Rule2024-25570
Covered Clearing Agency Resilience and Recovery and Orderly Wind-Down Plans
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 18, 2024
Effective
January 17, 2025
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting amendments to certain rules in the Covered Clearing Agency Standards ("CCA Standards") under the Securities Exchange Act of 1934 ("Exchange Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The amendments strengthen existing rules by adding new requirements related to the collection of intraday margin by a covered clearing agency ("CCA") and the use of substantive inputs in its risk-based margin system. The Commission is also adopting a new rule to establish required elements of a CCA's recovery and orderly wind-down plan ("RWP").
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<title>Federal Register, Volume 89 Issue 222 (Monday, November 18, 2024)</title>
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[Federal Register Volume 89, Number 222 (Monday, November 18, 2024)]
[Rules and Regulations]
[Pages 91000-91059]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-25570]
[[Page 90999]]
Vol. 89
Monday,
No. 222
November 18, 2024
Part III
Securities and Exchange Commission
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17 CFR Part 240
Covered Clearing Agency Resilience and Recovery and Orderly Wind-Down
Plan; Final Rule
Federal Register / Vol. 89, No. 222 / Monday, November 18, 2024 /
Rules and Regulations
[[Page 91000]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-101446; File No. S7-10-23]
RIN 3235-AN19
Covered Clearing Agency Resilience and Recovery and Orderly Wind-
Down Plans
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to certain rules in the Covered Clearing Agency
Standards (``CCA Standards'') under the Securities Exchange Act of 1934
(``Exchange Act'') and the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''). The amendments strengthen existing
rules by adding new requirements related to the collection of intraday
margin by a covered clearing agency (``CCA'') and the use of
substantive inputs in its risk-based margin system. The Commission is
also adopting a new rule to establish required elements of a CCA's
recovery and orderly wind-down plan (``RWP'').
DATES:
Effective date: January 17, 2025.
Compliance date: The applicable compliance dates are discussed in
Part III.
FOR FURTHER INFORMATION CONTACT: Elizabeth Fitzgerald, Assistant
Director, Matthew Lee, Assistant Director, Jesse Capelle, Special
Counsel, Adam Allogramento, Special Counsel, Haley Holliday, Attorney-
Adviser, and David Li, Senior Financial Analyst, at (202) 551-5710,
Office of Clearance and Settlement, Division of Trading and Markets;
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-7010.
SUPPLEMENTARY INFORMATION: Pursuant to section 17A of the Exchange
Act,\1\ as well as the Payment, Clearing, and Settlement Supervision
Act (``Clearing Supervision Act'') in Title VIII of the Dodd-Frank
Act,\2\ the Commission is adopting amendments to 17 CFR 240.17ad-
22(e)(6) and adding new Sec. 240.17ad-26. Below is a table of
citations to the rules referenced in this release, including all rules
being amended or adopted:
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\1\ 15 U.S.C. 78q-1.
\2\ 12 U.S.C. 5461 et seq.
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Commission reference CFR citation (17 CFR)
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Exchange Act:
Rule 17Ad-22....................... Sec. 240.17ad-22.
Rule 17Ad-22(e)(3)(ii)............. Sec. 240.17ad-22(e)(3)(ii).
Rule 17Ad-22(e)(4)................. Sec. 240.17ad-22(e)(4).
Rule 17Ad-22(e)(6)................. Sec. 240.17ad-22(e)(6).
Rule 17Ad-22(e)(6)(ii)............. Sec. 240.17ad-22(e)(6)(ii).
Rule 17Ad-22(e)(6)(iv)............. Sec. 240.17ad-22(e)(6)(iv).
Rule 17Ad-22(e)(15)................ Sec. 240.17ad-22(e)(15).
Rule 17Ad-22(e)(15)(ii)............ Sec. 240.17ad-22(e)(15)(ii).
Rule 17Ad-22(e)(23)................ Sec. 240.17ad-22(e)(23).
Rule 17Ad-22(e)(23)(i)............. Sec. 240.17ad-22(e)(23)(i).
Rule 17Ad-22(e)(23)(ii)............ Sec. 240.17ad-22(e)(23)(ii).
Rule 17Ad-22(e)(23)(iv)............ Sec. 240.17ad-22(e)(23)(iv).
Rule 17Ad-25....................... Sec. 240.17ad-25.
Rule 17Ad-25(c).................... Sec. 240.17ad-25(c).
Rule 17Ad-25(i).................... Sec. 240.17ad-25(i).
Rule 17Ad-25(j).................... Sec. 240.17ad-25(j).
Rule 17Ad-26....................... Sec. 240.17ad-26.
Rule 17Ad-26(a).................... Sec. 240.17ad-26(a).
Rule 17Ad-26(a)(1)................. Sec. 240.17ad-26(a)(1).
Rule 17Ad-26(a)(2)................. Sec. 240.17ad-26(a)(2).
Rule 17Ad-26(a)(3)................. Sec. 240.17ad-26(a)(3).
Rule 17Ad-26(a)(4)................. Sec. 240.17ad-26(a)(4).
Rule 17Ad-26(a)(5)................. Sec. 240.17ad-26(a)(5).
Rule 17Ad-26(a)(6)................. Sec. 240.17ad-26(a)(6).
Rule 17Ad-26(a)(7)................. Sec. 240.17ad-26(a)(7).
Rule 17Ad-26(a)(8)................. Sec. 240.17ad-26(a)(8).
Rule 17Ad-26(a)(9)................. Sec. 240.17ad-26(a)(9).
Rule 17Ad-26(b).................... Sec. 240.17ad-26(b).
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The amendments to Rule 17Ad-22(e)(6)(ii) establish new requirements
with respect to a CCA's policies and procedures regarding the
collection of intraday margin, specifically, to (i) include a new
requirement to monitor intraday exposures on an ongoing basis, (ii)
modify the preexisting reference to making intraday calls ``in defined
circumstances'' to making intraday calls ``as frequently as
circumstances warrant'' and identifying examples of such circumstances,
and (iii) require that a CCA document when it determines not to make an
intraday margin call pursuant to its written policies and procedures
required under paragraph (e)(6)(ii). The amendments to Rule 17Ad-
22(e)(6)(iv) establish new requirements for a CCA relying upon
substantive inputs to its risk-based margin model, including when such
substantive inputs are not readily available or reliable.
New Rule 17Ad-26 prescribes requirements for the contents of a
CCA's RWP. While Rule 17Ad-22(e)(3)(ii) currently requires a CCA's
written policies and procedures to include the CCA's RWP, Rule 17Ad-
22(e)(3)(ii) did not include requirements for the content of RWPs.\3\
New Rule 17Ad-26 identifies elements that a CCA's RWP must contain,
including: (i) elements related to planning, including the
identification and use of scenarios, triggers, tools, staffing, and
service providers, as discussed in Parts II.C.1 through 5; (ii) timing
and implementation of the plans,
[[Page 91001]]
as discussed in Parts II.C.6 and 7; and (iii) testing and board
approval of the plans, as discussed in Parts II.C.8 and 9. Definitions
included in new Rule 17Ad-26 are discussed in Part II.D.
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\3\ 17 CFR 240.17ad-22(e)(3)(ii).
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In developing these final rules, Commission staff has consulted
with the Financial Stability Oversight Council (``FSOC''), the
Commodity Futures Trading Commission (``CFTC''), the Federal Deposit
Insurance Corporation (``FDIC''), and the Board of Governors of the
Federal Reserve System (``FRB'').\4\
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\4\ See, e.g., 12 U.S.C. 5464(a)(2); 5472.
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The compliance dates for the amendments to Rule 17Ad-22(e)(6) and
new Rule 17Ad-26 are discussed in Part III.
Table of Contents
I. Introduction
II. Discussion of Comments Received and Final Rules
A. Collection of Intraday Margin
1. Proposed Amendment to Rule 17Ad-22(e)(6)(ii)
2. Discussion of Comments
B. Inputs to Margin System
1. Proposed Amendment to Rule 17Ad-22(e)(6)(iv)
2. Discussion of Comments
C. Contents of Recovery and Orderly Wind-Down Plans
1. Core Services: Rule 17Ad-26(a)(1)
2. Service Providers: Rule 17Ad-26(a)(2)
3. Scenarios: Rule 17Ad-26(a)(3)
4. Triggers: Rule 17Ad-26(a)(4)
5. Tools: Rule 17Ad-26(a)(5)
6. Implementation: Rule 17Ad-26(a)(6)
7. Notification to Commission: Rule 17Ad-26(a)(7)
8. Testing: Rule 17Ad-26(a)(8)
9. Board Approval: Rule 17Ad-26(a)(9)
10. Other Comments
D. Defined Terms in Rule 17Ad-26
1. Definition of ``Orderly Wind-Down''
2. Other Defined Terms and Introductory Clause
III. Compliance Date
IV. Economic Analysis
A. Introduction
B. Economic Baseline
1. Description of Market
2. Overview of the Existing Regulatory Framework
3. Current Recovery and Orderly Wind-Down Plans
4. Current Risk-Based Margin
C. Consideration of Benefits and Costs as Well as the Effects on
Efficiency, Competition, and Capital Formation
1. Final Rule 17Ad-26
2. Amendments to Rule 17Ad-22(e)(6)
3. Other Compliance Costs
4. Efficiency, Competition, and Capital Formation
D. Reasonable Alternatives to the Final Rule and Amendments
1. Establish Precise Triggers for Implementation of RWPs Across
All CCAs
2. Establish Specific Scenarios and Analyses
3. Establish Specific Rules, Policies, Procedures, Tools, and
Resources
4. Require the Identification of Interconnections and
Interdependencies
5. Establish a Specific Monitoring Frequency for Intraday Margin
Calls
6. Adopt Only Certain Elements of Rule 17Ad-26
7. Focus Intraday Margin Requirements on a Subset of CCAs
V. Paperwork Reduction Act
A. Amendments to Rule 17Ad-22(e)(6)
B. New Rule 17Ad-26
C. Chart of Total PRA Burdens
VI. Regulatory Flexibility Act
A. Clearing Agencies
B. Certification
VII. Other Matters
Statutory Authority
I. Introduction
CCAs are an essential part of the infrastructure of the U.S.
securities markets.\5\ While central clearing and other important
functions provided by clearing agencies benefit the markets they
serve,\6\ clearing agencies can pose systemic risk to the financial
system,\7\ due in part to the fact that such clearing functions
concentrate risk in the clearing agency.\8\ Disruption to a clearing
agency's operations, or failure on the part of a clearing agency to
meet its obligations, could therefore serve as a potential source of
contagion, resulting in significant costs not only to the clearing
agency itself or its members but also to other market participants and
the broader U.S. financial system.\9\ As a result, proper management of
the risks associated with CCAs is necessary to help ensure the
stability of the U.S. securities markets and the broader U.S. financial
system.\10\
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\5\ See Release No. 34-78961 (Sept. 28, 2016), 81 FR 70786,
70789 (Oct. 13, 2016) (``CCA Standards Adopting Release''), <a href="https://www.govinfo.gov/content/pkg/FR-2016-10-13/pdf/2016-23891.pdf">https://www.govinfo.gov/content/pkg/FR-2016-10-13/pdf/2016-23891.pdf</a>; see
also 15 U.S.C. 78q-1(a)(1)(A) (finding that the prompt and accurate
clearance and settlement of securities transactions, including the
transfer of record ownership and the safeguarding of securities and
funds related thereto, are necessary for the protection of investors
and persons facilitating transactions by and acting on behalf of
investors). CCAs are a subset of clearing agencies registered with
the Commission. See 17 CFR 240.17ad-22(a) (defining ``covered
clearing agency''); see also infra note 6 (explaining further the
definition of ``covered clearing agency'' and two functions of a
CCA).
\6\ Two functions are that of the central counterparty (``CCP'')
and the central securities depository (``CSD''), each of which
constitutes a financial market infrastructure (``FMI''). A CCP is a
clearing agency that interposes itself between the counterparties to
securities transactions, acting functionally as the buyer to every
seller and the seller to every buyer. 17 CFR 240.17ad-22(a). A CSD
is a clearing agency that is a securities depository as described in
section 3(a)(23)(A) of the Exchange Act. Id. CCAs are clearing
agencies registered with the Commission that provide CCP or CSD
services. See 17 CFR 240.17ad-22(a).
\7\ CCA Standards Adopting Release, supra note 5, at 70792; see
also 12 U.S.C. 5461-72 (setting forth provisions under the Clearing
Supervision Act for designating a clearing agency as systemically
important and imposing risk management standards consistent with
international standards).
\8\ CCA Standards Adopting Release, supra note 5, at 70793.
\9\ Id.; see also Committee on Payment and Settlement Systems,
International Organization of Securities Commissions (``CPMI-
IOSCO''), Principles for financial market infrastructures (Apr. 16,
2012), <a href="http://www.bis.org/publ/cpss101a.pdf">http://www.bis.org/publ/cpss101a.pdf</a> (``PFMI'') (identifying
the risks posed by FMIs, including CCPs and CSDs, across 23 discrete
principles). The Committee on Payment and Settlement Systems renamed
itself the Committee on Payments and Market Infrastructures
(``CPMI'') in 2014.
\10\ CCA Standards Adopting Release, supra note 5, at 70788
n.18.
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Whether in normal or stressed market conditions, the effective
functioning of the securities markets requires a regulatory framework
for CCAs that can promote effective risk management, help preserve
financial stability, and help ensure the continuity of critical CCP and
CSD functions for the markets they serve, participants in those
markets, and investors more generally. Since the enactment of the Dodd-
Frank Act,\11\ the Commission has adopted a series of rules designed to
support its ongoing supervision and oversight of clearing agencies and
to help ensure that CCAs are robust and resilient under normal market
conditions and in periods of market stress.\12\ The potential for CCAs
to spread contagion through the financial system, particularly in
periods of market stress, has necessitated that the Commission continue
to consider and adopt new rules over time to improve the regulatory
framework for CCAs. These series of rules help ensure an effective
regulatory response to evolving risks that could threaten the U.S.
financial system.\13\
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\11\ Public Law 111-203, 124 Stat. 1376 (2010).
\12\ E.g., 17 CFR 240.17ad-22; 17 CFR 240.17ad-25; see also
Release No. 34-9895 (Nov. 16, 2023), 88 FR 84454 (Dec. 5, 2023)
(``CA Governance Adopting Release''), <a href="https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf">https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf</a>; Release No. 34-88616
(Apr. 9, 2020), 85 FR 28853 (May 14, 2020) (``CCA Definition
Adopting Release''), <a href="https://www.govinfo.gov/content/pkg/FR-2020-05-14/pdf/2020-07905.pdf">https://www.govinfo.gov/content/pkg/FR-2020-05-14/pdf/2020-07905.pdf</a>; CCA Standards Adopting Release, supra note 5;
Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 2012),
<a href="https://www.govinfo.gov/content/pkg/FR-2012-11-02/pdf/2012-26407.pdf">https://www.govinfo.gov/content/pkg/FR-2012-11-02/pdf/2012-26407.pdf</a>.
\13\ See infra Part II (discussing the rule amendments and new
rules in greater detail). In addition, when designated as
systemically important by the FSOC, CCAs are also subject to
requirements set forth in Title VIII of the Dodd-Frank Act and rules
thereunder. See, e.g., 12 U.S.C. 5461-72.
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Since the Commission first adopted the CCA Standards, supervisory
authorities, CCAs, and market participants have continued to pursue
further consideration of several topics,
[[Page 91002]]
including the collection of margin generally, the collection of
intraday margin specifically, the potential effects of such margin
collection on market liquidity, and the need for some transparency into
the margin collection process so that market participants that use or
rely on CCAs for risk management functions can monitor and manage their
own financial and other risks.\14\
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\14\ E.g., CPMI-IOSCO, Streamlining Variation Margin in
Centrally Cleared Markets--Examples of Effective Practices (Feb. 14,
2024), <a href="https://www.bis.org/cpmi/publ/d221.pdf">https://www.bis.org/cpmi/publ/d221.pdf</a>; CPMI-IOSCO,
Transparency and Responsiveness of Initial Margin in Centrally
Cleared Markets--Review and Policy Proposals (Jan. 16, 2024),
<a href="https://www.bis.org/bcbs/publ/d568.pdf">https://www.bis.org/bcbs/publ/d568.pdf</a>; CPMI-IOSCO, Resilience of
Central Counterparties (CCPs): Further Guidance on the PFMIs (July
2017), <a href="https://www.bis.org/cpmi/publ/d163.pdf">https://www.bis.org/cpmi/publ/d163.pdf</a> (``CPMI-IOSCO
Resilience Guidance'').
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Although the CCA Standards adopted in 2016 included several
provisions directed to a CCA's margin system generally,\15\ and
specifically the modeling of financial risk and the collection of
margin within it,\16\ the Commission has identified two areas of focus
that support strengthening these pre-existing rules: (i) ensuring
effective monitoring of intraday exposures and specifying particular
circumstances for collection of margin intraday, and (ii) ensuring that
CCAs have effective tools for margin modelling even when inputs to the
margin system become unreliable or unavailable. Ongoing monitoring by
the CCA is necessary to help ensure that a CCA collects sufficient
margin to cover its exposures throughout the day, as portfolios and
positions may change after margin is collected at the start of the day.
This requirement should help ensure that the CCAs have the appropriate
policies and procedures to address market events featuring large
intraday price and position changes, such as the events in the equity
and options markets in early 2021.\17\ In addition, establishing backup
procedures if a substantive input to a margin model is unavailable or
unreliable is especially relevant to ensuring that a CCA can continue
to meet its regulatory obligations and calculate margin appropriately.
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\15\ See, e.g., 17 CFR 240.17ad-22(e)(6).
\16\ See 17 CFR 240.17ad-22(e)(6)(i) (regarding the setting of
margin levels commensurate with the risks and particular attributes
of each relevant product, portfolio, and market); (e)(6)(iii)
(regarding the calculating of margin sufficient to cover the CCA's
potential future exposure to its participants); (e)(6)(vi)
(regarding the monitoring and regular review, testing, and
verification of margin models using backtesting and sensitivity
analysis).
\17\ For example, a CCA may require more margin to guard against
an increased risk of defaults, which may occur if, for example,
buyers do not carry-through on paying for a stock that has plummeted
or sellers do not carry-through on delivering a stock that has
skyrocketed. See, e.g., Staff Report on Equity and Options Market
Structure Conditions in Early 2021, at 31 (Oct. 14, 2021), <a href="https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf">https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf</a> (describing how the National Securities
Clearing Corporation (``NSCC'') observed unusual volatility in
certain securities in January 2021 and imposed intraday margin calls
in response to trading patterns in Gamestop Corp. (``GME'') and
other equity securities).
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Accordingly, in the RWP Proposing Release,\18\ the Commission
proposed new requirements to ensure that CCAs monitor intraday margin
on an ongoing basis and to facilitate intraday margin collection not
only in ``defined'' circumstances but as frequently as circumstances
warrant.\19\ The Commission also defined two circumstances in which a
CCA should have policies and procedures for applying intraday margin:
(i) when specific risk thresholds have been breached, and (ii) when the
products cleared or markets served display elevated volatility.\20\ As
the Commission explained in the RWP Proposing Release, these
requirements would help ensure that the CCA has an effective process
for monitoring margin and avoiding circumstances in which a participant
becomes under-margined, which undermines the ability of a CCA to
mitigate risk.\21\ In addition, with respect to the inputs into a CCA's
margin system, the Commission proposed to expand existing requirements
requiring timely and reliable price data beyond that limited topic to
also encompass other substantive inputs to a CCA's risk-based margin
system, to help ensure that mechanisms are in place to calculate margin
during periods where inputs become unavailable, such as if a data feed
becomes interrupted or corrupted.\22\ In Parts II.A and B, the
Commission discusses these new requirements in greater detail, in
addition to addressing the comments received on the proposed rules.
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\18\ See Release No. 34-97516 (May 17, 2023), 88 FR 34708, 34708
(May 30, 2023) (``RWP Proposing Release''), <a href="https://www.govinfo.gov/content/pkg/FR-2023-05-30/pdf/2023-10889.pdf">https://www.govinfo.gov/content/pkg/FR-2023-05-30/pdf/2023-10889.pdf</a>.
\19\ See infra Parts II.A and B (further discussing these
amended requirements).
\20\ See infra Part II.A (further discussing these amended
requirements).
\21\ RWP Proposing Release, supra note 18, at 34714.
\22\ Id. at 34715.
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Importantly, to be resilient in times of market stress, a CCA will
need to monitor intraday risk on an ongoing basis and use timely and
accurate data inputs to its margin system. Each helps ensure that a CCA
can, in turn, calculate and collect margin in a timely manner, managing
its exposures to its participants throughout the day. In times of
rapidly evolving or stressed market conditions, a CCA must be able to
monitor risk and collect margin while also effectively analyzing the
potential impact of any intraday collections on market liquidity and
financial stability.
Even a robust and resilient CCA may face stressed market conditions
or other events so extreme that the resources it has reserved for
potential loss scenarios will prove insufficient. For example,
depending on the markets they serve, CCAs may hold financial resources
sufficient to withstand the default of the one or two largest
participant families from among their clearing participants.\23\ Such
CCAs may not have sufficient prefunded resources to withstand defaults
beyond these,\24\ and would, in such a circumstance, be charged with
allocating losses among their non-defaulting participants to close out
the portfolios of its defaulting participants.\25\ CCAs may also find
that stressed market conditions lead to liquidity shortfalls or that
certain events drain other capital sources that impair the functioning
of the CCA. Accordingly, to help preserve financial stability and
ensure the continuity of critical CCP and CSD functions in periods of
extreme stress, a resilient CCA still needs to plan effectively to
replenish financial resources when depleted, address and allocate
losses when they accrue, and, if the CCA is unable to allocate losses
and replenish depleted resources, implement an orderly wind-down and
cessation or transfer of its business. If a CCA is unable to take these
steps in a transparent, orderly, and effective way, it will serve as a
source of contagion, resulting in the potential for significant costs
not only to the CCA itself or its clearing members but also to other
market participants and the broader U.S. financial system.\26\
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\23\ See, e.g., 17 CFR 240.17ad-22(e)(4)(i), (ii) (establishing
requirements related to maintaining financial resources at the
minimum to enable a CCA to cover a wide range of foreseeable stress
scenarios that include, but are not limited to, the default of the
one or two participant families that would potentially cause the
largest aggregate credit exposure for the CCA in extreme but
plausible market conditions).
\24\ Financial Stability Board (``FSB''), Central Counterparty
Financial Resources for Recovery and Resolution (Mar. 10, 2022),
<a href="https://www.fsb.org/wp-content/uploads/P090322.pdf">https://www.fsb.org/wp-content/uploads/P090322.pdf</a> (``FSB
Analysis'').
\25\ See, e.g., CPMI-IOSCO, Recovery of financial market
infrastructures (rev. July 2017), at 2.4, <a href="https://www.bis.org/cpmi/publ/d162.pdf">https://www.bis.org/cpmi/publ/d162.pdf</a> (explaining considerations related to CCP recovery in
circumstances where the CCP's prefunded financial resources have
been depleted) (``CPMI-IOSCO Recovery Guidance'').
\26\ The RWP Proposing Release discusses in greater detail the
relationship between RWPs implemented by CCAs and the considerations
related to orderly resolution of financial companies by the FDIC
pursuant to Title II of the Dodd-Frank Act. RWP Proposing Release,
supra note 18, at 34712.
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[[Page 91003]]
Although the CCA Standards adopted in 2016 included a requirement
for CCAs to have policies and procedures that provide for plans for
recovery and orderly wind-down, the Commission did not include in the
rule the specific elements to be required as part of such plans.\27\
The Commission stated that, given the nature of recovery and resolution
planning, the RWP would likely reflect the specific characteristics of
the CCA (e.g., its ownership, organizational, and operational
structures, as well as its size, systemic importance, global reach,
and/or the risks inherent in the products it clears).\28\ Since that
time, each CCA has developed an RWP pursuant to the requirement for
such plans in Rule 17Ad-22. In addition, the Commission has, through
its supervisory process and through its participation in the ongoing
consideration of issues regarding CCP recovery and resolution,\29\
identified several elements that should be included in any RWP
regardless of the market served or the products cleared, to help ensure
that planning is effective, thoughtful, and thorough.
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\27\ See 17 CFR 240.17ad-22(e)(3)(ii) (requiring ``plans for the
recovery and orderly wind-down of the CCA necessitated by credit
losses, liquidity shortfalls, losses from general business risk, or
any other losses'').
\28\ RWP Proposing Release, supra note 18, at 34709 (citing CCA
Standards Adopting Release, supra note 5, at 70808-09).
\29\ E.g., CPMI-IOSCO Recovery Guidance, supra note 25; FSB
Analysis, supra note 24; FSB, Financial Resources and Tools for
Central Counterparty Resolution (Apr. 25, 2024), <a href="https://www.fsb.org/wp-content/uploads/P250424-1.pdf">https://www.fsb.org/wp-content/uploads/P250424-1.pdf</a> (``FSB Guidance'').
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Accordingly, in the RWP Proposing Release,\30\ the Commission
proposed new requirements directed to establishing specific elements of
all RWPs across CCAs, including: requirements to identify critical
systems and service providers and related staffing that would support
these functions, to be maintained in a recovery or wind-down scenario;
\31\ the identification and analysis of scenarios and triggers that
could necessitate implementation of a recovery or wind-down; \32\ the
identification and analysis of which tools would be appropriate in
certain scenarios in order to facilitate recovery or an orderly wind-
down; \33\ requirements for effecting implementation of the plan; \34\
notification to the Commission; \35\ robust annual testing with
participants and key stakeholders, as appropriate; \36\ and provisions
for board review and approval of the plan and any material changes
thereto.\37\ As discussed in the RWP Proposing Release, these new
requirements draw from existing practices at CCAs.\38\ In Parts II.C
and D, the Commission discusses in greater detail these new
requirements, codified in new Rule 17Ad-26, in addition to addressing
the comments received on the proposed rules. New Rule 17Ad-26 promotes
three important objectives: (i) bolstering the existing RWPs at CCAs;
(ii) codifying some existing RWP elements to ensure that these elements
remain in the plans over time; and (iii) establishing that the RWP of
any new CCA would contain each of the elements specified in the
rule.\39\ By advancing these objectives, new Rule 17Ad-26 helps ensure
that, in times of extreme market stress, the recovery or wind-down of a
CCA can preserve financial stability and ensure the continuity of
critical CCP or CSD functions.\40\
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\30\ See RWP Proposing Release, supra note 18, at 34715-16.
\31\ See infra Parts II.C.1 and 2 (discussing critical services
and service providers, respectively).
\32\ See infra Parts II.C.3 and 4 (discussing scenarios and
triggers, respectively).
\33\ See infra Part II.C.5 (discussing tools).
\34\ See infra Part II.C.6 (discussing requirements related to
implementation).
\35\ See infra Part II.C.7 (discussing notification to the
Commission).
\36\ See infra Part II.C.8 (discussing the testing requirement).
\37\ See infra Part II.C.9 (discussing board review and approval
of the RWP and material changes thereto, including material changes
to the covered clearing agency's operations that would significantly
affect the viability or execution of the RWP).
\38\ RWP Proposing Release, supra note 18, at 34709.
\39\ See id. at 34711.
\40\ Id. at 34712. In April, the FSB published guidance
describing the existing set of financial resources and tools
available for use by resolution authorities (such as the FDIC), in a
CCP resolution. FSB Guidance, supra note 29. The FSB Guidance is
relevant to some of the comments received on proposed Rule 17Ad-26,
as discussed further in Part II.
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The Commission received comments on the RWP Proposing Release from
CCAs, industry groups (representing both clearing agencies and their
participants), other market participants, academics, individual
investors, and other interested parties.\41\ Commenters were generally
supportive of the proposal, though some commenters also expressed
concerns regarding specific elements of the proposed rules. In Part II,
the Commission discusses these comments in detail and the modifications
made to the final rules to address comments received. As discussed
further in Part II, the Commission is adopting each of the proposed
rules, some substantially as proposed and others with certain
modifications.
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\41\ Comments received are available on the Commission's website
at <a href="https://www.sec.gov/comments/s7-10-23/s71023.htm">https://www.sec.gov/comments/s7-10-23/s71023.htm</a>.
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In addition, and separate from the Commission's proposed rules for
CCAs, the CFTC also has proposed rules directed to the RWPs of
systemically important derivatives clearing organizations (``SIDCOs'')
under the Commodity Exchange Act.\42\ Like the Commission's final rules
for CCAs adopted in this release, the CFTC's proposed rules are
intended to codify certain common elements of RWPs across SIDCOs. With
respect to some elements of final Rule 17Ad-26, the Commission has
taken a different approach from the CFTC's proposed rule. For example,
given the range of products cleared and markets served across CCAs, the
Commission has not included in Rule 17Ad-26 requirements for scenarios
at the same level of granularity as the CFTC. Nonetheless, the final
Rule 17Ad-26 and the CFTC's proposal are aligned in their objectives
and promote substantially similar outcomes. The differing approaches
are discussed further in Part II.C.10.\43\
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\42\ Derivatives Clearing Organizations Recovery and Order Wind-
Down Plans, Information for Resolution Sharing (July 3, 2023), 88 FR
48968, 48972-73 (July 28, 2023), <a href="https://www.govinfo.gov/content/pkg/FR-2023-07-28/pdf/2023-14457.pdf">https://www.govinfo.gov/content/pkg/FR-2023-07-28/pdf/2023-14457.pdf</a>.
\43\ Commission staff communicates with the CFTC staff regularly
on topics of mutual interest for their respective registrants,
including RWPs, and has consulted with CFTC staff regarding RWPs.
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II. Discussion of Comments Received and Final Rules
A. Collection of Intraday Margin
1. Proposed Amendment to Rule 17Ad-22(e)(6)(ii)
The RWP Proposing Release proposed to strengthen the preexisting
requirements in Rule 17Ad-22(e)(6)(ii) for a CCA to have policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, among
other things, includes the operational capacity to make intraday margin
calls in defined circumstances.\44\ Specifically, the proposed
amendments to Rule 17Ad-22(e)(6)(ii) required a CCA that provides CCP
services to establish, implement, maintain and enforce written policies
and procedures reasonably designed to cover its credit exposures to
establish a risk-based margin system that, among other things, includes
the authority and operational capacity to (i) monitor intraday exposure
on an ongoing basis, and (ii) to make intraday margin calls as
[[Page 91004]]
frequently as circumstances warrant, including when risk thresholds
specified by the CCA are breached or when the products cleared or
markets served display elevated volatility.\45\
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\44\ RWP Proposing Release, supra note 18, at 34713.
\45\ Id. at 34712-14. The preexisting requirement in Rule 17Ad-
22(e)(6)(ii) to establish written policies and procedures that
provide for marking participant positions to market and collecting
margin, including variation margin or equivalent charges if
relevant, at least daily, would be unchanged under the amendments
being adopted in this release.
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2. Discussion of Comments
a. Monitoring Intraday Exposure on an Ongoing Basis: Rule 17Ad-
22(e)(6)(ii)(B)
When adopted in 2016, preexisting Rule 17Ad-22(e)(6)(ii) included
the requirement that CCAs have the authority and operational capacity
to make intraday margin calls.\46\ In the RWP Proposing Release, the
Commission stated that the ``operational capacity'' to make intraday
margin calls ``includes the ability to monitor intraday exposure;
otherwise, it would be impossible for a CCA to make appropriate
intraday margin calls if it were not monitoring its intraday
exposure.'' \47\ Therefore, as originally adopted, Rule 17Ad-
22(e)(6)(ii) required a CCA to have some ability to monitor for
intraday exposure and make intraday margin calls but did not include a
specific requirement to monitor for intraday exposure or regarding the
frequency at which to monitor intraday exposures.\48\
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\46\ Id. at 34713.
\47\ Id.
\48\ Id.
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In the RWP Proposing Release, the Commission stated its continued
belief, consistent with its statements when adopting the CCA Standards,
that it is essential that a CCA monitor its intraday exposures because
the CCA faces a risk that a CCA's exposure to its participants can
change rapidly because of intraday changes in prices, positions, or
both.\49\ The Commission further stated that a requirement that such
monitoring occur on an ongoing basis would contribute to ensuring that
the CCA is sufficiently informed and situated to take appropriate
actions to manage any intraday exposure that arises.\50\ The Commission
also stated that being able to monitor, on an ongoing basis, any
decrease in the margin coverage (as compared to the changes in intraday
credit exposures in its participants' portfolios) should help a CCA
ensure that it is able to collect margin sufficient to cover its
participants' exposures.\51\ The Commission further stated that this
requirement to monitor intraday exposure on an ongoing basis should
provide each CCA with some flexibility to determine what monitoring
frequency is appropriate in the market served by the CCA. Therefore,
the Commission did not specify a particular time period or frequency
for monitoring on an ongoing basis because a CCA ``should be able to
tailor its monitoring to the particular products cleared and markets
served.'' \52\
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\49\ Id.
\50\ Id.; see also CPMI-IOSCO Resilience Guidance, supra note
14, at 5.2.2 (discussing how a CCP addresses intraday exposure in
its margin system and stating that ``a CCP faces the risk that its
exposure to its participants can change rapidly as a result of
intraday changes in prices, positions, or both; ie [sic], adverse
price movements, as well as participants building larger positions
through new trading (and settlement of maturing trades). For the
purposes of addressing these and other forms of risk that may arise
intraday, a CCP should address and monitor on an ongoing basis how
such risks affect all components of its margin system, including
initial margin, variation margin and add-on charges.'').
\51\ RWP Proposing Release, supra note 18, at 34713. The
Commission also explained that a CCA ``generally should consider
whether its intraday monitoring considers how participants'
exposures would affect all risks faced by the CCA, including those
that may already by contemplated by variation margin, initial
margin, or add-on charges.'' Id.
\52\ Id.
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Commenters generally recognized the importance of monitoring
intraday exposure.\53\ Several commenters agreed with the approach in
the proposal not to prescribe a particular monitoring frequency that
would constitute an ``ongoing basis,'' because of the need for a CCA to
be able to tailor its monitoring to the particular products cleared and
markets served.\54\ For example, one such commenter stated that, rather
than the Commission prescribing a monitoring frequency, a CCA's
monitoring ``should align with each [CCA's] scheduled settlement,
initial margin, and variation margin practices to support financial
stability in both normal and volatile market conditions.'' \55\
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\53\ Letter from Megan Malone Cohen, Corporate Secretary,
General Counsel, The Options Clearing Corporation (July 17, 2023) at
3 (``OCC''); Letter from Timothy Cuddihy, Managing Director, Group
Chief Risk Officer, Depository Trust & Clearing Corporation (July
17, 2023) at 3 (``DTCC''); Letter from Ullrich Karl, Head of
Clearing Services, International Swaps and Derivatives Association,
and Jacqueline Mesa, Senior Vice President, Futures Industry
Association (July 17, 2023) at 6 (``The Associations''); Letter from
Stephen W. Hall, Legal Director and Securities Specialist, Better
Markets, Inc. (July 17, 2023) at 7 (``Better Markets''); Letter from
Chris Edmonds, Chief Development Officer, Intercontinental Exchange
(July 19, 2023) at 2 (``ICE''); see also Letter from Sarah Bessin,
Deputy General Counsel, Investment Company Institute (Sept. 26,
2023) at 10 (``ICI'') (generally supporting the Commission's
proposed amendments).
\54\ OCC at 3; Letter from Global Association of Central
Counterparties (July 17, 2023) at 2 (``CCP12''); DTCC at 3; see also
ICE at 2 (stating that clearing agencies should continue to have the
flexibility to determine the appropriate timeframe for intraday
monitoring).
\55\ CCP12 at 2.
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By contrast, one commenter stated that the Commission should
prescribe some particular universal, minimum monitoring frequency
(i.e., establishing a maximum time between instances of a CCA's
intraday monitoring of its credit exposures).\56\ This commenter
acknowledged the benefit that would arise from deferring ongoing
monitoring assessments to a CCA, but supported that the Commission
include a universal, minimum monitoring frequency in this
requirement.\57\ Specifically, this commenter stated that ``every 15
minutes should be the absolute minimum'' for frequency of monitoring
intraday exposures related to any possible intraday margin
collection.\58\
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\56\ See The Associations at 6.
\57\ Id. at 6.
\58\ Id.
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The Commission is adopting the requirement to monitor intraday
exposures on an ongoing basis as proposed.\59\ As stated in the RWP
Proposing Release, a CCA should be able to tailor its risk monitoring
to the particular products cleared and the markets served.\60\
Accordingly, the proposed requirement to monitor intraday exposures on
an ongoing basis is designed to allow a CCA to determine what
monitoring frequency is appropriate for its particular market.\61\ A
CCA needs this flexibility because ``more frequent monitoring may be
necessary for a CCA that operates in markets where intraday trading may
be more prevalent'' (such as, for example, in the U.S. Treasury
market),\62\ or
[[Page 91005]]
alternatively where a CCA's ``intraday exposures may tend to be larger
because of specific features, such as the settlement process.'' \63\
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\59\ The Commission is adding paragraph divisions to Rule 17Ad-
22(e)(6)(ii) to better delineate the sections of the rule, for
clarity. The portion of the rule text regarding monitoring intraday
exposure would be Rule 17Ad-22(e)(6)(ii)(B). The Commission is also
adding ``(A)'' before the portion of the rule that relates to
marking participant positions to market and collecting margin at
least daily and changing the punctuation at the end of that section
to a semi-colon, as opposed to a comma. The Commission is also
revising the punctuation at the end of Rule 17Ad-22(e)(6)(ii)(B) to
a semicolon, as opposed to a comma.
\60\ RWP Proposing Release, supra note 18, at 34713.
\61\ Id.
\62\ See, e.g., Release No. 34-99149 (Dec. 13, 2023), 89 FR
2714, 2782 (Jan. 16, 2024) (``Treasury Clearing Adopting Release''),
<a href="http://govinfo.gov/content/pkg/FR-2024-01-16/pdf/2023-27860.pdf">govinfo.gov/content/pkg/FR-2024-01-16/pdf/2023-27860.pdf</a> (``Today,
[proprietary trading firms] actively buy and sell large volumes of
U.S. Treasury securities on an intraday basis using high-speed and
other algorithmic trading strategies.''); James C. Harkrader &
Daniel J. Weitz, FEDS Notes: How Do Principal Trading Firms and
Dealers Trade around FOMC Statement Releases? (Dec. 31, 2020),
<a href="https://www.federalreserve.gov/econres/notes/feds-notes/how-do-principal-trading-firms-and-dealers-trade-around-fomc-statement-releases-20201231.html">https://www.federalreserve.gov/econres/notes/feds-notes/how-do-principal-trading-firms-and-dealers-trade-around-fomc-statement-releases-20201231.html</a>.
\63\ RWP Proposing Release, supra note 18, at 34713.
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In response to the commenter seeking a required mandatory minimum
frequency for intraday monitoring, the Commission does not agree that
such a requirement is necessary. Previously, the Commission stated that
a CCA generally should consider whether its policies and procedures for
intraday monitoring address how participants' exposures would affect
financial risks faced by the CCA.\64\ For example, some CCA margin
methodologies may be designed to account for some intraday price and
position changes, which could have an impact on the appropriate
intraday monitoring frequency. Therefore, the Commission is not
adopting a minimum monitoring frequency. The Commission, however, would
be able to consider whether a particular CCA's intraday monitoring
frequency is reasonably designed to meet this requirement within the
proposed rule change process when changes thereto are filed as a
proposed rule change, including what the CCA has identified as the
appropriate ongoing basis for the products cleared and the markets
served and in light of the entirety of the CCA's margin methodology
(that is, whether it has other components which account for some
intraday price and position changes).\65\ More generally, whether a CCA
has established, implemented, maintained and enforced written policies
and procedures reasonably designed to comply with Rule 17Ad-22(e) is
subject to examination.
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\64\ These risks could include those that ``may already be
contemplated by variation margin, initial margin, or add-on
charges.'' Id.
\65\ See infra note 84 and accompanying text.
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When designing its intraday margin monitoring, a CCA generally
should consider whether its monitoring encompasses all aspects of
intraday exposures, including how such exposures affect all components
of a CCA's margin model, including initial margin, variation margin,
and add-on charges.\66\ A CCA also generally should consider whether
its basis to recalculate margin intraday accounts for both position
changes and price volatility.
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\66\ See, e.g., CPMI-IOSCO Resilience Guidance, supra note 14,
at 5.2.22.
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b. Circumstances for Intraday Margin Calls
Preexisting Rule 17Ad-22(e)(6)(ii) also required that a CCA's
written policies and procedures be reasonably designed to include the
authority and operational capacity to make intraday margin calls ``in
defined circumstances.'' \67\ However, preexisting Rule 17Ad-
22(e)(6)(ii) did not define what constitutes ``defined circumstances.''
\68\ In proposing the requirement regarding collecting intraday margin
as frequently as ``circumstances warrant,'' the Commission stated that
the proposed requirement would build upon and expand this preexisting
requirement (i.e., to have the authority and operational capacity to
make intraday margin calls in ``defined circumstances''). Specifically,
the proposed requirement would identify two particular circumstances:
(1) when risk thresholds specified by the CCA are breached or (2) when
the products cleared or markets served display elevated volatility. The
proposed requirement would also continue to provide flexibility to CCAs
to make intraday margin calls as frequently as circumstances
warrant.\69\
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\67\ 17 CFR 240.17ad-22(e)(6)(ii).
\68\ Id.; see also RWP Proposing Release, supra note 18, at
34713.
\69\ RWP Proposing Release, supra note 18, at 34713-14.
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Commenters generally agreed with the need for thresholds regarding
when a CCA would make intraday margin calls. However, commenters raised
several concerns which are addressed below.\70\
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\70\ See The Associations; Better Markets; ICI; Letter from
Thomas F. Price, Managing Director, Technology, Operations, and
Business Continuity, SIFMA, and William C. Thum, Managing Director
and Associate General Counsel, SIFMA Asset Management Group (Sept.
26, 2023) (``SIFMA'').
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i. Scheduled vs. Unscheduled Intraday Calls
Several commenters suggested that intraday margin calls generally
should be scheduled, with unscheduled intraday margin calls limited to
extreme circumstances.\71\ One such commenter specified that scheduled
intraday margin calls should be at the same time every day, in the
early afternoon.\72\ This commenter explained that the unpredictability
of unscheduled intraday margin calls may require a fund (which is a
participant in a CCA) to keep a portion of its assets in lower-
yielding, highly liquid assets.\73\
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\71\ ICI at 10-11; Letter from John P. Davidson (June 5, 2023)
at 2, 9 (``Davidson'') (stating that intraday financial flows should
be mandatory at a fixed scheduled time and at the same time across
all linked CCPs, but also acknowledging ``the occasional need for an
additional set of intraday cash and collateral movements in cases of
truly extreme market moves'').
\72\ SIFMA at 8.
\73\ Id.
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In response to these comments seeking additional requirements for
scheduled intraday margin calls and to limit unscheduled intraday
margin calls, the Commission recognizes that scheduled intraday margin
calls provide certainty for market participants about when resources
will be needed. However, there may be circumstances that arise
intraday, such as in times of elevated volatility or significant
position changes, where a CCA needs to manage its exposure to a
participant through an unscheduled margin call.\74\ In such
circumstances, scheduled intraday margin calls may not be sufficient to
ensure that a CCA collects margin to cover its exposure to its
participants. To ensure strong risk management in such circumstances,
CCAs need to have the ability to make unscheduled intraday margin
calls. It would not be appropriate to mandate that CCAs only make
scheduled intraday margin calls, and, therefore, the Commission is not
adopting such a requirement to require scheduled intraday margin calls.
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\74\ For example, if a CCA schedules intraday margin collection
at noon every day, there may be instances when thresholds are
triggered after that scheduled time, and the CCA would then make an
unscheduled margin call to avoid significant exposure being carried
overnight.
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However, the Commission understands the need for market
participants to plan for the potential resources needed to meet
intraday margin calls. To that end, the amended Rule 17Ad-
22(e)(6)(ii)(C) states that a CCA must establish policies and
procedures regarding at least two particular circumstances in which a
CCA would make intraday margin calls, that is, when risk thresholds
specified by the CCA are breached and when products cleared or markets
served display elevated volatility, as discussed in Part II.A.2.b
infra. For example, a CCA could specify that its risk threshold is
breached when the difference between a member's start of day margin and
a calculation of its intraday margin based on its new positions exceeds
a predetermined percentage or dollar amount. Thus, market participants
should be able to plan for their potential resource needs to meet
intraday margin calls because, as discussed in Part II.A.2.b.ii infra,
a CCA is required to have certain transparency around its margin model.
This transparency will allow a market participant to understand those
specified circumstances in which a CCA would make intraday margin calls
and would therefore allow the market participant to make arrangements
for additional liquidity in such circumstances, such
[[Page 91006]]
as, for example, securing additional financing to cover such margin
calls.
ii. Need for Clear Thresholds and Transparency
Commenters also requested that the Commission revise the proposal
to mandate that a CCA define its criteria for any unscheduled intraday
margin call in advance of any unscheduled intraday margin call and to
require additional disclosures regarding intraday margin calls.\75\
These commenters stated that requiring clear and transparent policies
regarding the conditions under which a CCA might make an intraday
margin call, both on a scheduled and unscheduled basis, would enhance
participants' ability to prepare for these margin calls and understand
any potential demands on their liquidity arising from such a call.\76\
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\75\ The Associations at 2; Better Markets at 8; ICI at 10-11;
SIFMA at 9.
\76\ The Associations at 2-3 (requesting ``clear and transparent
policies with regards to the conditions under which a [CCA] might
call intraday margin''); Better Markets at 8 (requesting ``full
transparency for triggers of intraday margin calls''); SIFMA at 9
(requesting ``published triggers and thresholds to calculate both
start of day and intraday margin requirements''); ICI at 11
(requesting a CCA ``communicate to market participants the
thresholds that would trigger both scheduled and ad hoc [sic]
intraday margin calls'').
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The Commission agrees with the commenters that it is essential that
a CCA determine and clearly communicate ex ante in what circumstances
it would make both scheduled and ad hoc intraday margin calls. However,
as discussed further below, CCAs already are subject to such
requirements in preexisting Rule 17Ad-22(e)(6)(ii) and (e)(23) and 17
CFR 240.19b-4 (``Rule 19b-4''). Further, by specifying two instances in
which CCAs must establish, implement, maintain and enforce policies and
procedures to collect intraday margin, the amendments being adopted in
this release will identify for clearing participants conditions under
which a CCA would make an intraday margin call.\77\
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\77\ The Commission is adding paragraph divisions to Rule 17Ad-
22(e)(6)(ii) to better delineate the sections of the rule, for
clarity. The portion of the rule text regarding the authority and
operational capacity to make intraday margin calls is in Rule 17Ad-
22(e)(6)(ii)(C).
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First, with respect to the commenters' request to require that CCAs
determine the circumstances for intraday margin calls, a CCA already is
required, under preexisting Rule 17Ad-22(e)(6)(ii), to have certain
policies and procedures regarding intraday margin. These policies and
procedures are the framework that a CCA uses when determining whether
to make intraday margin calls, and these policies and procedures must
identify the circumstances in which a CCA would make intraday margin
calls.\78\ This requirement will be strengthened by the amendments
adopted in this release, which provide more specificity that the CCA
must have policies and procedures to be able to make intraday margin
calls as frequently as circumstances warrant and in two particular
circumstances identified in the rule. Specifically, the amendments to
preexisting Rule 17Ad-22(e)(6)(ii) require that a CCA have written
policies and procedures to cover its credit exposures to its
participants by establishing a risk-based margin system, which, among
other things, includes the authority and operational capacity to make
intraday margin calls ``as frequently as circumstances warrant''
including in two particular situations: when risk thresholds specified
by the CCA are breached and in times of elevated volatility. This
requirement should ensure that the CCA develops ex ante policies and
procedures to determine risk thresholds for intraday margin and when it
considers volatility to be elevated above typical levels in a manner
specific to the products cleared and the markets served. Because these
amendments would identify specific circumstances in which a CCA must
have the authority and operational capacity to make intraday margin
calls which would be part of a CCA's overall disclosure requirements
regarding its margin methodology, as discussed further below,\79\ these
amendments should improve participants' ability to understand when they
may be subject to additional margin calls. This improved understanding
should further allow participants to be better able to prepare to
provide additional financial resources in anticipation of additional
margin calls.\80\
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\78\ This framework is not required to foreclose or prohibit the
use of any discretion in such determinations, as discussed further
in Part II.A.2.b.iii, infra.
\79\ See infra notes 81-100 and accompanying text (discussing
several Commission requirements that promote disclosure and
transparency).
\80\ RWP Proposing Release, supra note 18, at 34714.
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Second, with regard to the commenters' request to clearly
communicate ex ante the circumstances in which a CCA would make
intraday margin calls, the Commission agrees that such ex ante
transparency is essential for a CCA's participants, but disagrees that
any additional requirements are necessary to achieve such transparency.
A CCA's participants already have such transparency for several
reasons. As a registered clearing agency, a CCA is a self-regulatory
organization (``SRO'') under the Exchange Act,\81\ subject to the
provisions of section 19(b) of the Exchange Act which requires public
notice and an opportunity for public comment on any rule changes that
an SRO seeks to adopt.\82\ In addition, a CCA potentially is a
``designated financial market utility'' (alternatively, a
``systemically important financial market utility'' or ``SIFMU'')
subject to section 806(e) of the Dodd-Frank Act regarding advance
notice of material changes to its rules, procedures, or operations that
could materially affect the nature or level of risks presented.
Further, the CCA Standards impose requirements related to transparency
and disclosure to its participants.
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\81\ 15 U.S.C. 78c(a)(26) (``The term `self-regulatory
organization' means any [. . .] registered clearing agency'').
\82\ See, e.g., infra note 87 (discussing such changes that
previously have been considered by the Commission); infra note 119
(describing Commission rules that promote transparency regarding
margin practices at registered clearing agencies).
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A CCA's margin methodology, which would include, among other
things, the criteria used to determine whether to make intraday margin
calls, constitutes a material aspect of its operations, meaning that it
is part of a CCA's stated policies, practices, or interpretations under
Exchange Act Rule 19b-4.\83\ As such, a CCA's margin methodology is
subject to the filing obligations applicable to SROs under section
19(b) of the Exchange Act regarding any proposed rule or proposed
change to its rules.\84\ The proposed rule filing process provides
transparency into an SRO's proposed changes, through notice and
comment. An SRO is obligated to file its proposed rule changes in a
manner consistent with the requirements in Form 19b-4, which is
intended to elicit information necessary for the public to
[[Page 91007]]
provide meaningful comment on the proposed rule change and for the
Commission to determine whether the proposed rule change is consistent
with the requirements of the Exchange Act and the rules and regulations
thereunder.\85\ The Commission then publishes all proposed rule changes
for comment. In this way, the rule filing process promotes transparency
to market participants and the public by ensuring notice is provided
regarding a CCA's new initiatives or changes to governance, operations,
and risk management.\86\ With respect to a CCA's margin methodology,
the rule filing process should provide transparency about how and when
a CCA would calculate margin, including on an intraday basis, which is
consistent with the requirements sought by commenters.
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\83\ 17 CFR 240.19b-4(a)(6)(i) (defining ``stated policy,
practice, or interpretation'' to include, inter alia, ``[a]ny
material aspect of the operation of the facilities of the self-
regulatory organization''). Additionally, Rule 19b-4 would also
apply to certain statements that a CCA issues concerning its margin
methodology. Specifically, this rule would cover any CCA statement
``made generally available to the membership of [. . . the CCA] that
establishes or changes any standard, limit, or guideline, with
respect to: (a) the rights, obligations, and privileges of its
membership; or (b) the meaning, administration, or enforcement of an
existing rule.'' 17 CFR 240.19b-4(a)(6)(ii).
\84\ 15 U.S.C. 78s(b)(1) (requiring each SRO to ``file with the
Commission, in accordance with such rules as the Commission may
prescribe, copies of any proposed rule or any proposed change in,
addition to, or deletion from the rules of such self-regulatory
organization''); see also 17 CFR 240.19b-4. In addition, a stated
policy, practice, or interpretation of an SRO (e.g., written
policies and procedures) would generally be deemed to be a proposed
rule change. See 17 CFR 240.19b-4(c).
\85\ See General Instructions for Form 19b-4, at Instruction B,
<a href="https://www.sec.gov/files/form-19b4-general-instructions.pdf">https://www.sec.gov/files/form-19b4-general-instructions.pdf</a>. The
Form 19b-4 specifies the contents that must be included in a
proposed rule change filing includes, among other items, a statement
of purpose for the proposed rule change, which describes the reasons
for adopting the proposed rule change, any problems the proposed
rule change is intended to address, the manner in which the proposed
rule change will operate to resolve those problems, the manner in
which the proposed rule change will affect various persons (e.g.,
brokers, dealers, issuers, and investors), and any significant
problems known to the SRO that persons affected are likely to have
in complying with the proposed rule change. Id. at Information to Be
Included in the Completed Form, Item 3(a). The SRO must also include
in its proposed rule change the complete text of the proposed rule.
Id. at Information to Be Included in the Completed Form, Item 1(a).
The SRO may request confidential treatment of any portion of its
filing, see 17 CFR 240.24b-2, but it would still have to comply with
the requirements of Form 19b-4 with respect to describing the
contents of the proposed rule change for public comment.
\86\ See RWP Proposing Release, supra note 18, at 34711.
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The Commission has considered numerous proposed rule changes
regarding CCAs' margin methodologies. Notably, these proposed rule
changes have addressed CCAs' intraday margin policies and procedures,
and these proposed rule changes have identified thresholds and criteria
that a CCA would use in determining whether to make an intraday margin
call, similar to what the commenters have requested.\87\ The notice and
comment process provided by section 19(b) of the Exchange Act therefore
provides for transparency into a CCA's margin methodology, including
input from participants.
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\87\ See, e.g., Notice of Filing of Amendment No. 1 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified
by Amendment No. 1, To Implement Changes to the Required Fund
Deposit Calculation in the GSD Rulebook, Release No. 34-83362 (June
1, 2018), 83 FR 26514 (June 7, 2018) (File No. SR-FICC-2018-001)
(approving proposed rule change to provide transparency with respect
to GSD's existing authority under GSD Rule 4 to calculate and assess
intraday margin amounts, by identifying the three criteria that GSD
uses to calculate the intraday amount due ((i) the dollar threshold,
which evaluates whether a member's intraday VaR Charge equals or
exceeds a set dollar amount when compared to the VaR Charge that was
included in the most recent margin collection: (ii) the percentage
threshold, which evaluates whether the intraday VaR Charge equals or
exceeds a percentage increase of the VaR Charge that was included in
the most recent collection; and (iii) the coverage target, which
evaluates whether a member is experiencing backtesting results below
a 99% confidence level), and stating that FICC assesses intraday
margin when all three criteria are breached and, under certain
market conditions when the thresholds in (i) and (ii) are breached);
FICC Important Notice GOV1244-22 (Apr. 11, 2022) (stating that,
consistent with its Rule 4 authority, GSD will assess an Intraday
Supplement Fund Deposit on a Netting Member if (i) a change in the
Netting Member's Intraday VaR Charge equals or exceeds $1 million
when compared to its most recent VaR Charge calculation, (ii) the
Netting Member's Intraday VaR Charge equals or exceeds 100% of its
most recent VaR Charge calculation, and (iii) the Netting Member's
backtesting coverage is below 100%. Additionally, Netting Members
who breached the thresholds for (i) and (ii) and have fewer than 100
trading days in a rolling 12-month period will be assessed an
Intraday Supplemental Fund Deposit regardless of their backtesting
coverage); Order Approving Proposed Rule Change to Adopt Intraday
Volatility Charge and Eliminate Intraday Backtesting Charge, Release
No. 34-97129 (Mar. 13, 2023), 88 FR 16681 (Mar. 20, 2023) (File No.
SR-NSCC-2022-009) (adopting an intraday volatility charge as part of
NSCC's margin methodology that would increase the margin collected
from members whose trading portfolios experience large and
unexpected intraday volatility).
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In addition, when a CCA is a SIFMU,\88\ it is also subject to the
regulatory framework of the Clearing Supervision Act.\89\ Once
designated by FSOC, CCAs that are SIFMUs are required to publicly file
60-days advance notice with the Commission of changes to rules,
procedures, and operations that could materially affect the nature or
level of risk presented by the designated clearing agency (``advance
notice''), and, pursuant to the Commission's rules, the Commission
shall provide for prompt publication of such an advance notice, and
then the public has the opportunity to comment on such an advance
notice.\90\ Rule 19b-4(n) defines the term ``materially affect the
nature or level of risk presented'' to mean matters as to which there
is a reasonable possibility that the change could affect the
performance of essential clearing and settlement functions or the
overall nature or level of risk presented by the designated clearing
agency, and it further provides examples of such potential changes as
including, among other things, changes that could materially affect
risk management or financial resources of the designated clearing
agency.\91\ When adopting this requirement, the Commission identified
changes to the ``methods for making margin calculations'' as among the
additional examples of such matters.\92\ Therefore, any changes to the
intraday margin policies and procedures of a CCA that has been
designated as a SIFMU could also be subject to the advance notice
process if the changes constitute a material change to the nature or
level of risk presented by the CCA, and the advance notice process
would bring additional transparency into such changes.
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\88\ Specifically, the Clearing Supervision Act provides for the
enhanced regulation of a CCA that qualifies as a ``financial market
utility'' that the FSOC designates as ``systemically important'' (a
``designated financial market utility''). See 12 U.S.C. 5462(6)(A)
(defining a ``financial market utility'' to include ``any person
that manages or operates a multilateral system or the purpose of
transferring, clearing, or settling payments, securities or other
financial transactions among financial institutions or between
financial institutions and the person'') and 12 U.S.C.
5462(4)(defining a ``designated financial market utility'' to mean
``a financial market utility'' that FSOC has designated as
``systemically important''); see also 12 U.S.C. 5463 (discussing
FSOC's ability to designate entities as ``systemically important'').
On July 18, 2012, FSOC designated four CCAs as systemically
important financial market utilities: The Depository Trust Company
(``DTC''); Fixed Income Clearing Corporation (``FICC''); National
Securities Clearing Corporation (``NSCC''); and The Options Clearing
Corporation (``OCC''). FSOC, 2012 Annual Report: Appendix A:
Designation of Systemically Important Financial Market Utilities
(July 18, 2012), <a href="https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf">https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf</a>.
\89\ See 12 U.S.C. 5461 et seq.
\90\ The Clearing Supervision Act defines a ``designated
clearing entity'' to include a ``designated financial market
utility'' that is a clearing agency registered with the Commission
(of which a CCA is a subset). See 12 U.S.C. 5462(3). The Clearing
Supervision Act defines the Commission as the ``Supervisory Agency''
for the four designated clearing agencies that are CCAs (i.e., DTC,
NSCC, FICC, and OCC). See 12 U.S.C. 5462(8)(A)(i). The Commission
published a final rule concerning the filing and publication of
advance notices for designated clearing agencies in 2012. See 17 CFR
240.19b-4(n); Release No. 34-67286 (June 28, 2012), 77 FR 41602
(July 13, 2012) (File No. S7-44-10) (``Filing of Advance Notices''),
<a href="https://www.govinfo.gov/content/pkg/FR-2012-07-13/pdf/2012-16233.pdf">https://www.govinfo.gov/content/pkg/FR-2012-07-13/pdf/2012-16233.pdf</a>.
\91\ 17 CFR 240.19b-4(n)(2)(i), (ii).
\92\ See Filing of Advance Notices, supra note 90, at 41620.
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Moreover, under the CCA Standards, a CCA is obligated to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for publicly disclosing all relevant
rules and material procedures, including key aspects of its default
rules and procedures.\93\ Such public disclosures generally should
include a discussion of a CCA's margin methodology, which could include
how the CCA determines intraday margin, and they should, in turn, allow
a market participant to understand how a CCA calculates margin,
including any margin add-ons
[[Page 91008]]
and cross-margin arrangements with other clearing agencies. In
addition, under Rule 17Ad-22(e)(23)(ii), these policies and procedures
must provide sufficient information to enable participants to identify
and evaluate the risks, fees, and other material costs they incur by
participating in the CCA.\94\
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\93\ 17 CFR 240.17ad-22(e)(23)(i).
\94\ 17 CFR 240.17ad-22(e)(23)(ii).
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Rule 17Ad-22(e)(23)(iv) also requires that a CCA produce a
comprehensive public disclosure that describes its material rules,
policies, and procedures regarding its legal, governance, risk
management, and operating framework (a ``Disclosure Framework''),
accurate in all material respects at the time of publication, that
includes, among other things, a standard-by-standard summary narrative
for each applicable standard set forth in paragraphs (e)(1) through
(23) of the CCA Standards with sufficient detail and context to enable
a reader to understand the CCA's approach to controlling the risks and
addressing the requirement in each standard.\95\ Therefore, a CCA must
issue a public document addressing each of the CCA Standards, including
those with respect to margin under Rule 17Ad-22(e)(6).\96\ A CCA
generally should consider whether its disclosures regarding its margin
methodology, through its Disclosure Framework and/or other publicly
available documents, allows participants to understand how the model
reacts to market conditions and to assess with some reasonable degree
of certainty whether it will be subject to a margin call and in what
amount. In addition, a CCA generally should consider whether it could
provide a public-facing margin calculator to allow its participants,
and market participants more generally, to understand the potential
amount of any intraday margin calls on their portfolios, including with
respect to add-on charges and any applicable cross-margin arrangements.
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\95\ 17 CFR 240.17ad-22(e)(23)(iv).
\96\ See DTC, Disclosure Framework for Covered Clearing Agencies
and Financial Market Infrastructure (Mar. 2024), <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC-Disclosure-Framework-2024-Q1.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC-Disclosure-Framework-2024-Q1.pdf</a>; FICC, Disclosure Framework for
Covered Clearing Agencies and Financial Market Infrastructure (Mar.
2024), <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC-Disclosure-Framework-Q1-2024.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC-Disclosure-Framework-Q1-2024.pdf</a>; ICE,
Disclosure Framework (July 31, 2023), <a href="https://www.ice.com/publicdocs/clear_credit/ICEClearCredit_DisclosureFramework.pdf">https://www.ice.com/publicdocs/clear_credit/ICEClearCredit_DisclosureFramework.pdf</a>; LCH,
Comprehensive Disclosure (July 31, 2024), <a href="https://www.lch.com/system/files/media_root/LCH%20SA%20-%20Comprehensive%20Disclosure%20as%20required%20by%20SEC%20Rule%2017Ad-22%28e%29%2823%29_2022%20Q2_2024.pdf">https://www.lch.com/system/files/media_root/LCH%20SA%20-%20Comprehensive%20Disclosure%20as%20required%20by%20SEC%20Rule%2017Ad-22%28e%29%2823%29_2022%20Q2_2024.pdf</a>; NSCC, Disclosure Framework
for Covered Clearing Agencies and Financial Market Infrastructure
(Mar. 2024), <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC-Disclosure-Framework-Q1-2024.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC-Disclosure-Framework-Q1-2024.pdf</a>; OCC,
Disclosure Framework for Financial Market Infrastructures (July 25,
2024), <a href="https://www.theocc.com/getmedia/4664dece-7172-42a5-8f55-5982f358b696/pfmi-disclosures.pdf">https://www.theocc.com/getmedia/4664dece-7172-42a5-8f55-5982f358b696/pfmi-disclosures.pdf</a>.
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In light of the existing requirements with respect to transparency
in the SRO rule filing process, the advance notice process, and Rule
17Ad-22(e)(23), the Commission does not believe additional mandatory
disclosures are necessary at this time. For example, every CCAs'
Disclosure Framework discusses the CCAs' margin methodologies.\97\
Several CCAs have published documents further outlining their margin
methodologies, including the formulas used in calculating margin.\98\ A
CCA generally should consider whether it provides such information,
i.e., the formulas used in calculating margin, to market participants,
such that a market participant could make such calculations on its own.
Finally, at least one CCA has developed a public calculator to provide
market participants with the ability to calculate potential margin
obligations on a simulated portfolio, for given positions and market
value, using its Value at Risk methodology.\99\ Although not a
substitute for a market participant's ability to understand a CCA's
margin methodology on its own, such a public calculator is a helpful
tool for determining how a CCA's margin methodology operates,
particularly if the calculator is able to provide information related
to add-on charges and any applicable cross-margin arrangements. A CCA
generally should consider whether it sufficiently identifies in its
Disclosure Frameworks and any other documentation that it makes
available the circumstances required under the amendments adopted to
Rule 17Ad-22(e)(6)(ii) regarding when a CCA must collect intraday
margin. Commenters requested that the Commission require a CCA's
intraday margin model to be transparent such that a CCA's participants
could anticipate a CCA's future intraday margin calls.\100\ As
discussed above, a CCA should generally consider whether it
sufficiently identifies when Rule 17Ad-22(e)(6)(ii) would require an
intraday margin call. Such transparency could improve the ability of a
CCA's participants to understand when participants may be subject to
additional margin calls. However, participants cannot expect to be able
to predict every intraday margin call with complete certainty, and
being able to do so may create moral hazard that would undermine the
CCA's ability to manage risk effectively.
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\97\ See id.
\98\ See, e.g., <a href="https://www.theocc.com/risk-management/margin-methodology">https://www.theocc.com/risk-management/margin-methodology</a>; <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/GSD-Clearing-Fund-Methodology-Overview.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/GSD-Clearing-Fund-Methodology-Overview.pdf</a>.
\99\ <a href="https://www.dtcc.com/managing-risk/stress-testing-and-liquidity-risk-management/ccfl-public-calculator">https://www.dtcc.com/managing-risk/stress-testing-and-liquidity-risk-management/ccfl-public-calculator</a>.
\100\ See supra note 80 and accompanying text.
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Finally, one commenter stated that CCAs should proactively engage
with clearing members ahead of applying intraday margin calls to
alleviate the potential liquidity risk for clearing members.\101\ The
Commission acknowledges that it could be helpful for a CCA to engage
with its clearing members regarding potential upcoming intraday margin
calls. Given the potentially fluid nature of circumstances
necessitating the need for an intraday margin call and the possibility
that such engagement would not be possible in a time of market stress,
imposing such engagement as an obligation would not be appropriate.
However, a CCA generally should consider whether its written policies
and procedures provide for engagement with a CCA ahead of applying an
intraday margin call, as circumstances permit.
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\101\ SIFMA at 9. This commenter also suggested that the
Commission should require that a CCA provide the Commission (and to
the extent possible, its clearing participants) with an explanation
for any discretionary intraday margin calls. Id. at 10.
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iii. Determinations by CCAs To Collect Intraday Margin
Several commenters addressed the role of discretion in the proposed
requirement for a CCA to have the authority and operational capacity to
make intraday margin calls as frequently as circumstances warrant,
including when risk thresholds specified by the CCA are breached or
when the products cleared or markets served display elevated
volatility.\102\ Specifically, while generally supportive of the
proposal, several commenters sought confirmation that a CCA could use
discretion when deciding to issue intraday margin calls.\103\ These
[[Page 91009]]
commenters stated that such discretion was necessary to allow the CCA
to consider the potential procyclical impacts of an intraday margin
call and/or any financial stability impacts.\104\ In this context,
procyclicality refers to ``changes in risk-management practices that
are positively correlated with market, business, or credit cycle
fluctuations and cause or exacerbate financial instability.'' \105\ For
example, margin calls during periods of declining asset prices may
cause participants to sell assets, putting further negative pressure on
asset prices and the market.\106\ Such events could negatively affect
other CCA participants, as well as other CCAs and their markets.\107\
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\102\ See DTCC; ICE; OCC; CCP12.
\103\ DTCC at 4 (requesting additional clarity regarding a CCA's
discretion and flexibility and stating that a CCA must maintain the
discretion and flexibility to determine if intraday margin calls are
required based on the totality of all circumstances the CCA may
consider relevant and appropriate); ICE at 2 (stating that a CCA
should be allowed the discretion on when and how to use its
authority to make intraday margin calls under the particular
circumstances); OCC at 4 (seeking explicit confirmation that a CCA
may ``exercise judgment when determining whether and when to
actually make intraday margin calls, based on all relevant
circumstances and using predefined criteria); CCP12 at 2 (supporting
the proposed approach to intraday margin, but also stating that a
CCA needs the ability to exercise discretion when issuing intraday
margin calls, including the ability to tailor [its] intraday margin
call processes to the characteristics of the market it clears (e.g.,
market structure)); see also Davidson at 11. But see id. at 9
(explaining that a CCA would only have an ``occasional need'' for an
unscheduled intraday margin call'' for only ``truly extreme market
moves''); and 10 (warning that unfettered issuances of intraday
margin calls could become ``liquidity sinks'' and ``absorb[ ]
liquidity like a giant sponge'').
\104\ DTCC at 4 (stating discretion is necessary when
considering issuing an intraday market call to consider various
factors, such as persistent exposure to a participant during normal
market conditions, general market conditions, and any possible
procyclical effects a margin collection may trigger); ICE at 2
(stating that discretion is needed for a CCA to consider the
procyclical effects of any possible intraday margin call, such as
``exacerbating credit and liquidity concerns with clearing
members,'' or ``in extreme cases[,] causing market participant
defaults); OCC at 4 (stating that, among other things, a CCA's
discretion should include considerations related to anti-
procyclicality (by maximizing predictability of liquidity demands)
and financial market stability); CCP12 at 2 (stating that this
discretion would allow a CCA to consider any potential intraday
margin call's ``negative procyclical effects'' and/or ``impacts to
the stability of the financial system'').
\105\ PFMI, supra note 9, at 47; see also Committee on the
Global Financial System, The role of margin requirements and
haircuts in procyclicality (Mar. 23, 2010) at 8 (defining
procyclicality as ``the mutually reinforcing interactions between
the financial and real sectors of the economy that tend to amplify
business cycle fluctuations and cause or exacerbate financial
instability''), <a href="https://www.bis.org/publ/cgfs36.pdf">https://www.bis.org/publ/cgfs36.pdf</a>.
\106\ See infra Part IV.C.2.a (discussing the relationship
between procyclicality and intraday margin calls).
\107\ Id.
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As discussed above, a CCA's margin methodology includes the
criteria that a CCA uses to determine whether to make intraday margin
calls.\108\ Because a CCA's margin methodology constitutes aspects of
the CCA's stated policies, practices, or interpretations under Rule
19b-4, a CCA is required to file a proposed rule change when the CCA
revises its margin methodology (including, for example, revisions
related to how its risk management concerns may affect a CCA's
determination to issue an intraday margin call).\109\ In such a filing,
the CCA would describe how any such revisions are consistent with the
requirements of Exchange Act and the rules thereunder, including Rule
17Ad-22(e)(6).
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\108\ See supra note 83 and accompanying text.
\109\ Id.
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The Commission agrees with these commenters that a CCA's policies
and procedures regarding intraday margin generally should be, under
Rule 17Ad-22(e)(6)(ii), reasonably designed to address such risk
management concerns, such as procyclicality. The Commission confirms
that a CCA's consideration of such concerns (and more generally, of a
CCA's understanding of its participants' activity and overall market
conditions) in its policies and procedures regarding intraday margin
(including a CCA's decision to collect or not collect margin in
response to such consideration) is permissible and consistent with the
requirements of both preexisting Rule 17Ad-22(e)(6)(ii) and the
amendments being adopted in this release. The requirement to adopt
policies and procedures that include the authority and operational
capacity to make intraday margin calls as frequently as circumstances
warrant, including when risk thresholds specified by the CCA are
breached or when the products cleared or markets served display
elevated volatility,\110\ should ensure that a CCA establishes the
criteria and thresholds that it would consider when determining whether
to make an intraday margin call. Such criteria are subject to the
transparency and disclosure requirements discussed above in Part
II.A.2.b.ii, and as an SRO, a CCA is obligated to follow its own rules.
But the CCA's criteria and thresholds are not required to be inflexible
or self-executing. A CCA generally should consider how its policies and
procedures specify what factors the CCA would consider when determining
when to make an intraday margin call when thresholds are breached or
there is elevated volatility.\111\
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\110\ See supra Part II.A.2.ii (discussing elevated volatility
under Rule 17Ad-22(e)(6)(ii) as when a CCA considers volatility to
be elevated above typical levels in a manner specific to the
products cleared and the markets served); contra CCA Standards
Adopting Release, supra note 5, at 70815 (stating that what would
constitute ``high volatility [. . .] may vary across asset
classes'').
\111\ As discussed above, supra note 101, one commenter sought
for the Commission to require disclosure to the Commission and, if
practicable, a CCA's participants, of the explanation for any
``discretionary'' intraday margin calls. SIFMA at 10. However, such
disclosure is not necessary because these policies and procedures
should clearly indicate when the CCA would make an intraday margin
call. By contrast, the Commission is requiring that a CCA document
when it determines not to make an intraday margin call when its
policies and procedures would otherwise indicate as such. See infra
note 118 and accompanying text.
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The Commission is adopting this requirement as proposed.\112\ A
CCA's determination to issue intraday margin calls, consistent with its
ex ante policies and procedures, should improve risk management
outcomes by enabling a CCA to apply its risk management expertise to
changing intraday circumstances, such as the extreme price volatility
or significant position changes recently experienced in January
2021.\113\ A CCA should be better positioned to respond to a market
event more effectively by developing policies and procedures that
provide a clear framework for the timing and collection of intraday
margin, but that also allows for the CCA to use its expertise (in
specific products and markets) to analyze the particular facts and
circumstances related to the market event and the affected market
participants.
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\112\ The Commission is making several clarifying changes to
Rule 17Ad-22(e)(6)(ii)(C): (1) capitalizing the first word of the
rule text to read ``Monitors''; (2) adding after the word
``including'' the language ``in the following circumstances'',
followed by a semi-colon; (3) adding (1) and (2) to separate the two
circumstances described in the rule text; and (4) adding the word
``and'' following the text of the rule.
\113\ See supra note 17 and accompanying text (further
discussing the response to heightened volatility in GME and other
equity securities).
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Commenters observed the importance of avoiding procyclicality in
margin calls generally and the importance of considering the impact an
intraday margin call may have on a CCA's participant.\114\ The
Commission agrees that a CCA generally should consider these issues
when determining whether to issue an intraday margin call, consistent
with the applicable regulatory requirement to consider, and produce
margin levels commensurate with, the risks and particular attributes of
each relevant product, portfolio, and market, and to calculate margin
sufficient to cover its potential future exposure to participants in
the interval between the last margin collection and the close out of
positions following a participant default.\115\
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\114\ SIFMA at 8-9.
\115\ 17 CFR 240.17ad-22(e)(6)(i), (iii).
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Therefore, in this analysis, a CCA generally should consider,
consistent with its policies and procedures, how its approach to
intraday margin aligns with broader systemic objectives, such as
minimizing potential procyclical effects and avoiding liquidity drains
on
[[Page 91010]]
its participants. For example, a CCA may choose not to issue an
intraday margin call triggered by the thresholds set forth in its
policies and procedures (i.e., when risk thresholds specified by the
CCA are breached or when the products cleared or markets served display
elevated volatility) if, in the CCA's judgment, the intraday call is
not required to effectively manage the risks posed to the CCA. A CCA's
decision not to issue an intraday margin call could, therefore, avoid
unnecessarily worsening market conditions by fostering procyclicality,
and drawing on its members' capital more than needed (i.e., avoiding
``liquidity sinks'').\116\
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\116\ See infra notes 559-563 and accompanying text (further
discussing the economic impact of procyclical margin calls and
considerations that a CCA may undertake in evaluating when to make
or not make a call).
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A commenter also stated that the Commission should require that a
CCA provide to the Commission, and to the extent possible, its clearing
members, an explanation of the reasons for discretionary intraday
margin calls because such explanation would allow for an evaluation of
whether the need to make such a call might have been averted by
improved procedures.\117\ The Commission does not agree that, as the
commenter suggests, an obligation to provide an explanation and
disclosure is necessary when a CCA makes an intraday margin call,
because its policies and procedures already must identify and document
the circumstances in which such a call would be made. However, a CCA
should be subject to an obligation to document when it, consistent with
its policies and procedures, determines not to make an intraday margin
call in circumstances identified in such policies and procedures. A
requirement to document when a CCA determines not to make such an
intraday margin call, pursuant to its written policies and procedures,
is broadly consistent with the goal identified by the commenter: that
the CCA should be able to evaluate the implementation of its policies
and procedures with respect to intraday margin. By keeping a record of
such instances in which a CCA determines not to make an intraday margin
call, pursuant to its written policies and procedures, it should be
easier for a CCA to review its determination not to make an intraday
margin call and to determine whether a breach of the thresholds that
triggered an intraday call could have been averted by changed
procedures. It also should better allow the CCA to holistically
consider the procyclical impacts of intraday margin calls, which, as
commenters stated, should be considered as part of a CCA's analysis
about such calls.
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\117\ SIFMA at 9, 10.
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Therefore, the Commission is further amending Rule 17Ad-
22(e)(6)(ii) to add paragraph (e)(6)(ii)(D) to require that a CCA's
risk-based margin system ``[d]ocuments when the covered clearing agency
determines not to make an intraday margin call pursuant to its written
policies and procedures required under paragraph (e)(6)(ii)(C)''.\118\
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\118\ See supra note 111.
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A CCA generally should review, on a regular basis, any
documentation created pursuant to this requirement of Rule 17Ad-
22(e)(6)(ii)(D). Such documentation can be used to identify the CCA's
rationale for not making an intraday margin call. In addition, a CCA
generally should consider whether (and how) to disclose the information
required under this documentation requirement to its participants, to
provide additional transparency to its participants about when a CCA
chooses not to make intraday margin calls, including whether such
disclosure is necessary pursuant to Rule 17Ad-25(j), which requires
that the CCA establish, implement, maintain, and enforce written
policies and procedures reasonably designed to require the board of
directors to solicit, consider, and document its consideration of the
views of participants and other relevant stakeholders of the registered
clearing agency regarding material developments in its risk management
and operations on a recurring basis.\119\ Consistent with this
obligation under Rule 17Ad-25(j), a CCA generally should consider how
best to solicit the views of participants and other relevant
stakeholders regarding intraday margin calls, which could include how
they were applied in the past by the CCA.
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\119\ 17 CFR 240.17ad-25(j).
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c. Other Comments
The Commission proposed requirements related to monitoring for
intraday exposure and providing further specificity as to the
circumstances when an intraday margin call could be made. However, one
commenter addressed three additional issues related to more granular
details within the calculation of an intraday margin call. First, this
commenter addressed the nature of an intraday margin call, stating that
any margin determination, including any intraday determination, should
be made with respect to a clearing member's current positions and the
current value of those positions, to the extent practicable.\120\ A CCA
generally should determine margin based on its participants' positions,
including a participant's total portfolio (that is, not just positions
at end of day or intraday).\121\
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\120\ SIFMA at 9. The Commission understands this commenter to
be referring to the difference between initial margin, which is
typically collected to cover potential changes in the value of each
participant's position (that is, potential future exposure) over the
appropriate close-out period in the event that the participant
defaults, as compared to variation margin, which is collected and
paid out to reflect current exposures resulting from actual changes
in market prices and is typically calculated by marking open
positions to current market prices. See, e.g., PFMI, supra note 9,
at 51. The commenter stated that an intraday call should clearly
separate the initial margin and variation margin components of such
a call. SIFMA at 9.
\121\ See, e.g., CPMI-IOSCO Resilience Guidance, supra note 14,
sec. 5.2.22 (``A CCP faces the risk that its exposure to its
participants can change rapidly as a result of intraday changes in
prices, positions, or both; ie adverse price movements, as well as
participants building larger positions through new trading (and
settlement of maturing trades). For the purposes of addressing these
and other forms of risk that may arise intraday, a CCP should
address and monitor on an ongoing basis how such risks affect all
components of its margin system . . .'').
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Second, this commenter also requested that a CCA net against each
other any amounts owing to a clearing member from, on the one hand,
initial margin and, on the other hand, variation margin.\122\ Third,
this commenter also requested that intraday margin calls be
bidirectional to return margin cash or collateral to a CCA's
participants.\123\
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\122\ SIFMA at 9.
\123\ Id. at 7-8, 10; Davidson at 2, 11 (stating that such a
bidirectional flow would allow the participants to avoid
``unnecessary liquidity timing gaps''); see also The Associations at
2 (requesting prompt return of margin to clearing members and
clients to alleviate liquidity constraints).
---------------------------------------------------------------------------
In response to these points, the Commission reiterates that the
circumstances that could give rise to intraday margin calls at a CCA
may vary significantly (e.g., intraday volatility, large changes in
participant positions), and may present varied challenges. Accordingly,
although there may be circumstances where it would be appropriate for a
CCA to take the approach suggested by the commenter, the Commission's
approach to Rule 17Ad-22(e) is to provide flexibility to CCAs, subject
to their obligations and responsibilities as SROs under the Exchange
Act, to design and structure their policies and procedures to take into
account the differences among clearing agencies and the markets and
products it clears. Accordingly, the Commission is not adopting any
requirements in response to this commenter.
This commenter also stated that the establishment of intraday
margin
[[Page 91011]]
procedures cannot be viewed separately from the establishment of margin
procedures as a whole, and that the reduction of ``surprises'' with
respect to intraday margin depends on having transparent margin
procedures generally and on having the start of day margin be as near
correct as possible (meaning that the margin collected at the
established start of day time period, as opposed to an intraday margin
call, should be as accurate as possible).\124\ The commenter provided
several suggestions regarding the calculation of margin more
generally.\125\ The Commission proposed requirements related to
monitoring for intraday exposure and providing further specificity as
to when the CCA must consider an intraday margin call. The suggestions
provided by the commenter relate to granular details within the
calculation of margin. Rule 17Ad-22(e)(6) already contains requirements
related to these issues raised by the commenter, most notably, that the
CCA's risk-based margin system must consider, and produce margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market, and calculate margin sufficient to
cover its potential future exposure to participants between the last
margin collection and the close out of positions following a
participant default, and use an appropriate method for measuring credit
exposure that accounts for relevant product risk factors and portfolio
effects across products.\126\ Although there may be circumstances where
it would be appropriate for a CCA to incorporate policies and
procedures such as those suggested by the commenter, the Commission's
approach to Rule 17Ad-22(e) is to provide flexibility to CCAs, subject
to their obligations and responsibilities as SROs under the Exchange
Act, to design and structure their policies and procedures to take into
account each clearing agency's unique characteristics. In addition, the
transparency requirements discussed in Part II.A.2.b.ii apply to all
components of a CCA's margin model, including those discussed by the
commenter.
---------------------------------------------------------------------------
\124\ SIFMA at 7.
\125\ Id. at 7-8 (discussing the development and maintenance of
margin models; accurate, robust pricing; margin period of risk;
calibration scenarios/lookback periods; margin add-ons, such as
concentration and liquidity risks; offsets; anti-procyclicality
measures; margin returns; and interoperability).
\126\ 17 CFR 240.17ad-22(e)(6)(i), (iii), (v).
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One commenter recommended that the Commission require a CCA to
disclose particular aspects of its risk models used in the calculation
of initial margin.\127\ As discussed supra in Part II.A.2.b.ii, CCAs
are already required to provide disclosure of key aspects of their
margin models under Exchange Act Rule 17Ad-22(e)(23)(iv) and to file
their rules as part of the SRO and/or SIFMU rule filing processes,
which further provides transparency.\128\ Therefore, additional
disclosure requirements are not required because of the current
requirements that a CCA must disclose key aspects of its margin model.
---------------------------------------------------------------------------
\127\ The Associations at 3.
\128\ 17 CFR 240.17ad-22(e)(23)(iv).
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Another commenter stated that a CCA should be required to publish
regular statistics in a consistent format as to the performance of
margin requirements, including how many clearing members were subject
to margin calls of what size, did clearing members go into a margin
deficit, and how frequently.\129\ However, CCAs already include, as
part of their public disclosures under Rule 17Ad-22(e)(23)(iv)(C), a
description of basic data and performance statistics on their services
and operations, such as basic volume and value statistics by product
type, average aggregate intraday exposures to its participants, and
statistics on the CCA's operational reliability.\130\ As such, the
Commission is not adopting any additional disclosure requirements.
However, CCAs generally provide such public information regarding their
margin models' performance as part of their periodic disclosures.\131\
For example, these disclosures include, with respect to margin,
identification of the number of times over the past 12 months that
margin coverage held against any account fell below the actual mark-to-
market exposure of that member account based on daily backtesting
results and, in the event of a breach of initial margin coverage, a
report on the size of the uncovered exposure, both of which are data
points consistent with the commenter's request to identify whether
clearing members went into a margin deficit and how frequently.\132\
Accordingly, the Commission is not adopting additional requirements.
However, a CCA generally should consider what disclosures regarding its
policies and procedures for margin collection can be useful to market
participants to facilitate their understanding of the performance of
its margin model.
---------------------------------------------------------------------------
\129\ SIFMA at 10.
\130\ See supra note 96 and accompanying text.
\131\ Id.
\132\ See, e.g., DTCC, ``Fixed Income Clearing Corporation and
National Securities Clearing Corporation Public Quantitative
Disclosures for Central Counterparties: Q2 2024'' (Aug. 29, 2024) at
13, <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/CPMI-IOSCO-Public-Quantitative-Disclosures-Q2-2024.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/CPMI-IOSCO-Public-Quantitative-Disclosures-Q2-2024.pdf</a>.
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B. Inputs to Margin System
1. Proposed Amendment to Rule 17Ad-22(e)(6)(iv)
In the RWP Proposing Release, the Commission proposed to amend Rule
17Ad-22(e)(6)(iv) to strengthen its requirements that a CCA have
policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that, among other things, uses reliable sources for its price
data and uses procedures for addressing circumstances in which price
data are not readily available or reliable.\133\ Specifically, the
Commission proposed expanding the rule's scope beyond price data to
also include other substantive inputs to a CCA's risk-based margin
system,\134\ meaning that the CCA's procedures would also have to
address when such a substantive input is not readily available or
reliable.\135\ The unavailability or unreliability of any substantive
input to a CCA's margin system could potentially affect the CCA's
ability to calculate margin.\136\ Citing as justification the current
requirement of ``reliable sources'' of price data,\137\ the Commission
stated that there is a need to use reliable sources for substantive
inputs other than price data.\138\ In response, the Commission proposed
to expand this requirement to substantive inputs other than price
data.\139\ The Commission stated that this proposal ``should help
ensure that the CCA can continue to calculate and collect margin''
pursuant to its obligations under Rule 17Ad-22(e)(6).\140\
---------------------------------------------------------------------------
\133\ RWP Proposing Release, supra note 18, at 34713.
\134\ See id. at 34715 (stating that ``substantive'' refers to
``any inputs used by the covered clearing agency that are necessary
for the risk-based margin system to calculate margin'').
\135\ Id. at 34714.
\136\ Id.
\137\ Id. (explaining that a reliable source of timely price
data was necessary because a CCA's ``margin system needs such data
to operate with a high degree of accuracy and reliability, given the
risks that the CCA's size, operation, and importance pose to U.S.
securities markets'').
\138\ Id.
\139\ Id. at 34714-15 (``The Commission is therefore proposing
to amend Rule 17Ad-22(e)(6)(iv) to expand its scope beyond price
data to encompass other substantive inputs to its risk-based margin
system and to impose requirements on a [CCA] to have procedures when
such substantive inputs are not readily available or reliable'').
\140\ Id. at 34714.
---------------------------------------------------------------------------
The Commission also proposed two new requirements on a CCA's backup
procedures when price data and other
[[Page 91012]]
substantive inputs are not readily available or reliable. First, the
Commission proposed these procedures to help ensure that the CCA can
meet its obligations under Rule 17Ad-22(e)(6).\141\ Second, the
Commission proposed that these procedures must include either: (i) the
use of price data or other substantive input from an alternate source;
or (ii) the use of an alternate risk-based margin system that does not
similarly rely on the same unavailable or unreliable substantive
input.\142\
---------------------------------------------------------------------------
\141\ Id. at 34715.
\142\ Id.
---------------------------------------------------------------------------
In proposing this amendment, the Commission included the following
guidance: an alternate source ``generally should meet the same level of
reliability of the primary source;'' and an ``alternate risk-based
system needs to be an alternate margin model that does not rely on the
same data source that is unavailable or unreliable'' to ensure to
compliance with Rule 17Ad-22(e)(6).\143\ The Commission also stated
that an alternate risk-based margin system would be subject to the
requirements of 17 CFR 240.17ad-22(e)(6)(vi) and (vii), with respect to
monitoring, review, testing, verification, and model validation.\144\
Additionally, the Commission stated that a CCA should ``consider its
reliance on any third party sources for purposes of its risk-based
margin system and consider whether an alternate system or source of
data or other inputs that is internal to the CCA, and does not rely
upon any third party provider, would be appropriate.'' \145\
---------------------------------------------------------------------------
\143\ Id.
\144\ Id.
\145\ Id.
---------------------------------------------------------------------------
The Commission is adopting the requirement as proposed, with minor
modifications discussed in Part II.B.2 below. The Commission is also
making clarifying technical changes.\146\
---------------------------------------------------------------------------
\146\ Specifically, the Commission is: (1) adding paragraph
markers (in the form of capital letters) to separate the clauses of
the rule text into (A), (B), and (C); (2) changing the punctuation
from a comma to a semi-colon and deleting the word ``and'' at the
end of paragraph (e)(6)(iv)(A); (2) adding parenthesis around the
text ``and, with respect to price data, sound valuation models'',
deleting the comma at the end of that language, and changing the
period to a semi-colon at the end of paragraph (e)(6)(iv)(B); (3)
adding additional paragraph markers (1) and (2) to paragraph
(e)(6)(iv)(C) before each of the two alternatives listed in this
paragraph (i.e., ``the use of price data or substantive inputs from
an alternate source; or'' and ``if it does not use an alternate
source, the use of a risk-based margin system that does not rely on
the unavailable or unreliable substantive input;'') and capitalizing
the first word in each new paragraphs (e)(6)(iv)(C)(1) and (2)
(``The'' and ``If'', respectively); (4) adding a clarifying,
internal cross-reference (``such procedures under paragraph
(e)(6)(iv)(B)'') in paragraph (e)(6)(iv)(C); and (5) replacing the
word ``shall'' in new Rule 17Ad-22(e)(6)(iv)(C) (i.e., ``Such
procedure under paragraph (e)(6)(iv)(B) of this section shall'')
with ``must'' to use more plain language.
---------------------------------------------------------------------------
2. Discussion of Comments
a. Inclusion and Definition of Substantive Inputs
As discussed above, the Commission proposed expanding the scope of
Rule 17Ad-22(e)(6)(iv) beyond price data to also include substantive
inputs to a CCA's margin methodology.\147\ Based on its supervisory
experience, the Commission understands that such substantive inputs
could include: (i) portfolio size; (ii) volatility, (iii) sensitivity
to various risk factors that are likely to influence security prices;
(iv) duration; (v) convexity; and/or (vi) the results of models run by
third parties.\148\
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\147\ In addition, to improve clarity and consistency of terms,
the Commission proposed technical edits standardizing references to
``price data'' in Rule 17Ad-22(e)(6)(iv), which currently refers to
both ``price data'' and ``pricing data,'' to refer only to price
data. The Commission previously used the two words interchangeably
in preexisting Rule 17Ad-22(e)(6)(ii). RWP Proposing Release, supra
note 18, at 34714 n.59. The Commission received no comments on this
proposed technical change of ``pricing data'' to ``price data'' in
this provision and is adopting as proposed.
\148\ RWP Proposing Release, supra note 18, at 34714.
---------------------------------------------------------------------------
Several commenters addressed this proposed modification to Rule
17Ad-22(e)(6)(iv).\149\ One commenter agreed generally with the
proposed extension of the rule's scope to include ``substantive
inputs.'' \150\ The commenter supported extending the requirement for
``reliable sources'' to include substantive inputs because a CCA's
margin systems need ``to operate with a high degree of accuracy and
reliability, given the risk that [its] size, operation, and importance
posed to the securities market.'' \151\
---------------------------------------------------------------------------
\149\ See Better Markets at 8-9; CCP12 at 2; DTCC at 5; The
Associations at 8.
\150\ See Better Markets at 8-9.
\151\ Id. at 8.
---------------------------------------------------------------------------
Several commenters requested that the Commission provide more
guidance regarding its statement about what inputs may be
``substantive.'' \152\ One commenter requested that ``the term
`substantive' as used in this context be further refined to avoid
confusion over the inputs that are `necessary' and those that are `non-
consequential.' '' \153\ In addition, several commenters stated that
the CCA should determine what constitutes a substantive input.\154\ One
such commenter also stated that, if the Commission prescribed a
definition of ``substantive input,'' a CCA may be forced to ``obtain,
often at great expense, alternate data sources for inputs with limited
utility and minimal or no impact on margin calculations.'' \155\
---------------------------------------------------------------------------
\152\ See DTCC at 5; CCP12 at 2; The Associations at 8.
\153\ DTCC at 5.
\154\ Id.; CCP12 at 2.
\155\ CCP12 at 2.
---------------------------------------------------------------------------
However, another commenter stated that the Commission's rules
around substantive inputs should be principles based, identifying one
such principle that ``every input that affects margin requirements by
[x]% is deemed substantive.'' \156\
---------------------------------------------------------------------------
\156\ The Associations at 8.
---------------------------------------------------------------------------
The Commission is not making any amendments to define what
constitutes a substantive input. A CCA is responsible for developing
its own policies and procedures, including its margin methodology, and
it is best positioned to determine what constitutes a substantive input
into its margin methodology. As stated in the RWP Proposing Release,
``substantive'' for the purposes of Rule 17Ad-22(e)(6)(iv), ``refers to
any inputs used by the CCA that are necessary for the risk-based margin
system to calculate margin'' and ``is meant to distinguish from other
potential inputs that may not be consequential to the calculation of
margin.'' \157\ Accordingly, as requested by some commenters, the
Commission confirms that a CCA has the discretion to determine what is
a ``substantive'' input, based on its knowledge of its risk-based
margin system, as compared to those that it determines to be non-
consequential.\158\ When establishing and maintaining its risk-based
margin system, each CCA must have the ability to consider its own
unique characteristics and circumstances, as well as those of the
market it serves.\159\ Rather than have the Commission define the term
``substantive'' prescriptively for each CCA, this discretion
corresponds with the Commission's principles-based approach in Rule
17Ad-22(e), which helps each CCA effectively meet the evolving risks
and challenges in the markets that each CCA serves.\160\ Therefore, no
further clarifications or guidance are necessary to distinguish a
substantive input from those inputs that are non-consequential.
---------------------------------------------------------------------------
\157\ RWP Proposing Release, supra note 18, at 34715.
\158\ See DTCC at 5; CCP12 at 2; The Associations at 8.
\159\ See CCA Standards Adopting Release, supra note 5, at
70800-01.
\160\ See id. at 70800.
---------------------------------------------------------------------------
Further, the Commission is not adopting any amendments to Rule
17Ad-22(e)(6)(iv) to incorporate the principle that ``every input that
affects margin requirements by [x]% is deemed substantive.'' \161\ This
type of requirement would not be principles-
[[Page 91013]]
based and instead would prescribe a particular scope of what
constitutes ``substantive,'' which the Commission does not seek to do.
Based on its supervisory experience, the Commission understands that a
wide range of margin models exists among the CCAs. This wide range of
margin models exists due to each CCA's different participants,
different products cleared, and different markets served. Given these
distinctions among the CCAs, and consistent with the principles-based
approach in Rule 17Ad-22(e) more generally, the Commission believes it
would be inappropriate to include in Rule 17Ad-22(e)(6)(iv) a
quantitative threshold defining those inputs that would be
``substantive.'' Such a specific percentage threshold likely would fail
to identify all the inputs for all CCAs' margin models that are
necessary to ensure every CCA's margin model can meet the requirements
of Rule 17Ad-22(e)(6) (i.e., covering its credit exposures to its
participants). Therefore, the Commission is not adopting modifications
responsive to the commenter requesting ``substantive'' to correspond to
a percentage impact on margin requirements.
---------------------------------------------------------------------------
\161\ The Associations at 8.
---------------------------------------------------------------------------
b. Use of an Alternate Source or an Alternate Risk-Based Margin System
As proposed, the changes to Rule 17Ad-22(e)(6)(iv) required that
the procedures for when price data or substantive inputs are not
readily available or reliable must include the use of price data or
substantive inputs from an alternate source or, if it does not use an
alternate source, the use of an alternate risk-based margin system
(that does not similarly rely on the unavailable or unreliable
substantive input).\162\
---------------------------------------------------------------------------
\162\ RWP Proposing Release, supra note 18, at 34715.
---------------------------------------------------------------------------
One commenter expressed support for this proposed requirement,\163\
and other commenters acknowledged the importance of ensuring that a
CCA's risk-based margin system be able to perform even when certain
sources of pricing data or other inputs become unavailable.\164\
---------------------------------------------------------------------------
\163\ Better Markets at 9 (stating that this proposed
requirement would ensure that the backup procedures available to a
CCA ``are sufficiently distinct from the impaired data source that
they will serves as reliable alternatives'').
\164\ See OCC at 4; ICE at 2; CCP12 at 2.
---------------------------------------------------------------------------
However, several commenters disagreed with the requirement of a
sole means of contingency (that is, the use of alternate sources) and
stated that CCAs should have the flexibility to develop their own
backup procedures and/or appropriate substitutions for unavailable
inputs in their margin models, depending on the products cleared and
the markets served.\165\ These commenters stated that it may not always
be possible to have a ``like-for-like'' substitution of an alternate
source.\166\ One commenter stated that the Commission should not
restrict choices in an emergency situation by requiring that an
alternate source be independent of the third-party provider, and that
CCAs should simply have a ``credible fallback'' in the event of
unavailable price data or substantive inputs.\167\ Another such
commenter recommended that the proposal be modified to allow for
``substantive inputs from an alternate source, and/or of appropriate
alternate inputs.'' \168\
---------------------------------------------------------------------------
\165\ DTCC at 4 (stating that a CCA should have ``the
flexibility to develop reasonable backup procedures and contingency
plans for these types of circumstances, which will depend on the
cleared products and market structure at issue, and may not in all
cases include the use of third-party secondary vendors or data
sources''); OCC at 5 (stating that a CCA should be permitted to use
its informed judgment to determine the appropriate substitutions for
unavailable inputs in its margin system, which would ensure that
CCAs have sufficient flexibility to address the need for alternative
data sources in a manner that addresses the Commission's policy
objectives, is tailored to the markets served and products cleared
by the [CCA], and is not unnecessarily burdensome).
\166\ DTCC at 4-5 (stating that requiring an alternate source
would not always be the most practical or effective means to ensure
a CCA meets its participants' credit obligations under Exchange Act
Rule 17Ad-22(e)(4), due to the possible absence of an alternate
source of pricing data or other substantive inputs (e.g., because of
industry consolidation among vendors), and the inability to use
discretion to develop a solution to unavailable price data or other
substantive input); OCC at 4 (stating that alternate sources may not
exist, or may be prohibitively expensive or technically difficult to
implement when compared to the impact of the input on the margin
model). One such commenter suggested that a CCA may find it
appropriate if its policies and procedures incorporated the use of
an alternative pricing vendor, where applicable, or in the absence
of such an alternative provider, pursuant to the CCA's policies and
procedures to ensure that timely pricing data is applied, with such
procedures including, for example, recording ``the last available
price'' in the CCA's pricing database with such price consumable to
applicable participants (citing to its recent update to its Clearing
Agencies' Securities Valuation Framework). Id. at 5.
\167\ The Associations at 9.
\168\ OCC at 5.
---------------------------------------------------------------------------
In response to the commenters who sought revisions to the proposed
requirement's obligation to use an alternate source, the requirement of
an alternate source does not mean that such an alternate source must be
external to a CCA or that the alternate source must be of the same
nature as the original substantive input (that is, the alternate source
need not be a ``like-for-like'' substitute). As stated in the RWP
Proposing Release, ``alternate source[s] generally should meet the same
level of reliability of the primary source, whether that alternate is
sourced from an external provider or created internally.'' \169\ By
acknowledging that an alternate source may be created internally, the
Commission recognized that an alternate source means, simply, an
alternate to the primary input and does not require an entirely
independent, third-party source to provide the same input. Similarly,
the recognition that the alternate source may be created internally
means that the Commission also recognized that the alternate source
may, in fact, be the result of internal policies and procedures that
the CCA designs to develop an internal alternate source and meet the
needs of its margin methodology.
---------------------------------------------------------------------------
\169\ RWP Proposing Release, supra note 18, at 34715 (emphasis
added).
---------------------------------------------------------------------------
Further, in response to the commenters seeking flexibility to
develop their own backup procedures, this requirement does not prevent
a CCA from using its discretion to determine the most appropriate
substitution for any price data or substantive input to its risk-based
margin system.\170\ This requirement also does not preclude the use of
policies and procedures that establish a methodology or approach to
determine the appropriate price,\171\ so long as, as discussed in Part
II.B.2.c infra, the CCA can still meet the obligations of Rule 17Ad-
22(e)(6), including meeting its credit obligations to its
participants.\172\ Therefore, revisions to or deletion of the rule text
regarding alternate sources, including those suggested by one commenter
to allow for ``substantive inputs from an alternate source, and/or of
appropriate alternate inputs,\173\ are not necessary, as the rule text
does not require an externally provided alternate source.
---------------------------------------------------------------------------
\170\ Id.
\171\ For example, one CCA commenter stated that its existing
policy provided that backup pricing may more accurately be sourced
from an alternative pricing vendor or may also be determined, in the
absence of an alternative pricing vendor, pursuant to the CCA's
applicable policies and procedures to ensure that timely pricing
data is applied, with such procedures including, for example, using
the last available price which is consumable to applicable
participants. DTCC at 5.
\172\ RWP Proposing Release, supra note 18, at 34715.
\173\ See OCC at 5.
---------------------------------------------------------------------------
One commenter stated that the Commission should ``refocus[ ]'' the
final rule on policies and procedures, as opposed to requiring policies
and procedures that include an alternate source or risk-based margin
system.\174\ The Commission agrees that the
[[Page 91014]]
requirement should allow for flexibility in how CCAs address the
unavailability or unreliability of an input to their margin model. The
requirement being adopted does not mandate that a specific alternate
source be used, but rather that the CCAs have policies and procedures
to ensure that some alternate source is available, even if that source
is determined internally by the CCA.
---------------------------------------------------------------------------
\174\ CCP12 at 2.
---------------------------------------------------------------------------
With respect to the requirement of a potential alternate risk-based
margin system, one commenter stated that requiring CCAs to develop and
maintain an entire alternate risk-based margin system would be
prohibitively expensive and operationally burdensome.\175\ However, the
Commission disagrees with the commenter's characterization that such
costs are necessary because the proposed rule does not require the
development and maintenance of a second risk-based margin system
separate from its current risk-based margin system, as discussed
below.\176\ Another commenter suggested that the Commission should
remove the requirement of a potential alternate risk-based margin
system from the rule text.\177\ The Commission disagrees that the
proposed rule requires a second risk-based margin system separate from
a CCA's current risk-based margin system, and the Commission is
modifying the term ``alternate risk-based margin system'' to make this
point clear.\178\ Specifically, the proposed requirement for backup
procedures when substantive inputs ``are not readily available or
reliable'' should help a CCA ensure it ``can continue to calculate and
collect margin commensurate with, the risks and particular attributes
of each relevant product, portfolio, and market, as required under Rule
17Ad-22(e)(6)(i).'' \179\
---------------------------------------------------------------------------
\175\ OCC at 5.
\176\ See infra notes 178 and 186 and accompanying text.
\177\ ICE at 2-3.
\178\ See infra note 187 and accompanying text.
\179\ Id.
---------------------------------------------------------------------------
Similarly, another commenter disagreed with the proposed additional
requirement that a CCA have advance plans ``to use an alternate risk-
based margin system because of the unavailability or unreliability of a
particular input,'' which ``would impose a significant burden on a
[CCA] solely for the purpose of addressing a problem with an input that
may be transitory.'' \180\ The commenter stated that it ``is not aware
of circumstances where a [CCA] has been unable to address a problem
with an input price through its normal business practices and
procedures.'' \181\ The commenter also stated that it ``does not
believe that the Commission has articulated a problem (other than a
theoretical one)'' that the proposal is designed to address and ``has
not recognized the considerable costs to'' CCAs, clearing firms, and
other market participants ``that would be required to develop and
implement alternate margin models to address a remote and theoretical
problem with price or other data inputs.'' \182\ The commenter
suggested that this clause be removed from the rule text.\183\ In
addition, one commenter requested that the Commission confirm that any
final rule does not create an expectation that CCAs should develop an
alternate risk-based margin system.\184\
---------------------------------------------------------------------------
\180\ ICE at 2.
\181\ Id. at 3.
\182\ Id.
\183\ Id.
\184\ CCP12 at 3 (stating that the development of such an
alternate system would require a CCA to effectively maintain two
very distinct margin systems, which is likely very resource
intensive and time consuming).
---------------------------------------------------------------------------
The Commission disagrees with the commenter that the failure of a
CCA's margin model (i.e., its risk-based margin system) due to an
unavailable or unreliable input is a ``theoretical'' problem. Rather,
the unavailability or unreliability of a substantive input could impact
a CCA's ability to establish, implement, maintain, and enforce a risk-
based margin system that Rule 17Ad-22(e)(6) requires. Moreover,
contrary to the commenter's assertion, the Commission is not requiring
that CCAs develop and implement alternate margin models, but rather, is
requiring that the CCA establish, implement, maintain and enforce
written policies and procedures to address particular issues that could
affect the functioning of its margin model. The requirement also allows
for the use of an alternate source in the existing risk-based margin
system, and a CCA may determine the alternate source using its own
policies and procedures.\185\ An alternate source from a third-party
provider is not required. More generally, this requirement is designed
to expand the scope of the preexisting rule and ensure that a CCA
establishes, implements, maintains and enforces written policies and
procedures to address the unavailability of a substantive input to its
margin model and meet its obligations under Rule 17Ad-22(e)(6). As
stated in the RWP Proposing Release, when substantive inputs are
unavailable or unreliable, CCAs must be able to continue to calculate
and collect margin commensurate with, the risks and particular
attributes of each relevant product, portfolio, and market.\186\
Additionally, the Commission analyzed the costs of the requirement in
Part IV, infra, and in the RWP Proposing Release. Given the analysis,
the Commission disagrees with the commenter's suggestion to remove the
clause from the proposal.
---------------------------------------------------------------------------
\185\ RWP Proposing Release, supra note 18, at 34715.
\186\ Id. at 34714.
---------------------------------------------------------------------------
The Commission is making several technical changes to the rule text
to clarify that an alternate risk-based margin system is not required
in all instances. Specifically, the Commission deletes the word
``alternate'' from ``an alternate risk-based margin system'' in Rule
17Ad-22(e)(6)(iv)(C)(2) (and changes ``an'' to ``a'' before ``risk-
based margin system'' for grammatical reasons). This revision responds
to commenters' concerns that the rule requires that a CCA develop an
alternate risk-based margin system separate from a CCA's current risk-
based margin system.\187\ The rule does not include such a requirement.
The Commission is also adding the term ``either'' after ``must
include'' to clarify that satisfying either paragraph (e)(6)(iv)(C)(1)
or (2) fulfills paragraph (e)(6)(iv)(C)'s requirement.\188\
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\187\ See supra notes 175, 184 and 177 and accompanying text.
\188\ The Commission also removes from Rule 17Ad-22(e)(6)(iv)(C)
the word ``similarly'' from between the words ``not'' and ``rely''
(i.e., ``the use of a risk-based margin system that does not rely on
the unavailable or unreliable substantive input'') to remove
redundancy (as the word ``similarly'' was unnecessary to convey the
meaning that the prohibited reliance was on the unavailable or
unreliable substantive input in question). The Commission also
revises the reference to ``the unavailable or unreliable substantive
input'' to ``substantive inputs that are unavailable or reliable''
for the same reasons.
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c. Obligation To Meet a CCA's Obligations Under Rule 17Ad-22(e)(6)
The proposed amendment to Rule 17Ad-22(e)(6)(iv) also provided that
the procedures discussed in Part II.B.2.b must ensure that the CCA is
able to meet its obligation to cover credit exposures to its
participants under Rule 17Ad-22(e)(6).\189\ In the RWP Proposing
Release, the Commission explained that, by specifying how these
procedures must perform (i.e., to allow a CCA to continue to cover its
credit exposures), this proposed amendment helps ensure that a CCA
adopts sufficiently robust procedures.\190\ As such, this proposed
amendment would, with respect to both
[[Page 91015]]
price data and other substantive inputs, require that such procedures
should address circumstances in which price data or substantive inputs
are not readily available or reliable, in order to ensure that the CCA
be able to meet its requirements under Rule 17Ad-22(e)(6) and cover its
credit exposures to its participants.\191\
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\189\ RWP Proposing Release, supra note 18, at 34715.
\190\ Id.
\191\ Id.
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The Commission received no comments on this requirement and is
adopting as proposed.
C. Contents of Recovery and Orderly Wind-Down Plans
The Commission received several overarching comments on proposed
Rule 17Ad-26 that were generally supportive of the approach,
particularly the addition of new and more specific requirements
applicable to a CCA's RWP. One commenter stated that a detailed RWP is
essential, as the inability of a CCA to recover from severe losses, or
the disorderly wind-down of a CCA, could have significant repercussions
not only for the sector in which the CCA operates but for the markets
and the economy as a whole.\192\ The commenter also stated that CCAs
must have comprehensive RWPs because even sound risk management may not
prevent a CCA's default in extreme circumstances.\193\ The commenter
continued by stating the obvious strength of recovery and orderly wind-
down planning is the ex ante development of a strategy to maintain as a
going concern the critical operations of the CCA, even in the face of
losses that would otherwise have caused its insolvency, or to ensure
the orderly transfer of functions.\194\ The commenter stated that not
aligning RWPs to uniform requirements introduces risk, and that the
proposed rule mitigates that risk by requiring all RWPs to incorporate
at least nine specific elements.\195\ Another commenter explained that
CCAs face no meaningful competitive pressure when they are the sole
clearing agency for the products they clear and can be a source of
systemic risk.\196\ The commenter stated that, in such cases, to
improve CCAs, regulatory mandates must effectively codify existing best
practices to enhance resiliency and create a level playing field for
resiliency, and that such improvements will only occur if the
Commission imposes specific regulatory requirements.\197\
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\192\ Better Markets at 10.
\193\ Id.
\194\ Id.
\195\ Id.
\196\ SIFMA at 10-11.
\197\ Id.
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One commenter cautioned that the proposed upgrades and focus on RWP
design and testing may create unrealistic expectations and over-
reliance on RWPs. The commenter also stated that care is needed to
ensure that confidence in such plans is well grounded and that the
efficient implementation of RWPs is properly stressed, accounting for
rapidly evolving market risk and for the ever-increasing speed of
market-moving data.\198\ In the Commission's view, effective planning
can help preserve financial stability and ensure the continuity of
critical CCP and CSD functions for the markets served by CCAs, and the
availability of tools and resources in the RWP generally reserved for
recovery and wind-down scenarios would not lead to an ``over-reliance''
on such tools in practice. In practical terms, default management,
recovery, and wind-down exist as distinct points across a spectrum from
normal market conditions to highly stressed market conditions. As such,
a CCA would deploy its RWP either (i) in a default scenario, only after
its business-as-usual default management tools had failed to close out
any defaulting portfolios and, likely, after the CCA had fully
exhausted its prefunded resources, or (ii) in a non-default scenario,
after resources set aside for business risk (e.g., six months of
operating expenses) or for other purposes had been exhausted.
Commission rules impose a high standard for resilience in normal and
stressed market conditions across both default and non-default loss
scenarios, consistent with the international standards set forth in the
PFMI, of which planning for recovery and orderly wind-down is but one
part of a multi-part and comprehensive regulatory framework. Given this
dynamic, CCAs would not have incentives to ``activate'' their RWPs
early.
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\198\ Letter from Erkki Liikanen, Co-Chair, and Simon Johnson,
Co-Chair, CFA Institute Systemic Risk Council (Aug. 30, 2023)
(``CFA'') at 5.
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More generally, the Commission agrees with commenters expressing
the view that thoughtful recovery and wind-down planning is necessary,
even when effective risk-management measures are in place, because of
the potential systemic risk implications of the failure of a CCA. Given
the evolving nature of recovery and orderly wind-down planning, as well
as the annual review and testing requirements included in Rule 17Ad-26,
the concern that adding more robust requirements for development and
testing of RWPs will lead to ``over-reliance'' on RWPs is misplaced.
Effective RWPs, with robust consideration of scenarios, triggers, and
processes for testing and board approval, help promote recovery. Such
planning for recovery is essential because, as other commenters have
stated, the wind-down of systemic functions often would not leave
alternative providers of clearance and settlement services to support
continued market function.\199\ To reach the stage where a CCA would
consider implementing its RWP, in the context of a default loss, the
CCA would have to incur default losses greater than the financial
resources maintained pursuant to policies and procedures required by
Rule 17Ad-22(e)(4),\200\ or in a non-default loss context, incur losses
greater than the liquid net assets funded by equity held pursuant to
the policies and procedures required by Rule 17Ad-22(e)(15)(ii) to
cover potential business losses.\201\ As such, neither CCAs nor market
participants are in danger of ``over-reliance'' on the policies and
procedures that undergird RWPs. In addition, although many systemic
functions are not currently offered by alternative providers, RWPs can,
in establishing robust policies and procedures for orderly wind-down,
help facilitate the orderly transfer of systemic functions to a new
entity to maintain clearance and settlement services for the market
served.
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\199\ See, e.g., Davidson at 1. This concern regarding the
feasibility or advisability of wind-down in the context of CCAs is
discussed further in Part II.D.1.c.
\200\ See 17 CFR 240.17ad-22(e)(4)(i) (requiring a CCA to
maintain sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence); see
also 17 CFR 240.17ad-22(e)(4)(ii) (requiring a CCA that provides CCP
services and is either systemically important in multiple
jurisdictions or a clearing agency involved in activities with a
more complex risk profile to maintain additional financial resources
at the minimum to enable it to cover a wide range of foreseeable
stress scenarios that include, but are not limited to, the default
of the two participant families that would potentially cause the
largest aggregate credit exposure for the CCA in extreme but
plausible market conditions); 17 CFR 240.17ad-22(e)(4)(iii)
(requiring a CCA that is not subject to Rule 17Ad-22(e)(4)(ii) to
maintain additional financial resources at the minimum to enable it
to cover a wide range of foreseeable stress scenarios that include,
but are not limited to, the default of the participant family that
would potentially cause the largest aggregate credit exposure for
the CCA in extreme but plausible market conditions).
\201\ See 17 CFR 240.17ad-22(e)(15)(ii) (requiring a CCA, at a
minimum, to hold liquid net assets funded by equity equal to the
greater of either six months of the CCA's current operating
expenses, or the amount determined by the board of directors to be
sufficient to ensure a recovery or orderly wind-down of the CCA).
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[[Page 91016]]
Another commenter stated that the RWP Proposing Release has not met
the burden of proof required by the Administrative Procedure Act. More
specifically, the commenter stated that the Commission has not
demonstrated that the rule amendments are necessary or in the public
interest because the proposed amendments are to existing rules that
already more than adequately cover the areas in question, and there
have been no examples of CCAs or clearing agency participants that
failed or of CCAs that executed recovery plans or parts thereof. \202\
The commenter further explains that the existing SRO rules of the CCAs
relating to RWPs have been approved by the Commission, and that the
Commission has conducted multiple examinations of CCAs under those
rules, where any deficiencies found have been subject to, or are in the
process of, review and remediation.
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\202\ Davidson at 1-3.
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Although rare, CCPs both in the U.S. and abroad have experienced
highly stressed market conditions that led to participant defaults, and
CCP failures have occurred outside the U.S. Examples of such
participant defaults include three CCP failures in other jurisdictions
in recent history, as well as the market stress that CCPs faced in
response to the 1987 market break and in response to the beginning of
the COVID-19 pandemic in 2020.\203\ These defaults and failures could
happen again and underscore the importance of the Commission's ongoing
efforts to ensure effective supervision and regulation of CCAs
following the enactment of the Dodd-Frank Act, as discussed in Part
I.\204\ These examples also reinforce the possibility that even a
robust and resilient CCA holding a sizeable pool of prefunded resources
and other liquid resources may experience stressed market conditions or
other events so extreme that the resources it has reserved for
potential loss scenarios will prove insufficient, potentially
necessitating actions beyond ``business-as-usual'' default management.
By establishing requirements related to core services and service
providers, the identification of scenarios, triggers, and tools for
recovery and orderly wind-down, and robust processes for
implementation, notification, testing and board review and approval,
new Rule 17Ad-26 helps ensure that CCAs can successfully plan for, and
navigate highly stressed or extreme market conditions, where events may
occur or conditions deteriorate rapidly.\205\
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\203\ See, e.g., Staff Report on the Regulation of Clearing
Agencies (Oct. 1, 2020) at 18, n.93, <a href="https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf">https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf</a> (describing recent examples
of participant defaults); Bank for International Settlements
(``BIS''), CCP Failure: A Rare but Present Danger (Dec. 16, 2018),
<a href="https://www.bis.org/publ/qtrpdf/r_qt1812z.htm">https://www.bis.org/publ/qtrpdf/r_qt1812z.htm</a> (describing three CCP
failures over the last 50 years); ``The October 1987 Market Break, A
Report by the Division of Market Regulation'' (Feb. 1988), <a href="https://www.sechistorical.org/collection/papers/1980/1988_0201_MarketBreak_01.pdf">https://www.sechistorical.org/collection/papers/1980/1988_0201_MarketBreak_01.pdf</a> (describing the market stress
associated with the 1987 market crash and the stress it placed on
CCPs at the time).
\204\ See supra Part I and notes 5-13, 23-40, and accompanying
text (discussing the rationale for the proposed rules and the
statutory authority for the regulation of clearing agencies).
\205\ See RWP Proposing Release, supra note 18, at 34709.
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Pursuant to the Exchange Act, the Commission is directed to
facilitate the ongoing development of the national system for clearance
and settlement, which includes ensuring effective risk management at
CCAs. As discussed throughout the RWP Proposing Release, and in this
release, the Commission has proposed and is now adopting new Rule 17Ad-
26 to codify certain elements that have emerged across some RWPs that
must be included in all RWPs to help ensure a CCA can effectively
allocate uncovered losses, manage liquidity shortfalls, and address
capital shortfalls arising from other causes. As such, new Rule 17Ad-26
sets forth these elements. While existing RWPs at CCAs may contain
several of these elements, new Rule 17Ad-26 requires each CCA to have
every element in its RWP. As previously discussed,\206\ new Rule 17Ad-
26 also promotes three important objectives consistent with its
statutory mandates: (i) bolstering the existing RWPs at CCAs; (ii)
codifying some existing RWP elements to ensure that these elements
remain in the plans over time; and (iii) establishing that the RWP of
any new CCA would contain each of the elements specified in the rule.
In so doing, the Commission is establishing a higher minimum standard
for the quality and effectiveness of RWPs, designed to help ensure that
planning for recovery and orderly wind-down is effective and can
promote financial stability in periods of market stress. The Commission
will continue to review rule filings and advance notices submitted by
CCAs under the rules adopted in this release to help ensure the
regulatory framework is an effective tool that can advance the evolving
process of recovery and resolution planning for CCPs and other CCAs.
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\206\ See supra note 39 and accompanying text.
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Below the Commission addresses comments regarding specific elements
of proposed Rule 17Ad-26.\207\
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\207\ The Commission is making one technical edit to the
preamble language for Rule 17Ad-26, replacing ``shall'' with
``must'' to use more plain language, as well as align with the
approaches in other recently adopted rules for clearing agencies at
17 CFR 240.17ad-25 and 240.17ad-27.
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1. Core Services: Rule 17Ad-26(a)(1)
Proposed Rule 17Ad-26(a)(1) required a CCA to identify and describe
in its RWP the CCA's critical payment, clearing, and settlement
services and address how the CCA would continue to provide such
critical services in the event of a recovery and during an orderly
wind-down, including the identification of the staffing necessary to
support such critical services and analysis of how such staffing would
continue in the event of a recovery and during an orderly wind-down.
In the RWP Proposing Release, the Commission explained that the
first step in effective recovery and orderly wind-down planning must be
identification of the critical services provided to market participants
because market participants rely on these services to facilitate
payment, clearing, and settlement in the U.S. securities markets. The
Commission also stated that such planning helps ensure that RWPs focus
on a CCA's ability to provide these services on an ongoing basis, even
under stress.\208\ Furthermore, the Commission stated its belief that
the CCA generally should consider the impact that any interruption to
particular services would have on the CCA's participants and the smooth
functioning of the market it serves, as well as whether the service is
available from any substitute provider. In the proposed rule,
``critical'' referred to the importance of the service to participants
and to the proper functioning of the markets, where an inability to
provide the service would implicate financial stability concerns. As
such, the Commission also proposed definitions of ``recovery'' and
``orderly wind-down'' focused on the need to continue to provide the
critical payment, clearance, and settlement services provided by a CCA
through the recovery or wind-down event.\209\
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\208\ RWP Proposing Release, supra note 18, at 34718.
\209\ See proposed Rule 17Ad-26(b).
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Several commenters generally supported the requirement to identify
the critical payment, clearance, and settlement services provided by a
CCA and address how the CCA would continue to provide such critical
services.\210\
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\210\ See SIFMA at 14 (``strongly supports the requirement that
Clearing Agencies ensure that they are able to maintain access to
services''); ICE at 3 (``supports the requirement to identify
critical payment, clearing, and settlement services and to address
continued use of such services during a recovery or wind-down'');
OCC at 6 (``agrees that identification of critical services and
planning for their continuation in a recovery or orderly wind-down
should be the core content of a CCA's RWP'').
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[[Page 91017]]
a. Replacing ``Critical'' With ``Core''
The Commission is modifying the final rule to refer to ``core
payment, clearance, and settlement services'' rather than ``critical
payment, clearance, and settlement services'' (hereinafter, referred to
as ``core services'') to improve clarity and consistency with
terminology in other rules, such as Rule 17Ad-25(i),\211\ which
concerns the governance of ``service providers for core services.''
Furthermore, the use of ``core'' as opposed to ``critical'' helps
distinguish a CCA's obligations under Rule 17Ad-26 from those under 17
CFR 242.1000 through 242.1007 (``Regulation SCI''), which addresses, in
the context of clearing agencies subject to the rule, ``critical
systems'' that support clearance and settlement.\212\
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\211\ 17 CFR 240.17ad-25(i).
\212\ See 17 CFR 242.1000 (defining ``Critical SCI systems'');
see also RWP Proposing Release, supra note 18, at 34719
(acknowledging there would likely be some connection between what a
CCA identifies as its critical services for purposes of inclusion in
its RWP and what it identifies as ``critical SCI systems'' for
purposes of Regulation SCI, but inclusion of a critical service in a
CCA's RWP would have no impact on the CCA's obligations under
Regulation SCI).
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Use of the descriptive term ``core'' rather than ``critical'' does
not affect the Commission's guidance stated in the RWP Proposing
Release on identifying those services.\213\ Accordingly, when
identifying a core service, the CCA generally should consider the
impact that any interruption to a particular service would have on the
CCA's participants and the smooth functioning of the markets that it
serves, as well as whether the service is available from any substitute
provider.\214\
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\213\ RWP Proposing Release, supra note 18, at 34718.
\214\ Id.
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b. Modification to ``Staffing'' Element
Several commenters stated that identifying staffing or staffing
resources is a necessary part of addressing how a CCA may continue
providing its core services.\215\ One of those commenters stated that
it is not necessary to identify specific personnel or positions
required to be maintained, and a CCA should have flexibility to
determine the staff needed in a particular situation, including taking
into consideration the availability and willingness of personnel to
perform services at the time of a recovery or wind-down.\216\ The
commenter suggested the proposed rule be amended to clarify that the
CCA is not required to identify specific personnel or positions
required to be maintained.\217\ Similarly, another commenter stated
that lists of specific employees may become dated quickly due to a
shift in responsibility or normal attrition.\218\ Another commenter
stated, given the volume of employee turnover and new initiatives,
personnel designations likely change with regularity, making specific
identification of personnel in the RWP superfluous.\219\
---------------------------------------------------------------------------
\215\ OCC at 6 (agreeing that any consideration of how a CCA
will continue its core services necessarily requires consideration
of how to plan to retain the necessary staff for such efforts); ICE
at 3 (recognizing that it is necessary to identify staffing
resources to implement RWPs); The Associations at 13 (agreeing that
emphasis should be placed on determining staffing requirements);
SIFMA at 14 (strongly supporting the requirement that CCAs ensure
that they are able to maintain access to services, including
personnel services, in a default scenario).
\216\ ICE at 3.
\217\ Id.
\218\ OCC at 6.
\219\ Davidson at 6.
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The Commission agrees with the commenters that identifying specific
personnel or employees is not necessary in planning and recognizes that
changes may occur in the staffing at a CCA. However, it is important
for planning purposes to identify those positions, roles, or personnel
functions that are necessary for the continuation of core services,
regardless of who or how many staff fills the role in ordinary
circumstances, to avoid unnecessary disruptions. As such, the
Commission is modifying the final rule from the proposal to refer to
the identification of ``staffing roles'' instead of ``staffing,'' the
latter of which could have been interpreted as requiring the
identification of specific individuals.
Several commenters responded to the clause requiring ``analysis of
how such staffing would continue in the event of a recovery and during
an orderly wind-down.'' One commenter stated that the process for
preparing to retain and incentivize critical employees under adverse
circumstances is the critical piece of information necessary for the
CCA and its supervisory and resolution authorities.\220\ The commenter
stated that what is most important in this aspect of planning are the
retention tools the CCA uses, how it considers retention when setting
and negotiating employment terms with essential personnel, and how it
tracks the terms of each such employee's employment.\221\ The commenter
suggested a minor wording change to proposed Rule 17Ad-26(a)(1) to
state ``analysis of how the CCA prepares for such staffing to continue
in the event of a recovery and during an orderly wind-down.'' \222\
Another commenter stated that it is important to have sufficient going
concern resources to allow a CCA to retain its key personnel, claiming
that the inability to keep personnel from leaving after a prior high
profile insolvency event in the 2008 financial crisis contributed to
large losses.\223\ Another commenter stated that not even the most
lucrative employment agreements can be sufficient to retain highly in-
demand skilled employees on a ``sinking ship,'' and furthermore stated
that certain CCAs have organized labor agreements in place with many
employees that would require time consuming renegotiation to satisfy
this clause in the proposed rule.\224\
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\220\ OCC at 6.
\221\ Id.
\222\ Id.
\223\ SIFMA at 14.
\224\ Davidson at 6.
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To address the above concerns regarding the potentially
unpredictable or evolving circumstances of employment during a recovery
or wind-down event, the Commission is modifying the clause related to
analyzing the continuation of staffing roles in a recovery and during
an orderly wind-down. The clause has been modified in the final rule to
state ``analyzing how such staffing roles necessary to support such
core services would continue in the event of a recovery and during an
orderly wind-down.'' \225\ In response to commenters generally focused
on concerns that a CCA could not guarantee the circumstances of
employment during a recovery or wind-down event, the rule only requires
that a CCA conduct an analysis, through which it would be able to
identify potential challenges and potential ways to address those
challenges. The final rule does not require the CCA to guarantee or
compel specific staff or personnel to remain in place. Rather, the
requirement promotes preparation for recovery and wind-down events,
helping to ensure that from a staffing perspective the necessary roles
or functions have been identified and established so that core services
can continue uninterrupted. As one commenter stated, there may be
organized labor agreements in place with employees. Pursuant to the
final rule, to address such circumstances, a CCA is required in its RWP
to analyze any such arrangements to see whether and how they might
impact staffing during a recovery or an orderly wind-
[[Page 91018]]
down, consistent with the terms of the rule requirement. The rule does
not require a CCA to renegotiate such arrangements.
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\225\ To eliminate extraneous words and align the text
grammatically, the Commission has replaced the phrase ``analysis
of'' with ``analyze.'' See infra note 228 and accompanying text
(describing other grammatical changes to the rule text).
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In addition, and separate from the requirements in Rule 17Ad-
26(a)(1), a CCA is required by Rule 17Ad-22(e)(15)(ii) to have written
policies and procedures to cover potential general business losses by
holding liquid net assets funded by equity equal to the greater of
either six months of the covered clearing agency's current operating
expenses, or the amount determined by the board of directors to be
sufficient to ensure a recovery or orderly wind-down of critical
operations and services of the covered clearing agency.\226\ As such, a
CCA generally should estimate the potential costs associated with
ensuring its core services, which could include the staffing necessary
to support those services, to ensure that it can meet the requirements
in Rule 17Ad-22(e)(15) related to implementing the recovery or orderly
wind-down of critical operations and core services.
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\226\ Pursuant to Rule 17Ad-22(e)(15)(iii), these liquid assets
are in addition to resources held by the CCA to cover participant
defaults or other risks covered by Rules 17Ad-22(e)(4)(i) through
(iii), as applicable, and to cover the liquidity risks identified in
Rules 17Ad-22(e)(7)(i) and (ii).
---------------------------------------------------------------------------
One commenter suggested a ``process'' approach to retain employees
with an associated wording change in the rule.\227\ By focusing on
``roles'' in the final rule, the modified rule text achieves the same
result. In addition to the substantive change from ``staffing'' to
``staffing roles necessary to support such core services'' discussed
above, the Commission has made technical edits to the rule text to add
paragraph markers (i) and (ii), aligning the text grammatically.\228\
---------------------------------------------------------------------------
\227\ OCC at 6.
\228\ Specifically, the phrase ``the identification of'' has
become ``by: identifying'' and ``analysis of'' has become
``analyzing.'' See supra note 225 (describing other grammatical
changes to the rule text).
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2. Service Providers: Rule 17Ad-26(a)(2)
Proposed Rule 17Ad-26(a)(2) required the RWP of a CCA to identify
and describe any service providers upon which the CCA relies to provide
the services identified in paragraph (a)(1) of proposed Rule 17Ad-26,
specify to what services such service providers are relevant and
address how the CCA would ensure that such service providers would
continue to perform in the event of a recovery and during an orderly
wind-down, including consideration of contractual obligations with such
service providers and whether those obligations are subject to
alteration or termination as a result of initiation of the recovery and
orderly wind-down plan.
The Commission, based on its supervisory experience, has observed
that CCAs rely upon some service providers to deliver core
services.\229\ For those service providers that are necessary for the
provision of core services, the failure of those service providers to
perform could pose significant operational risks and have substantial
effects on a CCA's ability to provide core services. In a recovery or
wind-down event, the continued performance of such a service provider
would be essential for the continuity of core services. Thus, the
Commission proposed to require a CCA to identify and describe the
subset of its service providers necessary to ensure the continued
delivery of core services throughout a recovery or wind-down event.
---------------------------------------------------------------------------
\229\ RWP Proposing Release, supra note 18, at 34719.
---------------------------------------------------------------------------
Final Rule 17Ad-26(a)(2) refers to ``its written agreements''
instead of ``contractual obligations'' for the reasons discussed in the
modifications to the definition of ``service provider for core
services'' in final Rule 17Ad-26(b) in Part II.D.2, infra.\230\ The
Commission is also making technical changes to Rule 17Ad-26(a)(2) by
adding paragraph markers to separate the clauses of the rule text into
paragraphs (a)(2)(i) and (ii).
---------------------------------------------------------------------------
\230\ The Commission is also modifying in final Rule 17Ad-
26(a)(2) the clause ``and whether those obligations'' to ``and
whether the obligations under those written agreements'' for
consistency with the written agreements modification.
---------------------------------------------------------------------------
The Commission received comments on proposed Rule 17Ad-26(a)(2) and
is making the modifications to the rule discussed below.
a. Identify and Describe Service Providers for Core Services
One commenter, agreeing with the Commission that continued
performance of a service provider as part of the RWP would be
essential, stated that the requirements of proposed Rule 17Ad-26(a)(2)
and the related proposed definition of ``service provider'' in proposed
Rule 17Ad-26(b) are circular in nature and overly broad, resulting in
too many service providers being captured and the requirement being
overly burdensome.\231\ Specifically, the commenter stated that the
phrases ``. . . upon which the covered clearing agency relies to
provide the services identified in paragraph (a)(1) of this section . .
.'' in proposed Rule 17Ad-26(a)(2) and ``. . . in any way related to
the provision of critical services, as identified by the covered
clearing agency in paragraph (a)(1) of this section . . .'' in the
definition of ``service provider'' in proposed Rule 17Ad-26(b) are
superfluous and unnecessary, and thus, both are not needed.\232\ The
commenter further stated that by including the term ``in any way'' as
well as ``relies'' in these two sections of the proposed rules, the
Commission broadened the scope of ``service provider'' to a point that
renders the term functionally useless for identifying those service
providers that are critical to the business operations of a CCA.\233\
By contrast, another commenter stated that the term as used in proposed
Rule 17Ad-26(a)(2) appears to limit the subset of providers to be
addressed in the RWP.\234\
---------------------------------------------------------------------------
\231\ DTCC at 5-6.
\232\ Id. at 5.
\233\ Id. at 6.
\234\ OCC at 6.
---------------------------------------------------------------------------
Commenters differed in their interpretation of these phrases in
proposed Rule 17Ad-26(a)(2) and the definition of ``service provider''
in proposed Rule 17Ad-26(b). The phrase ``upon which the covered
clearing agency relies to provide the services identified in paragraph
(a)(1) of this section'' has been deleted in final Rule 17Ad-26(a)(2)
to avoid any duplication of, or inconsistency with, the definition of
``service providers for core services'' in final Rule 17Ad-26(b).\235\
Along with the modifications to the definition of ``service provider
for core services'' in final Rule 17Ad-26(b) discussed in Part II.D.2
infra, the scope of service providers captured is appropriate for
recovery and orderly wind-down planning purposes.
---------------------------------------------------------------------------
\235\ To improve grammar and clarity, the Commission has also
modified the phrase ``specify to what services such service
providers are relevant'' to ``specifying which core services each
service provider supports'' in final Rule 17Ad-26(a)(2).
---------------------------------------------------------------------------
b. Ensure Continued Performance of Service Providers for Core Services
One commenter disagrees that CCAs can reasonably ``ensure'' that
there will be continuation of services by service providers.\236\ The
commenter stated that it interprets Rule 17Ad-22(e)(15)(ii) to require
a CCA to have sufficient resources to continue to pay service providers
through the entirety of an execution of a CCA's RWP, and therefore
states that this existing requirement should adequately address
[[Page 91019]]
the Commission's goals for this aspect of the proposal and recommends
that the Commission revise proposed Rule 17Ad-26(a)(2) by removing any
requirement that a CCA ``ensure'' continuation of services.\237\
Alternatively, the commenter requested that the Commission adopt a
standard that acknowledges these limitations of a CCA to ensure
continued performance of service providers and that requires a CCA to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to facilitate considerations of
contractual provisions with service providers that, subject to
continued payment by the CCA (or successor) obligates them to continue
to perform in the event of a recovery or during an orderly wind-
down.\238\
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\236\ DTCC at 8-9 (The commenter stated that the proposed
requirement ``overestimates the negotiating leverage that CCAs have
when entering contracts with service providers or assumes that CCAs
would be able to unilaterally require service providers to continue
performance during a recovery or orderly wind-down.'').
\237\ DTCC at 9.
\238\ Id.
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Another commenter stated it ``does not believe it is possible for a
CCA to `ensure' that a service provider would perform.'' The commenter
also stated that a CCA can and should analyze whether a service
provider has any termination rights or other contractual basis for not
performing in a recovery or wind-down situation. The commenter also
stated that a CCA should assess and document how it would handle the
situation where a service provider has a right to terminate or
otherwise not perform in a recovery or wind-down situation.\239\
Accordingly, the commenter suggested that proposed Rule 17Ad-26(a)(2)
be modified to require a CCA evaluate whether the service provider
would continue to perform in the event of a recovery or orderly wind-
down and address how the CCA would handle any termination or
alternation of performance by the service provider.
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\239\ ICE at 4.
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The Commission acknowledges that, while a CCA can, and generally
should, include provisions in its written agreements so that it can
contractually require that a service provider for core services
continues to perform during a recovery or wind-down, a CCA may not be
able to compel a service provider to continue to perform in all
circumstances. However, as proposed, Rule 17Ad-26(a)(2) addresses
planning for a recovery or wind-down scenario by requiring written
policies and procedures reasonably designed to address how a CCA would
ensure that service providers for core services would continue to
perform in the event of a recovery and during an orderly wind-
down.\240\ Thus, even though a CCA may not be able to compel a service
provider to continue performing in all circumstances, such planning and
any related contractual provisions designed to continue performance
under the contract help limit the potential for abrupt or unanticipated
disruptions in services during a recovery or wind-down event.\241\
Achieving this requirement would likely involve an evaluation of
whether the service provider would continue to perform in the event of
a recovery or orderly wind-down and address how the CCA would handle
any termination or alteration of performance by the service provider.
As previously discussed above, a CCA generally should consider when and
how to include provisions in its written agreements with service
providers that acknowledge and help ensure that service providers can
continue to perform their services during a recovery or wind-down event
to avoid potential disruptions in core services. In so doing, a CCA
generally should consider the terms to which its service providers may
be willing or unwilling to agree, so that the CCA can evaluate its
options effectively and develop its written agreement accordingly. As
this requirement concerns actions taken at the planning stage and does
not require a CCA to compel another entity to act, the Commission is
not making further modifications to Rule 17Ad-26(a)(2).
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\240\ The requirements of Rule 17Ad-26 lay out necessary
elements of a RWP, while the requirement for the RWP itself resides
in Rule 17Ad-22(e)(3)(ii), which requires reasonably designed
written policies and procedures.
\241\ A CCA designated systemically important generally should
consider also whether and how such agreements may be impacted by the
resolution or transfer of services conducted by the resolution
authority pursuant to Title II.
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One commenter, while agreeing that proposed Rule 17Ad-26(a)(2)
identifies a key component of planning for recovery and orderly wind-
down, stated that the Commission would best accomplish its objective of
ensuring continued performance by service providers for core services
by amending the proposed rule to focus on the CCA's relevant processes
for third-party engagement and management rather than on conditions at
a snapshot point in time, as the nature of a CCA's relationship with a
service provider, the services provided, and the roster of relevant
service providers necessarily evolves over time.\242\ The commenter
recommended slightly altering the language of the relevant portion of
proposed Rule 17Ad-26(a)(2) to state the following:
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\242\ OCC at 6.
. . . address the process by which how the CCA seeks to would ensure
that service providers would continue to provide such critical
services in the event of a recovery and during an orderly wind-down,
including consideration and tracking of contractual obligations with
such service providers and whether those obligations are subject to
alteration or termination as a result of initiation of the recovery
and orderly winddown plan.'' \243\
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\243\ Id. at 7.
As stated by the commenter, a CCA's roster of service providers for
core services evolves over time as does the relationship with each such
service provider and the services provided by it. However, a CCA is not
required to outline any process or other means it uses to track
relationships with service providers for core services in its RWP.
Accordingly, final Rule 17Ad-26(a)(2) requires only the identification
and description of such service providers, and a CCA has discretion on
how to address any changes or updates to the service providers, which
could be addressed in the reviews of a CCA's RWP required by final Rule
17Ad-26(a)(9).\244\
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\244\ In addition, board oversight of service provider
relationships is subject to the requirements of Rule 17Ad-25(i), 17
CFR 240.17ad-25(i), which can also help ensure that relationships
continue without sudden disruption in the event of a recovery or
wind-down scenario.
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One commenter raised the possible interaction with the U.S.
Bankruptcy Code in connection with the transfer of critical services to
another legal entity as part of an orderly wind-down strategy.\245\ The
commenter stated that the Bankruptcy Code would stay any vendors from
terminating their agreements subject to getting paid, which could allow
for an assignment to the other legal entity.\246\ According to the
commenter, this effectively would address the concern without an
unnecessary and overly prescriptive rule.\247\
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\245\ DTCC at 9.
\246\ Id.
\247\ Id.
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The Commission agrees that, in a scenario involving the transfer of
services from a CCA to another legal entity, bankruptcy proceedings may
facilitate continuity of services by, for example, staying any vendors
from terminating their agreements. The Commission also acknowledges
that, during a recovery or wind-down, service providers, affected
participants, or other stakeholders in the CCA may attempt to initiate
bankruptcy proceedings themselves for any number of reasons.
Ultimately, the requirements in Rule 17Ad-26 are designed to promote
effective planning for a recovery or
[[Page 91020]]
orderly wind-down, and the possibility of bankruptcy proceedings do not
reduce a CCA's obligations to plan effectively.
3. Scenarios: Rule 17Ad-26(a)(3)
Proposed Rule 17Ad-26(a)(3) required a CCA's RWP to identify and
describe scenarios that may potentially prevent the CCA from being able
to provide its critical payment, clearing, and settlement services
identified in proposed Rule 17Ad-26(a)(1) as a going concern, including
uncovered credit losses (as described in paragraph (e)(4)(viii) of 17
CFR 240.17ad-22), uncovered liquidity shortfalls (as described in
paragraph (e)(7)(viii) of 17 CFR 240.17ad-22), and general business
losses (as described in paragraph (e)(15) of 17 CFR 240.17ad-22).
Commenters differed on the level of granularity that was
appropriate in the rule. One commenter stated that it supported the
proposed rule, agreed that appropriate scenarios will vary across
different CCAs serving different markets, and stated that the
Commission has provided appropriate discretion to a CCA to identify the
scenarios most appropriate to its unique circumstances.\248\ The
commenter also stated that the Commission should not identify
particular scenarios for a CCA to address in its RWP.\249\ The
Commission agrees with this commenter, and reiterates that the risks
that may potentially prevent a CCA from being able to provide its core
services vary across different types of CCAs and even across CCAs of
the same type, resulting in identified scenarios that differ from CCA
to CCA.\250\
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\248\ OCC at 8.
\249\ Id.
\250\ RWP Proposing Release, supra note 18, at 34721.
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Another commenter stated that the enumerated list of scenarios in
Request for Comment No. 22 in the RWP Proposing Release \251\ is
comprehensive and in line with international standard setting guidance
and further stated that the list should be considered a minimum, and
supported a more granular list of scenarios that a CCA should
consider.\252\ The Commission is not including such a further list of
specific scenarios in final Rule 17Ad-26(a)(3). The rule requires a CCA
to identify and describe scenarios for uncovered credit losses,
uncovered liquidity shortfalls, and general business losses.\253\ Under
these broad categories, each CCA must identify scenarios considering
the unique circumstances of CCA, including the market served and
products cleared. Furthermore, a more granular list of scenarios may
not be appropriately applied to all CCAs, considering the variance in
the circumstances each individual CCA faces, and such a prescriptive
approach with a granular list of scenarios would be contrary to the
principles-based approach to Rule 17Ad-22(e), which contains the
requirement for a CCA to have a RWP.\254\ The commenter also stated
that it could be a worthwhile analysis to see if plans would still be
viable under a combination of scenarios, as there is potential for
simultaneous shocks to occur.\255\ A CCA, considering the unique
circumstances faced by it, may identify combinations of scenarios in
its analysis to achieve the requirements of final Rule 17Ad-26(a)(3).
The discretion to consider combinations of scenarios arising from the
potential of simultaneous shocks best remains with a CCA in its
planning for a recovery or orderly wind-down. In addition, the
commenter recommended that the Commission consider greater transparency
around the distinction between default and non-default losses and the
tools used under these scenarios.\256\ However, information available
in current rulebooks of the CCAs and through the SRO rule filing and
advance notice processes provides transparency on the RWPs of CCAs,
including how a CCA would address a default or non-default loss and the
tools available in such scenarios.\257\ As a result, additional
mechanisms to promote transparency are not necessary, as a clearing
member or market participant may obtain from these publicly available
documents a general understanding of the scenarios a CCA has identified
for default and non-default losses and the tools that could be used
under such scenarios.
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\251\ Id. at 34725.
\252\ The Associations at 15 (citing CPMI-IOSCO Recovery
Guidance, supra note 25, at 2.4.5).
\253\ See generally, PFMI, supra note 9, at 3.15.1 (describing.
as a general matter, the commonly understood meaning of ``general
business risk'' in the context of FMIs, as follows: ``General
business risk refers to the risks and potential losses arising from
an FMI's administration and operation as a business enterprise that
are neither related to participant default nor separately covered by
financial resources under the credit or liquidity risk principles.
General business risk includes any potential impairment of the FMI'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 must be charged
against capital. Such impairment can be caused by a variety of
business factors, including poor execution of business strategy,
negative cash flows, or unexpected and excessively large operating
expenses. Business-related losses also may arise from risks covered
by other principles, for example, legal risk (in the case of legal
actions challenging the FMI's custody arrangements), investment risk
affecting the FMI's resources, and operational risk (in the case of
fraud, theft, or loss).'').
\254\ See CCA Standards Adopting Release, supra note 5, at
70800.
\255\ The Associations at 15.
\256\ Id.; see also ICI at 6, 8 (similarly requesting clear
delineation between default and non-default loss scenarios).
\257\ See, e.g., RWP Proposing Release, supra note 18, at 34712
n.41; see also supra notes 81-100 (discussing the provisions of the
SRO rule filing and advance notice processes, as well as other
Commission rules that facilitate disclosure to clearing
participants).
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One commenter stated that the requirement of explicit consideration
in the recovery plan of what might lead to each scenario coming into
being and how the scenario might take shape (including prerequisite
contemplated market conditions) imposes a small burden on compliance
and risk functions in the entity while creating greatly-enhanced
transparency to investors and regulators around how, how quickly, and
under what conditions the entity may fail to meet obligations.\258\ The
Commission agrees that explicit consideration of what might lead to a
scenario coming into being and how the scenario might take shape are
important elements of identifying and describing scenarios, and
accordingly, Rule 17Ad-26(a)(3) requires a CCA to both identify and
describe such scenarios.\259\ In identifying and formulating the
description of such scenarios, the CCA can share information and
analysis with its participants and other key stakeholders to develop
its own
[[Page 91021]]
understanding, as well as the understanding of its participants and
other key stakeholders, regarding the potential causes of recovery and
wind-down scenarios. Various mechanisms under other Commission rules
may facilitate this process, such as those requiring testing of its
RWP,\260\ consideration by its risk management committee of matters
related to the RWP,\261\ and general solicitation of stakeholder
viewpoints regarding risk management topics.\262\ As discussed further
in Part IV.C.1 and V.B, the burden associated with such planning is
appropriate considering the risks associated with the potential failure
of a CCA.
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\258\ Letter from Muth, dated June 10, 2023 (``Muth'') at 3.
\259\ RWP Proposing Release, supra note 18, at 34721 (explaining
that the set of scenarios would include scenarios arising from a
participant default and from events not related to a participant
default, and that potential scenarios not related to a participant
default could include the realization of investment or custody
losses, the failure of a third party, such as a settlement bank, to
perform a critical function for the covered clearing agency, or
scenarios caused by a systems compliance and integrity (SCI) event
or other significant operational disruption, such as a significant
cybersecurity incident); id. (explaining that each scenario
generally should be analyzed individually in the recovery plan, with
the analysis including: a description of the scenario; the events
that are likely to trigger the scenario; the covered clearing
agency's process for monitoring such events; the market conditions,
operational and financial issues, and other relevant circumstances
that are likely to result from the scenario; the potential financial
and operational impact of the scenario on the covered clearing
agency and its participants, internal and external service
providers, and relevant affiliated companies, both in an orderly and
stressed market (e.g., where markets are unavailable or there are
limited solvent counterparties); and the specific steps that the
covered clearing agency would expect to take if the scenario occurs
or appears likely to occur, including, without limitation, any
governance or other procedures that may be necessary to implement
the relevant tools or use the relevant resources and to ensure that
such implementation occurs in sufficient time to achieve the
intended effect).
\260\ See infra Part II.C.8 (further discussing the requirements
for RWP testing in new Rule 17Ad-26(a)(8)).
\261\ See infra note 366 (further discussing requirements
related to the risk management committee in Rule 17Ad-25(d)(2)).
\262\ See infra note 367 (further discussing requirements for
soliciting stakeholder viewpoints in Rule 17Ad-25(j)).
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Consistent with the above discussion, the Commission is adopting
Rule 17Ad-26(a)(3) as proposed, except that it has replaced the term
``critical payment, clearing, and settlement services'' with ``core
services'' consistent with the modifications to uses of ``critical''
services as discussed in Part II.C.1.
4. Triggers: Rule 17Ad-26(a)(4)
Proposed Rule 17Ad-26(a)(4) required a CCA's RWP to identify and
describe criteria that would trigger the implementation of the recovery
and orderly wind-down plans and the process that the CCA uses to
monitor and determine whether the criteria have been met, including the
governance arrangements applicable to such process.
One commenter proposed that the Commission provide a list of
triggers that are required to be covered in the RWP and another list of
triggers that a CCA should consider for inclusion in the RWP.\263\ In
contrast, another commenter stated that prescribing bright line,
quantitative triggers that would apply to all CCAs, irrespective of
their unique structures and the features of the markets they serve and
products they clear, would run the risk of creating market instability
by potentially forcing a CCA to initiate its RWP even when the CCA has
not yet made the determination that it is necessary.\264\ For that
reason, the commenter stated that it supports the Commission's
determination to allow CCAs to identify appropriate triggers for their
individual circumstances.\265\ The Commission is not specifying a list
of triggers in the rule for inclusion in an RWP. As stated in the RWP
Proposing Release, for some circumstances, the trigger is obvious
(e.g., uncovered default losses),\266\ and the Commission is not
explicitly including such triggers in the final rule because it has
already required in Rule 17Ad-26(a)(3) that CCAs identify and describe
scenarios based on the most obvious types of triggers (e.g., uncovered
default losses, as well as uncovered liquidity shortfalls and general
business losses) and also included each of these triggers in the
definitions of ``recovery'' and ``orderly wind-down'' to ensure that
CCAs consider these types of circumstances throughout the development
of their RWPs.\267\ For other circumstances, as the Commission stated
in the RWP Proposing Release, a CCA may have to employ more judgment to
develop appropriate triggers,\268\ and discretion should be afforded to
a CCA in the planning process to develop these triggers instead of
having the Commission delineate a list of triggers that a CCA should
consider. This view generally aligns with the latter commenter, in that
the final rule provides for a CCA to identify appropriate triggers for
its individual circumstances.\269\ The Commission further agrees with
the latter commenter that the risk of having bright-line triggers could
result in forcing a CCA to initiate its RWP even when the CCA has not
yet made the determination that it was necessary, which could lead to
market instability.
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\263\ The Associations at 17.
\264\ OCC at 8.
\265\ Id.
\266\ RWP Proposing Release, supra note 18, at 34721.
\267\ See infra Part II.D (further explaining the definitions of
``recovery'' and ``orderly wind-down'').
\268\ Id.
\269\ See supra note 264.
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Regarding CCA discretion to trigger the RWP, one commenter proposed
that the general assumption should be that triggers are automatic,
unless the CCA makes the determination that discretion is appropriate
for a certain trigger.\270\ The Commission disagrees and is not
requiring in the rule that triggers execute automatically. As suggested
by the commenter,\271\ automatically triggering a RWP without
discretion could adversely affect market stability. In the RWP
Proposing Release, the Commission stated that the identification of
triggers does not mean that such triggers should be self-executing;
instead, the importance of identifying triggers lies in ensuring that a
CCA considers and identifies ex ante when it would initiate its
RWP.\272\ The Commission also stated that it believes that the RWP must
identify and describe the process that the CCA uses to monitor and
determine whether the criteria have been met, including the governance
arrangements applicable to such process.\273\ The final rule provides a
CCA with discretion to consider this guidance and to identify and
describe triggers appropriate to its RWP and whether any such triggers
are automatic or discretionary.
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\270\ The Associations at 18.
\271\ See supra note 264.
\272\ RWP Proposing Release, supra note 18, at 34721.
\273\ Id.
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The Commission is replacing the word ``would'' with ``could'' in
final Rule 17Ad-26(a)(4) to avoid any presumption that triggers are
self-executing and to reiterate the Commission's statement in the RWP
Proposing Release that the identification of triggers ``does not mean
that such triggers should be self-executing.'' \274\
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\274\ Id.
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5. Tools: Rule 17Ad-26(a)(5)
Proposed Rule 17Ad-26(a)(5) required the RWP of a CCA to identify
and describe the rules, policies, procedures, and any other tools or
resources the CCA would rely upon in a recovery or orderly wind-down.
The Commission is adopting Rule 17Ad-26(a)(5) as proposed.\275\
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\275\ To improve grammar and clarity, the Commission is adopting
a technical amendment to the final rule text. Specifically, the
Commission is removing use of the word ``upon,'' and adding the
phrase ``on which,'' such that final Rule 17Ad-26(a)(5) states:
``Identify and describe the rules, policies, procedures, and any
other tools or resources on which the covered clearing agency would
rely in a recovery or orderly wind-down.''
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In the RWP Proposing Release, the Commission stated that the
proposed requirement to describe rules, policies, procedures, and any
other tools or resources that may be used in advance for certain
situations would provide some level of predictability in such a
situation and avoid unexpected actions because it would allow
participants to understand the potential of tools or resources that
could be used, including whether any of the tools would require
participant involvement or resources (such as a cash call).\276\ While
stating that rules, policies, procedures, and any other tools or
resources should address shortfalls arising from the stress scenarios
identified by the CCA, the Commission declined to prescribe particular
tools, such as tear-up or margin haircutting, that a CCA would be
[[Page 91022]]
required to include in its RWP.\277\ The Commission stated its belief
that this proposed requirement preserved discretion for each CCA to
consider the full range of available recovery tools and select those
most appropriate for the circumstances of the CCA, including the
products cleared and the markets served.\278\
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\276\ Id. at 34722.
\277\ Id.
\278\ Id.
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a. Discretion for CCAs in Selection of Tools
One commenter stated that the rule should preserve discretion for
each CCA to consider the full range of available recovery tools and
select those most appropr
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