reasoning for not
considering it. Finally, the Commission is proposing that a DCO must
include at least two scenarios involving multiple failures (e.g., a
member default occurring simultaneously, or nearly so, with a failure
of a service provider) that, in the judgment of the DCO, are
particularly relevant to the DCO's business.\101\ The Commission
believes that a DCO should describe how it is prepared for these
additional exigencies in order to demonstrate to the market and its
clearing members that it is prepared to meet the demands of possible
market stresses.
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\99\ Id. at 5-6. These scenarios are described as ``commonly
applicable'' because, in the Commission's judgment, all DCOs will
plausibly be vulnerable to most of these scenarios occurring, that
is, most scenarios will be possible and, if such a scenario occurs,
it may damage the DCO's financial position sufficiently to require
recovery or orderly wind-down.
The reference to scenarios that are ``possible'' should not be
confused with a reference to scenarios that are ``likely.'' Thus, if
a DCO deposits all relevant funds as cash with a federally regulated
and insured depository institution, and in no circumstances invests
them, then a scenario of losses resulting from investment risk would
not be possible. On the other hand, while regulation of depository
institutions and FDIC insurance makes a loss due to failure of such
a depository bank extraordinarily unlikely, it is not impossible,
and thus is a scenario that should be addressed in the recovery and
orderly wind-down plans. See, e.g., NDL Discussion Paper at section
2.1 (``[L]ow risk is not zero risk, and consequently, CCPs should
have a plan to address [non-default losses (NDL)] from these
scenarios should they materialize. Some CCPs, however, do not
include certain types of NDL scenario[s] in their planning because
these CCPs seem to assume that regulated financial institutions or
central securities depositories pose zero custody [or depository]
risk, or that legal risk cannot cause an NDL (because Principle 1 of
the PFMI requires a legal basis with `a high degree of certainty').
These approaches appear to be inconsistent with the standards set
forth in the PFMI.'')
\100\ For loss scenarios resulting from interconnections and
interdependencies among the DCO and its parent or affiliates, the
DCO should consider, to the extent applicable, how its
organizational structure may impact the specific steps it would
anticipate taking.
\101\ The term ``in the judgment of the DCO, are particularly
relevant'' is being used rather than ``are most relevant'' to avoid
the implication that it would be necessary to conduct an analysis
ranking with precision the relevance of different combinations.
Rather, staff of the DCO should exercise their professional
judgement in selecting at least two particularly relevant
combination scenarios. It is highly unlikely that no such
combinations (or only one) would be possible.
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The Commission requests comment on this aspect of the proposal.
3. Recovery and Orderly Wind-Down Triggers--Sec. 39.39(c)(3)
Thorough planning also requires that a SIDCO or Subpart C DCO be
prepared to determine when recovery or orderly wind-down is necessary,
that is, when the recovery plan or orderly wind-down plan should be
``triggered.'' Some triggers might be automatic (e.g., because the DCO
is insolvent) while others may not be obvious, and many will
necessarily involve the exercise of judgment and discretion (e.g., the
DCO is suffering ongoing business losses that appear likely to lead to
insolvency, or an adverse legal judgment that involves large financial
liability appears likely).
The CPMI-IOSCO Recovery Guidance and CFTC Letter No. 16-61 each
advise that a SIDCO's and Subpart C DCO's recovery plan and wind-down
plan should define the criteria, both quantitative and qualitative,
that they would use to determine, or to guide its discretion in
determining, when to implement the recovery plan and the wind-down
plan, i.e., the trigger(s).\102\ The Commission believes that defining
those criteria (including conducting the

[[Page 48979]]

analysis necessary to do so) would materially aid these DCOs both in
developing effective plans, and in preparing to address events that
lead to such triggers. While the CPMI-IOSCO Recovery Guidance
references only recovery plans, the Commission believes that a similar
analysis should apply to planning for consideration of orderly wind-
down. The Commission also believes that the identification of possible
triggers would project confidence to the public that these DCOs will
continue to function in extreme circumstances (such as recovery), and
convey that these DCOs have a plan to consider wind-down in an orderly
manner if recovery is ineffective.
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\102\ See CPMI-IOSCO Recovery Guidance, at sections 2.4.6-2.4.8;
CFTC Letter No. 16-61, at 7.
---------------------------------------------------------------------------

The CPMI-IOSCO Recovery Guidance states that there may be some
triggers that ``should lead to a pre-determined information-sharing and
escalation process within the FMI's senior management and its board of
directors and to careful consideration of what action should be
taken.'' \103\ The Commission agrees that planning for such an
information-sharing and escalation process as part of the DCO's
governance is an important part of ensuring that the DCO is prepared to
deal with contingencies. Accordingly, the Commission is proposing new
Sec. 39.39(c)(3)(i) to require that a SIDCO's or Subpart C DCO's
recovery plan discuss the criteria that may trigger both implementation
and consideration of implementation of the recovery plan, and the
process that these DCOs have in place for monitoring for events that
are likely to trigger the recovery plan. With respect to the orderly
wind-down plan, the DCO must discuss the criteria that may trigger
consideration of implementation of the plan, realizing the importance
of discretion in determining whether to implement orderly wind-down (in
contrast to recovery, a terminal process), and the process that the DCO
has in place for monitoring for events that may trigger consideration
of implementation of the orderly wind-down plan.
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\103\ CPMI-IOSCO Recovery Guidance, at section 2.4.8.
---------------------------------------------------------------------------

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

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

[[Page 48980]]

recovery plan that includes the following: (i) a description of the
tools that the DCO would expect to use in each scenario required by
proposed paragraph (b) of this section that comprehensively addresses
how the DCO would continue to provide critical operations and services;
(ii) the order in which each such tool would be expected to be used;
(iii) the time frame within which each such tool would be expected to
be used; (iv) a description of the governance and approval processes
and arrangements within the DCO for the use of each tool available,
including the exercise of any available discretion; (v) the processes
to obtain any approvals external to the DCO (including any regulatory
approvals) that would be necessary to use each of the tools available,
and the steps that might be taken if such approval is not obtained;
\109\ (vi) the steps necessary to implement each such tool; (vii) a
description of the roles and responsibilities of all parties, including
non-defaulting clearing members, in the use of each such tool; (viii)
whether the tool is mandatory or voluntary; (ix) an assessment of the
likelihood that the tools, individually and taken together, would
result in recovery; and (x) an assessment of the associated risks from
the use of each such tool to non-defaulting clearing members and those
clearing members' customers with respect to transactions cleared on the
DCO, linked financial market infrastructures, and the financial system
more broadly. For those scenarios involving non-default losses, all
clearing members are non-defaulting.
---------------------------------------------------------------------------

\109\ Thus, while (iv) focuses on internal governance and
approval processes such as among DCO officers and committees, (v)
focuses on external approval processes, if any, such as approvals by
a regulator with the legal authority or practical power to require
approval of the use of a tool.
---------------------------------------------------------------------------

The Commission requests comment on this aspect of the proposal.
With respect to the types of recovery tools in particular, the
Commission welcomes comment on whether DCOs use, or would anticipate
using, any tools not identified above in order to meet the full scope
of financial deficits a DCO in recovery may need to remediate.
5. Orderly Wind-Down Scenarios and Tools--Sec. 39.39(c)(5)
As discussed further below, planning for orderly wind-down overlaps
significantly, though not totally, with planning for recovery. There
may be circumstances where the SIDCO or Subpart C DCO attempts to
recover but fails, upon which it should have a plan, as well as
sufficient capital, to transition to and execute an orderly wind-down.
SIDCOs and Subpart C DCOs must therefore plan for both recovery and
orderly wind-down.
Proposed Sec. 39.39(c)(5) would require a SIDCO's or a Subpart C
DCO's orderly wind-down plan to identify scenarios that could prevent
it from being able to meet its obligations, and to identify tools which
may be used in the orderly wind-down of the DCO. CFTC Letter No. 16-61
states that a DCO's analysis of its wind-down options ``should contain
many of the elements of a DCO's analysis of its recovery tools.'' \110\
The letter calls for the wind-down plan to identify and analyze in
detail, with respect to each scenario, nine required elements as well
as ``the manner in which liquidity requirements would be managed during
service closure'' and how essential support services would be
maintained during the wind-down period.\111\ The letter also calls for
the wind-down plan to address obstacles to each option, and the
viability of the options in light of the obstacles.
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\110\ CFTC Letter No. 16-61, at 9.
\111\ Id. at 10.
---------------------------------------------------------------------------

The Commission recognizes that, to plan effectively for orderly
wind-down, considering the scenarios and recovery tools described in
the DCO's recovery plan must precede the DCO's analysis of the events
that would trigger consideration of implementation of the orderly wind-
down plan, and the use of the DCO's orderly wind-down options.\112\ A
DCO's orderly wind-down plan should therefore include a description of
the point or points in the recovery plan, for each scenario, where
recovery efforts would likely be deemed to have failed and
consideration of implementing the orderly wind-down plan would be
triggered. The orderly wind-down plan should then describe at what
point the DCO will no longer be able to meet its obligations or provide
its critical services as a going concern. Once these scenarios are
identified, the plan should describe the tools available to the DCO to
effectuate an orderly wind-down. The DCO should, therefore, explain in
its wind-down plan how it would plan to accomplish an orderly wind-
down, taking into account the time it anticipates it would take to
implement the plan. The orderly wind-down plan should include a
complete analysis of the wind-down tools the DCO would anticipate
using, both individually and together. In order to support a thorough
planning process that is consistent with the international standards,
the Commission has preliminarily determined that for each wind-down
tool, the DCO should describe any discretion it has in the use or
sequencing of the wind-down tool for each scenario, any obstacles to
the use of a particular tool, the governance and approval processes for
the tools available, and how the DCO is planning for the viability of
the tools in light of any identified obstacles.
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\112\ See id. at 9.
---------------------------------------------------------------------------

To support a systematic planning process that will foster the DCO's
ability to wind-down in an orderly manner in situations of
unprecedented stress, where recovery is infeasible, proposed Sec.
39.39(c)(5) incorporates certain of the staff guidance included in CFTC
Letter No. 16-61, as well as international standards and guidance
issued since the 2013 rulemaking. Proposed Sec. 39.39(c)(5) would
require each SIDCO and Subpart C DCO to identify scenarios that may
prevent it from meeting its obligations or providing its critical
services as a going concern, describe the tools that it would expect to
use in an orderly wind-down that comprehensively address how the DCO
would continue to provide critical operations and services, describe
the order in which each such tool would be expected to be used,\113\
establish the time frame within which each such tool would be expected
to be used, describe the governance and approval processes and
arrangements within the DCO for the use of each of the tools available,
including the exercise of any available discretion, describe the
processes to obtain any approvals external to the DCO (including any
regulatory approvals) that would be necessary to use each of the tools
available, and the steps that might be taken if such approval is not
obtained, set forth the steps necessary to implement each such tool,
describe the roles and responsibilities of all parties, including non-
defaulting clearing members, in the use of each such tool, provide an
assessment of the likelihood that the tools, individually and taken
together, would result in orderly wind-down, and provide an assessment
of the associated risks to non-defaulting clearing members and those
clearing members' customers with respect to transactions cleared on the
DCO, linked financial market infrastructures, and the financial system
more broadly.
---------------------------------------------------------------------------

\113\ It may be the case that certain tools may be used
concurrently.
---------------------------------------------------------------------------

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

[[Page 48981]]

appropriately broad, and appropriately framed.
6. Agreements To Be Maintained During Recovery and Orderly Wind-Down--
Sec. 39.39(c)(6)
A DCO has a variety of contractual arrangements that must be
maintained during business as usual, in times of stress, and recovery
and orderly wind-down, such as those with clearing members, affiliates,
linked central counterparties, counterparties, external service
providers, and other third parties.\114\ These contractual arrangements
include the DCO's rules and procedures, agreements to provide
operational, administrative and staffing services, intercompany loan
agreements, mutual offset agreements or cross-margining agreements, and
credit agreements.\115\ Also, a DCO's recovery plan and orderly wind-
down plan should identify and analyze the implications of the various
contractual arrangements that the DCO maintains and describe the
actions that the DCO has taken to ensure that its operations can
continue during recovery and orderly wind-down despite the termination
or alteration of relevant contracts.\116\
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\114\ Id. at 11.
\115\ Id.
\116\ Id. Note that CFTC Letter No. 16-61 calls for the same,
i.e., determine whether any contractual arrangements include
covenants, material adverse change clauses or other provisions that
would permit a counterparty to alter or terminate the agreement as a
result of the implementation of the DCO's recovery plan or wind-down
plan.
---------------------------------------------------------------------------

Contracts may contain covenants, material adverse change clauses,
or other provisions that could subject such contracts to alteration or
termination as a result of the implementation of the recovery plan or
orderly wind-down plan, and thus render the continuation of the DCO's
critical operations and services difficult or impracticable. Therefore,
the Commission believes that each DCO's recovery plan and orderly wind-
down plan should be supported by the DCO's review and analysis of the
DCO's contracts associated with the provision of those critical
operations or services to determine if those contracts contain such
provisions. Where such contractual provisions are present and
enforceable against the DCO, it will need to have alternative methods
to continue those critical operations and services. The DCO's recovery
plan and orderly wind-down plan should describe the actions that the
DCO has taken to ensure that its operations can continue during
recovery and orderly wind-down despite these contractual provisions.
The orderly wind-down plan should also consider whether the contractual
relationships the DCO relies upon to perform its critical operations
and services would transfer to a new entity in the event of the
creation of a new entity or the sale or transfer of the business to
another entity in an orderly wind-down. Furthermore, the Commission
believes that a requirement that a DCO have plans in place to ensure
that its critical operations and services will continue into recovery
and orderly wind-down is consistent with the PFMI and is crucial to
providing ``a high degree of confidence'' that the DCO will continue
its operations and ``serve as a source of financial stability even in
extreme market conditions.'' \117\
---------------------------------------------------------------------------

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

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

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

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

[[Page 48982]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 48983]]

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

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

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

\139\ See text accompanying fn. 54, supra.
\140\ PFMI Principle 3, Key Consideration 4, at 32. The
Commission notes that resolution is distinct from orderly wind-down
in that the latter rests within the control of the DCO.
\141\ 17 CFR 39.39(c)(2).
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The Commission proposes to update its regulations to align Sec.
39.39(c)(2), as new Sec. 39.39(f), with the additional standards and
guidance applicable to resolution planning for systemically important
FMIs adopted since 2013.\142\ As stated in the 2017 FSB Resolution
Guidance, ``[a]uthorities should ensure that CCPs have in place
adequate processes and information management systems to provide the
authorities with the necessary data and information required for
undertaking'' an assessment of the financial resources and tools that
the resolution authority can reasonably expect to be available under
the resolution regime).\143\ In the United States, upon the completion
of the statutory appointment process set forth in Title II of the Dodd-
Frank Act, the FDIC would be appointed the receiver of a failing SIDCO
(or other covered financial company) \144\ The supervision of a DCO
rests with the Commission under the CEA, and, in particular, the
supervision of a SIDCO rests with the Commission as the supervisory
agency under Title VIII of the Dodd-Frank Act.\145\ The statutory
bifurcation of responsibilities between the FDIC and the Commission
creates important challenges. Under Title II of the Dodd-Frank Act, it
is the role of the FDIC to act as receiver for a failed covered
financial company if the requirements of Title II have been met. The
FDIC's ability to carry out its responsibilities as receiver would
benefit from advance preparation to ensure that, in the unlikely event
that resolution becomes necessary, there will be an effective and
efficient transition of the SIDCO to the FDIC receivership, thereby
fostering the success of a Title II resolution.\146\
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\142\ See, e.g., 2017 FSB Resolution Guidance, at section 6.4
(noting that ``[a]uthorities should ensure that CCPs have in place
adequate processes and information management systems to provide the
authorities with the necessary data and information required for
undertaking'' an assessment of the financial resources and tools
that the resolution authority can reasonably expect to be available
under the resolution regime).
\143\ 2017 FSB Resolution Guidance, at section 6.4.
\144\ Section 202(a) of the Dodd-Frank Act; 12 U.S.C. 5382(a).
\145\ Sections 803(8)(A)(ii) and 807(a) of the Dodd-Frank Act,
12 U.S.C. 5462(8)(A)(ii) and 5466(a); see also Section 2(12)(C) of
the Dodd-Frank Act, 12 U.S.C. 5301(12)(C).
\146\ This involves coordinated planning and information sharing
to enable a smooth transition into resolution. As the supervisory
agency for SIDCOs, the Commission provides information for
resolution planning to the FDIC under the auspices of a Memorandum
of Understanding (MOU). The current MOU is the ``Memorandum of
Understanding Between The Federal Deposit Insurance Corporation And
The Commodity Futures Trading Commission Concerning The Sharing Of
Information In Connection With Resolution Planning For Derivatives
Clearing Organizations,'' dated June 26, 2015.
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Pursuant to section 8a(5) of the CEA,\147\ the Commission has
authority to make and promulgate such rules and regulations as, in the
judgment of the Commission, are reasonably necessary to effectuate any
of the provisions or to accomplish any of the purposes of the CEA. One
of those purposes is the avoidance of systemic risk.\148\ As further
described in the following paragraphs, it would appear that a reporting
requirement that would enable the Commission to aid the FDIC in its
preparations for the resolution under Title II of a DCO--where placing
the DCO into resolution requires a finding by the Secretary of the
Treasury, in consultation with the President, that, inter alia, the
failure of the DCO and its resolution under otherwise applicable
Federal or State law would have serious adverse effects on financial
stability in the United States \149\--is reasonably necessary to foster
the avoidance of systemic risk.
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\147\ 7 U.S.C. 12a(5).
\148\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
\149\ Section 203(b)(2) of the Dodd-Frank Act, 12 U.S.C.
5383(b)(2).
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Moreover, under Title VIII of the Dodd-Frank Act, the Commission
may, in consultation with the FSOC and the Board of Governors of the
Federal Reserve, prescribe regulations containing risk management
standards, taking into consideration relevant international standards
and existing prudential requirements, for SIDCOs governing: (i) the
operations related to payment, clearing, and settlement activities of
SIDCOs; and (ii) the conduct of designated activities by SIDCOs.\150\
Under Section 805(b) of the Dodd-Frank Act, the objectives and
principles for such risk management standards shall be to: (1) promote
robust risk management; (2) promote safety and soundness; (3) reduce
systemic risks, and (4) support the stability of the broader financial
system.\151\ Additionally, Section 805(c) of the Dodd-Frank Act states
that the standards prescribed may address areas such as: (1) risk
management policies and procedures; (2) margin and collateral
requirements; (3) participant or counterparty default policies and
procedures; (4) the ability to complete timely clearing and settlement
of financial transactions; (5) capital and financial resources
requirements for the SIDCO; and (6) other areas that are necessary to
achieve the objectives and principles in Section 805(b).\152\
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\150\ Section 805(a)(2)(A) of the Dodd-Frank Act, 12 U.S.C.
5464(a)(2)(A).
\151\ 12 U.S.C. 5464(b).
\152\ 12 U.S.C. 5464(c).
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Similar to the context of recovery and orderly wind-down planning,
thorough preparation ex ante is crucial for successfully managing, on
an inherently abbreviated timeline, matters relating to resolution, in
aid of mitigating serious adverse effects on financial stability in the
United States. This thorough preparation for resolution is also crucial
for establishing market confidence, and the confidence of foreign
counterparts to the United States agencies. While the Commission
remains persuaded that the likelihood of a SIDCO requiring

[[Page 48984]]

resolution under Title II of the Dodd-Frank Act is ``extraordinarily
unlikely,'' \153\ thorough planning for such an exigency is
essential.\154\
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\153\ See Bankruptcy Regulations, 86 FR 19324, 19386 (Apr. 13,
2021).
\154\ Key Attributes ] 11.1, FSB CCP Resolution Planning
Guidance at section 7.
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While less likely, it remains possible that similar information may
also be required from Subpart C DCOs in times of extreme market stress,
if it appears at the time that the failure of such a DCO might meet the
requirements set forth in section 203(b) of the Dodd-Frank Act.\155\
Thus, while the Commission anticipates that the intensity of resolution
planning for Subpart C DCOs will be significantly less than that for
SIDCOs, in order to promote the goal of assuring that Subpart C DCOs
will, if necessary, remain capable of effectively being resolved under
Title II, including during times of extreme stress, Sec. 39.39(f)
would apply equally to SIDCOs and Subpart C DCOs.\156\
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\155\ 12 U.S.C. 5383(b). While the determination under Title II
is made at the time when the entity (here a DCO) is under stress
(see 12 U.S.C. 5383(b)(1) (determination that the financial company
is in default or in danger of default, emphasis added), the
determination under Title VIII is made during business as usual,
after a detailed process including notice to the proposed
systemically important financial market utility, and the standards
for the determination are different than those for the designation.
See generally Section 804 of the Dodd-Frank Act, 12 U.S.C. 5463; 12
CFR Part 1320 (Designation of Financial Market Utilities). Thus, an
entity not designated in advance under Title VIII may nonetheless in
particular circumstances be determined to meet the standards for
resolution under Title II, similarly, an entity designated in
advance under Title VIII may not, even in the event of its failure,
be determined to meet the standards under Title II.
Nonetheless, it would appear that the failure of a DCO that has
been determined during business as usual to have met the criteria
for designation pursuant to 12 U.S.C. 5463 is more likely to have
such adverse effects on financial stability than the failure of a
DCO that has not been determined to have met those criteria.
\156\ The Commission does not at this time believe that it is
likely that the failure of a U.S.-based DCO that is neither a SIDCO
nor a Subpart C DCO would meet the requirements set forth in Section
203(b) of the Dodd-Frank Act, 12 U.S.C. 5383(b), given the generally
smaller size of such DCOs and the fact that such DCOs do not have
banks as clearing members (see supra fn. 23). For foreign-based
DCOs, the relevant resolution authority would be the resolution
authority in the home jurisdiction. Accordingly, the Commission is
not proposing to extend this requirement to DCOs that are neither
SIDCOs nor Subpart C DCOs.
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The Commission's DCR staff has been working with FDIC staff on
resolution planning for the two SIDCOs. This joint work has revealed
that the Commission does not receive certain information from the
SIDCOs that the FDIC may need to plan for resolution. The Commission
therefore has determined to update its reporting requirements for
SIDCOs and Subpart C DCOs to reflect additional information that may be
used for resolution planning consistent with the international
standards set forth in the PFMI and related guidance.\157\
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\157\ See Sections 805(a)(1)(A)-(B) of the Dodd-Frank Act, 12
U.S.C. 5464(a)(1)(A)-(B).
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Most of the global standards and guidance relating to planning for
resolution (including for CCPs) apply to resolution authorities, in
cooperation with supervisory authorities (where the resolution
authority is separate from the supervisory authority).\158\ Because of
the nature of principle-based regulation for DCOs, there may be
information in the possession of a DCO that is required for resolution
planning but may not ordinarily be reported to the Commission and may
not be available publicly. Moreover, while the recovery and orderly
wind-down plans described above should be comprehensive in themselves,
there may be additional information that the Commission may require to
plan for the resolution of a SIDCO or Subpart C DCO. The Commission
therefore proposes to specify the types of information a SIDCO or
Subpart C DCO may be required to provide for resolution planning in
light of international standards and guidance established since 2013.
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\158\ E.g., FSB CCP Resolution Planning Guidance at section 7.
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1. Planning for Resolution Under Title II of the Dodd-Frank Act--Sec.
39.39(f)
Current Sec. 39.39(c)(2) requires SIDCOs and Subpart C DCOs to
have procedures in place to provide the Commission and the FDIC with
information for purposes of resolution planning. This rule is
consistent with the Key Attributes FMI Annex: ``In order to facilitate
the implementation of resolution measures, FMIs should be required to
maintain information systems and controls that can promptly produce and
make available, both in normal times and during resolution, relevant
data and information needed by the authorities for purposes of timely
resolution planning and resolution . . . .'' \159\ The Commission is
proposing in new Sec. 39.39(f) to clarify that the requirement that a
DCO have procedures in place to provide information directly to the
Commission and the FDIC for resolution planning purposes means that the
DCO must provide such information to the Commission. The Commission
would no longer be requiring DCOs to provide information related to
resolution planning directly to the FDIC. The Commission provides such
information related to resolution planning to the FDIC under the MOU.
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\159\ Key Attributes FMI Annex, at section 12.1.
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The Commission is also proposing, consistent with the Key
Attributes FMI Annex, to require that SIDCOs and Subpart C DCOs
maintain information systems and controls that can promptly produce and
make available data and information requested by the Commission for
purposes of resolution planning and resolution in the form and manner
specified by the Commission. The Commission expects that the form and
manner would be designed to facilitate the Commission's ability to
share the information with the FDIC. Such systems and controls are, for
the most part, already in place during business as usual between each
DCO and the Commission. The explicit requirement that a SIDCO and
Subpart C DCO ensure that its systems will continue to be able to
provide information to the Commission during resolution is sound public
policy, as it will ensure the Commission receives critical information
during this transitional period. The requirements of the CEA apply to
any DCO as long as it is doing business, and the affirmation that a
DCO's systems will be designed to be able to continue to function
should help to provide assurances to stakeholders and market
participants that clearing services will continue through all potential
exigencies.
Accordingly, the Commission is proposing new Sec. 39.39(f) to
require that a SIDCO or Subpart C DCO maintain information systems and
controls to provide to the Commission any data and information
requested for purposes of resolution planning and resolution, and that
each must supply such information and data electronically, in the form
and manner specified by the Commission.
2. Required Information--Sec. 39.39(f)(1)-(7)
It is sound regulatory policy for the Commission to be transparent
about the types of information that a SIDCO or Subpart C DCO might
anticipate providing to the Commission, upon request, in order to
enable the Commission to aid the FDIC in planning for resolution under
Title II of the Dodd-Frank Act. This transparency is sound public
policy because it would help assure stakeholders that, in the
extraordinarily unlikely event that resolution of a SIDCO or Subpart C
DCO under Title II becomes necessary, there will be an effective and
efficient transition of the DCO to the FDIC receivership, and a
successful resolution under Title II would be forthcoming. Thorough
preparation is also helpful in supporting market confidence, and the

[[Page 48985]]

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

[[Page 48986]]

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

[[Page 48987]]

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

D. Renaming Sec. 39.39

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

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

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

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

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

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

[[Page 48988]]

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

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

As is the case for SIDCOs and Subpart C DCOs, the Commission
believes, as a general matter, that the orderly wind-down plan of a DCO
that is not a SIDCO or a Subpart C DCO should include a summary
providing an overview of the plan followed by a detailed description of
how the DCO will implement the plan. The description of how the DCO
will implement its plans shall include an identification and
description of the critical operations and services the DCO provides to
clearing members and financial market participants, the service
providers upon which the DCO relies to provide these critical
operations and services, interconnections and interdependencies, and
staffing arrangements (including how they are resilient), obstacles to
success of the orderly wind-down plan, aggregate cost estimates for the
continuation of services during orderly wind-down, and how the DCO will
ensure that its services continue through orderly wind-down. The plan
shall also include a stress scenario analysis addressing the failure of
each critical operation and service, a description of the criteria the
DCO would consider in determining whether and when to trigger orderly
wind-down and the process for monitoring for events that may trigger
the wind-down; a description of the information-sharing and escalation
processes within the DCO's senior management and board of directors
following an event triggering consideration of orderly wind-down and
identification of the factors the board of directors would consider in
exercising judgment or discretion with respect to any decision-making
during wind down; an identification of scenarios that may trigger
orderly wind-down and analysis of the tools the DCO would use following
the occurrence of each scenario; an identification and review of
agreements to be maintained during orderly wind-down; a description of
the DCO's governance with respect to planning for orderly wind-down and
during the orderly wind-down; and testing. The Commission believes
these subjects and analyses are the minimum elements that DCOs should
incorporate in their orderly wind-down plans pursuant to their
obligation to manage the risks associated with discharging their
responsibilities under Core Principle D.\176\
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\176\ To the extent foreign CCPs are subject to home
jurisdiction regulation with different requirements for the subjects
and analyses that must be included in their wind-down plans, the
Commission welcomes comments describing those requirements, and
including suggestions on how to achieve the goals of this regulation
in a manner that appropriately addresses possible inefficiencies.
---------------------------------------------------------------------------

Accordingly, the Commission is proposing new Sec. 39.13(k)(2) to
require a DCO to include in its orderly wind-down plans a summary
providing an overview of the plan followed by a detailed description of
how the DCO will implement the plan.
The Commission requests comment on this aspect of the proposal.
Each required element of the orderly wind-down plan is discussed in
more detail below.
1. Critical Operations and Services, Interconnections and
Interdependencies, and Resilient Staffing--Sec. 39.13(k)(2)(i)
In Section II, the Commission highlighted the importance of
incorporating into recovery and orderly wind-down plans an
identification and description of the critical operations and services
that the SIDCO or Subpart C DCO provides to clearing members and
financial market participants, the service providers upon which the DCO
relies upon to provide these critical operations and services,
financial and operational interconnections and interdependencies, and
resilient staffing arrangements. As set forth below, the same is true
for the orderly wind-down plans for DCOs that are not SIDCOs or Subpart
C DCOs.
i. Critical Operations and Services Provided by and to DCOs
Limiting the operational disruption and financial harm to a DCO's
clearing members and other financial market participants during an
orderly wind-down, turns on the DCO's understanding of the critical
operations and services that the DCO performs for clearing members and
other financial market participants, and, in turn, operations and
services performed by others that are critical to the DCO performing
those critical functions. Thus, the Commission is proposing to require
that a DCO's orderly wind-down plan include an identification and
description of the critical operations and services that the DCO
provides to clearing members and other financial market participants.
For any critical (to the DCO) operations or services that the DCO
relies upon that are performed by internal or external service
providers, the plan should identify those providers and describe the
critical operations or services they perform. Likewise, to the extent
the DCO's ability to discharge its functions may be affected by the
performance of ancillary service providers, the plan should identify
those ancillary service providers and describe the operations or
services they perform. By requiring the identification and description
of the DCO's critical operations and services, including those
performed by internal or external service providers, and any ancillary
service providers, the Commission seeks to ensure, to the extent
practicable, that the DCO's ability to perform the critical operations
and services that others depend upon continues during the orderly wind-
down process.
In the same vein, the Commission is proposing to require that a
DCO's

[[Page 48989]]

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

[[Page 48990]]

delays in ultimately deciding whether to wind-down.
Similarly, the Commission is proposing to require that orderly
wind-down plans include the factors that the board of directors
anticipates that it would consider in any decision-making regarding
wind-down where judgment or discretion is required. The Commission
believes that the factors enumerated in the orderly wind-down plan
should be those that the DCO considers most important in guiding the
discretion of the board of directors. A predefined framework within
which the board may exercise judgment and discretion should facilitate
a timely decision regarding wind-down.
Accordingly, the Commission is proposing new Sec. 39.13(k)(2)(ii)-
(iii) to require that the DCO's orderly wind-down plan include a
description of the criteria that the DCO would consider in determining
whether to implement wind-down and, relatedly, the process for
monitoring for events that may trigger consideration of an orderly
wind-down; a description of the information-sharing and escalation
processes within the DCO's senior management and board of directors
following an event triggering consideration of an orderly wind-down;
and the identification of the factors that the DCO considers most
important in guiding the board of directors' judgment or discretion
with respect to any decision-making during the wind-down.
The Commission requests comment on this aspect of the proposal.
3. Orderly Wind-Down Scenarios and Tools--Sec. 39.13(k)(3)
The Commission is proposing to require that a DCO's orderly wind-
down plan (i) identify the scenarios that may lead to an orderly wind-
down, i.e., those scenarios that may prevent the DCO from meeting its
obligations or providing its critical operations and services as a
going concern, and (ii) analyze the tools the DCO would use following
the occurrence of each scenario. Specifically, the Commission is
proposing to require that the analysis describe the tools the DCO would
expect to use in an orderly wind-down that comprehensively address how
the derivatives clearing organization would continue to provide
critical operations and services; describe the order in which the DCO
would expect to implement any identified tools; describe the governance
and approval processes and arrangements that will guide the exercise of
any available discretion in the use of each tool; describe the
processes to obtain any approvals external to derivatives clearing
organization (including any regulatory approvals) that would be
necessary to use each of the tools available, and the steps that might
be taken if such approval is not obtained; establish the time frame
within which the DCO may use each tool; set out the steps necessary to
implement each tool; describe the roles and responsibilities of all
parties in the use of each tool; provide an assessment of the
likelihood that the tools, individually and taken together, would
result in orderly wind-down; and provide an assessment of the
associated risks to non-defaulting clearing members and those clearing
members' customers with respect to transactions cleared on the DCO, and
linked financial market infrastructures.
As may be the case for SIDCOs and Subpart C DCOs, the scenarios
that may trigger consideration for wind-down are typically those where
recovery efforts (if any) are deemed to have failed. At that point, the
DCO will no longer be able to meet its obligations or provide its
critical operations and services as a going concern. For each scenario
where the DCO may reach such a point, the Commission is proposing to
require that the orderly wind-down plan analyze the tools available to
effectuate an orderly wind-down.
The DCO's tools--i.e., the wind-down options available to the DCO
in each particular scenario--comprise those actions it may take to
effect, in an orderly manner, the sale or transfer, or if necessary in
extreme circumstances, permanent cessation, of its clearing and other
services. The Commission intends that the proposed analysis will
require the DCO to assess the effectiveness of a full range of actions
for orderly wind-down.
Among other things, an effective set of wind-down tools enables the
DCO to manage liquidity requirements in a manner in which critical
operations and services would be maintained during the orderly wind-
down period. Various factors may prevent an action from being
effective, including, for instance, the number of steps required to
implement the action (e.g., disclosure, risk reduction, trade
reduction, transfer or close-out of positions, and liquidation of
investments), the time required to complete each step (e.g., contract
termination and other relevant requirements following disclosure), the
discretion of various parties affecting the use or sequence of the
action (including non-defaulting parties), and any legal limits
regarding the action (e.g., the relevant DCO rules or rule amendments
necessary to support the use of the action and the roles, obligations
and responsibilities of the various parties in the use of the action).
Additionally, any action involving a proposed transfer may turn out
to be difficult to achieve due to the financial and operational
capacity that would be required of a transferee or the status of the
DCO as a distressed seller. Further, the action may have adverse
consequences on clearing members or other financial market
participants. The Commission proposes to require this analysis in order
to assist the DCO in determining which actions may effectuate an
orderly wind-down where critical operations and services would be
maintained throughout the orderly wind-down period while minimizing
public harm.
Accordingly, the Commission is proposing new Sec. 39.13(k)(3) to
require that a DCO's orderly wind-down plan include, following a
thorough analysis, the set of scenarios that may trigger consideration
of orderly wind-down and an analysis of the tools the DCO would use in
each scenario. The Commission is proposing to require that the analysis
describe the tools the DCO would expect to use in an orderly wind-down;
describe the order in which the DCO would expect to implement any
identified tools; describe the governance, approval processes and
arrangements that will guide the exercise of any available discretion
in the use of each tool; establish the time frame within which the DCO
may use each tool; set out the steps necessary to implement each tool;
describe the roles and responsibilities of all parties in the use of
each tool; provide an assessment of the likelihood that the tool would
result in orderly wind-down; and provide an assessment of the
associated risks to non-defaulting clearing members and their
customers, linked financial market infrastructures, and the financial
system more broadly, from the use of each tool.
The Commission requests comment on this aspect of the proposal.
4. Agreements To Be Maintained During Orderly Wind-Down--Sec.
39.13(k)(4)
The Commission is proposing to require that a DCO's orderly wind-
down plan identify any agreements associated with the provision of its
critical services and operations that are subject to alteration or
termination as a result of winding down and describe the actions the
DCO has taken to ensure such operations and services will continue
during wind-down. Similar to SIDCOs and Subpart C DCOs, the DCO may
have a variety of contractual agreements with clearing members,
affiliates, linked central counterparties, counterparties,

[[Page 48991]]

external service providers, and other third parties. The contractual
agreements may take the form of contracts, arrangements, agreements,
and licenses associated with the provision of its services as a DCO,
and may cover the DCO's rules and procedures, agreements for the
provision of operational,

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