Governance Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities; Additional Requirements Regarding the Mitigation of Conflicts of Interest, 722-737 [2010-31898]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 76, Number 4 (Thursday, January 6, 2011)]
[Proposed Rules]
[Pages 722-737]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31898]



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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 37, 38, 39, and 40

RIN 3038-AD01


Governance Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities; Additional 
Requirements Regarding the Mitigation of Conflicts of Interest

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'') 
hereby proposes regulations to further implement new statutory 
provisions enacted by Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act''). Specifically, the 
Commission proposes certain substantive requirements on the resolution 
of conflicts of interest, in order to further implement core principles 
applicable to derivatives clearing organizations (``DCOs''), designated 
contract markets (``DCMs''), and swap execution facilities (``SEFs''). 
Such substantive requirements address reporting, transparency in 
decision-making, and limitations on use or disclosure of non-public 
information, among other things. For DCOs and DCMs, the Commission also 
proposes regulations to implement core principles concerning governance 
fitness standards and the composition of governing bodies. Finally, for 
publicly-traded DCMs, the Commission proposes regulations to implement 
the core principle on diversity of Boards of Directors.
    The Commission welcomes comments on all aspects of the proposed 
regulations.

DATES: Submit comments on or before March 7, 2011.

ADDRESSES: You may submit comments, identified by RIN 3038-AD01 number, 
by any of the following methods:
     Agency Web site, via its Comments Online process: https://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's Regulations.\1\
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    \1\ 17 CFR 145.9.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Nancy Liao Schnabel, Special Counsel, 
Division of Clearing and Intermediary Oversight (DCIO), at 202-418-5344 
or nschnabel@cftc.gov; Lois Gregory, Assistant Deputy Director for 
Market Review, the Division of Market Oversight (DMO), at 202-418-5569 
or lgregory@cftc.gov; Alicia Lewis, Attorney-Advisor, DCIO, at 202-418-
5862 or alewis@cftc.gov; Jordan O'Regan, Attorney-Advisor, DCIO, at 
202-418-5984 or joregan@cftc.gov; or Jolanta Sterbenz, Counsel, Office 
of the General Counsel, at 202-418-6639 or jsterbenz@cftc.gov; in each 
case, also at the Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\ 
Title VII of the Dodd-Frank Act \3\ amended the Commodity Exchange Act 
(``CEA'') \4\ to establish a comprehensive new regulatory framework for 
swaps and certain security-based swaps. The legislation was enacted to 
reduce risk, increase transparency, and promote market integrity within 
the financial system by, among other things: (i) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; \5\ (ii) imposing mandatory clearing and trade 
execution requirements on clearable swap contracts; (iii) creating 
robust recordkeeping and real-time reporting regimes; and (iv) 
enhancing the rulemaking and enforcement authorities of the Commission 
with respect to, among others, all registered entities and 
intermediaries subject to the oversight of the Commission.
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    \2\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010). The text of the Dodd-Frank Act may be accessed at https://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq.
    \5\ In this release, the terms ``swap dealer'' and ``major swap 
participant'' shall have the meanings set forth in Section 721(a) of 
the Dodd-Frank Act, which added Sections 1a(49) and (33) of the CEA. 
However, Section 721(c) of the Dodd-Frank Act directs the Commission 
to promulgate rules to further define, among other terms, ``swap 
dealer'' and ``major swap participant.'' The Commission is in the 
process of this rulemaking. See, e.g., https://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_2_Definitions.html. The Commission 
anticipates that such rulemaking will be completed by the statutory 
deadline of July 15, 2011.
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    In order to ensure the proper implementation of the comprehensive 
new regulatory framework, the Dodd-Frank Act requires the Commission to 
promulgate regulations regarding the mitigation of conflicts of 
interest in the operation of certain DCOs, DCMs, and SEFs. On October 
1, 2010, the Commission identified possible conflicts. Section II below 
briefly summarizes these conflicts. To address these conflicts, the 
Commission proposed \6\ both (i) structural governance requirements \7\ 
and (ii) limits on ownership of voting equity and exercise of voting 
power \8\ (the ``Conflicts of Interest NPRM'').
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    \6\ 75 FR 63732 (Oct. 18, 2010).
    \7\ According to the Conflicts of Interest NPRM: (i) Each DCO, 
DCM, or SEF must have a Board of Directors with at least 35 percent, 
but no less than two, public directors; (ii) each DCO, DCM, or SEF 
must have a nominating committee with at least 51 percent public 
directors; (iii) each DCO, DCM, or SEF must have one or more 
disciplinary panels, with a public participant as chair; (iv) each 
DCM or SEF must have (A) a regulatory oversight committee (``ROC''), 
with all public directors, and (B) a membership or participation 
committee, with 35 percent public directors; and each DCO must have 
a risk management committee (``RMC''), with at least (A) 35 percent 
public directors and (B) 10 percent customer representatives. See 
generally 75 FR 63732 (Oct. 18, 2010).
    \8\ According to the Conflicts of Interest NPRM, no DCM or SEF 
member (and related persons) may (i) beneficially own more than 20 
percent of any class of voting equity or (ii) directly or indirectly 
vote an interest exceeding 20 percent of the voting power of any 
class of equity.
    A DCO may choose one of the following alternatives. Under the 
first alternative, no individual member may beneficially own more 
than 20 percent of any class of voting equity or directly or 
indirectly vote an interest exceeding 20 percent of the voting power 
of any class of equity. In addition, the enumerated entities, 
whether or not they are DCO members, may not collectively own on a 
beneficial basis more than 40 percent of any class of voting equity, 
or directly or indirectly vote an interest exceeding 40 percent of 
the voting power of any class of equity.
    Under the second alternative, no DCO member or enumerated 
entity, regardless of whether it is a DCO member, may own more than 
five (5) percent of any class of voting equity or directly or 
indirectly vote an interest exceeding five (5) percent of the voting 
power of any class of equity. Notwithstanding the foregoing, the 
Conflicts of Interest NPRM provides a procedure for the DCO to apply 
for, and the Commission to grant, a waiver of the abovementioned 
limits. See generally 75 FR 63732 (Oct. 18, 2010).
    ``Enumerated entities'' are those entities listed in Section 
726(a) of the Dodd-Frank Act and include: (i) Bank holding companies 
with over $50,000,000,000 in total consolidated assets; (ii) a 
nonbank financial company supervised by the Board of Governors of 
the Federal Reserve System; (iii) an affiliate of (i) or (ii); (iv) 
a swap dealer; (v) a major swap participant; or (vi) an associated 
person of (iv) or (v).

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[[Page 723]]

    The Conflicts of Interest NPRM primarily aims to implement Sections 
726 and 725(d) of the Dodd-Frank Act.\9\ However, the Commission drew 
additional authority to propose the abovementioned requirements from 
Sections 725(c),\10\ 735(b),\11\ and 733 \12\ of the Dodd-Frank Act. 
Together, such sections contain DCO, DCM, or SEF core principles that 
require each such entity to (i) establish and enforce rules to minimize 
conflicts of interest in its decision-making process and (ii) establish 
a process for resolving such conflicts.\13\ This proposed rulemaking 
(the ``Governance NPRM'') aims to more fully implement such core 
principles. Therefore, the Governance NPRM proposes the following 
requirements, which complement those in the Conflicts of Interest NPRM:
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    \9\ First, Section 726(a) of the Dodd-Frank Act specifically 
empowers the Commission to adopt ``numerical limits * * * on 
control'' or ``voting rights'' that enumerated entities may hold 
with respect to such DCOs, DCMs, and SEFs. Second, Section 726(b) of 
the Dodd-Frank Act directs the Commission to determine the manner in 
which its rules may be deemed necessary or appropriate to improve 
the governance of certain DCOs, DCMs, or SEFs or to mitigate 
systemic risk, promote competition, or mitigate conflicts of 
interest in connection with the interaction between swap dealers and 
major swap participants, on the one hand, and such DCOs, DCMs, and 
SEFs. Finally, Section 726(c) of the Dodd-Frank Act directs the 
Commission to consider the manner in which its rules address 
conflicts of interest in the abovementioned interaction arising from 
equity ownership, voting structure, or other governance arrangements 
of the relevant DCOs, DCMs, and SEFs.
    Section 725(d) of the Dodd-Frank Act states: ``[t]he Commodity 
Futures Trading Commission shall adopt rules mitigating conflicts of 
interest in connection with the conduct of business by a swap dealer 
or a major swap participant with a derivatives clearing 
organization, board of trade, or a swap execution facility that 
clears or trades swaps in which the swap dealer or major swap 
participant has a material debt or material equity investment.''
    \10\ Section 725(c) of the Dodd-Frank Act amends Section 5b(c) 
of the CEA to include new DCO Core Principle O (Governance Fitness 
Standards), P (Conflicts of Interest), and Q (Composition of 
Governing Boards). Together, such core principles empower the 
Commission to develop performance standards for determining whether 
a DCO has: (i) Governance arrangements that are transparent to 
fulfill public interest requirements and to permit consideration of 
the views of owners and participants; (ii) appropriate fitness 
standards for directors, members, and others; (iii) rules to 
minimize and resolve conflicts of interest in DCO decision-making; 
and (iv) governing boards or committees that include market 
participants.
    \11\ Section 735(b) of the Dodd-Frank Act retains the existing 
DCM core principle on conflicts of interest and governance fitness 
standards, but (i) amends the existing DCM core principle on 
composition of governing boards of contract markets to state: 
``[t]he governance arrangements of the board of trade shall be 
designed to permit consideration of the views of market 
participants,'' and (ii) adds a new DCM core principle on diversity 
of the Board of Directors. Together, such core principles empower 
the Commission to develop performance standards for determining 
whether a DCM has: (i) Appropriate fitness standards for directors, 
members, and others; (ii) rules to minimize conflicts of interest in 
DCM decision-making; (iii) appropriate governance arrangements to 
permit the Board of Directors to consider the views of market 
participants; and (iv) rules, if the DCM is a publicly-traded 
company, regarding the cultural diversity of the Board of Directors.
    \12\ Section 733 of the Dodd-Frank Act includes SEF Core 
Principle 12 (Conflicts of Interest) in new Section 5h of the CEA. 
Such core principle empowers the Commission to establish performance 
standards for determining whether a SEF has rules to minimize and 
resolve conflicts of interest in SEF decision-making.
    \13\ The conflicts of interest core principles are DCO Core 
Principle P, DCM Core Principle 16, and SEF Core Principle 12. Such 
core principles shall hereinafter be referred to as ``Conflicts of 
Interest Core Principles.''
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     Each DCO must report to the Commission when its Board of 
Directors rejects a recommendation from or supersedes an action of the 
RMC; \14\
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    \14\ In addition, a DCO would be required to report to the 
Commission when its RMC rejects a recommendation from or supersedes 
an action of a subcommittee of the RMC.
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     Each DCM or SEF must report to the Commission when its 
Board of Directors rejects a recommendation from or supersedes an 
action of the ROC or the Membership or Participation Committee; \15\
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    \15\ The proposed regulations would also require the ROC of a 
DCM or SEF to prepare an annual report to the Board of Directors 
assessing various components of the regulatory program of such DCM 
or SEF.
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     Each DCO, DCM, or SEF must:
    [cir] Implement a regulatory program to identify, on an ongoing 
basis, existing and potential conflicts of interest, as well as a 
method for making fair and non-biased decisions in the event of such a 
conflict;
    [cir] Prescribe limits on the use or disclosure of non-public 
information by owners, members of the Board of Directors, members of 
any committee, officers or other employees; and
    [cir] Make certain information on governance arrangements available 
to the public and relevant authorities, including summaries of 
significant decisions.
    In addition to containing the Conflicts of Interest Core 
Principles, Sections 725(c), 735(b), and 733 of the Dodd-Frank Act add 
or amend DCO or DCM core principles on (i) governance fitness standards 
and (ii) composition of the Board of Directors or other governing 
bodies. Section 735(b) of the Dodd-Frank Act also adds a DCM core 
principle on diversity of certain Boards of Directors. To implement 
such core principles, the Governance NPRM proposes the following 
requirements:
     Each DCO or DCM must specify and enforce fitness standards 
for its members, directors, members of any Disciplinary Panel or 
Disciplinary Committee, persons with direct access, and certain 
affiliates;
     Each publicly-traded DCM must evaluate the breadth and 
cultural diversity of its Board of Directors;
     Each DCM must design and institute a process for 
considering the range of opinions that market participants \16\ hold 
with respect to (i) the functioning of an existing market and (ii) new 
rules or rule amendments; and
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    \16\ In general, the Commission interprets the term ``market 
participants'' to be more expansive than the term ``member'' (as 
defined in Section 1a(34) of the CEA). Therefore, with respect to 
DCMs, DCOs, and SEFs, the Commission construes the term ``market 
participants'' to encompass customers of members (to the extent that 
such customers do not fall within Section 1a(34) of the CEA).
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     Each DCO must have 10 percent customer representation on 
its Board of Directors, in lieu of having such representation on the 
RMC (or the RMC Subcommittee). Alternatively, each DCO must have 10 
percent customer representation on the RMC (or the RMC Subcommittee), 
in lieu of having such representation on the DCO Board of 
Directors.\17\
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    \17\ As Section IV(c)(ii) below describes further, the 
Commission is reconsidering that portion of the Conflicts of 
Interest NPRM that requires 10 percent customer representation on 
the RMC. The Commission notes that it has authority under both 
Section 726 of the Dodd-Frank Act, as well as under DCO Core 
Principles P (Conflicts of Interest) and Q (Composition of Governing 
Boards) to adopt either a Board or RMC composition requirement.

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[[Page 724]]

    Sections 725(c), 735(b), and 733 explicitly authorize the 
Commission to promulgate regulations implementing DCO, DCM, and SEF 
core principles under Section 8a(5) of the CEA. Section 8a(5) of the 
CEA states that ``[t]he Commission is authorized * * * to make or 
promulgate such rules and regulations as, in the judgment of the 
Commission, are reasonably necessary to effectuate any of the 
provisions or to accomplish any of the purposes of [the CEA].'' The 
requirements that the Governance NPRM proposes apply to all DCOs and 
DCMs, regardless of whether they clear or list swap contracts or only 
commodity futures or options.\18\
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    \18\ As the Conflicts of Interest NPRM states:
    In applying such requirements and limits, the Commission does 
not propose to distinguish between DCMs and SEFs listing swap 
contracts. As mentioned above, such DCMs and SEFs may experience 
sustained competition with respect to the same swap contract, and 
therefore would face the same pressures on self-regulation. 
Additionally, the Commission does not propose to distinguish between 
(i) DCMs listing swap contracts and (ii) DCMs listing only commodity 
futures and options. As mentioned above, clearable swap contracts 
may share sufficiently similar characteristics with certain 
commodity futures and options as to compete with respect to 
execution. Therefore, a DCM listing only commodity futures and 
options may face competition from a SEF with fewer self-regulatory 
requirements, in the same manner as a DCM listing swap contracts. 
Given that the same conflicts of interest may concern both types of 
DCM, it would appear that the same (i) structural governance 
requirements and (ii) limits on the ownership of voting equity and 
the exercise of voting power should apply.
    In addition, the Commission does not propose to distinguish 
between (i) DCOs clearing swap contracts and (ii) DCOs clearing only 
commodity futures and options. Certain standardized swap contracts 
have sufficiently similar risk profiles to commodity futures and 
options that the Commission has, on occasion, permitted such 
products to be commingled and margined within the segregated 
customer account under Section 4d of the CEA. If the Commission 
applied differential (i) structural governance requirements and (ii) 
limits on the ownership of voting equity and the exercise of voting 
power, the Commission risks creating an incentive for regulatory 
arbitrage between the two types of DCO.
    75 FR at 63737. The Commission has requested comment in the 
Conflicts of Interest NPRM regarding this approach. The Commission 
reiterates its request for comment in the context of the Governance 
NPRM.
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    The Governance NPRM reflects consultation with staff of the 
following agencies: (i) The Securities and Exchange Commission (the 
``SEC''); \19\ (ii) the Board of Governors of the Federal Reserve; 
(iii) the Office of the Comptroller of the Currency; (iv) the Federal 
Deposit Insurance Corporation; and (v) the Treasury Department. The 
Governance NPRM has been further informed by (i) the joint roundtable 
that Commission and SEC staff conducted on August 20, 2010 (the 
``Roundtable'') \20\ and (ii) public comments posted to the Web site of 
the Commission.\21\ Finally, mindful of the importance of international 
harmonization,\22\ the Governance NPRM incorporates certain elements 
of: (i) The Proposal for a Regulation of the European Parliament and of 
the Council on OTC Derivatives, Central Counterparties, and Trade 
Depositories (the ``European Commission Proposal''); \23\ and (ii) the 
Recommendations for Central Counterparties, drafted by the Committee on 
Payment and Settlement Systems of the Bank for International 
Settlements and the Technical Committee of the International 
Organization of Securities Commissions, dated November 2004 (the ``CCP 
Recommendations'').\24\
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    \19\ Section 765 of the Dodd-Frank Act requires the SEC to 
promulgate rules to mitigate conflicts of interest in the operation 
of (i) a clearing agency that clears security-based swaps, (ii) a 
security-based swap execution facility, or (iii) a national 
securities exchange that posts or makes available for trading 
security-based swaps. Core Principles for security-based swap 
execution facilities are set forth in Section 763 of the Dodd-Frank 
Act.
    \20\ The transcript from the roundtable (the ``Roundtable Tr.'') 
is available at: https://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/derivative9sub082010.pdf.
    \21\ Such comments are available at: https://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_9_DCOGovernance.html.
    \22\ Currently, the Commission regulates certain entities based 
outside of the United States (e.g., LCH.Clearnet Limited and ICE 
Clear Europe Limited, each of which is based in the United Kingdom).
    \23\ COM(2010) 484/5.
    \24\ The CCP Recommendations are available at: https://www.bis.org/publ/cpss61.pdf.
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    The Commission requests comment on all aspects of the Governance 
NPRM.

II. Conflicts of Interest

    As mentioned above, Title VII of the Dodd-Frank Act amended the CEA 
to establish a comprehensive new framework for swaps and certain 
security-based swaps. This framework imposes mandatory clearing and 
trade execution requirements with respect to clearable swap contracts. 
Some market participants, investor advocates, and academics have 
expressed a concern that the enumerated entities have economic 
incentives to minimize the number of swaps subject to mandatory 
clearing and trading. They contend that control of a DCO by the 
enumerated entities, whether through ownership or otherwise, 
constitutes the primary means for keeping swap contracts out of the 
mandatory clearing requirement, and therefore also out of the trading 
requirement. A further contention is that sustained competition between 
DCMs or SEFs may exacerbate certain structural conflicts of 
interest.\25\
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    \25\ This term is defined in 72 FR 6936 (Feb. 14, 2007), which 
includes acceptable practices that the Commission previously adopted 
for the DCM core principle on conflicts of interest.
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    As the Conflicts of Interest NPRM further describes, the potential 
conflicts of interest that the Commission has identified are: Conflicts 
of interest that a DCO may confront when determining (i) whether a 
product is capable of being cleared, (ii) the minimum criteria that an 
entity must meet in order to become and remain a clearing member, and 
(iii) whether a particular entity satisfies such criteria; and 
conflicts of interest that a DCM or SEF may confront in balancing 
advancement of commercial interests and fulfillment of self-regulatory 
responsibilities.
    In addition, the Commission has identified misuse or disclosure of 
non-public information as a conflict of interest that a DCO, DCM, or 
SEF may confront. Certain individuals (e.g., owners, members of the 
Board of Directors, officers, or other employees) will be privy to non-
public information. Such non-public information could be used or 
disclosed improperly (e.g., to the detriment of competitors), whether 
advertently or inadvertently.

III. Mitigation of Conflicts of Interest

    To more fully implement the Conflicts of Interest Core Principles, 
the Commission proposes certain requirements related to (i) reporting, 
(ii) identification and mitigation of conflicts of interest, (iii) 
transparency of governance arrangements, and (iv) limitations on use or 
disclosure of non-public information.

A. Reporting Requirements

1. DCOs, DCMs, and SEFs
    As mentioned above, the Conflicts of Interest NPRM imposes specific 
compositional requirements on the Boards of Directors and certain 
committees of DCOs, DCMs, and SEFs. In order to facilitate the 
responsibility of the Commission to oversee compliance with such 
requirements, the Governance NPRM proposes to mandate that each DCO, 
DCM, or SEF submit to the Commission within 30 days after each election 
of its Board of Directors:
     A list of all members of the Board of Directors, each 
committee with a composition requirement (including any Executive 
Committee \26\), and each other

[[Page 725]]

committee that has the authority to amend or constrain the action of 
the Board of Directors,
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    \26\ The Conflicts of Interest NPRM defines ``Executive 
Committee'' as a committee of the Board of Directors that may 
exercise the authority delegated to it by the Board of Directors 
with respect to the management of the company or organization. See 
proposed Sec.  1.3(ccc). 75 FR at 63747.
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     A description of the relationship, if any, between such 
directors and the registered entity or the members of the registered 
entity (and, in each case, any affiliates thereof),
     The basis for any determination that a director qualifies 
as a Public Director, and \27\
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    \27\ With respect to DCOs, the Commission also requires the 
basis for any determination that a director qualifies as a customer 
representative.
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     A description of how the composition of the Board of 
Directors and each of the abovementioned committees allows the 
registered entity to comply with applicable core principles, 
regulations, as well as to the rules of the registered entity.
2. DCOs
    As the Conflict of Interest NPRM states:

swap clearing members at DCOs that currently clear large volumes of 
swap contracts are exclusively enumerated entities. Some have argued 
that the enumerated entities have an incentive to influence DCO risk 
assessments regarding (i) whether a swap contract is capable of 
being cleared, (ii) the appropriate membership criteria for a swap 
clearing member, and (iii) whether a particular entity meets such 
criteria. Therefore, the Commission must carefully consider the 
composition of the Risk Management Committee, in order to achieve 
(i) the increased clearing of swap contracts that the Dodd-Frank Act 
contemplates without compromising (ii) DCO safety and soundness.\28\
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    \28\ 75 FR at 63740.

    The Conflicts of Interest NPRM proposes to require each DCO to have 
an RMC, with at least (i) 35 percent public directors and (ii) 10 
percent customer representatives.\29\ If a DCO would like to have 
greater clearing member participation in risk management, then it may 
cause its RMC to delegate to a subcommittee (the ``RMC Subcommittee'') 
decisions implicating whether (i) a product is capable of being cleared 
and (ii) particular entities or categories of entities are capable of 
performing such clearing. After such delegation the RMC would be free 
of any composition requirements.
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    \29\ See Section IV(c)(ii) below on Commission reconsideration 
of requiring customer representation on the RMC, rather than on the 
DCO Board of Directors.
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    In the abovementioned structure, the RMC Subcommittee reports to 
the RMC, whereas the RMC reports to the DCO Board of Directors. 
Therefore, a DCO governing body that is not subject to the same 
compositional requirements as the RMC or the RMC Subcommittee may 
reject a recommendation or supersede an action thereof.\30\ To enable 
the Commission to determine whether such a rejection or supersession 
originates from a conflict of interest, the Governance NPRM proposes to 
require a DCO to submit a written report to the Commission, whenever 
such a rejection or supersession occurs.\31\ Such report would detail, 
among other things, the rationale for such rejection or supersession. 
This requirement parallels the requirements for central counterparties 
(``CCPs'') in the European Commission Proposal.\32\ The Commission 
anticipates that such a reporting requirement may serve to deter 
conflicts from arising in the first place.
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    \30\ This observation would be true regardless of whether the 
Commission ultimately requires customer representation on the RMC or 
the DCO Board of Directors. However, the Commission requests comment 
on whether the reporting requirement described herein should apply 
to a DCO if the Commission requires the latter and not the former.
    \31\ If, after examination, the Commission determines that such 
rejection or supersession originates from a conflict of interest, 
the Commission may find that the DCO regulatory program (as 
referenced in Section III(b) herein) is non-compliant with DCO Core 
Principle P. Upon making such a finding, the Commission may resort 
to certain administrative remedies (e.g., pursuant to Section 5c(d) 
of the CEA).
    \32\ See Article 26(5) of the European Commission Proposal.
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3. DCMs or SEFs
    The Conflicts of Interest NPRM emphasizes the importance of the ROC 
and Membership or Participation Committees in ensuring that the DCM or 
SEF does not prioritize commercial interests over self-regulatory 
responsibilities, including restricting access or imposing burdens on 
access in a discriminatory manner.\33\ As mentioned above, the 
Conflicts of Interest NPRM proposes to require each DCM or SEF to have 
(i) a ROC with all public directors and (ii) a Membership or 
Participation Committee with 35 percent public directors. However, the 
Conflicts of Interest NPRM contemplates that such ROC or Membership or 
Participation Committee would report to the DCM or SEF Board of 
Directors. As such DCM or SEF Board of Directors may not be subject to 
the same composition requirements (or may not have the same members) as 
the ROC or Membership or Participation Committee, the Governance NPRM 
proposes to require a DCM or SEF to submit a written report to the 
Commission whenever such Board of Directors rejects a recommendation of 
the ROC or the Membership or Participation Committee or supersedes an 
action. Such report would detail among other things, the rationale for 
such action. The Commission believes that such a reporting requirement 
would alert it to potential conflicts of interests, as well as deter 
such conflicts from arising in the first place.
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    \33\ 75 FR 63741.
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    In addition to the above, the Governance NPRM proposes to require 
the ROC to prepare an annual report to the Board of Directors assessing 
various components of the DCM or SEF regulatory program. Such a 
requirement generally parallels current acceptable practices under DCM 
Core Principle 15.\34\
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    \34\ Such regulatory program is described further in section 
III(b) herein. The Dodd-Frank Act has redesignated DCM Core 
Principle 15 as DCM Core Principle 16, but has left the actual 
language of the core principle substantively unchanged. See section 
3(ii)(E) under Acceptable Practices for Core Principle 15 in 
Appendix B to Part 38 of the Commission's regulations.
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4. Questions \35\
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    \35\ See note 30 supra.
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    The Commission requests comment on all aspects of the reporting 
requirements. The Commission further requests comment on the questions 
set forth below.
     Pursuant to Article 31(2) of the European Commission 
Proposal, if a CCP cannot manage, through structural or substantive 
governance arrangements, conflicts of interest that may disadvantage a 
specific member or customer, then that CCP must disclose to that member 
(or customer, if known) the general nature or sources of such 
conflicts. The CCP must make such disclosure before accepting new 
transactions from the affected member, presumably so that such member 
(or customer thereof) may choose to discontinue clearing with the CCP. 
Should the Commission consider imposing a similar requirement on DCOs? 
Why or why not?
     If the Commission decides to impose a similar requirement 
on DCOs, should the Commission extend such a requirement to cover DCMs 
and SEFs? Why or why not?

B. Regulatory Program

    The Governance NPRM proposes to require that, as part of its 
regulatory program, each DCO, DCM, or SEF must establish, maintain, and 
enforce written procedures to:
     Identify, on an ongoing basis, existing and potential 
conflicts of interest; and

[[Page 726]]

     Make fair and non-biased decisions in the event of a 
conflict of interest. Such procedures would include rules regarding the 
recusal, when appropriate, of parties involved in the making of 
decisions. The Chief Compliance Officer (for DCOs and SEFs), or the 
Chief Regulatory Officer (for DCMs), shall, in consultation with the 
Board of Directors of the entity or a senior officer of the entity, 
resolve any conflicts of interest.
    The Commission anticipates that the potential conflicts of interest 
that each DCO, DCM, or SEF confronts may change as the swaps market 
evolves under regulation. Consequently, the Commission believes that it 
is appropriate to require a DCO, DCM, or SEF to have a regulatory 
program to monitor existing and potential conflicts of interest on an 
ongoing basis. The Commission intends to permit a DCO, DCM, or SEF to 
contract with a third-party regulatory service provider to fulfill such 
requirement, subject to Commission guidance generally applicable to 
such contractual relationships.\36\
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    \36\ See ``Trading Facilities, Intermediaries, and Clearing 
Organizations; New Regulatory Framework; Final Rule,'' 66 FR 42256, 
42266 (August 10, 2001). Although the relevant discussion focuses on 
DCMs, a similar logic would apply to DCOs. Further, pursuant to the 
Dodd-Frank Act, the Commission is contemplating proposing 
regulations regarding such contractual relationships.
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    To protect the integrity of trade execution and clearing, the 
Commission believes that it is appropriate to require each DCO, DCM, or 
SEF to have procedures, including recusal procedures, to make fair and 
non-biased decisions in the event of a conflict of interest. Article 
26(4) of the European Commission Proposal includes a similar recusal 
requirement for CCP risk committees. Specifically, if the chairman of a 
CCP risk committee determines that a member has an actual or potential 
conflict of interest on a particular matter, that member would not be 
allowed to vote on that matter.
1. Questions
    The Commission requests comment on all aspects of the regulatory 
program. The Commission further requests comment on the questions set 
forth below:
     As mentioned above, the Commission intends to permit a 
DCO, DCM, or SEF to contract with a third-party regulatory service 
provider (e.g., the National Futures Association) to implement the 
abovementioned regulatory program. Would a third-party regulatory 
service provider itself ever experience a conflict of interest from the 
performance of its obligations under such a contract? If so, under what 
circumstances?
     Should the Commission propose any other substantive 
requirements with respect to the decision-making process of a DCO, DCM, 
or SEF?

C. Transparency Requirements

    At the Roundtable, certain market participants emphasized that DCO 
governance arrangements must be transparent to permit the Commission, 
as well as the public, to (i) learn of decisions that have systemic 
importance (e.g., whether a product is capable of being cleared), and 
(ii) identify the governing bodies (e.g., the RMC) responsible for 
making such decisions.\37\ Previously, when the Commission proposed 
acceptable practices for current DCM Core Principle 15 (Conflicts of 
Interest), the Commission recognized the value of transparency in 
``maintaining market integrity and public trust.'' \38\ Such a 
rationale would appear to also apply to DCOs and SEFs.\39\
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    \37\ See, e.g., Comments from Jason Kastner, Vice Chairman, 
Swaps and Derivatives Markets Association (``I think that the issue 
is making sure that the risk committees of these DCOs are 
transparent, that you know who the membership is, that the decisions 
that are taken about whether to permit new clearing members and 
whether to permit new products to be listed are transparent and 
readily appraisable, and so that everyone knows, you know, what's 
going on. * * * So this is an open hearing, right? There's a public 
record. There's cameras. There's recordings. The same type of 
transparency should apply to DCO governance so that everyone is 
clear about how decisions are taken and how they're made and who's 
making them.''), Roundtable Tr. at 74-75; and Comments from Randy 
Kroszner, Professor of Economics, Booth School of Business, 
University of Chicago (``I think this gets back to the transparency 
point, but I do think it's extremely important to have people with 
the knowledge, the wherewithal, and with their money on the line 
having input into these risk-management decisions, and I think the 
best way to ensure that is to ensure a very, very transparent 
process so that outsiders can evaluate and provide the commentary 
and the independent directors will have enough wherewithal, enough 
knowledge to know what is going on.''), Roundtable Tr. 78-79.
    \38\ 71 FR 38741 (July 7, 2006) (which proposed the acceptable 
practices for current DCM core principle 15) (``* * * the current 
market environment mandates enhanced and transparent governance as 
an essential business practice for maintaining market integrity and 
public trust.'').
    \39\ According to Section 4.13.3 of the CCP Recommendations, 
``[g]overnance arrangements should be clearly specified and publicly 
available.''
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    In light of the above, the Governance NPRM proposes to establish 
minimum standards for the transparency of the governance arrangements 
of each DCO, DCM, or SEF to relevant authorities (including the 
Commission) as well as the public.\40\ These minimum standards \41\ 
require each DCO, DCM, or SEF to:
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    \40\ The Commission intends to promulgate the transparency 
requirements for DCMs and SEFs pursuant to its authority under DCM 
Core Principle P, SEF Core Principle 12 (in each case, Conflicts of 
Interest), and Section 8a(5) of the CEA. The Commission intends to 
promulgate the transparency requirements for DCOs pursuant to its 
authority under DCO Core Principle O (Governance Fitness Standards), 
and Section 8a(5) of the CEA. This core principle requires that a 
DCO establish governance arrangements that are transparent to, among 
other things, fulfill public interest requirements. This core 
principle is interrelated to DCO Core Principle P (Conflicts of 
Interest), since transparency requirements enhance the ability of 
the Commission to detect conflicts of interest, and may serve to 
deter such conflicts. The Commission believes that it has the 
authority to promulgate transparency requirements under either DCO 
Core Principle O or P.
    \41\ As Section III discusses in greater detail, the Commission 
proposes to require DCOs and DCMs to meet additional standards 
regarding the manner in which the Board of Directors considers the 
opinions of market participants, among others.
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     Make available certain information to the public and 
relevant authorities; \42\
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    \42\ Such information includes (i) the charter (or mission 
statement) of the registered entity; (ii) the charter (or mission 
statement) of the Board of Directors and certain committees; (iii) 
the Board of Directors nominations process for the registered 
entity, as well as the process for assigning members of the Board of 
Directors or other persons to certain committees; (iv) names of all 
members of (a) the Board of Directors and (b) certain committees; 
(v) the identities of all Public Directors (and with respect to a 
DCO, all customer representatives); (vi) the lines of responsibility 
and accountability for each operational unit of the registered 
entity; and (vii) summaries of significant decisions implicating the 
public interest.
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     Ensure that the information made available is current, 
accurate, clear and readily accessible; and
     Disclose summaries of certain significant decisions.
    DCM, SEF, and DCO significant decisions involve those areas in 
which conflicts of interest identified in Section II above may be most 
manifest. With respect to a DCM or a SEF, significant decisions would 
relate to access, membership, and disciplinary procedures. With respect 
to a DCO, significant decisions would relate to open access, 
membership, and the finding of products acceptable (or not acceptable) 
for clearing. The Commission proposes to require that the DCO 
specifically disclose whether (i) its Board of Directors has rejected a 
recommendation or superseded an action of the RMC, or (ii) the RMC has 
rejected a recommendation or superseded an action of the RMC 
Subcommittee. The Commission does not intend the foregoing to require a 
DCM, SEF, or DCO to disclose any ``non-public information'' (as 
proposed Sec.  1.3(ggg) defines such term), including, without 
limitation, minutes from meetings of its Board of Directors or 
committees or information that it may have received on a confidential 
basis from an applicant for membership.

[[Page 727]]

1. Questions
    The Commission requests comment on all aspects of the transparency 
requirements. The Commission further requests comment on the questions 
set forth below.
     Are the abovementioned proposals necessary or appropriate 
to mitigate DCO, DCM, or SEF conflicts of interest or to ensure that 
DCO governance arrangements are transparent to, among other things, 
fulfill public interest requirements? If not, why not? What would be a 
better alternative?
     Should the Commission require that a DCO, DCM, or SEF make 
available to the public and relevant authorities information other than 
that identified above?
     Has the Commission accurately identified DCO, DCM, or SEF 
significant decisions? Should the Commission explicitly deem any other 
DCO, DCM, or SEF decisions as significant? Conversely, should the 
Commission deem any of the DCO, DCM, or SEF decisions that it has 
identified to be not significant? Why?
     Should the Commission permit a DCO, DCM, or SEF to keep 
confidential any information identified above? If so, why?

D. Limitation on Use or Disclosure of Non-Public Information

1. Requirements
    The Governance NPRM proposes to require each DCO, DCM, or SEF to 
establish and maintain written policies and procedures on safeguarding 
non-public information. These policies and procedures must, at a 
minimum, preclude a DCO, DCM, or SEF owner, director, officer, or 
employee from using or disclosing any non-public information gained 
through their interest or position, absent prior written consent from 
the DCO, DCM, or SEF, as applicable.\43\ The Commission intends for 
such requirements to prohibit those in a position of power, either by 
holding a certain position in the organization or through an ownership 
interest, from leveraging such power to benefit, commercially or 
otherwise, from non-public information.\44\ The Commission believes 
that such leveraging would constitute a clear conflict of interest. The 
Commission notes that such requirements comport with certain aspects of 
the European Commission Proposal.\45\
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    \43\ The Commission recognizes that the disclosure of non-public 
information may be necessary in certain instances, even without the 
written consent of the DCO, DCM, or SEF. Such instances include if 
disclosure is compelled by valid legal process (provided that the 
individual or entity notifies the registered SDR) or required by a 
regulatory authority.
    \44\ For example, a DCO, DCM, or SEF member may use or disclose 
non-public information (e.g., the possibility of disciplinary 
action) to the detriment of its competitor.
    \45\ See Article 26(4) of the European Commission Proposal 
(stating that ``[w]ithout prejudice to the right of competent 
authorities to be duly informed, the members of the risk committee 
shall be bound by confidentiality.'').
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    The Governance NPRM proposes to define ``non-public information'' 
as any information that the DCO, DCM, or SEF owns or any information 
that such entity otherwise deems confidential, such as intellectual 
property belonging to (A) such registered entity or (B) a third party, 
which property such registered entity receives on a confidential basis. 
The Commission will not preclude a DCO, DCM, or SEF from adopting a 
more expansive definition of ``non-public information.''
2. Questions
    The Commission requests comment on all aspects of the limitation on 
use of non-public information. The Commission further requests comment 
on the questions set forth below.
     Are the abovementioned proposals necessary or appropriate 
to mitigate DCO, DCM, and SEF conflicts of interests? If not, why not? 
What would be a better alternative?
     Has the Commission proposed an appropriate definition for 
``non-public information''? If not, why not? What would be a better 
alternative?
     Should the Commission consider any other concerns 
regarding the use of ``non-public information''?

IV. Regulations Implementing Governance Core Principles

    In addition to regulations more fully implementing the Conflicts of 
Interest Core Principles, the Commission also proposes regulations 
implementing DCO and DCM core principles on governance fitness and the 
composition of governing boards. Further, the Commission proposes 
regulations to implement the DCM core principle on diversity of certain 
Boards of Directors.

A. Governance Fitness Standards

    DCO Core Principle O,\46\ as added by Section 725(c) of the Dodd-
Frank Act, provides that each DCO shall (i) establish governance 
arrangements that are transparent to fulfill public interest 
requirements and to permit the consideration of the views of owners and 
participants and (ii) establish and enforce appropriate fitness 
standards for (A) directors, (B) members of any disciplinary committee, 
(C) members of the DCO, (D) any other individual or entity with direct 
access to the settlement or clearing activities of the DCO, and (E) any 
party affiliated with any entity mentioned above. DCM Core Principle 
15, as retained by Section 735(b) of the Dodd-Frank Act, provides that 
a DCM shall establish and enforce appropriate fitness standards for (i) 
directors, (ii) members of any disciplinary committee, (iii) members of 
the DCM, (iv) any other person with direct access to the facility, and 
(v) any person affiliated with any entity mentioned above.
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    \46\ 7 U.S.C. 5b(c)(2)(O).
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1. Fitness Requirements
    To implement DCM Core Principle 15 and partially implement DCO Core 
Principle O, the Governance NPRM proposes to require each DCM and DCO 
to specify and enforce fitness standards for (i) directors, (ii) 
members of any Disciplinary Panel,\47\ and (iii) members of the 
Disciplinary Committee.\48\ These standards shall include, at a 
minimum, (i) those bases for refusal to register a person under Section 
8a(2) of the CEA,\49\ and (2) the absence of a significant history of 
serious disciplinary offenses, such as those that would be 
disqualifying under Sec.  1.63 of the Commission's regulations.\50\
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    \47\ The Conflicts of Interest NPRM defines ``Disciplinary 
Panel'' as a panel that shall be responsible for conducting 
hearings, rendering decisions, and imposing sanctions with respect 
to disciplinary matters. See proposed Sec.  40.9(c)(3)(i). 75 FR at 
63752.
    \48\ Section 1.63 of the Commission's regulations defines 
``Disciplinary Committee'' as a person or committee of persons, or 
any subcommittee thereof, that is authorized by a self-regulatory 
organization to issue disciplinary charges, to conduct disciplinary 
proceedings, to settle disciplinary charges, to impose disciplinary 
sanctions or to hear appeals thereof. See 17 CFR 1.63.
    \49\ 7 U.S.C. 12(a)(2). Bases for refusal to register a person 
under Section 8a(2) of the CEA include, among other things, 
suspension or revocation of registration, certain court orders 
prohibiting action in the capacity of a registrant under the CEA, 
certain felony convictions, or findings of violation of the CEA or 
certain other Federal statutes.
    \50\ 17 CFR 1.63. Such offenses include violations of certain 
self-regulatory organization rules and violations of the CEA or the 
Commission's regulations thereunder.
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    Also, the Governance NPRM proposes to require each DCM and DCO to 
specify and enforce fitness standards for (i) its members and 
affiliates \51\ thereof, (ii) persons with direct access to the DCM or, 
in the case of a DCO, to its settlement and clearing activities, (iii) 
natural persons who, directly or indirectly, own greater than ten 
percent of any one class

[[Page 728]]

of equity interest in a DCM or DCO,\52\ and (v) parties affiliated with 
(A) directors, (B) members of any Disciplinary Panel, and (C) members 
of the Disciplinary Committee.\53\ At a minimum, such standards shall 
include those bases for refusal to register a person under Section 
8a(2) of the CEA.\54\
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    \51\ The Governance NPRM proposes to define ``affiliate'' as a 
person that directly, or indirectly through one or more 
intermediaries, controls, is controlled by, or is under common 
control with, a registered entity.
    \52\ This provision is a clarification of acceptable practices 
under current DCM Core Principle 14.
    \53\ Currently, the Governance NPRM does not propose to impose 
any requirement on each DCM and DCO with respect to fitness 
standards for affiliates of persons with direct access. Therefore, 
under Section 5(d)(1)(B) of the CEA, as added by Section 735 of the 
Dodd-Frank Act, each DCM has reasonable discretion in comporting 
with DCM Core Principle 15 with respect to such affiliates. Also, 
under Section 5b(c)(2)(A)(ii) of the CEA, as added by Section 725 of 
the Dodd-Frank Act, each DCO retains similar discretion.
    \54\ See note 49 supra.
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    Further, the Governance NPRM proposes to require each DCM and DCO 
to collect and verify information that supports compliance with the 
standards articulated above and provide that information to the 
Commission annually.
    The abovementioned proposals codify the acceptable practices under 
current DCM Core Principle 14 (Governance Fitness Standards) and extend 
such practices to DCOs.\55\ The Commission believes that such proposals 
are appropriate to ensure the integrity of individuals and entities 
specified above. Such integrity, in turn, allows DCMs and DCOs to 
operate in the best interests of the public.\56\
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    \55\ DCM Core Principle 14 is redesignated as DCM Core Principle 
15 under the Dodd-Frank Act.
    \56\ DCMs facilitate the execution of, and DCOs provide clearing 
for, ``* * * transactions * * * affected with a national public 
interest.'' See Section 3(a) of the CEA, 7 U.S.C. 5.
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    In addition to the above, the Governance NPRM proposes to mandate 
that members and certain other persons must agree to become subject to 
the jurisdiction of the DCM or the DCO, as a condition of access. Such 
a proposal ensures that a DCM or DCO, each of which has self-regulatory 
responsibilities, would be able to appropriately discipline a member or 
such other person for violation of DCM or DCO rules. The Commission 
believes that a DCM or DCO must have the ability to exert such 
discipline in order to ensure the fitness of members or such other 
persons.
2. Questions
    The Commission requests comment on all aspects of the governance 
fitness standards. Specifically, the Commission requests comment on the 
questions set forth below.
     Are the abovementioned proposals necessary or appropriate 
to implement DCM Core Principle 15 and DCO Core Principle O? If not, 
why not? What would be a better alternative?
     Should the Commission propose any minimum fitness 
standards other than those specified above?
     Is the Commission's proposed definition of affiliate 
appropriate? If not, why?

B. Transparency Requirements

    As mentioned above, DCO Core Principle O \57\ provides that each 
DCO shall establish governance arrangements that are transparent to 
fulfill public interest requirements.\58\ Section III(C) of the 
Governance NPRM discusses proposals to implement such portion of the 
core principle. However, DCO Core Principle O also provides that each 
DCO shall establish governance arrangements that are transparent to 
permit the consideration of the views of owners and participants. Such 
language appears unique to DCOs. Hence, the Governance NPRM sets forth 
the following additional proposals for DCOs:
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    \57\ 7 U.S.C. 5b(c)(2)(O).
    \58\ To comport with the European Commission Proposal, the 
Commission has additionally interpreted DCO Core Principle O to 
require governance arrangements that are well-defined and that 
include a clear organizational structure with consistent lines of 
responsibility and effective internal controls.
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     Each DCO shall make available to the public, as well as 
relevant authorities (including the Commission), a description of the 
manner in which its governance arrangements permit the consideration of 
the views of owners (whether voting or non-voting) and its 
participants, including, without limitation, clearing members and 
customers;
     Such description shall include, at a minimum:
    [cir] The general method by which the DCO learns of the views of 
owners (other than through the exercise of voting power) and 
participants (other than through representation on the DCO Board of 
Directors or any DCO committee); and
    [cir] The manner in which the DCO considers such views.
1. Questions
    The Commission requests comment on all aspects of the additional 
proposals. Specifically, the Commission requests comment on the 
questions set forth below.
     Are such additional proposals necessary or appropriate to 
implement DCO Core Principle O? If not, why not? What would be a better 
alternative?
     Should the Commission propose to require that each DCO 
make available to the public, as well as relevant authorities, 
information other than that identified above?

C. Composition of the Board of Directors

1. DCMs
    DCM Core Principle 17,\59\ as amended by Section 735(b) of the 
Dodd-Frank Act,\60\ provides that the governance arrangements of a DCM 
shall be designed to permit consideration of the views of market 
participants. To implement this provision, the Governance NPRM proposes 
to require each DCM to design and institute a process for considering 
the range of opinions that market participants hold with respect to (i) 
the functioning of an existing market (including governance 
arrangements) and (ii) new rules or rule amendments. The Commission 
intends to permit each DCM to have the flexibility to determine the 
process that is most appropriate for its market participants. The 
Commission notes that one process by which a DCM may fulfill DCM Core 
Principle 17 is to have market participants on its Board of Directors 
(or other governing bodies). Regardless of the process that a DCM 
chooses, the Governance NPRM requires the DCM to make a description of 
such process available to the public and to relevant authorities 
(including the Commission) as part of its compliance with the 
transparency requirements described in Section III(C) above.\61\
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    \59\ 7 U.S.C. 7(d)(17).
    \60\ The Dodd-Frank Act redesignated DCM Core Principle 16 
(Composition of Boards of Mutually Owned Contract Markets) as DCM 
Core Principle 17 (Composition of Governing Boards of Contract 
Markets), and amended the language of the core principle. Former DCM 
Core Principle 16 stated: ``In the case of a mutually owned contract 
market, the board of trade shall ensure that the composition of the 
governing board reflects market participants.'' DCM Core Principle 
17, as amended by the Dodd-Frank Act states that ``[t]he governance 
arrangements of the board of trade shall be designed to permit 
consideration of the views of market participants.''
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    a. Questions.
    The Commission requests comment on this proposal. Specifically, the 
Commission requests comment on the questions set forth below.
     Is the abovementioned proposal appropriate to implement 
DCM Core Principle 17? What would be a better alternative? What are the 
costs and benefits of the abovementioned proposals? What are the costs 
and benefits of any alternative?
     Does the Commission need to consider proposing any 
additional requirements in order to implement DCM Core Principle 17? 
What would be the costs and benefits of any such requirement?

[[Page 729]]

2. DCOs
    DCO Core Principle Q, as added by Section 725(c) of the Dodd-Frank 
Act, provides that each DCO shall ensure that the composition of the 
governing board or committee of the DCO includes market participants. 
In partial reliance on this core principle, the Conflicts of Interest 
NPRM proposed requiring that the RMC (or the RMC Subcommittee) be 
composed of at least 10 percent customer representatives. However, 
based on comments that the Commission received on the Conflicts of 
Interest NPRM,\62\ certain market participants would prefer that the 
DCO Board of Directors, rather than the RMC, include customer 
representation.\63\ Therefore, the Commission is reconsidering whether 
requiring customer representation on the RMC or the DCO Board of 
Directors would better implement both Section 726 of the Dodd-Frank Act 
and DCO Core Principle Q. Preliminarily, the Commission is not inclined 
to require customer representation on both the RMC and the DCO Board of 
Directors, as the former reports to the latter. As members of the DCO 
Board of Directors, customer representatives would have the opportunity 
to (i) review recommendations and actions of the RMC, (ii) request the 
rationale behind such recommendations and actions, and (iii) vote to 
reject such recommendations and to supersede such actions.
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    \62\ The comment period for the Conflicts of Interest NPRM 
closed on November 17, 2010. Comments are available at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=861.
    \63\ See, e.g., Comment from the Investment Company Institute, 
dated November 17, 2010 (stati