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pdfPAPERWORK REDUCTION ACT SUBMISSION
Rules 17Ad-22
Supporting Statement
A. JUSTIFICATION
1. Necessity of Information Collection
Legal and Administrative Requirements
i. Title VII of Dodd-Frank Act
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(“Dodd-Frank Act”) added new provisions to the Securities Exchange Act of 1934 (“Exchange
Act”) that require clearing agencies that clear security-based swaps (“security-based swap
clearing agencies”) to register with the Securities Exchange Commission (“Commission”) and
require the Commission to adopt rules with respect to security-based swap clearing agencies.
Specifically, new Section 17A(j) of the Exchange Act requires the Commission to adopt
rules governing security-based swap clearing agencies. New Section 17A(i) of the Exchange Act
also gives the Commission authority to promulgate rules that establish standards for securitybased swap clearing agencies. Compliance with any such rules is a prerequisite to the
registration of a clearing agency with the Commission and is also a condition to the maintenance
of that security-based swap clearing agency’s continued registration.
ii. Payment, Clearing, and Settlement Supervision Act of 2010
Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing, and Settlement
Supervision Act of 2010 (“Clearing Supervision Act”), establishes an enhanced supervisory and
risk control system for systemically important clearing agencies and other financial market
utilities (“FMUs”). It provides that the Commission may prescribe regulations containing risk
management standards, taking into consideration relevant international standards and existing
prudential requirements, for any designated clearing entities it regulates. While no designations
have been made with respect to whether any FMU is, or is likely to become, systemically
important, the Commission believes it is beneficial to consider the requirements of the Clearing
Supervision Act in its rules for clearing agencies because the Clearing Supervision Act may
apply to one or more clearing agencies in the future and the Commission preliminarily believes
that its goals are consistent with the goals of Section 17A of the Exchange Act. Specifically,
Congress recognized in the Clearing Supervision Act that the operation of multilateral payment,
clearing or settlement activities may reduce risks for clearing participants and the broader
financial system, while at the same time creating new risks that require multilateral payment,
clearing or settlement activities to be well-designed and operated in a safe and sound manner.
The Clearing Supervision Act is designed, in part, to provide a regulatory framework to help deal
with such risk management issues, which is generally consistent with the Exchange Act
requirement that clearing agencies be organized in a manner so as to facilitate prompt and
accurate clearance and settlement, safeguard securities and funds and protect investors.
iii. Section 17A of Exchange Act
As noted above, in addition to the new authority provided to the Commission under Titles
VII and VIII of the Dodd-Frank Act, the Commission has existing authority over clearing
agencies under the Exchange Act. For example, entities are required to register with the
Commission pursuant to Section 17A of the Exchange Act and Rule 17Ab2-1, prior to
performing the functions of a clearing agency. Under this registration system, the Commission is
not permitted to grant registration unless it determines that the rules and operations of the
clearing agency meet the standards set forth in Section 17A. Specifically, Sections
17A(b)(3)(A)-(I) identify determinations that the Commission must make about the rules and
structure of a clearing agency prior to granting registration. If a clearing agency is granted
registration, the Commission oversees the clearing agency to facilitate compliance with the
Exchange Act through the rule filing process for self-regulatory organizations (“SROs”) and
through on-site examinations by Commission staff. Section 17A also gives the Commission
authority to adopt rules for clearing agencies as necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act
and prohibits a registered clearing agency from engaging in any activity in contravention of these
rules and regulations.
Rules Governing Clearing Agencies 1
The Commission is adopting several new rules that would set standards for the operation
and governance of clearing agencies. As noted above, the Dodd-Frank Act specifically gives the
Commission authority to regulate security-based swaps and to adopt regulations addressing risk
management standards for designated clearing entities that the Commission regulates. In
addition to considering this specific directive in formulating the rules, the Commission
preliminarily believes that applying certain rules to all clearing agencies would promote financial
stability, one of the goals of the Dodd-Frank Act, by facilitating prompt and accurate clearance
and settlement of all securities transactions consistent with Section 17A of the Exchange Act
while promoting the Dodd-Frank Act’s stated aims of accountability and transparency.
For a clearing agency to be registered under Section 17A of the Exchange Act, it must have
the ability to facilitate the prompt and accurate clearance and settlement of transactions, safeguard
investor funds and securities, remove impediments to and perfect the mechanism of a national
clearance and settlement system, and to generally protect investors. Also, the clearing agency’s
rules must provide adequate access to qualified participants, fair representation of shareholders and
participants, equitable pricing, fair discipline of participants, and must not impose any undue burden
on competition. The Commission is adopting Rule 17Ad-22 (“Rule”) to require clearing agencies
to establish, implement, maintain and enforce written policies and procedures designed to
promote effective risk management procedures and controls as well as meet the statutory
requirements under the Exchange Act on an ongoing basis.
1
See infra Section 15 regarding discussion of key differences between the Adopting
Release and the Proposing Release.
2
The establishment of consistent standards for clearing agencies that offer central
counterparty (“CCP”) and central securities depository (“CSD”) services is an important goal
that underpinned the enactment of Section 17A of the Exchange Act. Rule 17Ad-22 establishes
minimum standards for the operations and risk management practices for clearing agencies that
are consistent with the standards for CCPs and CSDs operating domestically and in other
jurisdictions. At this time, the Commission does not intend for Rule 17Ad-22 to apply to
clearing agencies that perform post-trade processing services (i.e., comparison of trade data,
collateral management and tear-up/compression). The scope of Rule 17Ad-22 will be limited to
clearing agencies that are registered with the Commission and the rule will not apply to any
clearing agencies operating pursuant to an exemption from registration as a clearing agency
granted by the Commission, unless the terms of future exemptions specifically contemplate its
application, in whole or in part. The Commission has clarified this as part of the final Rule
17Ad-22 by adding the word “registered” before the term “clearing agency” appearing in the first
instance in paragraphs (b), (c)(1), (c)(2), and (d). For this reason, references to the term
“clearing agency” in the Adopting Release are generally intended to capture only registered
clearing agencies, unless the context suggests otherwise. The Commission may consider at a
later time whether rules tailored to clearing agencies that provide post-trade processing services
would be appropriate.
There are a number of collections of information contained in the Rule. The information
collected in these provisions is necessary to carry out the mandates of the Exchange Act, as
amended by the Dodd-Frank Act.
The statutory basis for the Rule is as follows: Exchange Act Section 3C, 15 U.S.C. 78c-3;
Exchange Act Section 17A, 15 U.S.C. 78q-1; and 12 U.S.C. 5464(a)(2).
2.
Purpose and Use of the Information Collection
i. Standards for Clearing Agencies
a.
Measurement and Management of Credit Exposures
Rule 17Ad-22(b)(1) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed
to measure its credit exposures to its participants at least once each day, and limit its exposures to
potential losses from defaults by its participants in normal market conditions so that the
operations of the clearing agency would not be disrupted and non-defaulting participants would
not be exposed to losses that they cannot anticipate or control. The purpose of the collection of
information is to enable the clearing agency to monitor and limit its exposures to its participants.
b.
Margin Requirements
Rule 17Ad-22(b)(2) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed
to: (i) use margin requirements to limit its credit exposures to participants in normal market
conditions; (ii) use risk-based models and parameters to set margin requirements; and (iii) review
the models and parameters at least monthly. The purpose of the collection of information is to
enable the clearing agency to maintain sufficient collateral or margin.
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c.
Financial Resources
Rule 17Ad-22(b)(3) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed
to maintain sufficient financial resources to withstand, at a minimum, a default by the participant
family to which it has the largest exposure in extreme but plausible market conditions, provided
that a registered clearing agency acting as a central counterparty for security-based swaps shall
maintain additional financial resources sufficient to withstand, at a minimum, a default by the
two participant families to which it has the largest exposures in extreme but plausible market
conditions, in its capacity as a central counterparty for security-based swaps. The purpose of the
collection of information is to enable the clearing agency to satisfy all of its settlement
obligations in the event of a participant default.
d.
Model Validation
Rule 17Ad-22(b)(4) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed
to provide for an annual model validation consisting of evaluating the performance of the
clearing agency’s margin models and the related parameters and assumptions associated with
such models by a qualified person who is free from influence from the persons responsible for
the development or operation of the models being validated. The purpose of the collection of
information is to enable the clearing agency to obtain an assessment of its margin model by a
qualified, independent person.
e.
Non-Dealer Access
Rule 17Ad-22(b)(5) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed
to provide the opportunity for a person that does not perform any dealer or security-based swap
dealer services to obtain membership at the clearing agency to clear securities for itself or on
behalf of other persons. The purpose of the collection of information is to enable more market
participants to obtain indirect access to clearing agencies.
f.
Portfolio Size and Transaction Volume Restrictions
Rule 17Ad-22(b)(6) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed
to have membership standards that do not require that participants maintain a portfolio of any
minimum size or that participants maintain a minimum transaction volume. The purpose of the
collection of information is to remove unnecessary barriers to participation in clearing agencies
that provide CCP services.
g.
Net Capital Restrictions
Rule 17Ad-22(b)(7) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and procedures reasonably designed
4
to provide a person that maintains net capital equal to or greater than $50 million with the ability
to obtain membership at the clearing agency, provided that such persons are able to comply with
other reasonable membership standards, with any net capital requirements being scalable so that
they are proportional to the risks posed by the participant’s activities to the clearing agency. The
rule also permits a clearing agency to provide for a higher net capital requirement (i.e., higher
than $50 million) as a condition for membership at the clearing agency if the clearing agency
demonstrates to the Commission that such a requirement is necessary to mitigate risks that could
not otherwise be effectively managed by other measures, such as scalable limitations on the
transactions that the participants may clear through the clearing agency, and the Commission
approves the higher net capital requirement as part of a rule filing or clearing agency registration
application. The purpose of the collection of information is to remove unnecessary barriers to
clearing access by market participants with a net capital level above $50 million, while at the
same time facilitating sound risk management practices by clearing agencies by encouraging
them to examine and articulate the benefits that higher net capital requirements would create
through having clearing agencies develop scalable membership standards that links the activities
any participants could potentially engage in with the potential risks posed by the participant.
h.
Record of Financial Resources
Rule 17Ad-22(c)(1) would require that each fiscal quarter (based on calculations made as
of the last business day of the clearing agency’s fiscal quarter), or at any time upon Commission
request, a clearing agency that performs CCP services shall calculate and maintain a record of
the financial resources necessary to meet the requirement in Rule 17Ad-22(b)(3) and sufficient
documentation to explain the methodology it uses to compute such financial resource
requirement. The purpose of the collection of information is to enable the Commission to
monitor the financial resources of clearing agencies that provide CCP services.
i.
Annual Audited Financial Statements
Rule 17Ad-22(c)(2) would require a clearing agency to post on its website an annual
audited financial statement that must (i) be a complete set of financial statements of the clearing
agency for the most recent two fiscal years of the clearing agency and be prepared in accordance
with U.S. generally accepted accounting principles (“U.S. GAAP”), except that for a clearing
agency that is a corporation or other organization incorporated or organized under the laws of
any foreign country, the financial statements may be prepared according to U.S. GAAP or
International Financial Reporting Standards as issued by the International Accounting Standards
Board (“IFRS”); (ii) be audited in accordance with standards of the Public Company Accounting
Oversight Board by a registered public accounting firm that is qualified and independent in
accordance with Rule 2-01 of Regulation S-X (17 CFR 210.2-01); and (iii) include a report of
the registered public accounting firm that complies with paragraphs (a) through (d) of Rule 2-02
of Regulation S-X (17 CFR 210.2-02). The purpose of the collection of information is to enable
the Commission to monitor the financial resources of clearing agencies that provide CCP
services.
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j.
Transparent and Enforceable Rules and Procedures
Rule 17Ad-22(d)(1) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to provide for a well-founded,
transparent, and enforceable legal framework for each aspect of their activities in all relevant
jurisdictions. The purpose of the collection of information is to help ensure that clearing
agencies’ policies and procedures do not cause confusion or legal uncertainty among their
participants because they are unclear, incomplete or conflict with other applicable laws or
judicial precedent.
k.
Participation Requirements
Rule 17Ad-22(d)(2) has three principle requirements related to establishing,
implementing, maintaining and enforcing written policies and procedures for participation
requirements. First, it would require clearing agencies to require participants to have sufficient
financial resources and robust operational capacity to meet their obligations. The purpose of the
collection of information is to enable clearing agencies to ensure that only persons with sufficient
financial and operational capacity are direct participants. Second, clearing agencies would be
required to have procedures in place to monitor that participation requirements are met on an
ongoing basis. The purpose of the collection of information is to help clearing agencies identify
a participant experiencing financial difficulties before the participant fails to meet its settlement
obligations. Third, a clearing agency’s participation requirements would have to be objective,
publicly disclosed, and permit fair and open access. The purpose of the collection of information
is to ensure that all qualified persons can access a clearing agency’s services on an equivalent
basis.
l.
Custody of Assets and Investment Risk
Rule 17Ad-22(d)(3) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to hold assets in a manner that
minimizes risk of loss or delay in access to them, and to invest assets in instruments with
minimal credit, market, and liquidity risks. The purpose of the collection of information is to
enable clearing agencies to access their financial resources quickly so that they settle securities
transactions on time and at the agreed upon terms.
m.
Identification and Mitigation of Operational Risk
Rule 17Ad-22(d)(4): would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to: (i) identify sources of
operational risk and minimize them through the development of appropriate systems, controls,
and procedures; (ii) implement systems that are reliable, resilient and secure, and have adequate,
scalable capacity; and (iii) have business continuity plans that allow for timely recovery of
operations and fulfillment of a clearing agency’s obligations. The purpose of the collection of
information is to ensure that clearing agencies can maintain operations in the event of an
operational problem, natural disaster or other similar event.
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n.
Money Settlement Risks
Rule 17Ad-22(d)(5) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to employ money settlement
arrangements that eliminate or strictly limit the clearing agency’s settlement bank risks, that is,
its credit and liquidity risks from the use of banks to effect money settlements with its
participants, and require funds transfers to the clearing agency to be final when effected. The
purpose of the collection of information is to promote reliability in a clearing agency's settlement
operations.
o.
Cost-Effectiveness
Rule 17Ad-22(d)(6) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to be cost-effective in meeting
the requirements of participants while maintaining safe and secure operations. The purpose of
the collection of information is to help ensure that the services of clearing agencies do not
become too expensive.
p.
Links
Rule 17Ad-22(d)(7) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to evaluate the potential sources
of risks that can arise when the clearing agency establishes links either cross-border or
domestically to clear trades, and ensure that the risks are managed prudently on an ongoing
basis. The purpose of the collection of information is to help ensure that clearing agencies
adequately assess the risks associated with establishing a link with another clearing organization.
q.
Governance
Rule 17Ad-22(d)(8) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to have governance
arrangements that are clear and transparent to fulfill the public interest requirements in Section
17A of the Exchange Act applicable to clearing agencies; to support the objectives of owners and
participants; and to promote the effectiveness of the clearing agency’s risk management
procedures. The purpose of the collection of information is to promote boards of directors that
exercise sufficient oversight of the clearing agency’s management and appropriately represent
the interests of relevant stakeholders.
r.
Information on Services
Rule 17Ad-22(d)(9) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to provide market participants
with sufficient information for them to identify and evaluate the risks and costs associated with
using their services. The purpose of the collection of information is to help market participants
identify the risks and costs associated with using the clearing agency and would allow market
participants to make informed decisions about the use of the clearing agency and take
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appropriate actions to mitigate their risks and costs associated with the use of the clearing
agency.
s.
Immobilization and Dematerialization of Stock Certificates
Rule 17Ad-22(d)(10) would require clearing agencies that perform central securities
depository services to establish, implement, maintain and enforce written policies and procedures
reasonably designed to immobilize or dematerialize securities certificates and transfer them by
book entry to the greatest extent possible. The purpose of the collection of information is to
enable clearing agencies to promote greater efficiency in the settlement of securities transactions
and reduce risk by transferring securities by book entry movements.
t.
Default Procedures
Rule 17Ad-22(d)(11) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to make key aspects of their
default procedures publicly available and to establish default procedures that ensure that the
clearing agency can take timely action to contain losses and liquidity pressures and to continue
meeting its obligations in the event of a participant default. The purpose of the collection of
information is to foster a greater understanding by market participants of possible steps a
clearing agency may take when a participant defaults and possibly reduce the likelihood of
market participants taking actions based on incorrect information.
u.
Timing of Settlement Finality
Rule 17Ad-22(d)(12) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to ensure that final settlement
occurs no later than the end of the settlement day and require that intraday or real-time finality be
provided where necessary to reduce risks. The purpose of the rule is to promote consistent
standards of timing and reliability in the settlement process.
v.
Delivery Versus Payment
Rule 17Ad-22(d)(13) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to eliminate principal risk by
linking securities transfers to funds transfers in a way that achieves delivery versus payment.
The purpose of the rule is to eliminate principal risk in the transfer of securities and funds.
w.
Risk Controls to Address Participant’s Failure to Settle
Rule 17Ad-22(d)(14) would require clearing agencies that perform central securities
depository services and extend intraday credit to participants to establish, implement, maintain
and enforce written policies and procedures reasonably designed to institute risk controls,
including collateral requirements and limits to cover the clearing agency’s credit exposure to
each participant fully, and ensure timely settlement in the event that the participant with the
largest payment obligation is unable to settle. The purpose of the collection of information is to
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enable clearing agencies to satisfy their settlement obligations on time and for the agreed upon
terms.
x.
Identification and Management of Physical Delivery Risks
Rule 17Ad-22(d)(15) would require clearing agencies to establish, implement, maintain
and enforce written policies and procedures reasonably designed to state to their participants the
clearing agency’s obligations with respect to physical deliveries and to identify and manage the
risks that arise in connection with these obligations. The purpose of the collection of information
is to provide the clearing agency’s participants with sufficient information to evaluate the risks
and costs associated with participation in the clearing agency.
3.
Consideration of Information Technology
The Rule is drafted to utilize as much information technology as possible in collecting the
information. Over time, the Commission expects that the burden will be reduced due to future
technology enhancements. The Commission is not aware of any technical or legal obstacles to
reducing the burden through the use of improved information technology.
4.
Duplication
Section 712(a)(2) of the Dodd-Frank Act provides that, before commencing any
rulemaking regarding, among other things, clearing agencies with regard to security-based
swaps, the Commission must consult and coordinate with the Commodity Futures Trading
Commission (“CFTC”) and other prudential regulators for the purposes of assuring regulatory
consistency and comparability, to the extent possible. The Commission staff and the CFTC staff
have consulted and coordinated with one another regarding their respective Commissions’ rules
regarding clearing agencies as mandated by the Dodd-Frank Act. The Commission staff has also
consulted and coordinated with other prudential regulators. The Rule does not duplicate
information required to be collected elsewhere.
5.
Effect on Small Entities
The Rule would not affect any small entities.
6.
Consequences of Not Conducting Collection
The Dodd-Frank Act enacted sweeping reforms in the financial system, including FMUs
such as clearing agencies. It also charged the Commission with significant duties in carrying out
these reforms. The consequences of not conducting collections of information or any less
frequent collections of information pursuant to the Rule would significantly impair the
Commission’s ability to carry out its statutory obligations under the Exchange Act, as amended
by Titles VII and VIII of the Dodd-Frank Act.
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7.
Inconsistencies with Guidelines in 5 CFR 1320.8(d)
The information collection is consistent with the general information collection
guidelines imposed for public protection as set forth in 5 CFR 1320.5(d)(2),
8.
Consultations Outside the Agency
The Commission has issued a release soliciting comment on the new “collection of
information” requirements and associated paperwork burdens. 2 Comments were due by April
29, 2011. The Commission received 25 comment letters. Comments were generally received
from registrants, investors, and other market participants. In addition, the Commission and staff
participate in ongoing dialogue with representatives of various market participants through
public conferences, meetings and informal exchanges. The Commission considered all
comments received prior to publishing the final rule, and explains in the Adopting Release how
the final rule responds to such comments, in accordance with 5 C.F.R. 1320.11(f). The comments
received on the proposed rulemaking and are posted on the Commission’s public website, and
are available through http://www.sec.gov/rules/proposed.shtml.
Some commenters expressed general concerns about the burden of regulation, but such
comments focused on rules in the Proposing Release not being adopted today and on areas that
go beyond the scope of the Adopting Release. 3 Commenters expressed concerns about the
burdens associated with parts of Rule 17Ad-22(b), and those comments are addressed below.
Commenters did not specifically comment on the burdens associated with Rule 17Ad-22(c)–(d).
To the extent that commenters submitted comments about the costs of implementing the
proposed rules or requested changes in proposed rules, those comments are also set out below.
Proposed Rules Generally
One commenter noted that complex clearing organizations have many subsidiaries that
engage in many different activities and are subject to regulation by many different
regulators. Such organizations need the flexibility, to the extent possible, to structure
their enterprise-wide programs in a way that works with each business and complies
with all applicable laws and regulations.
The commenter argued that is particularly the case with respect to compliance
programs because if the proposed rules are overly prescriptive, organizations such as
2
See Exchange Act Release No. 34-64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011)
(“Proposing Release”), available at http://www.sec.gov/rules/proposed/2011/3464017fr.pdf.
3
See, e.g., ICE Letter at 1-2 (stating that “[p]ost-trade processing service providers would
be unable to distribute end-of-day settlement prices, as required by the Proposal, and the
record keeping requirements of the Proposal would prove so burdensome to such
providers that the efficiency and alacrity that they provide to the CDS industry would be
adversely affected.”).
10
DTCC may be subject to conflicting requirements and may be forced to fragment certain
enterprise-wide programs to comply with such conflicting requirements, which could
substantially increase costs and compliance risks within such organizations.
Further, if the proposed rules are overly prescriptive, they may prevent clearing
agencies from being able to adapt quickly to changes in markets and global standards
and that retaining that flexibility is extremely important. 4
The commenter noted that many of the proposed rules require a clearing agency
to establish, implement, maintain and enforce written policies and procedures and stated
its belief that the precise form of these written policies and procedures should be a
matter for the clearing agency to determine (so long as they are compliant) and may
include service guides, operational arrangements, compliance procedures, link and
cross-guaranty agreements and materials relating to internal operations and controls. 5
•
4
5
Another commenter requested that if the rules are adopted as proposed then the rules
should not become effective until at least two years after their approval and that at a
minimum compliance with any "two largest participants" standard that the SEC might
adopt in proposed Rule 17Ad-22(b)(3) should be subject to a two year delayed
implementation schedule. 6
The commenter stated that if the rules are adopted as proposed it will require extensive
new policies and procedures, drafting, proposing and obtaining approval of necessary
rules and rule changes, executing plans to raise additional financial resources conducting
extensive internal training, hiring of additional compliance personnel and many other
tasks while also taking many other steps to comply with other aspects of the Dodd-Frank
Act. 7
The commenter also noted that phase in periods would be appropriate because the rules
would require that clearing agencies :
review their existing policies and procedures for compliance with the proposed
rules;
develop and draft new policies and procedures to implement new requirements of
the proposed rules;
prepare and obtain Commission approval for rule changes under Section 19(b) of
the Exchange Act; and
in all likelihood, hire and train additional personnel.
See letter from Larry E. Thompson, General Counsel, The Depository Trust & Clearing
Corporation, dated April 29, 2011 (“The DTCC (April) Letter”)at 6-7.
See The DTCC (April) Letter at 7.
6
See letter from William H. Navin, Executive Vice President, General Counsel, and
Secretary, The Options Clearing Corporation, dated April 29, 2011 (“The OCC Letter”)at
17.
7
See The OCC Letter at 17.
11
A number of the proposed rules impose new operational requirements on clearing
agencies that may require very significant changes in their operational arrangements. 8
• One commenter strongly encouraged the SEC to avoid final action on its proposed rules
before it has greater clarity on what clearinghouse regulations are ultimately adopted by
European and U.K. regulators and what approaches to regulation are embraced by CPSSIOSCO. This would allow the SEC to adopt rules that would not unknowingly force
market activity into other jurisdictions by virtue of associated regulatory costs. 9
Rule 17Ad-22
• One commenter supported the rule with certain clarifications and stated that proposed
Rule 17Ad-22(b)(4) is overly prescriptive in two respects. 10
First, the commenter expressed that the rule should not require the validation to be
performed on an annual basis. Instead, the frequency should be left to the
discretion of the clearing agency because it is in the best position to determine the
appropriate timing. 11
The commenter supported its contention that the proposed rule is overly
prescriptive by stating that the requirement for an annual validation is
unnecessary and may be overly burdensome in the absence of a material
change in the model or a material change in the market environment that may
affect the model. 12
Second, the commenter argued that the clearing agency performing central
counterparty services is in the best position to determine how to achieve the goal
of performing a candid assessment that is free from outside influences and
therefore the rule should not prescribe a particular method of achieving that
outcome. 13
The commenter pointed out that with respect to achieving independence in a
model validation review the Board of Governors of the Federal Reserve
System and the Office of the Comptroller of the Currency stated in the recent
Supervisory Guidance on Model Risk Management that independence "may be
supported by separation of reporting lines" but that it "should be judged by
8
9
See The DTCC (April) Letter at 6.
See The OCC Letter at 3.
10
See The DTCC (April) Letter at 13.
11
See The DTCC (April) at Letter 13.
12
See The DTCC (April) Letter at 13.
13
See The DTCC (April) Letter at 13.
12
actions and outcomes, since there may be additional ways to ensure objectivity
and prevent bias." 14
The commenter recommends that the SEC replace the aspect of the currently
proposed rule text that addresses independence with the language already in the
corresponding discussion section of the release, which states that "the person
validating the clearing agency's model should be sufficiently free from outside
influences so that he or she can be completely candid in their assessment of the
model.” 15
In sum, the commenter recommended that the 17Ad-22(b)(4) rule text be recast as
follows: "(b) A clearing agency that performs central counterparty services shall
establish, implement, maintain and enforce written policies and procedures
reasonably designed to: (4) Provide for periodic model validation consisting of
evaluating the performance of the clearing agency's margin models and the related
parameters and assumptions associated with such models by a qualified person
who is sufficiently free from outside influences to perform a candid evaluation of
such models."
The commenter did not believe that any additional changes are necessary to
rule 17Ad-22(b)(4) and stated its belief that this approach is more consistent
with Recommendation 4 from the CPSS-IOSCO Recommendations for Central
Counterparties and with Principles for Financial Market Infrastructures
Principle 6 because it does not prescribe a model validation frequency or a
specific way to ensure the integrity of the validation process. 16
• One commenter expressed that proposed Rules 17Ad-22(b)(5)–(7) providing for
mandatory access to CCPs in certain circumstances goes “beyond anything in current or
proposed global standards. . . . [and is, therefore,] unnecessary and counterproductive to
the goal of fair and open access within a framework of safe and sound operation.” 17
• One commenter responded to the challenges of bringing independence to the model
review process by explaining that if it undertook to detach model review entirely from
model development it would be necessary to have two quantitative teams which presents
the following issues:
Cost of staff;
14
See The DTCC (April) Letter at 14.
15
See The DTCC (April) Letter at 14.
16
See The DTCC (April) Letter at 15.
17
See The DTCC (April) Letter at 5; see also The DTCC (April) Letter at 4 (stating that
“[t]he application of global standards to clearing agencies will also prevent clearing
agencies and their participants from incurring unnecessary expense associated with
complying with different, and potentially conflicting regulatory standards.”).
13
Staffing problems since talented young people with the requisite quantitative
skills tend to see review as non-creative;
Adversarial relations (a team dedicated solely to review may be seen to contribute
only if it finds fault; and
Tensions that require senior management to resolve highly technical disputes
between the development and review teams. 18
Regarding proposed Rule 17Ad-22(d)(8), one commenter urged the SEC not to adopt
hard and fast standards that will be costly to implement and maintain and that yield little
or no apparent corresponding regulatory benefits. 19
• One commenter expressed concern that proposed Rule 17Ad-22(d)(12) could be
interpreted to provide intraday or real-time finality beyond what clearing agencies
currently provide and beyond what they can provide without devoting resources to make
significant changes in systems and processes. 20
Therefore, the commenter suggested that the Commission should make clear in
the final rule that the rule is not intended to impose an obligation on clearing
agencies to provide intraday or real-time finality beyond what they currently
provide or any obligation to build such additional capability unless and until there
is industry and regulatory consensus on whether and what additional capability to
build and how to allocate the cost. 21
9.
Payment or Gift
Not applicable.
10.
Confidentiality
i. Standards for Clearing Agencies
a.
Measurement and Management of Credit Exposures
The collection of information relating to the measurement and management of credit
exposures under Rule 17Ad-22(b)(1) would not require disclosure of information to the
Commission staff.
18
See The OCC Letter at 11.
19
See letter from Craig S. Donohue, CME Group, dated April 29, 2011 (“CME Letter”) at
4.
20
See The DTCC (April) Letter at 25.
21
See The DTCC (April) Letter at 25.
14
b.
Margin Requirements
The collection of information relating to margin requirements under Rule 17Ad-22(b)(2)
would not require disclosure of information to the Commission staff.
c.
Financial Resources
The collection of information relating to financial resources under Rule 17Ad-22(b)(3)
would not require disclosure of information to the Commission staff.
d.
Model Validation
The collection of information relating to conducting an annual model validation under
Rule 17Ad-22(b)(4) would not require disclosure of information to the Commission staff.
e.
Non-Dealer Access
The collection of information relating to non-dealer access under Rule 17Ad-22(b)(5)
would not require disclosure of information to the Commission staff.
f.
Net Capital Requirements
The collection of information relating to the procedures for net capital requirements
under Rule 17Ad-22(b)(7) would not require disclosure of information to the Commission staff.
g.
Record of Financial Resources
The collection of information relating to the calculation and maintenance by a clearing
agency that provides CCP services of a quarterly report describing the financial resources
necessary to meet the requirements of Rule 17Ad-22(b)(3) would not require disclosure of
information to the Commission staff.
h.
Annual Audited Financial Statements
The collection of information relating to the annual audited financial statements
published to the clearing agency's website under Rule 17Ad-22(c)(2) would be subject to public
availability.
i.
Transparent and Enforceable Rules and Procedures
The collection of information relating to a clearing agency’s well-founded, transparent
and enforceable legal framework under Rule 17Ad-22(d)(1) would not require disclosure of
information to the Commission staff.
15
j.
Participation Requirements
The collection of information relating to the procedures for monitoring and publicly
disseminating the participation requirements under Rule 17Ad-22(d)(2) would be subject to
public availability.
k.
Custody of Assets and Investment Risk
The collection of information relating minimizing custody and investment risk under
Rule 17Ad-22(d)(3) would not require disclosure of information to the Commission staff.
l.
Identification and Mitigation of Operational Risk
The collection of information relating to identifying and minimizing operational risk
under Rule 17Ad-22(d)(4) would not require disclosure of information to the Commission staff.
m.
Money Settlement Risks
The collection of information relating to the procedures for money settlement
arrangements under Rule 17Ad-22(d)(5) would not require disclosure of information to the
Commission staff.
n.
Cost-Effectiveness
The collection of information relating to being cost-effectiveness under Rule 17Ad22(d)(6) would not require disclosure of information to the Commission staff.
o.
Links
The collection of information relating to evaluating potential sources of risk in links
arrangements under Rule 17Ad-22(d)(7) would not require disclosure of information to the
Commission staff.
p.
Governance
The collection of information relating to a clearing agency’s governance arrangements
under Rule 17Ad-22(d)(8) would not require disclosure of information to the Commission staff.
q.
Information on Services
The collection of information relating to the provision of sufficient information to market
participants under Rule 17Ad-22(d)(9) would not require disclosure of information to the
Commission staff.
16
r.
Immobilization and Dematerialization of Stock Certificates
The collection of information relating to the procedures for immobilizing and
dematerializing stock certificates under Rule 17Ad-22(d)(10) would not require disclosure of
information to the Commission staff.
s.
Default Procedures
The collection of information relating to the establishment and maintenance of default
procedures under Rule 17Ad-22(d)(11) would be subject to public availability.
t.
Risk Controls to Address Participants’ Failure to Settle
The collection of information relating to risk controls to address participants’ failure to
settle under Rule 17Ad-22(d)(14) would not require disclosure of information to the Commission
staff.
u.
Identification and Management of Physical Delivery Risks
The collection of information relating to the statement and management of physical
delivery risk under Rule 17Ad-22(d)(15) would not require disclosure of information to the
Commission staff.
11.
Sensitive Questions
Not applicable. There are no questions of a sensitive nature asked.
12.
Burden of Information Collection
Rules 17Ad-22(b)(1)–(3) and Rules 17Ad-22(d)(1)–(15) are discussed together because
these rules represent usual and customary practices already being implemented by registered
clearing agencies. Because Rules 17Ad-22(b)(4), (b)(5)–(7) and (c), respectively establish new
minimum practices for registered clearing agencies with regard to model validation, membership
practices and certain financial information, the Adopting Release discusses these rules
separately.
i.
Number of Respondents
Standards in Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) that Impose a PRA Burden
The Commission believes that the standards in Rule 17Ad-22(b)(1)-(3) and (d)(1)-(15)
impose a PRA burden. As noted above, registered clearing agencies already have written
policies and procedures that meet the standards set forth in Rules 17Ad-22(b)(1)–(3) and (d)(1)–
(15) as part of their usual and customary business practice. Accordingly, the Commission
believes that the registered clearing agencies would not need to build new infrastructure or
modify operations to continue to meet Rule 17Ad-22(b)(1)–(3) and (d)(1)–(15). The
Commission believes that registered clearing agencies will incur the incremental burdens of
17
reviewing existing policies and procedures for compliance and updating existing policies and
procedures where appropriate. Thus, for these provisions, the Commission estimates that there
would be ten respondent clearing agencies.
Standards in Rule 17Ad-22(b)(4) that Impose a PRA Burden
The requirement to develop written policies and procedures in Rule 17Ad-22(b)(4)
imposes a PRA burden. The requirement in Rule 17Ad-22(b)(4) will apply to all CCPs. As
discussed above, the Commission estimates that nine CCPs will be subject to the burdens under
Rule 17Ad-22(b)(4).
Standards in Rules 17Ad-22(b)(5)-(7) that Impose a PRA Burden
The requirements to develop written policies and procedures in Rules 17Ad-22(b)(5)–(7)
impose a PRA burden. These PRA burdens will apply to all CCPs. As discussed above, the
Commission estimates that nine CCPs will be subject to the burdens under Rules 17Ad-22(b)(5)–
(7). The Commission believes that CCPs are more likely to be able to address the changes
required by Rules 17Ad-22(b)(5)–(7) in an integrated, not piecemeal, review and drafting
process to implement policies and procedures responsive to these rules. Therefore, the revised
PRA burden estimates no longer account for each requirement as a separate burden.
Standards in Rule 17Ad-22(c) that Impose a PRA Burden
The standards in Rule 17Ad-22(c) impose a PRA burden. 22 The requirements of Rule
17Ad-22(c) will apply to all registered clearing agencies (ten respondent clearing agencies).
Standards in Rule 17Ad-22(c)(1) that Impose a PRA Burden
The standards in Rule 17Ad-22(c)(1) impose a PRA burden. The requirements of Rule
17Ad-22(c)(1) will apply to CCPs (nine respondent CCPs).
Standards in Rule 17Ad-22(c)(2) that Impose a PRA Burden
The standards in Rule 17Ad-22(c)(2) impose a PRA burden. The requirements of Rule
17Ad-22(c)(2) will apply to all registered clearing agencies (ten respondent clearing agencies).
22
The burden discussion for the different information collection requirements of Rule
17Ad-22(c)(1)—(2) has been split into sections to account for the different requirements
for varying numbers of respondents. Rule 17Ad-22(c) imposes an overall burden relating
to policies and procedures and system adjustments on all registered clearing agencies,
while Rule 17Ad-22(c)(1), as discussed below, imposes on CCPs an ongoing burden to
generate the required reports concerning their financial resources and Rule 17Ad22(c)(2), as discussed below, imposes initial and ongoing burdens related to annual
audited financial statements to all registered clearing agencies, some of which are already
implementing this requirement as part of their usual and customary practices.
18
ii.
Source of Estimates, Annual Hour Burden, and Explanation of Estimates
Standards in Rules 17Ad-22(b)(1)–(3) and (d)(1)–(15) that Impose a PRA Burden
The requirements to develop written policies and procedures in Rules 17Ad-22(b)(1)–(3)
and Rules 17Ad-22(d)(1)–(15) impose a recordkeeping PRA burden. The requirements in Rules
17Ad-22(b)(1)–(3) will apply to CCPs that are registered clearing agencies. The Commission
estimates that a total of nine CCPs 23 will be subject to the burdens under Rules 17Ad-22(b)(1)–
(3). Currently, six clearing agencies are registered to provide CCP services, and the Commission
estimates that three more entities could register as clearing agencies to provide CCP services.
The requirements in Rules 17Ad-22(d)(1)–(15) (with the exception of Rules 17Ad-22(d)(10) and
(13)–(15), which are applicable only to CSDs), on the other hand, apply to all registered clearing
agencies, of which there could potentially be a total of ten entities, including the one registered
clearing agency that is a CSD.
As noted above, registered clearing agencies already have written policies and procedures
that meet the standards set forth in Rules 17Ad-22(b)(1)–(3) and (d)(1)–(15) as part of their usual
and customary business practice. Accordingly, the Commission believes that the registered
clearing agencies would not need to build new infrastructure or modify operations to continue to
meet Rule 17Ad-22(b)(1)–(3) and (d)(1)–(15). The Commission believes that registered clearing
agencies will incur the incremental burdens of reviewing existing policies and procedures for
compliance and updating existing policies and procedures where appropriate. The requirements
would impose an aggregate one-time burden of approximately 1,750 hours for all registered
clearing agencies. 24 The standards contained in Rule 17Ad-22(d) would also impose ongoing
burdens on registered clearing agencies. For example, Rules 17Ad-22(b)(1)–(3) and (d)(1)–(15)
would require registered clearing agencies to perform certain ongoing monitoring and
enforcement activities with respect to the written policies and procedures the registered clearing
agency creates in response to the standard. Accordingly, after the first year, the Commission
believes that those ongoing activities would impose an aggregate annual burden of
approximately 600 hours for all respondent clearing agencies. 25 Because recent assessments of
the registered U.S. clearing agencies support the conclusion that clearing agencies and their rule
23
The Commission believes that there is a potential for new security-based swap clearing
agencies to form but does not expect there to be a large number based on the significant
level of capital and other financial resources needed for the formation of a clearing
agency.
24
This figure was calculated as follows: ((Assistant General Counsel at 60 hours) +
(Compliance Attorney at 85 hours) + (Computer Operations Manager at 15 hours) +
(Senior Business Analyst at 15 hours)) = 175 hours x 10 respondent clearing agencies =
1,750 hours.
25
This figure was calculated as follows: Compliance Attorney at 60 hours x 10 respondent
clearing agencies = 600 hours.
For each respondent clearing agency, the estimated annualized burden for Rules 17Ad22(b)(1)—(3) and (d)(1)—(15) is 98 hours (figure calculated as follows: 175 hours (Year
1 burden) + 60 hours (Year 2 burden) + 60 hours (Year 3 burden) = 295 hours (estimated
total burden over 3 years) ÷ 3 years = 98 hours).
19
books generally meet or exceed analogous standards of operation and governance to those
standards within Rules 17Ad-22(b)(1)–(3) and (d)(1)–(15), 26 the Commission believes that the
burden estimate for the aggregate one-time burden should be revised down from the burden
estimated in the Proposing Release. The Commission estimates that because these initial
compliance efforts will largely comprise a review of existing policies and procedures, the
aggregate one-time burden on respondent clearing agencies will be incremental to their current
compliance processes. The expected review of current policies and procedures will likely not
involve much involvement by the information technology staff at the clearing agency or much
involvement by the clearing agency’s assistant general counsel because the requirements of these
rules have already been written into and have been implemented as part of the policies and
procedures of registered clearing agencies. Accordingly, those burden estimates have been
reduced and the burden estimate for the compliance attorney, who will most likely perform most
of the review of current policies and procedures, has been increased. In order to estimate the
one-time burden and annual burden for ongoing activities, we looked to the burdens imposed by
similar policies and procedures requirements in Regulation NMS as a guide and adapted those
figures for the purposes of this release. 27
Standards in Rule 17Ad-22(b)(4) that Impose a PRA Burden
The requirement to develop written policies and procedures in Rule 17Ad-22(b)(4)
imposes a recordkeeping PRA burden. The requirement in Rule 17Ad-22(b)(4) will apply to all
CCPs. The Commission estimates that nine CCPs will be subject to the burdens under Rule
17Ad-22(b)(4).
Based on the analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS, the Commission has preserved the burden estimates from
the Proposing Release. The Commission estimates that Rule 17Ad-22(b)(4) would impose a
one-time burden on each respondent CCP of 210 hours, corresponding to an aggregate one-time
burden on all respondent CCPs of 1,890 hours. 28
Rule 17Ad-22(b)(4) would require one-time systems adjustments related to the capability
to perform an annual model validation. These adjustments would amount to a one-time systems
adjustment burden per respondent of 100 hours, or an aggregate one-time burden of
approximately 900 hours. 29 Taking into account the afore-mentioned policies and procedures
one-time burden, the total one-time burden per respondent for this rule is 310 hours.
26
See Proposing Release, supra note 2, at 14509.
27
See Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005)
(discussing in Section VIII.A.4 the time needed from legal, compliance, information
technology and business operations personnel to create policies and procedures for
preventing and monitoring trade-throughs).
28
This figure was calculated as follows: ((Assistant General Counsel at 87 hours) +
(Compliance Attorney at 77 hours) + (Computer Operations Manager at 23 hours) +
(Senior Business Analyst at 23 hours)) = 210 hours x 9 respondent CCPs = 1,890 hours.
29
This figure was calculated as follows: ((Chief Compliance Officer for 40 hours) +
(Computer Department Operations Manager for 40 hours) + (Senior Programmer for 20
hours)) = 100 hours x 9 respondent CCPs = 900 hours.
20
CCPs would be required to collect information relating to their model validation
standards required by Rule 17Ad-22(b)(4) on an ongoing basis. The Commission expects that
the exact burden of administering the procedures for model validation standards would vary
depending on how frequently each CCP may need to update its procedures. Based on the
analogous policies and procedures requirements and the corresponding burden estimates in
Regulation NMS, the Commission estimates that the ongoing requirements of this rule after the
first year would impose an annual burden of 60 hours on each respondent CCP, corresponding to
an aggregate annual burden for all respondent CCPs of 540 hours. 30
Standards in Rules 17Ad-22(b)(5)–(7) that Impose a PRA Burden
The requirements to develop written policies and procedures in Rules 17Ad-22(b)(5)–(7)
impose a recordkeeping PRA burden. These PRA burdens will apply to all CCPs. The
Commission estimates that nine CCPs will be subject to the burdens under Rules 17Ad-22(b)(5)–
(7). The Commission believes that CCPs are more likely to be able to address the changes
required by Rules 17Ad-22(b)(5)–(7) in an integrated, not piecemeal, review and drafting
process to implement policies and procedures responsive to these rules. Therefore, the revised
PRA burden estimates no longer account for each requirement as a separate burden.
Based on the analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS, the Commission has preserved the burden estimates from
the Proposing Release. The Commission estimates that Rules 17Ad-22(b)(5)–(7) would impose
a one-time burden on each respondent CCP of 210 hours, corresponding to an aggregate onetime burden on all respondent CCPs of 1,890 hours. 31
CCPs would be required to collect information relating to standards of Rules 17Ad22(b)(5)–(7) on an ongoing basis. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS, the Commission estimates that the
ongoing requirements of this rule after the first year would impose an annual burden of 60 hours
on each respondent CCP, corresponding to an aggregate annual burden for all respondent CCPs
of 540 hours. 32
30
This figure was calculated as follows: Compliance Attorney at 60 hours x 9 respondent
CCPs = 540 hours for all respondent CCPs.
For each respondent CCP, the estimated annualized burden for Rule 17Ad-22(b)(4) is
143 hours (figure calculated as follows: 210 hours + 100 hours (Year 1 burden) + 60
hours (Year 2 burden) + 60 hours (Year 3 burden) = 430 hours (estimated total burden
over 3 years) ÷ 3 years = 143 hours).
31
This figure was calculated as follows: ((Assistant General Counsel at 87 hours) +
(Compliance Attorney at 77 hours) + (Computer Operations Manager at 23 hours) +
(Senior Business Analyst at 23 hours)) = 210 hours x 9 respondent CCPs = 1,890 hours.
32
This figure was calculated as follows: Compliance Attorney at 60 hours x 9 respondent
CCPs = 540 hours for all respondent CCPs.
For each respondent CCP, the estimated annualized burden for Rules 17Ad-22(b)(5)—(7)
is 110 hours (figure calculated as follows: 210 hours (Year 1 burden) + 60 hours (Year 2
burden) + 60 hours (Year 3 burden) = 330 hours (estimated total burden over 3 years) ÷ 3
years = 110 hours).
21
Standards in Rule 17Ad-22(c) that Impose a PRA Burden
The standards in Rule 17Ad-22(c) impose a recordkeeping PRA burden. The
requirements of Rule 17Ad-22(c) will apply to all registered clearing agencies. The information
collection requirement for Rule 17Ad-22(c) was not discussed separately from Rules 17Ad22(c)(1)—(2) in the Proposing Release and does not represent a new information collection
requirement in the Adopting Release. The burden for Rule 17Ad-22(c) has been separately
accounted for in the Adopting Release to reflect the different information collection requirements
for varying numbers of respondents.
Based on the analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS, the Commission has preserved the burden estimates from
the Proposing Release. In contrast to the Proposing Release’s burden estimates for proposed
Rule 17Ad-22(c)(2), which accounted for 17 clearing agencies, the burden estimate in the
adopting release for Rule 17Ad-22(c) reflects a smaller number of clearing agencies. The
Commission estimates that Rule 17Ad-22(c) would impose a one-time burden on each
respondent clearing agency of 191 hours, corresponding to an aggregate one-time burden on all
respondent clearing agencies of 1,910 hours. 33
The Commission believes the one-time burden imposed would involve adjustments
needed to synthesize and format existing information in a manner sufficient to explain the
methodology the clearing agency uses to meet the requirement of Rule 17Ad-22(c). The
Commission believes these adjustments would impose a one-time burden of 100 hours on each
clearing agency, corresponding to an aggregate one-time burden imposed on all clearing
agencies of 1,000 hours. 34
Clearing agencies would be required to collect information relating to standards of Rule
17Ad-22(c) on an ongoing basis. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS, the Commission estimates that the
ongoing requirements of this rule would impose an aggregate annual burden of 60 hours on each
respondent clearing agency, corresponding to an aggregate annual burden for all respondent
clearing agencies of 600 hours. 35
33
This figure was calculated as follows: ((Assistant General Counsel at 60 hours) +
(Compliance Attorney at 85 hours) + (Computer Operations Manager at 23 hours) +
(Senior Business Analyst at 23 hours)) = 191 hours x 10 respondent clearing agencies =
1,910 hours.
34
This figure was calculated as follows: ((Chief Compliance Officer at 40 hours) +
(Computer Operations Department Manager at 40 hours) + (Senior Programmer at 20
hours)) = 100 hours x 10 respondent clearing agencies = 1,000 hours.
35
This figure was calculated as follows: Compliance Attorney at 60 hours x 10 respondent
clearing agencies = 600 hours for all respondent clearing agencies.
For each respondent clearing agency, the estimated annualized burden for Rule 17Ad22(c) is 137 hours (figure calculated as follows: 191 hours + 100 hours (Year 1 burden)
+ 60 hours (Year 2 burden) + 60 hours (Year 3 burden) = 411 hours (estimated total
burden over 3 years) ÷ 3 years = 137 hours).
22
Standards in Rule 17Ad-22(c)(1) that Impose a PRA Burden
The standards in Rule 17Ad-22(c)(1) impose a recordkeeping PRA burden. In contrast to
the Proposing Release’s burden estimates for proposed Rule 17Ad-22(c)(2), which accounted for
17 clearing agencies, the burden estimate in the adopting release for Rule 17Ad-22(c)(1) reflects
a smaller number of clearing agencies. The requirements of Rule 17Ad-22(c)(1) will apply to
nine CCPs.
On an ongoing basis, the Commission estimates that for a CCP to generate the required
reports concerning its financial resources would impose a burden of three hours per respondent
CCP per quarter. This amounts to an annual burden of 12 hours for each CCP and corresponds
to an aggregate annual burden of 108 hours for all respondent CCP. 36
Standards in Rule 17Ad-22(c)(2) that Impose a PRA Burden
The standards in Rule 17Ad-22(c)(2) impose a third-party disclosure PRA burden. In
contrast to the Proposing Release’s burden estimates for proposed Rule 17Ad-22(c)(2), which
accounted for 17 clearing agencies, the burden estimate in the adopting release for Rule 17Ad22(c)(2) reflects a smaller number of clearing agencies. The requirements of Rule 17Ad-22(c)(2)
will apply to all registered clearing agencies, a total of ten respondents.
With regard to Rule 17Ad-22(c)(2), the requirements will apply to all registered clearing
agencies. The Commission expects that the exact burden of collecting information relating to
the procedures for facilitating an annual audited financial statement of the clearing agency and
posting that annual audited financial statement to the clearing agency’s website would vary
depending on how frequently each clearing agency may need to update its procedures. Also, the
Commission estimates based on its experience with entities of similar size to the respondents to
this collection, that the initial burden of generating annual audited financial statements would
generally require on average 500 hours per respondent clearing agency. 37 However, as most
registered clearing agencies are already implementing this requirement as part of their usual and
customary practices, the rule, as an initial burden, would largely affect a total of four entities -three potential new entrants and one clearing agency that currently does not have two years of
annual audited financial statements prepared in accordance with U.S. GAAP or IFRS posted on
its website and therefore, would be required to incur the costs of paying for an independent audit
36
This figure was calculated as follows: ((Compliance Attorney at 1 hour) + (Computer
Operations Department Manager at 2 hours)) = 3 hours per quarter x 4 quarters per year =
12 hours per year x 9 respondent clearing CCPs = 108 hours.
For each respondent CCP, the estimated annualized burden for Rule 17Ad-22(c)(1) is 8
hours (figure calculated as follows: 0 hours (Year 1 burden) + 12 hours (Year 2 burden)
+ 12 hours (Year 3 burden) = 24 hours (estimated total burden over 3 years) ÷ 3 years = 8
hours).
37
An example of the Commission’s experience with entities of a similar size to the
respondents is that the Commission required entities to post their annual financial
statements on their respective websites as conditions to the Commission’s authorizing
them to provide CCP services for credit default swaps.
23
for two years of financial statements. 38 The Commission estimates that Rule 17Ad-22(c)(2)
would impose a one-time burden on each of these four clearing agencies of 500 hours to prepare
and review internal financial statements, corresponding to an aggregate one-time burden on the
four respondent clearing agencies of 2,000 hours. 39 This requirement would necessitate work
hours of compliance personnel and finance personnel at the clearing agency to compile relevant
data, organize and analyze that data, and then post it to the clearing agency’s website consistent
with the rule.
Clearing agencies also would be required to collect information relating to any
procedures used to support compliance with Rule 17Ad-22(c)(2) on an ongoing basis. Based on
the analogous policies and procedures requirements and the corresponding burden estimates in
Regulation NMS, the Commission estimates that the ongoing requirements of this rule would
impose an annual burden in subsequent years of 250 hours on each respondent clearing agency
for collecting information relating to administering policies and procedures for facilitating an
annual audited financial statement of the clearing agency and posting that annual audited
financial statement to the clearing agency’s website for an aggregate burden of 2,500 hours. 40
Total Burden for Rule 17Ad-22
The total initial burden for Rule 17Ad-22 is 11,340 hours. 41 The total ongoing annual
burden for Rule 17Ad-22 is 4,888 hours. 42 When monetized 43 those estimated burdens and costs
total $3.7 million44 in initial costs and $10.1 million 45 in annual ongoing costs.
38
The Boston Stock Exchange Clearing Corporation (“BSECC”) and Stock Clearing
Corporation of Philadelphia (“SCCP”) currently do not post audited financial statements
on their websites and are considered new entrants.
39
This figure was calculated as follows: Senior Accountant at 500 hours x 4 respondent
clearing agencies = 2,000 hours.
40
This figure was calculated as follows: Senior Accountant at 250 hours x 10 respondent
clearing agencies = 2,500 hours.
Annualized, the estimated burden for Rule 17Ad-22(c)(2) is 333 hours (figure calculated
as follows: 500 hours (Year 1 burden) + 250 hours (Year 2 burden) + 250 hours (Year 3
burden) = 1,000 hours (estimated total burden over 3 years) ÷ 3 years = 333 hours). This
figure represents a weighted average for 10 respondent clearing agencies. The burden
will be higher for clearing agencies that have not yet implemented Rule 17Ad-22(c)(2).
The burden will be less for clearing agencies that have already implemented the
requirement as part of their usual and customary practices.
41
This figure was calculated as follows: 1,750 hours for initial burdens associated with
17Ad-22(b)(1)–(3) and (d)(1)–(15) + 2,790 hours for initial burdens associated with
17Ad- 22(b)(4) + 1,890 hours for initial burdens associated with 17Ad-22(b)(5)–(7) +
4,910 hours for initial burdens associated with 17Ad-22(c) = 11,340 hours.
42
This figure was calculated as follows: 600 hours for annual burdens associated with
17Ad-22(b)(1)–(3) and (d)(1)–(15) + 540 hours for annual burdens associated with 17Ad22(b)(4) + 540 hours for initial burdens associated with 17Ad-22(b)(5)–(7) + 3,208 hours
for annual burdens associated with 17Ad-22(c) = 4,888 hours.
24
43
To monetize the internal costs the Commission staff used data from the SIFMA
publications, Management and Professional Earnings in the Security Industry- 2010, and
Office Salaries in the Securities Industry – 2010, modified by the Commission staff to
account for an 1800 hour work-year and multiplied by 5.35 (professionals) or 2.93
(office) to account for bonuses, firm size, employee benefits and overhead.
44
The total initial cost was calculated as follows: [for Rules 17Ad-22(b)(1)–(3) and (d)(1)–
(15) (Assistant General Counsel for 60 hours at $430 per hour) + (Compliance Attorney
for 85 hours at $320 per hour) + (Computer Operations Department Manager for 15 hours
at $367 per hour) + (Senior Business Analyst for 15 hours at $232 per hour) = $61,985 x
10 respondents = $619,850]; + [for Rule 17Ad-22(b)(4) ((Assistant General Counsel for
87 hours at $430 per hour) + (Compliance Attorney for 77 hours at $320 per hour) +
(Computer Operations Department Manager for 23 hours at $367 per hour) + (Senior
Business Analyst for 23 hours at $232 per hour) = $75,827 x 9 respondents = $682,443)
+ ((Chief Compliance Officer for 40 hours at $423 per hour) + (Computer Department
Operations Manager for 40 hours at $367 per hour) + (Senior Programmer for 20 hours at
$304 per hour) = $37,680 x 9 respondents = $339,120) = $1,021,563]; + [for Rules
17Ad-22(b)(5)–(7) (Assistant General Counsel for 87 hours at $430 per hour) +
(Compliance Attorney for 77 hours at $320 per hour) + (Computer Operations
Department Manager for 23 hours at $367 per hour) + (Senior Business Analyst for 23
hours at $232 per hour)) = $75,827 x 9 respondents = $682,443]; + [for Rule 17Ad-22(c)
((Assistant General Counsel for 60 hours at $430 per hour) + (Compliance Attorney for
85 hours at $320 per hour) + (Computer Operations Department Manager for 23 hours at
$367 per hour) + (Senior Business Analyst for 23 hours at $232 per hour) = $66,777 x 10
respondents = $667,770) + ((Chief Compliance Officer for 40 hours at $423 per hour) +
(Computer Department Operations Manager for 40 hours at $367 per hour) + (Senior
Programmer for 20 hours at $304 per hour) = $37,680 x 10 respondents = $376,800) =
$1,044,570] + [for Rule 17Ad-22(c)(2) (Senior Accountant for 500 hours at $198 per
hour) x 4 respondents = $396,000] = $3,764,426.
45
The total ongoing cost was calculated as follows: [for Rules 17Ad-22(b)(1)–(3) and
(d)(1)–(15) (Compliance Attorney for 60 hours at $320 per hour = $19,200 x 10
respondents = $192,000)]; + [for Rule 17Ad-22(b)(4) ((Compliance Attorney for 60
hours at $320 per hour = $19,200 x 9 respondents = $172,800) + (2 Independent
Consultants for 30 hours per week at $600 per hour = $36,000 per week x 12 weeks =
$432,000 x 9 respondents = $3,888,000) = $4,060,800]; + [for Rules 17Ad-22(b)(5)–(7)
(Compliance Attorney for 60 hours at $320 per hour = $19,200 x 9 respondents =
$172,800]; + [for Rule 17Ad-22(c) (Compliance Attorney for 60 hours at $320 per hour =
$19,200 x 10 respondents = $192,000)]; [for Rule 17Ad-22(c)(1) (Compliance Attorney
for 1 hour at $320 per hour) + (Computer Operations Department Manager for 2 hours at
$367) = $1,054 per quarter x 4 quarters per year = $4,216 per year x 9 respondents =
$37,944]; [for Rule 17Ad-22(c)(2) (Senior Accountant for 250 hours at $198 per hour) x
10 respondents = $495,000) + (Independent Audit Fee = $500,000 per year x 10
respondents = $5,000,000)] = $10,150,544.
25
Table of Burdens (calculated per respondent)
Rules
Rules 17Ad22(b)(1)-(3)
and (d)(1)(15)
Rule 17Ad22(b)(4)
Rules 17Ad22(b)(5)-(7)
Rule 17Ad22(c)
Rule 17Ad22(c)(1)
Rule 17Ad22(c)(2)
Total
13.
Estimated
Year 1
Burden
175 Hours
Estimated
Year 2
Burden
60 Hours
Estimated
Year 3
Burden
60 Hours
Estimated
Total Burden
over 3 Years
295 Hours
Estimated Annualized
Burden/Respondent
310 Hours*
60 Hours
60 Hours
430 Hours
143 Hours
9
1287
210 Hours
60 Hours
60 Hours
330 Hours
110 Hours
9
990
291 Hours**
60 Hours
60 Hours
411 Hours
137 Hours
10
1370
12 Hours
12 Hours
24 Hours
8 Hours
9
72
500 Hours
250 Hours
250 Hours
1000 Hours
333 Hours
10
3330
1486 Hours
502 Hours
502 Hours
2490 Hours
829 Hours
98 Hours
Number of
Total
Respondents Annualized
Burden
10
980
8029
Costs to Respondents
Standards in Rule 17Ad-22(b)(4) that Impose Costs
As discussed above, based on its oversight of clearing agencies, the Commission
estimates that Rule 17Ad-22(b)(4) would impose an annual cost on all respondent CCPs for work
on model validation. Based on its oversight of clearing agencies, the Commission estimates that
Rule 17Ad-22(b)(4) would impose an annual cost on all respondent CCPs for work on model
validation. The Commission believes clearing agencies would hire a consulting firm that
dedicates two consultants to the project. Consistent with the Proposing Release, 46 the
Commission estimates that should respondent CCPs decide to hire external consultants to
develop and implement Rule 17Ad-22(b)(4) through written policies and procedures, the
ongoing cost associated with hiring such consultants would be approximately $3.9 million per
year. 47
Standards in Rule 17Ad-22(c)(2) that Impose Costs
As noted above, Rule 17Ad-22(c)(2) would require each clearing agency to post on its
website an annual audited financial statement. The requirement also would require the services
of a registered public accounting firm. The Commission estimates those services would on
46
See Proposing Release, supra note 2, at 14529.
47
This figure was calculated as follows: 2 Consultants for 30 hours per week at $600 per
hour = $36,000 per week x 12 weeks = $432,000 per clearing agency x 9 respondent
CCPs = $3,888,000. The $600 per hour figure for a consultant was calculated using
www.payscale.com, modified by Commission staff to account for an 1800 hour workyear and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead.
26
average cost approximately $500,000 annually. 48 Therefore, to meet the ongoing requirements
of Rule 17Ad-22(c)(2) the Commission estimates a total annual cost of approximately
$5,000,000 in the aggregate for all respondent clearing agencies. 49
Total Costs for Rule 17Ad-22
The ongoing external cost for Rule 17Ad-22 is $8.9 million.50
Table of Costs (calculated per respondent)
Rules
Rule 17Ad-22(b)(4)
Rule 17Ad-22(c)(2)
Estimated
Annualized Cost
$432,000
$500,000
Total
$932,000
14.
Costs to Federal Government
Not applicable.
15.
Changes in Burden
The Commission notes that the PRA burden estimates in the Adopting Release are
significantly lower than the PRA burden estimates in the Proposing Release. 51 Several reasons
account for the change. The Proposing Release contained five proposed rules with PRA
collection of information requirements in addition to Rule 17Ad-22 – proposed Rules 17Aj-1,
17Ad-23, 17Ad-25, 17Ad-26 and 3Cj-1. These other proposed rules are not being adopted at this
time.
48
A precise estimate of audit costs for clearing agencies cannot be made, and therefore, we
examined a number of existing surveys, (see, e.g., surveys by CFO.com studying large
and small public companies). While the costs may vary depending on the circumstances,
we are using an estimate of $500,000, which is on the upper range for an average cost.
49
This figure was calculated as follows: $500,000 estimated cost of registered public
accounting firm x 10 respondent clearing agencies = $5,000,000.
50
This figure was calculated as follows: $3,888,000 (for Rule 17Ad-22(b)(4)) +
$5,000,000 (for Rule 17Ad-22(c)(2)).
See Proposing Release at 14521 (“The Commission preliminarily believes that for all
respondent clearing agencies the aggregate paperwork burdens contained in proposed
Rules 17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14), (15),
(b)(1), (2), (3), (4), (5), (6), (7), (c)(1) and (2) would impose a one-time burden of 83,343
hours and an ongoing annual burden of 39,658 hours.”). In the Adopting Release, the
Commission estimates the total initial burden for Rule 17Ad-22 to be 11,880 hours, with
the total ongoing annual burden for Rule 17Ad-22 to be 4,888 hours.
51
27
Additionally, the Proposing Release estimated that the proposed rules would have applied
to seventeen entities. A number of these entities -- in particular those providing post-trade
processing services for security-based swap transactions -- would have been completely
unfamiliar with the Commission’s registration process for clearing agencies. Further, these
entities typically do not have written rule books to govern their relationship with their users. As
a result, they would have experienced significant initial burdens associated with the proposed
rules.
In contrast, the Rule applies only to the seven clearing agencies currently registered with
the Commission that provide CCP or CSD services. 52 These registered clearing agencies already
have written rules, policies and procedures addressing significant aspects of Rule 17Ad-22. For
purposes of the PRA analysis, the Commission also estimates that three entities may potentially
register with the Commission as clearing agencies acting as CCPs, bringing the total number of
respondents to ten – nine of which are CCPs and one of which is a CSD. 53 The Commission
believes that some of the entities seeking to register with the Commission as clearing agencies
may already be providing similar services in other jurisdictions and therefore may already have
written rules and procedures similar to those contemplated by Rule 17Ad-22. Accordingly, the
Commission believes that the potential PRA burden on this smaller and more established group
of respondents will be significantly lower than the estimates provided in the Proposing Release.
Further, the Proposing Release treated each subsection of the rule -- and therefore each required
policy and procedure -- as a separate PRA burden. However, the Commission believes that
registered clearing agencies are more likely to be able to address the changes required by Rule
17Ad-22 in an integrated, not piecemeal, review and drafting process. That is, respondents are
likely to group aspects of Rule 17Ad-22 together as they implement policies and procedures
responsive to Rule 17Ad-22. Therefore, the revised PRA burden estimates no longer account for
each requirement as a separate burden.
Finally, the Commission has revised the PRA burden estimates in recognition that many
parts of Rule 17Ad-22 – specifically Rules 17Ad-22(b)(1)–(3) and Rules 17Ad-22(d)(1)–(15) -reflect usual and customary practices of registered clearing agencies. Since registered clearing
agencies already comply with significant aspects of Rule 17Ad-22 in the normal course of their
activities, many aspects of Rule 17Ad-22 impose minimal PRA burdens on registered clearing
agencies limited to the review of the rule and their existing policies and procedures. As
discussed below, because certain rules would involve adjustments to a registered clearing agency’s
rule book and its policies and procedures rather than the creation of entirely separate policies and
procedures to support entirely new operations and practices, the Commission recognizes that some
aspects of Rule 17Ad-22 will impose incremental new PRA burdens on registered clearing
agencies. Accordingly, the estimated PRA burdens discussed below reflect these updated
assessments of the likely PRA burdens.
52
The Commission also notes that the BSECC and SCCP are currently registered with the
Commission as clearing agencies but conduct no clearance or settlement operations. See
Securities Exchange Act Release Nos. 63629 (Jan. 3, 2011), 76 FR 1473 (Jan. 10, 2011),
and 63268 (Nov. 8, 2010), 75 FR 69730 (Nov. 15, 2010), respectively.
53
The burden estimates include the possibility that either BSECC or SCCP, or both, resume
operations in the future.
28
16.
Information Planned for Statistical Purposes
Not applicable.
17.
Approval to Omit OMB Expiration Date
The Commission is not seeking approval to omit the OMB expiration date.
18.
Exceptions to Certification for Paperwork Reduction Act Submissions
Not applicable.
B.
COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable. The collection of information does not employ statistical methods.
29
| File Type | application/pdf |
| File Modified | 2012-11-02 |
| File Created | 2012-11-02 |