Governance Requirements for Derivatives Clearing Organizations, 49559-49568 [2022-16683]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 87, Number 154 (Thursday, August 11, 2022)]
[Proposed Rules]
[Pages 49559-49568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-16683]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 39

RIN 3038-AF15


Governance Requirements for Derivatives Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission) 
is proposing amendments to require derivatives clearing organizations 
(DCOs) to establish and consult with one or more risk management 
committees (RMCs) comprised of clearing members and customers of 
clearing members on matters that could materially affect the risk 
profile of the DCO. In addition, the Commission proposes establishing 
minimum requirements for RMC composition and rotation, and requiring 
DCOs to establish and enforce fitness standards for RMC members. The 
Commission also proposes requiring DCOs to maintain written policies 
and procedures governing the RMC consultation process and the role of 
RMC members. Finally, the Commission is proposing to require DCOs to 
establish one or more market participant risk advisory working groups 
(RWGs) that must convene at least quarterly, and adopt written policies 
and procedures related to the formation and role of the RWG.

DATES: Comments must be received by October 11, 2022.

ADDRESSES: You may submit comments, identified by ``Governance 
Requirements for Derivatives Clearing Organizations'' and RIN number 
3038-AF15, by any of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.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 (FOIA), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to in this 
release are found at 17 CFR chapter I (2020), and are accessible on 
the Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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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://comments.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 FOIA.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [email protected]; Division of Clearing and Risk, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581; Theodore Z. Polley III, Associate 
Director, (312) 596-0551, [email protected]; or Joe Opron, Special 
Counsel, (312) 596-0653, [email protected]; Division of Clearing and 
Risk, Commodity Futures Trading Commission, 77 West Jackson Boulevard, 
Suite 800, Chicago, Illinois 60604.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Proposed Amendments to Sec.  39.24(b)
III. Proposed Amendments to Sec.  39.24(c)
IV. Request for Comments
V. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

    The Market Risk Advisory Committee (MRAC) is a discretionary 
advisory committee established by the authority of the Commission in 
accordance with the Federal Advisory Committee Act, as amended.\2\ The 
MRAC advises the Commission on matters related to evolving market 
structures and movement of risk across clearinghouses, exchanges, 
intermediaries, market makers and end-users.\3\ MRAC subcommittees are 
organized by topic to produce reports and recommendations to the full 
MRAC that, if approved, are submitted to the Commission for its 
consideration.
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    \2\ 5 U.S.C. App. 2.
    \3\ See Market Risk Advisory Committee, available at https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
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    On February 23, 2021, the MRAC approved a report from its Central 
Counterparty (CCP) Risk and Governance Subcommittee (Subcommittee) that 
provided several recommendations on DCO risk governance.\4\ For each 
topic considered in the report, the (1) DCOs and (2) clearing members 
and end-users (CM/EU) represented on the Subcommittee each provided 
separate recommendations, and in some instances proposed rule text. On 
some topics, the two groups reached a general agreement on how DCO 
governance might be improved, but there were also areas of 
disagreement.
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    \4\ MRAC CCP Risk and Governance Subcommittee, Recommendations 
on CCP Governance and Summary of Subcommittee Constituent 
Perspectives, available at https://www.cftc.gov/media/6201/MRAC_CCPRGS_RCCOG022321/download (Feb. 23, 2021).
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    The Commission is proposing several amendments to Sec.  39.24 that 
are consistent with the Subcommittee's recommendations to enhance the 
Commission's DCO governance standards. First, the Commission proposes 
to require each DCO to establish and consult with one or more RMCs 
comprised of clearing members

[[Page 49560]]

and customers of clearing members prior to making decisions that could 
materially affect the risk profile of the DCO, and proposes 
requirements related to the composition and activities of RMCs. Second, 
the Commission proposes to require each DCO to establish one or more 
RWGs in order to seek risk-based input (as opposed to commercially-
driven input) from a broader array of market participants. The 
Commission also requests comment below on several other topics 
discussed in the Subcommittee report on which the DCO and CM/EU members 
of the Subcommittee did not reach clear agreement.

II. Proposed Amendments to Sec.  39.24(b)

    Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth 
core principles with which a DCO must comply in order to be registered 
and to maintain registration as a DCO (DCO Core Principles),\5\ and 
part 39 of the Commission's regulations implement the DCO Core 
Principles. DCO Core Principle O requires a DCO to establish governance 
arrangements that are transparent, fulfill public interest 
requirements, and permit the consideration of the views of owners and 
participants.\6\ Paragraphs (a) and (b) of Sec.  39.24 implement this 
aspect of Core Principle O by providing minimum requirements regarding 
the substance and form of a DCO's governance arrangements. The 
Commission proposes to enhance these requirements by requiring a DCO 
to: (1) establish and consult with one or more RMCs on matters that 
could materially affect the risk profile of the DCO; (2) appoint 
clearing members and customers of clearing members to the RMC; (3) 
rotate RMC membership on a regular basis; (4) establish one or more 
RWGs; and (5) establish written policies and procedures regarding the 
RMC consultation process and the formation and role of each RWG.
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    \5\ 7 U.S.C. 7a-1.
    \6\ See 7 U.S.C. 7a-1(c)(2)(O)(i).
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A. Establishment and Consultation of RMC--Sec.  39.24(b)(11)

    Commission regulations require a DCO to consider the views of 
clearing members and customers of clearing members as part of the DCO's 
governance process. Most notably, Sec.  39.24(a)(1)(iv) requires a DCO 
to have governance arrangements that support the relevant public 
interest considerations of clearing members, customers of clearing 
members, and other relevant stakeholders. Regulation 39.24(a)(2) 
requires a DCO's board of directors to make certain that the DCO's 
design, rules, overall strategy, and major decisions appropriately 
reflect the legitimate interests of clearing members, customers of 
clearing members, and other relevant stakeholders.
    While not required by Commission regulations, many DCOs have 
addressed the above requirements by establishing advisory RMCs 
comprised of clearing members that provide expert opinion on key risk 
management issues.\7\ Codifying this best practice furthers the purpose 
of Core Principle O by providing a consistent, formalized process 
across all DCOs to solicit, consider, and address input from clearing 
members and end-users before making decisions that could materially 
affect the risk profile of the DCO. Moreover, while serving on an RMC, 
clearing members and end-users would be able to use their risk 
management expertise to promote the safety and efficiency of the DCO 
and foster the stability of the broader financial markets. Finally, 
codifying a market participant consultation requirement formally 
enhances the role of market participants in the DCO risk governance 
process across DCOs.
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    \7\ See, e.g., Chicago Mercantile Exchange, Inc., Clearing House 
Risk Committee Charter, accessed on February 3, 2022, available at 
https://investor.cmegroup.com/static-files/7445789a-8aaa-46ec-8539-069e8cbf0fab; ICE Clear Credit Regulation and Governance, Fact 
Sheet, accessed February 3, 2022, available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.
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    Therefore, the Commission is proposing new Sec.  39.24(b)(11), 
which would require a DCO to maintain governance arrangements that 
establish one or more RMCs,\8\ and require a DCO's board of directors 
to consult with, and consider and respond to input from, its RMC(s) on 
all matters that could materially affect the risk profile of the 
DCO.\9\ While the Commission is not proposing to prescribe exactly how 
a board of directors should respond to RMC input, the board of 
directors must respond to the substance of the input it receives rather 
than merely acknowledging that the input was received. Proposed Sec.  
39.24(b)(11) would identify a non-exhaustive list of matters that could 
materially affect the risk profile of the DCO, including any material 
change to the DCO's margin model, default procedures, participation 
requirements, and risk monitoring practices, as well as the clearing of 
new products.
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    \8\ The Commission notes that some DCOs maintain separate RMCs 
for each product type that they clear. For example, Chicago 
Mercantile Exchange, Inc.'s (CME) Clearing House Risk Committee 
oversees primarily futures and options products, and its Interest 
Rate Swaps Risk Committee oversees interest rate swaps products. See 
CME, Governance, accessed on February 3, 2022, available at https://www.cmegroup.com/education/articles-and-reports/governance.html.
    \9\ RMCs are mentioned in existing Commission regulations (see, 
e.g., Sec.  39.24((b)(7)) given that many DCOs already use them, but 
current regulations do not explicitly require a DCO to establish an 
RMC or prescribe the nature of its role.
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    Clearing members have a significant interest in the clearing of new 
products, especially at DCOs with mutualized default funds. The fact 
that new products typically have low open interest upon launch does not 
prevent them from potentially materially affecting the risk profile of 
the DCO. When determining whether a new product could materially affect 
its risk profile, a DCO should consider the product's potential impact 
as the product matures, and not only at the onset of trading, when 
risks may be less pronounced.
    The Commission requests comment on whether a DCO's proposal to 
clear a new product should be categorically treated as a matter that 
could materially affect the DCO's risk profile for purposes of the 
proposed RMC consultation requirement given the heightened potential 
for novel and complex risks associated with clearing new products. If 
so, should the Commission define what constitutes a new product for 
this purpose, and how should it do so? For example, should the 
Commission define new products to include those that have margining, 
liquidity, default management, pricing, or other risk characteristics 
that differ from those currently cleared by the DCO? In the 
alternative, should the Commission require DCOs to adopt policies 
defining what constitutes a new product?
    Finally, for the avoidance of doubt, the Commission notes that 
while it believes that codifying an RMC consultation requirement will 
significantly enhance overall DCO risk management, a DCO's board of 
directors has the ultimate responsibility to make major decisions with 
respect to the DCO.\10\
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    \10\ See 17 CFR 39.24(a)(2) through (3).
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B. Policies and Procedures Governing RMC Consultation--Sec.  
39.24(b)(11)(i)

    The Commission is proposing new Sec.  39.24(b)(11)(i), which would 
require a DCO to maintain written policies and procedures to make 
certain that the RMC consultation process is described in detail, and 
includes requirements for the DCO to document the board's consideration 
of and response to RMC input. The Commission believes that explicitly 
requiring DCOs to develop and maintain policies and procedures

[[Page 49561]]

governing DCO consultation with its RMC(s), and to document the 
activities of its RMC(s), will promote transparency, accountability, 
and predictability, and facilitate effective oversight by the 
Commission in this area. The Commission requests comment on whether 
DCOs should be required to create and maintain minutes or other 
documentation of RMC meetings.

C. Representation of Clearing Members and Customers on RMC--Sec.  
39.24(b)(11)(ii)

    As discussed above, Core Principle O and Sec.  39.24 require DCOs 
to consider the views and legitimate interests of clearing members and 
customers of clearing members in their decision-making process. This 
principle is rooted in the need to ensure that these parties have an 
opportunity to express their concerns, and in recognition of the stake 
that clearing members and their customers have in the financial 
integrity of the DCO, as well as the fact that DCOs benefit from their 
unique perspective and expertise on risk management issues. 
Accordingly, the Commission is proposing new Sec.  39.24(b)(11)(ii), 
which would require a DCO to maintain policies to make certain that an 
RMC includes representatives from clearing members and customers of 
clearing members.
    With respect to RMC composition, the Commission proposes to adopt 
the Subcommittee's recommendation that an RMC include 
``representatives'' from both clearing members and customers of 
clearing members. The Commission believes that requiring more than one 
clearing member and more than one customer of a clearing member ensures 
a minimum level of market participant participation on RMCs while 
providing DCOs with appropriate flexibility to account for differences 
among DCOs in terms of size, business models, resources, and governance 
structure. However, the Commission requests comment on whether it 
should adopt additional specific composition requirements, and if so, 
what those requirements should be.

D. Rotation of RMC Membership--Sec.  39.24(b)(11)(iii)

    The Commission believes that requiring DCOs to regularly rotate 
their RMC membership will promote the ability of clearing members and 
customers of clearing members from a broad array of market segments to 
provide their expertise, and will ensure that the RMC provides the DCO 
with fresh perspectives on risk management matters. Accordingly, the 
Commission is proposing new Sec.  39.24(b)(11)(iii), which would 
require a DCO to maintain policies to make certain that membership of 
an RMC is rotated on a regular basis. The Commission requests comment 
on whether it should set a minimum frequency for RMC membership 
rotation, what are the advantages and disadvantages of doing so, and, 
if it does, what that frequency should be.

E. Establishment of RWG To Obtain Input--Sec.  39.24(b)(12)

    As noted above, the Commission's proposal to require a DCO to 
establish and consult with an RMC that includes clearing member and 
customer representatives who are rotated on a regular basis would 
further implement the Core Principle O requirement that a DCO establish 
governance arrangements that permit the consideration of the views of 
owners and participants. However, the Commission recognizes that 
practical considerations, most notably the size of a typical RMC and 
the significant time commitment that an RMC would require of its 
members, will limit the number of representatives that can serve on a 
DCO's RMC at any given time. Many DCOs have dozens of clearing members, 
each of which can have a large number of customers. Moreover, as 
proposed, an RMC's duties would involve formal consultation with a 
DCO's board of directors on all matters that could materially affect 
the risk profile of the DCO. Thus, RMC membership may constitute a 
significant time commitment. As an advisory working group, an RWG would 
require a smaller time commitment from its participants. Therefore, in 
order to further expand and diversify the information available to a 
DCO while making material risk decisions, and to expand opportunities 
for those with a stake in DCO risk management to provide input, the 
Commission is proposing new Sec.  39.24(b)(12) to require a DCO to 
establish one or more RWGs, and to maintain policies and procedures 
regarding the formation and role of each RWG. Having an RWG would allow 
a DCO to seek risk-based input (as opposed to commercially-driven 
input) from a broader array of market participants, such that a diverse 
cross-section of the DCO's clearing members and customers of its 
clearing members are represented, regarding all matters that could 
materially affect the risk profile of the DCO. Requiring policies and 
procedures regarding the role of each RWG will promote transparency, 
accountability, and predictability and facilitate effective oversight 
by the Commission. Finally, the Commission proposes to require each RWG 
to convene at least quarterly, with the goal of ensuring that each RWG 
is able to discuss and provide input on material risk matters in a 
timely manner.
    The Commission requests comment on whether the proposed requirement 
that each RWG convene quarterly is the appropriate frequency. The 
Commission also requests comment on whether it should require DCOs to 
document the proceedings of RWG meetings, considering both the 
transparency and accountability benefits of such a requirement and the 
potential impact of a documentation requirement on free and open 
dialogue.

III. Proposed Amendments to Sec.  39.24(c)

A. Fitness Standards for RMC Members--Sec.  39.24(c)(1)

    Regulation 39.24(c) implements subsection (ii) of DCO Core 
Principle O, which requires a DCO to establish and enforce appropriate 
fitness standards for directors, members of any disciplinary committee, 
members of the DCO, any other individual or entity with direct access 
to the settlement or clearing activities of the DCO, and any other 
party affiliated with any of the foregoing individuals or entities.\11\ 
If a DCO is required to establish and consult with its RMC on all 
matters that could materially affect the risk profile of the DCO as 
proposed, the Commission believes a DCO also would need to consider the 
fitness of individual members for RMC participation, recognizing that 
fitness standards may vary across DCOs. Therefore, the Commission 
proposes to amend Sec.  39.24(c) by adding new paragraph (c)(1)(iv) 
(and renumbering current paragraphs (c)(1)(iv) and (v) accordingly) to 
require a DCO to establish and enforce appropriate fitness standards 
for its RMC members.
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    \11\ See 7 U.S.C. 7a-1(c)(2)(O).
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B. Role of RMC Members as Independent Experts--Sec.  39.24(c)(3)

    As discussed above, the Commission's proposal to require a DCO's 
board of directors to consult with its RMC(s), comprised of clearing 
member and customer representatives, is intended to benefit the DCO 
risk management process by engaging a broad array of backgrounds and 
expertise. The Commission believes that in order to ensure that RMC 
members feel empowered to provide objective input during this process, 
they must be able to serve as independent experts, neither beholden to 
their employers' particular interests nor acting as fiduciaries of the

[[Page 49562]]

DCO. Therefore, the Commission is proposing new Sec.  39.24(c)(3) to 
require a DCO to maintain policies designed to enable its RMC members 
to provide independent, expert opinions in the form of risk-based input 
on all matters presented to the RMC for consideration, and perform 
their duties in a manner that supports the safety and efficiency of the 
DCO and the stability of the broader financial system. The Commission 
requests comment on whether requiring RMC members to act as independent 
experts, neither beholden to their employers' commercial interests nor 
acting as fiduciaries of the DCO raises any potential legal issues for 
those members. Specifically, as a matter of corporate law, would RMC 
members be forced to contend with competing duties or obligations to 
the DCO and their employer, including any duties or obligations that 
would foreclose RMC participation? If so, how may the goal of receiving 
independent, expert opinions be achieved? Should DCOs be required to 
have policies specific to RMC members for managing conflicts of 
interest?

IV. Request for Comment

    The Commission generally requests comment on all aspects of the 
proposed rules. Additionally, the Commission requests comments on the 
following specific items, which the Commission might address in a 
future rulemaking:

A. Market Participant Consultation Prior to a Rule Change

    Commission regulations require a DCO to include in its rule 
submissions under Sec. Sec.  40.5, 40.6, and 40.10 a brief explanation 
of any substantive opposing views expressed to the DCO by governing 
board or committee members, members of the DCO, or market participants 
that were not incorporated into the rule, or a statement that no such 
opposing views were expressed.\12\
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    \12\ 17 CFR 40.5(a)(7)(iv); 40.6(a)(7)(iv); 40.10(a)(1) 
(including by reference the requirements of 17 CFR 40.6(a)(7)).
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    The proposed amendments to Sec.  39.24 would require a DCO's board 
of directors to consult with its RMC, which must contain 
representatives from clearing members and customers of clearing 
members, on all matters that could materially affect the risk profile 
of the DCO, including matters that would be captured in DCO rule 
submissions. In addition, a DCO would be required to establish one or 
more RWGs as a forum to seek risk-based input from a broad array of 
market participants, such that a diverse cross-section of the DCO's 
clearing members and customers of clearing members are represented, 
regarding all matters that could materially affect the risk profile of 
the DCO.
    The Commission requests comment on whether it should also require a 
DCO to consult with a broad spectrum of market participants prior to 
submitting any rule change pursuant to Sec. Sec.  40.5, 40.6, or 40.10. 
If so, what constitutes a sufficiently broad spectrum of market 
participants, and how should the DCO engage that group? Should a DCO be 
required to consult only on those rule changes that could materially 
affect the DCO's risk profile?
    In accomplishing effective consultation, is there value to 
requiring a DCO to respond to market participant feedback? 
Specifically, where specific risk-based feedback from market 
participants has not been incorporated in the DCO's decision, should 
the DCO be required to respond to market participants informing them of 
the decision and outlining the rationale behind their action? How could 
such a requirement be tailored to avoid forcing a DCO to respond to 
excessively detailed or irrelevant comments?
    As noted above, Commission regulations currently require a DCO to 
provide to the Commission a ``brief explanation of any substantive 
opposing views.'' Should the Commission further clarify the meaning of 
``substantive'' in the context of this requirement? Should a DCO be 
required to provide the Commission with a report of all opposing views 
expressed to the DCO? Rather than expecting the DCO to accurately 
describe opposing views, should the Commission only require a DCO to 
pass on to the Commission any opposing views expressed to the DCO in 
writing? Should a DCO be required in its submission to the Commission 
to respond to opposing views expressed to the DCO? Finally, should the 
Commission consider additional rules to address a DCO's failure to 
comply with the full submission requirements of part 40, such as the 
imposition of an automatic stay?

B. RMC Member Information Sharing With Firm To Obtain Expert Opinions

    The Commission believes that the proposed RMC requirements will 
greatly improve the level of market participant input during the DCO 
risk governance process for those DCOs that do not currently have an 
RMC. However, the Commission recognizes that an RMC member's employer 
may have subject matter experts other than the RMC member who could 
provide additional expertise that could improve the RMC's ability to 
make informed recommendations to the DCO. The information provided to a 
DCO's RMC is often confidential, however, and the value of the enhanced 
input must be weighed against the increased risk of disclosure in 
allowing confidential information to be shared outside of the RMC. 
Moreover, different types of information may require different levels 
of confidentiality. For example, information concerning prospective 
changes to aspects of the DCO's risk management framework may have a 
different level of confidentiality than information concerning an 
action against a member due to financial responsibility concerns.
    The Commission requests comment on whether DCOs should be required 
to maintain policies and procedures designed to enable an RMC member to 
share certain types of information it learns in its capacity as an RMC 
member with fellow employees in order to obtain additional expert 
opinion. If so, what types of information should be eligible to be 
shared? What measures should be taken to ensure that confidential 
information is appropriately protected?

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\13\ The 
amendments proposed by the Commission will affect only DCOs. The 
Commission has previously established certain definitions of ``small 
entities'' to be used by the Commission in evaluating the impact of its 
regulations on small entities in accordance with the RFA.\14\ The 
Commission has previously determined that DCOs are not small entities 
for the purpose of the RFA.\15\ Accordingly, the Chairman, on behalf of 
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities.
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    \13\ 5 U.S.C. 601 et seq.
    \14\ 47 FR 18618 (Apr. 30, 1982).
    \15\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \16\ provides that Federal 
agencies, including the Commission, may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a valid

[[Page 49563]]

control number from the Office of Management and Budget (OMB). This 
proposed rulemaking contains reporting and recordkeeping requirements 
that are collections of information within the meaning of the PRA. This 
section addresses the impact that the proposal will have on existing 
information collection requirements associated with part 39 of the 
Commission's regulations.
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    \16\ 44 U.S.C. 3501 et seq.
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    The Commission is proposing to add new Sec.  39.24(b)(11) to 
require a DCO to establish one or more RMC(s) and require its board of 
directors to consult with the relevant RMC on all matters that could 
materially affect the DCO's risk profile. The Commission also is 
proposing to add new Sec.  39.24(b)(11)(i), which would require a DCO 
to maintain policies to ensure that the RMC consultation process is 
described in detail, including the documentation and consideration of 
input; new Sec.  39.24(b)(11)(ii), which would require a DCO to 
maintain policies to ensure each RMC includes representatives from 
clearing members and customers of clearing members; new Sec.  
39.24(b)(11)(iii) to require a DCO to maintain policies that make 
certain membership of each RMC is rotated on a regular basis; new Sec.  
39.24(b)(12) to require a DCO to establish one or more RWG(s) and to 
maintain policies and procedures regarding the formation and role of 
each RWG; and new Sec.  39.24(c)(1)(iv), which would require a DCO to 
establish fitness standards for RMC members. Finally, the Commission is 
proposing new Sec.  39.24(c)(3), which would require a DCO to maintain 
policies enabling its RMC members to provide independent, expert 
opinions in the form of risk-based input to the RMC, and to perform 
their duties in a manner that supports the DCO's safety and efficiency 
and the stability of the broader financial system.
    The proposed regulations require a DCO to develop governance 
arrangements for its RMC(s) and RWG(s), to the extent it does not 
already have governance arrangements meeting the requirements. Existing 
regulations require a DCO to disclose new governance arrangements to 
the extent permitted under applicable statutory and regulatory 
requirements on confidentiality to the Commission, other relevant 
authorities, clearing members and their customers, owners of the DCO, 
and the public.\17\ Because this disclosure requirement stems from 
existing regulations, it is already included in the reporting burden 
estimate for Sec.  39.24 and currently covered by the collection of 
information titled ``Requirements for Derivatives Clearing 
Organizations, OMB control number 3038-0076.'' The proposed regulations 
will not impose a new reporting burden and will not increase the 
reporting burden estimate.
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    \17\ See 17 CFR 39.24(b)(2).
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Request for Comment
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. The Commission will consider public 
comments on this proposed collection of information in:
    (1) Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) Evaluating the accuracy of the estimated burden of the proposed 
collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    (3) Enhancing the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) Minimizing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    The Commission specifically invites public comment on the accuracy 
of its estimates that the proposed regulations will not impose a new 
reporting burden and will not increase the reporting burden estimate.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC 
20581, (202) 418-5160 or from https://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the proposed information 
collection requirements should send those comments to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (email).
    Please provide the Commission with a copy of submitted comments so 
that all comments can be summarized and addressed in the final 
rulemaking, and please refer to the ADDRESSES section of this proposed 
rule for instructions on submitting comments to the Commission. OMB is 
required to make a decision concerning the proposed information 
collection requirements between 30 and 60 days after publication of 
this proposed rule in the Federal Register. Therefore, a comment to OMB 
is best assured of receiving full consideration if OMB receives it 
within 30 calendar days of publication of this proposed rule. Nothing 
in the foregoing affects the deadline enumerated above for public 
comment to the Commission on the proposed rule.

C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\18\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five specific considerations identified in Section 15(a) of the CEA 
(collectively referred to herein as Section 15(a) factors) addressed 
below.
---------------------------------------------------------------------------

    \18\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission recognizes that the proposed amendments may impose 
costs. The Commission has endeavored to assess the expected costs and 
benefits of the proposed amendments in quantitative terms, including 
PRA-related costs, where possible. In situations where the Commission 
is unable to quantify the costs and benefits, the Commission identifies 
and considers the costs and benefits of the applicable proposed 
amendments in qualitative terms. The lack of data and information to 
estimate those costs is attributable in part to the nature of the 
proposed amendments. Additionally, any initial and recurring compliance 
costs for any particular DCO will depend on the size, existing 
infrastructure, practices, and cost structure of the DCO.
    The Commission generally requests comment on all aspects of its 
cost-benefit considerations, including the identification and 
assessment of any costs and benefits not discussed herein; data and any 
other information to assist or otherwise inform the Commission's 
ability to quantify or qualitatively describe the costs and benefits of 
the proposed amendments; and substantiating data, statistics, and any 
other information to support positions posited by commenters with 
respect to the Commission's discussion. The Commission welcomes comment 
on such costs, particularly from existing DCOs that can provide 
quantitative cost

[[Page 49564]]

data based on their respective experiences. Commenters may also suggest 
other alternatives to the proposed approach.
2. Baseline
    The baseline for the Commission's consideration of the costs and 
benefits of this proposed rulemaking are: (1) the DCO Core Principles 
set forth in Section 5b(c)(2) of the CEA; and (2) Sec.  39.24. 
Specifically, DCO Core Principle O requires a DCO to establish 
governance arrangements that are transparent, to fulfill public 
interest requirements and to permit the consideration of the views of 
owners and participants, and Sec.  39.24 implements DCO Core Principle 
O. Of the fifteen DCOs currently registered with the Commission, twelve 
already have some form of an RMC, which may have been intended, in 
part, to fulfill the DCO's compliance obligations under DCO Core 
Principle O and Sec.  39.24. Of the fifteen DCOs currently registered 
with the Commission, six already have some form of an RWG, which may 
have been intended, in part, to fulfill the DCO's compliance 
obligations under DCO Core Principle O and Sec.  39.24.
3. Proposed Amendments to Sec.  39.24
a. Summary of Proposed Amendments
    The Commission is proposing regulations that require each DCO to 
establish an RMC and require each DCO's board of directors to consult 
with, and consider and respond to input from, the RMC on all matters 
that could materially affect the DCO's risk profile. The Commission 
also proposes to require DCOs to: establish fitness standards for RMC 
members; maintain policies to ensure each RMC includes representatives 
from clearing members and customers of clearing members; maintain 
policies that require rotation of the membership of each RMC on a 
regular basis, and maintain written policies and procedures regarding 
the RMC consultation process. The Commission also proposes to require 
each DCO to maintain policies enabling RMC members to provide 
independent, expert opinions in the form of risk-based input to the 
RMC, and to perform their duties in a manner that supports the DCO's 
safety and efficiency and the stability of the broader financial 
system. Finally, the Commission proposes to require each DCO to 
establish one or more RWGs as a forum to seek risk-based input from a 
broad array of market participants, such that a diverse cross-section 
of the DCO's clearing members and customers of clearing members are 
represented, regarding all matters that could materially affect the 
risk profile of the DCO. RWGs would be required to convene at least 
quarterly. In addition, each DCO would be required to adopt written 
policies and procedures related to the formation and role of the RWG.
b. Benefits
    The proposed additions to Sec.  39.24 would promote more efficient, 
effective, and reliable DCO risk management, benefitting DCOs, clearing 
members, market participants, and the financial system more broadly. 
RMCs would provide a formal mechanism for DCOs to receive valuable 
expert input from market participants on critical issues including the 
DCO's margin model, default procedures, participation requirements, and 
risk monitoring practices, as well as the clearing of new products that 
could materially impact the DCO's risk profile. Moreover, codifying the 
requirement that a DCO's board of directors consult with, and consider 
and respond to input from, market participants on an RMC will formalize 
a widely-used method for engaging market participants in the risk 
governance process. This would allow DCOs to more effectively consider 
and address risks impacting DCO stability, market participant 
stability, and market resilience.
    To the extent that some DCOs already have RMCs that are compliant 
or partially compliant with the proposed rules, the benefits of the 
proposed regulations are currently being realized to some degree.
    The proposed regulations would help RMCs to be well positioned to 
provide effective risk management opinions to the DCO's board of 
directors by requiring DCOs to establish RMC membership fitness 
standards. These standards would help to ensure that individual RMC 
members are well qualified to perform the RMCs' duties. Ensuring that 
RMCs include representatives from clearing members and customers of 
clearing members would give DCOs the benefit of these stakeholders' 
perspectives on risk management issues, and gives market participants 
the benefit of a forum for conveying their input on risk management 
issues. Rotating the membership of the RMCs on a regular basis would 
promote a diversity of perspectives. In addition, requiring DCOs to 
implement policies enabling RMC members to provide independent, expert 
opinions in the form of risk-based input, and to perform their duties 
in a manner that supports the DCO's safety and efficiency, would help 
ensure that RMC members feel empowered to provide objective input 
during this process by serving as independent experts that are neither 
beholden to their employers' commercial interests nor acting as 
fiduciaries of the DCO. These requirements for RMCs and their members 
collectively increase the likelihood of effective DCO risk management. 
Finally, requiring DCOs to develop and maintain policies and procedures 
governing DCO board of directors consultation with its RMC(s), and to 
document the activities of its RMC(s), will promote transparency, 
accountability, and predictability, and facilitate effective oversight 
by the Commission in this area.
    Similarly, the requirement that each DCO establish one or more RWGs 
will further increase the likelihood of effective DCO risk management 
by providing each DCO with an expanded pool of clearing member and 
customer of clearing member representatives to consult when considering 
matters that could materially affect the risk profile of the DCO. 
Requiring DCOs to maintain written policies and procedures related to 
the formation and role of each risk advisory working group will promote 
transparency, accountability, and predictability and facilitate 
effective oversight by the Commission in this area.
    As discussed above, the Commission requests comments on the 
potential benefits of the proposed changes to Sec.  39.24, including 
benefits that would be realized by DCOs, other market participants 
(including clearing members and their customers), or the financial 
system more broadly.
c. Costs
    To the extent that some DCOs do not already have RMCs or would need 
to adjust the policies and procedures of their existing RMCs to comply 
with the proposed rules, the proposed regulations would impose some 
costs on DCOs. Costs could arise from additional hours a DCO's 
employees might need to spend analyzing the compliance of the DCO's 
rules and procedures with these requirements, designing and drafting 
new or amended rules and procedures when necessary, and implementing 
these new or amended rules and procedures. Specifically, DCOs would 
need to draft governance arrangements providing for RMCs and RWGs with 
the membership requirements and policies stated in the proposed 
amendments to Sec.  39.24 if compliant arrangements are not already in 
place.
    Drafting new governance arrangements would cost DCOs administrative 
time. The amount of time required for each DCO to initially implement 
the proposed requirement

[[Page 49565]]

would vary based on a number of factors, including whether the DCO 
already has policies complying with the proposed regulations and the 
amount of time needed for each DCO to design and draft new or amended 
policies where necessary. As noted above, twelve of the fifteen DCOs 
currently registered with the Commission already have RMCs in place in 
some form, which may lower the cost of implementing the proposed 
regulations. Further, the DCOs' policies implementing the proposed 
regulations would likely not change significantly from year to year, so 
after the initial creation of the policies, the time required to create 
rules and procedures would be minimal.
    Ongoing implementation of the proposed regulations would also 
impose costs. Establishing and operating an RMC would cost a DCO time 
to identify potential RMC members that meet the fitness standards when 
the RMC is initially formed, as well as each time the RMC membership is 
rotated. Operation of the RMC would require a DCO to provide 
information to the RMC as needed for its consideration, and time for 
the DCO's board to consult with the RMC and consider and respond to its 
input. An RMC's operation would also require time from its members to 
consider relevant information regarding the DCO's risk practices, and 
to form and deliver its views. These costs would, however, be dispersed 
among different participants over time due to the proposed requirement 
that DCOs rotate their RMC members regularly.
    As discussed above, the Commission requests comments on the 
potential costs of the proposed amendments to Sec.  39.24, including 
any costs that would be imposed on DCOs, other market participants, or 
the financial system more broadly. In particular, for those DCOs that 
already have RMCs and RWGs in place, the Commission requests comment on 
the extent to which the proposed regulations would require changes to 
the DCO's existing policies and procedures regarding its RMC(s) and 
RWG(s).
d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.24 in 
light of the following five broad areas of market and public concern 
identified in Section 15(a) of the CEA: (1) protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission believes that the proposed amendments 
would have a beneficial effect on sound risk management practices and 
on the protection of market participants and the public.
    (1) Protection of market participants and the public: The proposed 
regulations also would protect market participants and the public by 
improving DCOs' identification and handling of risk, reducing the 
likelihood that market participants and the public face unexpected 
costs resulting from deficient DCO risk management. The proposed 
amendments to Sec.  39.24 also give market participants a voice in DCO 
risk management matters through their participation in RMCs and RWGs, 
increasing the likelihood that risks to market participants are 
adequately considered and minimized.
    (2) Efficiency, competitiveness, and financial integrity of futures 
markets: The improvements to DCO risk management practices that the 
proposed regulations are designed to encourage also would benefit the 
financial integrity of futures and cleared swap markets. The Commission 
has not identified any other effect of the proposed rules on 
efficiency, competitiveness, and financial integrity.
    (3) Price discovery: The Commission has not identified any effect 
of the proposed regulations on price discovery.
    (4) Sound risk management practices: The proposed regulations are 
designed to support sound risk management practices at DCOs by 
providing a forum for independent, expert risk-based input to a DCO's 
board of directors from clearing members and customers of clearing 
members. Proposed requirements regarding RMC composition, fitness 
standards for RMC members, and RMC membership rotation all support 
RMCs' purpose of promoting sound risk management practices. In 
addition, the proposed requirement that a DCO establish one or more 
RWGs is designed to further expand and diversify the information 
available to a DCO while making material risk decisions, and to expand 
opportunities for those with a stake in DCO risk management to provide 
input, which further promotes sound risk management.
    (5) Other public interest considerations: The Commission has not 
identified any effect of the proposed regulations on other public 
interest considerations.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\19\
---------------------------------------------------------------------------

    \19\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is the promotion of competition. The Commission 
requests comment on whether the proposed amendments implicate any other 
specific public interest to be protected by the antitrust laws. The 
Commission has considered the proposed rulemaking to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
The Commission requests comment on whether the proposed rulemaking is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
proposed rule amendments are not anticompetitive and have no 
anticompetitive effects, the Commission has not identified any less 
anticompetitive means of achieving the purposes of the CEA. The 
Commission requests comment on whether there are less anticompetitive 
means of achieving the relevant purposes of the CEA that would 
otherwise be served by adopting the proposed rule amendments.

List of Subjects in 17 CFR Part 39

    Governance requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 39 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464; 
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July 
21, 2010, 124 Stat. 1749.

0
2. Amend Sec.  39.24 as follows:
0
a. Revise paragraphs (b)(9) and (b)(10)(iii);
0
b. Add paragraphs (b)(11) and (12);
0
c. Redesignate paragraphs (c)(1)(iv) and (v) as paragraphs (c)(1)(v) 
and (vi) and add new paragraph (c)(1)(iv); and
0
d. Add paragraph (c)(3).
    The revisions and additions read as follows:


Sec.  39.24  Governance.

* * * * *
    (b) * * *

[[Page 49566]]

    (9) Assign responsibility and accountability for risk decisions, 
including in crises and emergencies;
    (10) * * *
    (iii) Recovery and wind-down plans required by Sec.  39.39, as 
applicable;
    (11) Establish one or more risk management committees and require 
the board of directors to consult with, and consider and respond to 
input from, the risk management committee(s) on all matters that could 
materially affect the risk profile of the derivatives clearing 
organization, including any material change to the derivatives clearing 
organization's margin model, default procedures, participation 
requirements, and risk monitoring practices, as well as the clearing of 
new products. A derivatives clearing organization shall maintain 
written policies and procedures to make certain that:
    (i) The risk management committee consultation process is described 
in detail, and includes requirements for the derivatives clearing 
organization to document the board's consideration of and response to 
risk management committee input;
    (ii) A risk management committee includes representatives from 
clearing members and customers of clearing members; and
    (iii) Membership of a risk management committee is rotated on a 
regular basis; and
    (12) Establish one or more market participant risk advisory working 
groups as a forum to seek risk-based input from a broad array of market 
participants, such that a diverse cross-section of the derivatives 
clearing organization's clearing members and customers of clearing 
members are represented, regarding all matters that could materially 
affect the risk profile of the derivatives clearing organization. A 
derivatives clearing organization shall maintain written policies and 
procedures related to the formation and role of each risk advisory 
working group. Each market participant risk advisory working group 
shall convene at least quarterly.
    (c) * * *
    (1) * * *
    (iv) Members of risk management committee(s);
* * * * *
    (3) A derivatives clearing organization shall maintain policies 
designed to enable members of risk management committee(s) to provide 
independent, expert opinions in the form of risk-based input on all 
matters presented to the risk management committee for consideration, 
and perform their duties in a manner that supports the safety and 
efficiency of the derivatives clearing organization and the stability 
of the broader financial system.

    Issued in Washington, DC, on July 29, 2022, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Governance Requirements for Derivatives Clearing 
Organizations--Commission Voting Summary, Chairman's Statement, and 
Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioners Johnson, 
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    The last several years have tested the resilience of the 
derivatives markets and post-financial crisis reforms more generally 
in ways that few risk scenarios could have contemplated. Despite a 
resoundingly strong response to the numerous market shocks, the 
global regulatory community, in concert with market participants, 
has appropriately debated the need for additional tools, resources, 
and rules to manage these and future risks. As farmers, ranchers, 
corporates, pension funds, insurers, and other market participants 
continue to turn to the derivatives markets for risk management and 
price discovery, it is critical that derivatives clearing 
organizations (DCOs) clearing these products sufficiently calibrate 
their risk management tools and frameworks to meet the most extreme, 
but plausible, tail events.
    DCOs with governance structures that embrace the diverse risk-
based views of clearing members and their clearing members' 
customers will be better situated to refine their risk management 
frameworks to withstand extreme but plausible market conditions 
while promoting financial stability. With an ever-evolving risk 
landscape, including new clearing structures, new product 
innovation, and the emerging risk of climate change to name just a 
few, it is critical that DCOs' governance arrangements and fitness 
standards evolve.
    That is why I support today's proposal to amend the governance 
requirements for DCOs in CFTC Regulation 39.24 to enhance the role 
of clearing members and customers of clearing members in the risk 
governance process for DCOs. A DCO's robust risk management 
framework is particularly critical because of the systemic nature of 
clearinghouses and the integral role that DCOs have in promoting 
financial stability.
    Today's DCO governance proposal is a direct outgrowth of the 
work of the Central Counterparty (CCP) Risk and Governance 
Subcommittee (Subcommittee) of the Commission's Market Risk Advisory 
Committee (``MRAC''),\1\ of which I was the immediate past Sponsor. 
The Subcommittee's February 2021 report to the MRAC provided several 
recommendations for improving DCO governance standards that the 
Commission is proposing today to amend CFTC Regulation 39.24.
---------------------------------------------------------------------------

    \1\ The MRAC is a discretionary advisory committee established 
by the authority of the Commission in accordance with the Federal 
Advisory Committee Act. 5 U.S.C. App. 2. The MRAC advises the 
Commission on matters related to evolving market structures and 
movement of risk across clearinghouses, exchanges, intermediaries, 
market makers, and end-users. See Market Risk Advisory Committee, 
available at https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
---------------------------------------------------------------------------

    First, the Commission proposes to require each DCO to establish 
one or more risk management committees (RMCs) to consult wit 
clearing members and clearing member customers prior to making any 
decisions that could materially affect the risk profile of the DCO. 
Under the proposal, the DCO would need to consult with the RMC for 
material changes to a DCO's margin model, default procedures, 
participation requirements, risk monitoring practices, and clearing 
of new products. The proposal would further require a DCO to have 
written policies and procedures related to the RMC's consultation 
process, composition, and rotation of the membership on a regular 
basis. As proposed, a DCO would be required to establish and enforce 
appropriate fitness standards for RMC members. The Commission also 
proposes that a DCO maintain policies that are designed to enable 
RMC members to provide independent, expert opinions in the form of 
risk-based input on all matters presented to the RMC for its 
consideration.
    Second, the Commission proposes to require each DCO to establish 
one or more risk advisory working groups (RWGs) as a forum to seek 
risk-based input (as opposed to commercially-driven input) from a 
broader array of market participants on matters that could 
materially affect the DCO's risk profile. The Commission proposes to 
require a DCO to maintain written policies and procedures related to 
the formation and role of each RWG, which would be required to 
convene at least quarterly.
    Finally, the Commission is also requesting comment on the 
consultation process to add or amend a DCO rule, disclosure of 
opposing views in a rule submission, and whether DCOs should be 
required to maintain policies and procedures designed to enable an 
RMC member to share certain types of information in order to obtain 
additional expert opinions.
    Today's proposal is an extremely positive and critical step 
towards further enhancing the effectiveness of the CFTC's governance 
standards. Strengthening the clearing ecosystem and developing a DCO 
governance policy has been a priority since I joined the Commission 
in 2017. As Chairman, this critical market infrastructure will 
remain a focus, and I look forward to taking a data-driven approach 
to support any possible enhancements to the agency's oversight of 
DCOs, ensuring coordination and consistency with our domestic and 
international partners as we collectively pursue our shared goals of 
market resiliency and financial stability.

[[Page 49567]]

Today is a big step, and the Commission will continue to monitor the 
clearing ecosystem and engage market participants on DCO risk and 
governance issues in the future.
    I wish to again thank the hardworking staff in the Division of 
Clearing and Risk for all of their efforts towards bringing us here 
today.

Appendix 3--Statement of Support of Commissioner Kristin N. Johnson

    I support the Commission's consideration of the proposed 
derivatives clearing organization (DCO) governance measures that 
establish structural and procedural mechanisms designed to improve 
efforts to identify and mitigate material risks, strengthen DCO 
resilience, and foster the integrity of our markets.
    DCOs provide comprehensive settlement services and take on 
counterparty risk with the assistance of clearing members to 
facilitate centralized and over-the-counter trading. DCOs also stand 
as final guarantors of performance in the event of a customer and 
clearing member default. The Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) \1\ introduced 
groundbreaking reforms that directed the bulk of derivatives trading 
to DCOs, charging them with the great responsibility of maintaining 
the integrity of the derivatives markets through comprehensive and 
prudent risk mitigation practices. These practices include securely 
handling participant funds and assets, developing and administering 
robust forward-looking margining frameworks for idiosyncratic 
markets, consistently setting appropriate margin levels for trader 
portfolios, and collecting risk-based guaranty fund contributions 
from clearing members. DCO risk mitigation practices thereby can 
profoundly impact individual firms and, depending on the systemic 
importance of a specific DCO, the broader financial market.
---------------------------------------------------------------------------

    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, tit. VII (July 21, 2010) (codified in relevant 
part at 7 U.S.C. 7a-1).
---------------------------------------------------------------------------

    The proposed rules include recommendations that the Commission 
received from the Central Counterparty (CCP) Risk and Governance 
(Subcommittee) of the Market Risk Advisory Committee (MRAC).\2\ I 
thank Chairman Behnam, who previously served as the sponsor of the 
MRAC and its subcommittees. The Subcommittee's Report is the product 
of effective collaboration among market participants with divergent 
views. The Report reflects the leadership of Chairman Behnam and the 
Subcommittee Co-Chairs, Alicia Crighton and Lee Betsill, as well as 
the exceptional stewardship of Alicia Lewis, Special Counsel to the 
Chairman. Today, I serve as the MRAC's sponsor, and intend to 
continue the work of Chairman Behnam and further the goals outlined 
in the Committee's Charter--``promoting the integrity, resilience, 
and vibrancy of the U.S. derivatives markets through sound 
regulation, as well as the monitoring and management of systemic 
risk.'' \3\
---------------------------------------------------------------------------

    \2\ See Report of the Central Counterparty (CCP) Risk and 
Governance Subcommittee, Market Risk Advisory Committee of the U.S. 
Commodity Futures Trading Commission (Feb. 23, 2021) (the 
``Report'').
    \3\ MRAC Charter available at https://www.cftc.gov/About/AdvisoryCommittees/MRAC.
---------------------------------------------------------------------------

    The proposed rulemaking requires DCOs to standup risk management 
committees comprised of clearing members and their customers to 
leverage their risk management expertise and formalize the role of 
market participants in the DCO governance process pursuant to DCO 
Core Principles. The proposed rulemaking acknowledges that, at 
times, the perspectives of DCOs and their clearing members may not 
be aligned. As privately-owned businesses DCOs balance the interests 
of their owners and those of clearing members who have strong 
incentives to mitigate preventable default because DCO clearing 
members disproportionately bear default costs. DCOs adopt diverse 
business organizational forms and may have existing board committees 
focused on risk management oversight, however, we anticipate that 
comments to the proposal will articulate the best approach for 
establishing a clear and uniform process for risk management 
committees to report concerns on all matters that could materially 
affect a DCO's risk profile to the board of directors or appropriate 
decision-making authority and for ensuring that the decision-making 
authority effectively considers the reported concerns.
    In 2010 and 2011, similar requirements were proposed but not 
adopted.\4\ DCO Core Principles O (Governance Fitness Standards), P 
(Conflicts of Interest), and Q (Composition of Governing Boards) 
collectively address governance requirements related to considering 
the views of owners and participants, adopting appropriate fitness 
standards for directors and others, minimizing and resolving 
conflicts of interest in decision-making, and including market 
participants on governing boards or committees. DCO Core Principle O 
expressly directs each DCO to establish governance arrangements that 
``permit the consideration of the view of owners and participants.'' 
\5\ Consequently, today's proposal rekindles a critical, unresolved 
effort to reinforce DCO risk governance.
---------------------------------------------------------------------------

    \4\ See Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities Regarding 
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 
2010); Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities, Additional Requirements Regarding the Mitigation of 
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011).
    \5\ 7 U.S.C. 7a-1(c)(2)(O).
---------------------------------------------------------------------------

    While I am supportive of the proposal, I stand committed to 
carefully consider, based on the comments that we receive, the 
benefits, efficacy, limitations, and burdens of the proposed 
governance rules. There are certain aspects of the proposal where I 
particularly believe substantive comments from market participants 
will tremendously add value to the deliberative process. I am 
hopeful that the comments submitted in response to the proposal will 
support drafting final rules that make our markets stronger and 
safer through regulatory oversight. I am sensitive to the need to 
consider how the proposed measures supplement existing risk 
management oversight and concerns about the need to ensure that the 
proposed rules effectively accomplish the articulated goals of 
making our markets safer and more resilient.
    With the considerations noted above, I support issuing today's 
proposal for comment. The Dodd-Frank Act prominently entrusts DCOs 
with maintaining the integrity of the derivatives markets through 
risk mitigation practices that can profoundly impact individual 
firms and the broader financial market. The Dodd-Frank Act 
amendments to the Commodity Exchange Act also expressly direct each 
DCO to establish governance arrangements that internalize the views 
of participants. I look forward to receiving substantive commentary 
from all stakeholders to facilitate tailoring governance rules that 
further enhance a DCO's ability to prudently manage risk.

Appendix 4--Statement of Support of Commissioner Christy Goldsmith 
Romero

    I support the Commission's efforts to strengthen the resilience 
of clearing houses to future risk, including through this proposed 
rule. Since the 2008 financial crisis, I have spent my entire career 
in [Federal] public service helping our nation recover, and build a 
stronger, safer, more resilient, financial system. I have seen how 
clearing houses play an important public interest role--one of 
critical market infrastructure that fosters financial stability, 
trust and confidence in U.S. markets. The Financial Stability 
Oversight Council (``FSOC'') has recognized this public interest 
role, designating several clearing houses as systemically important 
Financial Market Utilities. FSOC's designation highlights the 
important role that the Commission plays in the oversight of 
clearing houses.
    Thank you to the staff for taking this oversight role seriously. 
Thank you for working closely with me and my office on changes to 
improve the proposal in ways that will facilitate effective 
oversight by the Commission and promote greater accountability, 
transparency, and predictability.
    Clearing houses serve as a cornerstone to mitigating risk in 
U.S. markets. The 2008 financial crisis revealed that over-the-
counter trades left market participants vulnerable to the weaknesses 
of their counterparties, and left regulators in the dark about 
hidden risk. In contrast, clearing houses--who put themselves in the 
center of counterparties--take on counterparty risk and bring 
transparency to the markets and regulators.
    One important post-crisis reform was to increase central 
clearing of trades in U.S. markets, putting clearing houses in even 
more of a public interest role. However, this has resulted in a 
concentration of more risk in clearing houses. FSOC found that the 
failure or disruption of systemically important clearing houses 
``could create or increase the risk of significant liquidity or 
credit problems spreading among financial

[[Page 49568]]

institutions or markets and thereby threaten the stability of the 
U.S. financial system.'' \1\
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    \1\ See https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations. 
FSOC designates clearing houses who serve as central counterparties 
responsible for clearing a large majority of trades as systemically 
important Financial Market Utilities.
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    The systemic nature of several clearing houses registered with 
the Commission further underscores the need for vigilant oversight 
by the Commission.\2\ Under the Commission's oversight, clearing 
houses have shown resilience in navigating an ever-growing list of 
recent market stress events. They have helped U.S. markets maintain 
financial stability during the global pandemic, supply chain issues, 
and geopolitical events.
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    \2\ The Commodity Exchange Act established several core 
principles for Derivatives Clearing Houses, including a requirement 
that the clearing houses establish governance arrangements that are 
transparent to fulfill public interest requirements and to permit 
the consideration of the views of owners and participants. 7 U.S.C. 
7a-1(c)(2)(O). To further implement these core principles, the 
Commission adopted several rules including a rule that clearing 
houses maintain clear, documented governance arrangements. 
Commission regulation 39.24(b).
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    However, uncertainty surrounding these events has driven home 
the need for the Commission to enhance its rules so that clearing 
houses strengthen their resilience to future risk. The public 
interest role of clearing houses is best served when the clearing 
houses work with their clearing members who have much at stake as 
they shoulder the burden of losses and defaults. Clearing houses, 
members, and end users should work collaboratively to decide how to 
increase the resilience of their respective clearing house, and how 
to best navigate risk during times of market stress. Simply put, 
there is strength in numbers and diversity of perspective.
    We have seen how clearing houses have benefitted from risk 
management committees and other working groups that reflect a broad 
coalition of stakeholders. Their voices should be heard in a 
meaningful way.\3\ Today, the Commission proposes formalizing 
requirements for these committees.\4\ We propose a requirement for 
the consideration of input from members of risk committees on 
matters that could strengthen or weaken the resilience of the 
clearing organization to future risk. The proposed rule seeks to 
balance the calls of those on the committees for increased 
transparency, predictability, and a voice in risk management, with 
the clearing houses' calls for flexibility and consideration of 
their own internal opinions on risk. Commenters will tell us whether 
we have gotten this balance right in a way that will strengthen the 
resilience of clearing houses to future risk while keeping it agile 
to respond to sudden market events.
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    \3\ The Commission previously stated that clearing organization 
governance rules, ``improve DCO risk management practices by 
promoting transparency of governance arrangements and making sure 
that the interests of a DCO's clearing members and, where relevant, 
their customers are taken into account.'' Derivatives Clearing 
Organization General Provisions and Core Principles, 85 FR 4800, 
4848 (Jan. 27. 2020).
    \4\ Proposals include broad and diverse participation, fitness, 
the importance of independent, expert opinions, and a performance of 
committee duties focused on the safety of the clearing organization 
and the stability of the financial system.
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    Additionally, we endeavor to formalize governance rules that 
promote accountability of clearing houses, and facilitate oversight 
by the CFTC. Both accountability and oversight are served in the 
proposal through written policies and procedures, and documentation 
that stakeholder voices have been solicited and heard. The proposal 
is not prescriptive about the content of the policies and 
procedures. A requirement for written policies and procedures, 
accompanied by documentation of the consideration of input, will 
benefit the full range of clearing houses, from systemically 
significant clearing houses to new or future clearing houses, 
including in the digital asset space, who may not have a history of 
risk management committees.
    It is my hope that over time, a requirement for policies and 
procedures will serve as a launch pad for best practices to emerge. 
I look forward to public comment on additional opportunities for how 
the Commission can effectively advance best practices, including the 
question of whether the Commission should require the publication of 
the policies and procedures, and whether the Commission should be 
prescriptive of the content. I also look forward to comments on 
whether meetings of risk advisory working groups should be 
documented to ensure that those members' voices are adequately heard 
in a meaningful way.
    Today's proposal serves as an important first step to promote 
accountability, transparency, predictability, and effective 
oversight for the governance of clearing houses. We also invite 
comment on certain future rulemaking for best practices. I look 
forward to future consideration of additional opportunities for the 
Commission to promote transparency, accountability, predictability, 
and effective oversight.\5\
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    \5\ While there may be a diversity of views on these additional 
opportunities, I hope that diversity will help, rather than deter, 
this independent Commission to develop strong and long-lasting rules 
to strengthen the resilience of clearing houses to future risk.

[FR Doc. 2022-16683 Filed 8-10-22; 8:45 am]
BILLING CODE 6351-01-P