Clearing Agency Governance and Conflicts of Interest, 51812-51857 [2022-17316]
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Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240 and 242
[Release No. 34–95431; File No. S7–21–22]
RIN 3235–0695
Clearing Agency Governance and
Conflicts of Interest
Securities and Exchange
Commission.
ACTION: Proposed rule; partial
withdrawal of proposed rule;
withdrawal of applicability of proposed
rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
proposing rules under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’)
to help improve the governance of
clearing agencies registered with the
Commission (‘‘registered clearing
agencies’’) by reducing the likelihood
that conflicts of interest may influence
the board of directors or equivalent
governing body (‘‘board’’) of a registered
clearing agency. The proposed rules
would identify certain responsibilities
of the board, increase transparency into
board governance, and, more generally,
improve the alignment of incentives
among owners and participants of a
registered clearing agency. In support of
these objectives, the proposed rules
would establish new requirements for
board and committee composition,
independent directors, management of
conflicts of interest, and board
oversight.
SUMMARY:
As of August 23, 2022, SEC
withdraws amendatory instructions # 7
and 8 (§§ 240.17Ad–25 and 240.17Ad–
26 in Release No. 34–64017), published
at 76 FR 14472 on March 16, 2011. Also
as of August 23, 2022, SEC withdraws
the applicability of the proposed rule
published at 75 FR 65881 on October
26, 2010 (Release No. 34–63107) as it
pertained to clearing agencies.
Comments on this proposal should be
received on or before October 7, 2022.
ADDRESSES: Comments may be
submitted by any of the following
methods:
DATES:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/submitcomments.htm); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
21–22 on the subject line.
Paper Comments
• Send paper comments to Secretary,
Securities and Exchange Commission,
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100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number S7–21–22. This file number
should be included on the subject line
if email is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s website (https://
www.sec.gov/rules/proposed.shtml).
Comments are also available for website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC 20549,
on official business days between the
hours of 10 a.m. and 3 p.m. Operating
conditions may limit access to the
Commission’s public reference room.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on the Commission’s website. To ensure
direct electronic receipt of such
notifications, sign up through the ‘‘Stay
Connected’’ option at www.sec.gov to
receive notifications by email.
FOR FURTHER INFORMATION CONTACT:
Matthew Lee, Assistant Director,
Stephanie Park, Senior Special Counsel,
Claire Noakes, Special Counsel, or
Tanin Kazemi, Attorney-Adviser, Office
of Clearance and Settlement at (202)
551–5710, Division of Trading and
Markets, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–7010.
SUPPLEMENTARY INFORMATION: The
Commission is withdrawing the
following proposed rules under the
Exchange Act: Regulation MC as
proposed for security-based swap
clearing agencies,1 and rules proposed
for clearing agencies at 17 CFR
240.17Ad–25 (‘‘Rule 17Ad–25’’) and
240.17Ad–26 (‘‘Rule 17Ad–26’’).2 In
their place, the Commission is
proposing a new Rule 17Ad–25 to
mitigate conflicts of interest, promote
the fair representation of owners and
1 Exchange Act Release No. 63107 (Oct. 14, 2010),
75 FR 65882 (Oct. 26, 2010) (‘‘Regulation MC
Proposing Release’’).
2 Exchange Act Release No. 64017 (Mar. 3, 2011),
76 FR 14471 (Mar. 16, 2011) (‘‘Clearing Agency
Standards Proposing Release’’) (proposing Rules
17Ad–25 and 17Ad–26).
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participants in the governance of a
clearing agency, identify responsibilities
of the board, and increase transparency
into clearing agency governance.
The Commission is also mindful of
the differing perspectives that exist at
registered clearing agencies among
stakeholders, including owners and
participants (some of whom also are
clearing agency owners), small and large
participants, and direct participants
(who are clearing members) and indirect
participants.3 Proposed Rule 17Ad–25
would establish new requirements for
clearing agency boards to address and
mitigate conflicts of interest and to help
ensure more effective oversight of the
clearing agency by the board. The
Commission believes these
requirements would help ensure that a
clearing agency’s governance
arrangements can more effectively
manage these different perspectives so
that the clearing agency can, among
other things, help ensure that the design
and implementation of risk management
decisions are effective. Specifically, the
proposed rule would: (i) define
independence in the context of a
director serving on the board of a
registered clearing agency and require
that a majority of directors on the board
be independent, unless a majority of the
voting rights distributed to shareholders
of record are directly or indirectly held
by participants of the registered clearing
agency, in which case at least 34 percent
of the board must be independent
directors; (ii) establish requirements for
a nominating committee, including with
respect to the composition of the
nominating committee, fitness standards
for serving on the board, and
documenting the process for evaluating
board nominees; (iii) establish
requirements for the function,
composition, and reconstitution of the
risk management committee; (iv) require
policies and procedures that identify,
mitigate or eliminate, and document the
identification and mitigation or
elimination of conflicts of interest; (v)
require policies and procedures that
obligate directors to report potential
conflicts promptly; (vi) require policies
and procedures for the board to oversee
relationships with service providers for
critical services; and (vii) require
policies and procedures to solicit,
consider, and document the registered
clearing agency’s consideration of the
views of its participants and other
3 Examples of indirect participants might be
entities such as customers or clients of direct
participants or clearing members since they rely on
services provided by a direct participant to access
the services of the clearing agency.
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Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / Proposed Rules
relevant stakeholders regarding its
governance and operations.
Table of Contents
I. Introduction
II. Background
A. Differing Perspectives at Registered
Clearing Agencies
B. Regulatory Framework for Registered
Clearing Agencies
C. Risks Associated with Clearance and
Settlement
III. Proposed Rules
A. Board Composition and Requirements
for Independent Directors
B. Nominating Committee
C. Risk Management Committee
D. Conflicts of Interest
E. Board Obligation to Oversee Service
Providers for Critical Services
F. Obligation to Formally Consider
Stakeholder Viewpoints
G. Considerations Related to
Implementation and Compliance
H. General Request for Comment
IV. Economic Analysis
A. Introduction
B. Economic Baseline
C. Consideration of Benefits and Costs
D. Reasonable Alternatives to the Proposed
Rule
E. Request for Comment
V. Paperwork Reduction Act
A. Rule 17Ad–25(b)
B. Rule 17Ad–25(c)
C. Rule 17Ad–25(d)
D. Rule 17Ad–25(g)
E. Rule 17Ad–25(h)
F. Rule 17Ad–25(i)
G. Rule 17Ad–25(j)
H. Chart of Total PRA Burdens
I. Request for Comment
VI. Small Business Regulatory Enforcement
Fairness Act
VII. Regulatory Flexibility Act Certification
A. Registered Clearing Agencies
B. Certification
VIII. Statutory Authority and Text of
Proposed Rule
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I. Introduction
Clearing agencies registered with the
Commission play an important role in
the securities markets. They help ensure
the prompt and accurate clearance and
settlement of securities transactions,
including the transfer of record
ownership and the safeguarding of
securities and related funds, which has
the effect of protecting investors and
persons facilitating transactions by and
acting on behalf of investors.4 As such,
4 See 15 U.S.C. 78q–1(a)(1)(A); see, e.g.,
Committee on Payment and Settlement Systems and
Technical Committee of the International
Organization of Securities Commissions, Principles
for financial market infrastructures (Apr. 16, 2012),
at 5 (‘‘PFMI’’), https://www.bis.org/publ/
cpss101a.pdf (stating that financial market
infrastructures (‘‘FMIs’’), which include clearing
agencies like central counterparties (‘‘CCPs’’) and
central securities depositories (‘‘CSDs’’), ‘‘[w]hile
safe and efficient . . . contribute to maintaining
and promoting financial stability and economic
growth, FMIs also concentrate risk. If not property
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Section 17A of the Exchange Act
requires that, before an entity provides
clearing agency services, it must register
with the Commission.5 Under the
Commission’s supervision, registered
clearing agencies, as self-regulatory
organizations (‘‘SROs’’) under Section
19 of the Exchange Act,6 must submit to
the Commission changes to their rules
for review and approval or to be deemed
immediately effective upon filing.7
Given the important role of clearing
agencies in the U.S. financial system,
the governance framework of each
clearing agency is an integral part in
helping to ensure that the clearing
agency is resilient and strong. A
transparent and reliable governance
framework has a positive and lasting
cascading effect: Through the decisionmaking of the clearing agency and to its
effective and efficient supervision. From
the outset, an ideal governance
framework that establishes a clear and
deliberative process would have the
clearing agency consider a range of
stakeholder views as part of its rules
and risk management practices,
resulting in more thorough and robust
SRO rule proposals for the Commission
to consider in supervising the clearing
agency. In essence, improved
governance would help promote
optimum practices for all registered
clearing agencies to follow to help
ensure that their processes and
decisions are clear, transparent, and
reliable, that risks are appropriately
monitored, addressed, and managed,
and that their leadership is competent
and accountable. When these
fundamental guiding principles on
governance influence and permeate a
clearing agency’s culture and
operations, the clearing agency will
instill confidence in its participants, the
markets, and the investing public,
thereby meeting and promoting the
policy objectives in Section 17A of the
Exchange Act regarding the prompt and
accurate clearance and settlement of
managed, FMIs can be sources of financial shocks,
such as liquidity dislocations and credit losses, or
a major channel through which these shocks are
transmitted across domestic and international
financial markets’’).
5 See 15 U.S.C. 78q–1(a)(2); see also 17 CFR
240.17Ab2–1.
6 Upon registration, registered clearing agencies
are SROs under Section 3(a)(26) of the Exchange
Act. See 15 U.S.C. 78c(a)(26).
7 Except for certain rule changes that do not need
approval, set forth in 17 CFR 240.19b–4(f), an SRO
must submit proposed rule changes to the
Commission for review and approval pursuant to
Rule 19b–4 under the Exchange Act. A stated
policy, practice, or interpretation of an SRO, such
as its written policies and procedures, would
generally be deemed to be a proposed rule change.
See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4.
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securities transactions, among other
objectives.8
The Commission has previously
stated that clear and transparent
governance arrangements help promote
accountability and reliability in the
decisions, rules and procedures of the
clearing agency because they provide
interested parties (such as owners,
direct and indirect participants, and
general members of the public) with
information about how such decisions
are made and what the rules and
procedures are designed to accomplish.9
In turn, clear and transparent
governance arrangements help optimize
the clearing agency’s decisions, rules
and procedures that the Commission
considers in the SRO rule filing process
because clearing agency transparency
improves the quality of the information
shared with stakeholders, which in turn
improves the public comments
submitted in response to rule filings.
While the business models of clearing
agencies vary and include entities that
are affiliates of publicly traded
companies and entities that function as
participant-owned utilities, the key
components of a clearing agency’s
governance arrangements include the
8 See 15 U.S.C. 78q–1(a)(1)(A)–(D); see also
Exchange Act Release No. 68080 (Oct. 22, 2012), 77
FR 66219, 66252 (Nov. 2, 2012) (‘‘Clearing Agency
Standards Adopting Release’’) (noting that
‘‘[g]overnance arrangements have the potential to
play an important role in making sure that clearing
agencies fulfill the Exchange Act requirements that
the rules of a clearing agency be designed to protect
investors and the public interest and to support the
objectives of owners and participants. Similarly,
governance arrangements may promote the
effectiveness of a clearing agency’s risk
management procedures by creating an oversight
framework that fosters a focus on the critical role
that risk management plays in promoting prompt
and accurate clearance and settlement’’).
9 See Clearing Agency Standards Proposing
Release, supra note 2, at 14488 (‘‘Clear and
transparent governance arrangements promote
accountability and reliability in the decisions, rules
and procedures of the clearing agency because they
provide interested parties (such as owners,
participants, and general members of the public)
with information about how such decisions are
made and what the rules and procedures are
designed to accomplish. The key components of a
clearing agency’s governance arrangements include
the clearing agency’s ownership structure, the
composition and role of its board, the structure and
role of board committees, reporting lines between
management and the board, and the processes that
ensure management is held accountable for the
clearing agency’s performance. Governance
arrangements have the potential to play an
important role in making sure that clearing agencies
fulfill the Exchange Act requirements that the rules
of a clearing agency be designed to protect investors
and the public interest and to support the objectives
of owners and participants. Similarly, governance
arrangements may promote the effectiveness of a
clearing agency’s risk management procedures by
creating an oversight framework that fosters a focus
on the critical role that risk management plays in
promoting prompt and accurate clearance and
settlement.’’).
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clearing agency’s ownership structure,
the composition and role of its board,
the structure and role of board
committees, reporting lines between
management and the board, and the
processes that help ensure management
is held accountable for the clearing
agency’s performance.10 Regardless of
the business model, the clearing agency
is more effective when it has governance
arrangements that accomplish the
following: (1) help ensure that the
clearing agency satisfies the Exchange
Act requirements and Commission rules
that are designed to protect investors
and the public interest; and (2) support
the objectives of the clearing agency’s
owners, direct participants, and indirect
participants.11
In recognizing the implications that a
robust governance framework has on the
operations of clearing agencies, the
Commission adopted a series of clearing
agency governance requirements. In
2012, the Commission adopted a general
governance rule for all registered
clearing agencies (that are not covered
clearing agencies) under Rule 17Ad–
22(d).12 In 2016, the Commission
adopted a governance rule under Rule
17Ad–22(e) as part of its heightened
standards for covered clearing agencies,
defined as a registered clearing agency
that provides the services of a central
counterparty or central securities
depository.13 The Commission took a
broad, principles-based approach in the
design of both rules, and emphasized
that governance remains an area of
continued consideration and interest,
with the goal of establishing an evolving
10 See
id. at 66269.
id. at 66252.
12 See 17 CFR 240.17Ad–22(d)(8) (requiring that
all registered clearing agencies aside from covered
clearing agencies establish, implement, maintain
and enforce written policies and procedures
reasonably designed to have governance
arrangements that are clear and transparent to fulfill
the public interest requirements in Section 17A of
the Exchange Act, to support the objectives of
owners and participants, and to promote the
effectiveness of the clearing agency’s risk
management procedures).
13 See 17 CFR 240.17Ad–22(e)(2) (requiring a
covered clearing agency to establish, implement,
maintain and enforce written policies and
procedures reasonably designed to provide for
governance arrangements that are clear and
transparent, clearly prioritize the safety and
efficiency of the covered clearing agency, support
the public interest requirements in Section 17A of
the Exchange Act and the objectives of owners and
participants, establish that the board of directors
and senior management have appropriate
experience and skills to discharge their duties and
responsibilities, specify clear and direct lines of
responsibility, and consider the interests of
participants’ customers, securities issuers and
holders, and other relevant stakeholders of the
covered clearing agency); see also Exchange Act
Release No. 78961 (Sept. 28, 2016), 81 FR 70786
(Oct. 13, 2016) (‘‘CCA Standards Adopting
Release’’).
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11 See
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regulatory framework for clearing
agencies.14
During the ensuing years since the
adoption of the 2016 covered clearing
agency governance rule, the
Commission has observed and learned
from recurring tensions among incentive
structures in the area of clearing agency
governance. The Commission
understands that differing views among
clearing agency stakeholders can have a
ripple effect on the decisions that
clearing agencies make, including risk
management decisions that, in turn,
affect clearing members and the larger
financial community. Accordingly and
for the reasons described throughout
this release, the Commission is
proposing rules that would build upon
and strengthen the existing governance
requirements adopted by the
Commission in the Clearing Agency
Standards Adopting Release in 2012 and
the CCA Standards Adopting Release in
2016.15 Specifically, the Commission
believes that the existing clearing
agency governance rules should be
enhanced to help balance the differing
incentives of the registered clearing
agencies, clearing members, and other
key stakeholders. While the governance
requirements adopted by the
Commission at that time are broad and
principles-based, the rules proposed
today would set more specific and
defined parameters and requirements
for governance for all registered clearing
agencies—both covered clearing
agencies under Rule 17Ad–22(e) under
the Exchange Act and all registered
clearing agencies other than covered
clearing agencies that are subject to Rule
17Ad–22(d) under the Exchange Act.
Because all clearing agencies would face
these tensions, the Commission believes
it is appropriate to have this governance
proposal apply to all registered clearing
agencies. In this regard, the rules would
establish new governance requirements
on board composition for independent
directors, nominating committees, risk
management committees, conflicts of
interest, board obligations to oversee
service providers for critical services,
and an obligation to formally consider
14 See Clearing Agency Standards Adopting
Release, supra note 8, at 66252 (stating that ‘‘[w]e
continue to perform a careful review and evaluation
of the comments that the Commission received on
proposed Rules 17Ad–25, 17Ad–26 and Regulation
MC, which commenters rightly observed represent
separate, and in some cases more prescriptive,
proposed requirements related to clearing agency
governance and mitigation of conflicts of interest
. . . .We believe it is more appropriate to consider
those issues in connection with the Commission’s
ongoing consideration of those rules’’).
15 See 17 CFR 240.17Ad–22; see also Clearing
Agency Standards Adopting Release, supra note 8;
CCA Standards Adopting Release, supra note 13.
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stakeholder viewpoints. The proposed
rules are designed to address
governance issues specific to registered
clearing agencies, due to their distinct
ownership structures and organizational
forms. Moreover, the rules are designed
to take a multi-layered approach to
governance in that one rule alone would
not necessarily capture and address an
issue relating to governance; each of the
different rules proposed today would
provide one additional mitigation layer
to help ensure that registered clearing
agencies are designed, managed, and
operated under a robust governance
framework to protect investors and the
public interest and help promote the
prompt and accurate clearance and
settlement of securities transactions.
Each mitigation layer improves the
robustness of the governance framework
by itself, with each additional
mitigation layer having a cumulative
effect on robustness.
In Part II below, the Commission
provides context for the rule proposal
by (i) discussing the different
perspectives that exist among various
stakeholders at registered clearing
agencies, (ii) briefly summarizing
changes to the regulatory framework for
registered clearing agencies following
passage of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of
2010 (‘‘Dodd-Frank Act’’),16 and (iii)
describing recent events that have
increased focus among market
participants on the governance
arrangements that direct risk
management policies and procedures at
registered clearing agencies.
II. Background
Rule 17Ad–22 under the Exchange
Act provides for two categories of
registered clearing agencies and
contains a set of rules that apply to each
category. The first category is covered
clearing agencies, which are registered
clearing agencies that provide CCP 17 or
16 Public
Law 111–203, 124 Stat. 1376 (2010).
CCP is a type of registered clearing agency
that acts as the buyer to every seller and the seller
to every buyer, providing a trade guaranty with
respect to transactions submitted for clearing by the
CCP’s participants. See 17 CFR 240.17Ad–22(a)(2);
Exchange Act Release No. 88616 (Apr. 9, 2020), 85
FR 28853, 28855 (May 14, 2020) (‘‘CCA Definition
Adopting Release’’). A CCP may perform a variety
of risk management functions to manage the market,
credit, and liquidity risks associated with
transactions submitted for clearing. For example,
CCPs help manage the effects of a participant
default by closing out the defaulting participant’s
open positions and using financial resources
available to the CCP to absorb any losses. In this
way, the CCP can prevent the onward transmission
of financial risk. See, e.g., Exchange Act Release No.
94196 (Feb. 9, 2022), 87 FR 10436, 10448 (Feb. 24,
2022) (‘‘T+1 Proposing Release’’). If a CCP is unable
to perform its risk management functions
17 A
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CSD 18 services.19 Rule 17Ad–22(e)
applies to covered clearing agencies and
includes requirements intended to
address the activity and risks that their
size, operation, and importance pose to
the U.S. securities markets, the risks
inherent in the products they clear, and
the goals of both the Exchange Act and
the Dodd-Frank Act.20 The second
category includes registered clearing
agencies other than covered clearing
agencies; such clearing agencies must
comply with Rule 17Ad–22(d).21 Rule
17Ad–22(d) establishes a regulatory
regime to govern registered clearing
agencies that do not provide CCP or
CSD services.22 Currently, all clearing
agencies registered with the
Commission that are actively providing
clearance and settlement services are
covered clearing agencies.23 Although
all currently registered and active
clearing agencies meet the definition of
a covered clearing agency, thereby
making Rule 17Ad–22(d) not applicable
to any registered and active clearing
agencies at present, clearing agencies
that are not covered clearing agencies
may register with the Commission in the
future and would be subject to Rule
17Ad–22(d).24
effectively, however, it can transmit risk throughout
the financial system.
18 A CSD is a type of registered clearing agency
that acts as a depository for handling securities,
whereby all securities of a particular class or series
of any issuer deposited within the system are
treated as fungible. Through use of a CSD, securities
may be transferred, loaned, or pledged by
bookkeeping entry without the physical delivery of
certificates. A CSD also may permit or facilitate the
settlement of securities transactions more generally.
See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad–
22(a)(3); CCA Definition Adopting Release, supra
note 17, at 28856. If a CSD is unable to perform
these functions, market participants may be unable
to settle their transactions, transmitting risk through
the financial system.
19 See 17 CFR 240.17Ad–22(a)(5).
20 See CCA Standards Adopting Release, supra
note 13, at 70793. The Financial Stability Oversight
Council (‘‘FSOC’’) has designated certain financial
market utilities (‘‘FMUs’’)—which include clearing
agencies that manage or operate a multilateral
system for the purpose of transferring, clearing, or
settling payments, securities, or other financial
transactions among financial institutions or
between financial institutions and the FMU—as
systemically important or likely to become
systemically important (‘‘SIFMUs’’). See 12 U.S.C.
5463. An FMU is systemically important if the
failure of or a disruption to the functioning of such
FMU could create or increase the risk of significant
liquidity or credit problems spreading among
financial institutions or markets and thereby
threaten the stability of the U.S. financial system.
See 12 U.S.C. 5462(9).
21 See 17 CFR 240.17Ad–22(d).
22 See CCA Standards Adopting Release, supra
note 13, at 70793.
23 They are The Depository Trust Company
(‘‘DTC’’), FICC, NSCC, ICE Clear Credit (‘‘ICC’’), ICE
Clear Europe (‘‘ICEEU’’), The Options Clearing
Corporation (‘‘OCC’’), and LCH SA.
24 The Boston Stock Exchange Clearing
Corporation (‘‘BSECC’’) and Stock Clearing
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In establishing these regimes under
Rule 17Ad–22 under the Exchange Act,
the Commission stated that the
approach under Rules 17Ad–22(d) and
(e) takes into account clearing agency
activities and the risks they pose, while
promoting robust risk management
practices and the general safety and
soundness of registered clearing
agencies and addressing concerns
relating to the level of concentration in
the provision of clearing agency
services.25 The Commission recognized
that Rule 17Ad–22(d) would allow new
entrants to more firmly establish
themselves as clearing agencies, which
is important for the deconsolidation and
diffusion of risk across the market.26
Notwithstanding their different risk
profiles, all registered clearing
agencies—whether covered clearing
agencies under Rule 17Ad–22(e) or
registered clearing agencies under Rule
17Ad–22(d)—are important to the U.S.
financial system, as evident in their
obligations under Section 17A of the
Exchange Act. Effective governance—
the primary way by which a clearing
agency develops and oversees the
provision of its clearance and settlement
services—is the lynchpin to ensuring a
well-functioning and resilient clearing
agency that can withstand periods of
market stress.27 In this regard, the
Commission believes that the
governance requirements in proposed
Rule 17Ad–25 should apply to all
registered clearing agencies. The
Commission’s intent with respect to
proposed Rule 17Ad–25 is, in part, to
take another incremental step to help
ensure that risks posed by registered
clearing agencies are appropriately
managed consistent with the purposes
of the Exchange Act.
A. Differing Perspectives at Registered
Clearing Agencies
The Exchange Act requires each
registered clearing agency to be so
organized and have the capacity to
facilitate prompt and accurate clearance
Corporation of Philadelphia (‘‘SCCP’’) are currently
registered with the Commission as clearing agencies
but conduct no clearance or settlement operations;
both inactive clearing agencies are subject to Rule
17Ad–22(d). See Exchange Act Release No. 63629
(Jan. 3, 2011), 76 FR 1473, 1474 (Jan. 10, 2011)
(‘‘BSECC Notice’’); Exchange Act Release No. 63268
(Nov. 8, 2010), 75 FR 69730, 69731 (Nov. 15, 2010)
(‘‘SCCP Notice’’).
25 See CCA Standards Adopting Release, supra
note 13, at 70793.
26 See id.
27 See SEC Division of Trading and Markets and
Office of Compliance Inspections and
Examinations, Staff Report on the Regulation of
Clearing Agencies (Oct. 1, 2020) (‘‘Staff Report on
Clearing Agencies’’), https://www.sec.gov/files/
regulation-clearing-agencies-100120.pdf.
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and settlement.28 It also requires each
registered clearing agency to have rules
that assure the fair representation of
shareholders and participants in the
selection of directors and the
administration of its affairs.29 These
requirements highlight the importance
of a clearing agency’s organization in
facilitating prompt and accurate
clearance and settlement, and of the
need for a clearing agency to have rules
that help ensure that both owners and
participants participate in the selection
of directors and the administration of its
affairs, including board governance.
Moreover, the Commission’s recent
experience has revealed that differing
perspectives among other categories of
stakeholders may influence the ways
risk management decisions and
practices develop and are implemented
by the registered clearing agency. These
differing views—whether between small
and large clearing members or between
direct and indirect participants of the
clearing agency—warrant attention as
they may manifest themselves in a
clearing agency’s decision-making to
benefit one category of stakeholders at
the expense of another category of
stakeholders.
28 15
U.S.C. 78q–1(b)(3)(A).
U.S.C. 78q–1(b)(3)(C). The Exchange Act
specifically states the ‘‘fair representation of . . .
shareholders (or members) and participants’’ in the
selection of directors and the administration of
affairs, reflecting the fact that a clearing agency
could be either a for-profit or not-for-profit entity.
See Regulation of Clearing Agencies, Exchange Act
Release No. 16900, 20 SEC Docket 415, 420 n.15
(June 17, 1980) (explaining that ‘‘[t]he fair
representation requirement was adopted verbatim
from S. 249, the Senate bill that preceded the
Securities Acts Amendments of 1975. The report of
the Senate Committee on Banking, Housing and
Urban Affairs to accompany S. 249 states: ‘The rules
of the clearing agency must assure fair
representation of its shareholders (or members) and
participants in the decision making process of the
clearing agency . . . . The reference to
shareholders of [sic] members makes it clear that
the bill establishes no norm as to whether clearing
agencies should or should not be operated for
profit. The bill makes no attempt to set up
particular standards of representation or
participation. Rather, it provides that the
Commission must assure itself that the rules of the
clearing agency regarding the manner in which
decisions are made give fair voice to participants as
well as to shareholders or members. Fair
representation of participants may be found if they
are afforded an opportunity to acquire voting stock
of the clearing agency in proportion to their use of
its facilities’’). ‘‘Members,’’ however, is a term often
used to describe the participants of a clearing
agency. This release refers to ‘‘shareholders (or
members)’’ collectively as ‘‘owners’’ of the
registered clearing agency. In some instances,
owners and shareholders may differ in certain
respects, such as the nature and extent of their
voting rights on the board. To avoid confusion, in
this release the Commission uses only
‘‘participants’’ to refer to the direct users of a
clearing agency, which have met the standards for
participation and have executed a participation
agreement.
29 15
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First, based on its supervisory
experiences, the Commission has
observed that owners and participants
may have structural incentives that
differ from one another, leading to
differing views as to the efficacy of
certain risk management tools and the
potential for divergent interests in the
risk management of the clearing agency.
For example, owners and participants
may have differing views as to the scope
of products cleared by the clearing
agency, the minimum standards
required for participation in the clearing
agency, and the size, timing, and nature
of financial resource requirements
applied as part of the risk management
framework.
Fundamentally, an owner’s interest in
protecting the equity and continued
operation of the clearing agency
diverges from a participant’s interest in
avoiding the allocation of losses from a
defaulting participant. Diverging
interests and incentives among owners
and participants with respect to loss
allocation or scope of products—such as
in the event that some participants may
want to limit access to a market by
limiting access to clearing, while
owners would like to expand the scope
of products to collect fees–could limit
the benefits of a clearing agency, and
even potentially cause harm to the
market it serves as well as the broader
financial system to the extent that they
might undermine the risk mitigating
purpose of the clearing agency by failing
to achieve the right balance among
competing interests.30
When a clearing agency chooses to
mutualize the risk it faces among its
owners and participants, it may find a
closer alignment of incentives among
owners and participants because both
owners and participants would bear
losses associated with a failure of the
clearing agency.31 In considering how to
mutualize the risk it faces, a clearing
agency may choose from a number of
different approaches. For example, a
clearing agency may be organized so
that the participants are owners of the
clearing agency,32 which may eliminate
diverging incentives between owners
30 For a discussion of the importance of aligning
clearing agency governance with the interests of
those who bear the financial risk, see infra note 167
and accompanying text.
31 See Jorge Cruz Lopez & Mark Manning, Who
Pays? CCP Resource Provision in the PostPittsburgh World (Dec. 2017), https://
www.bankofcanada.ca/wp-content/uploads/2017/
12/sdp2017-17.pdf.
32 See, e.g., Exchange Act Release No. 52922 (Dec.
7, 2005), 70 FR 74070 (Dec. 14, 2005) (explaining
that participants of DTC, FICC, and NSCC that make
full use of the services of one or more of these
clearing agency subsidiaries of DTCC are required
to purchase DTCC common shares).
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and participants. Regardless of the
approach, as stated above, the Exchange
Act requires that a clearing agency be so
organized and have the capacity to
facilitate prompt and accurate clearance
and settlement. In addition, the
Exchange Act requires that the rules of
the clearing agency assure a fair
representation of its shareholders (or
members) and participants in the
selection of its directors and
administration of its affairs.33
Second, the Commission has observed
differing views between large and small
participants in a registered clearing
agency about risk management
practices. Consolidation among market
participants in recent years has resulted
in the increased concentration of
clearance and settlement activity among
a smaller set of firms. For example, over
90 percent of the total notional amount
of the U.S. market in credit derivatives
is concentrated in four U.S. commercial
banks.34 Large clearing agency
participants, especially participantowners, often have different incentives
from smaller participants. When a small
number of dominant participants
exercise control or influence over a
registered clearing agency with respect
to the services provided by the
registered clearing agency or the rules
applicable to its participants, these
participants may promote margin
requirements that are not commensurate
with the risks and particular attributes
of each participant’s specific products,
portfolio, and market, thereby indirectly
limiting competition and increasing
their ability to maintain higher profit
margins. Given such incentives, a
registered clearing agency that is
dominated by a small number of large
participants might make decisions that
are designed to provide them with a
competitive advantage.
Third, the Commission’s proposal is
informed, in part, by its experience
overseeing registered clearing agencies
with regard to the concerns raised by
certain participants that access criteria
and risk management standards may
impose disproportionate costs relative
to the value of access to clearing
agencies. In addition, when the
Commission proposed Regulation MC,
the Commission identified a potential
area where a conflict of interest of
participants that exercise undue control
33 See
15 U.S.C. 78q–1(b)(3)(C).
Staff Report on Clearing Agencies, supra
note 27, at 21 (citing the Office of the Comptroller
of the Currency, Quarterly Report on Bank Trading
and Derivatives Activities, Third Quarter 2019,
graph 4 (Dec. 2019), https://www.occ.gov/
publications-andresources/publications/quarterlyreport-on-bank-trading-and-derivatives-activities/
files/pub-derivativesquarterly-qtr3-2019.pdf).
34 See
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or influence over a security-based swap
clearing agency could adversely affect
the central clearing of security-based
swaps by limiting access to the securitybased swap clearing agency, either by
restricting direct participation in the
security-based swap clearing agency or
restricting indirect access by controlling
the ability of non-participants to enter
into correspondent clearing
arrangements.35 The resulting conflicts
of interest could limit the benefits of a
registered security-based swap clearing
agency in the securities market to
indirect participants. As a result, the
Commission believes it should continue
to implement measures that help ensure
the decisions of a registered clearing
agency reflect the interests and
perspectives of the broadest crosssection of stakeholders as possible.
This proposal is intended to help
ensure that a registered clearing
agency’s governance arrangements can
manage these differing perspectives and
interests more effectively. As discussed
in detail below, the Commission
believes that the proposed rules would
help ensure that a registered clearing
agency’s governance arrangements can
more effectively manage the divergent
interests between and among clearing
agency owners and participants, small
and large participants, and direct and
indirect participants of a clearing
agency, which, in turn, would improve
a clearing agency’s risk management
practices to be fair and more effective.
Imposing these requirements on all
registered clearing agencies would have
the effect of building upon existing
governance requirements with
consistent, more defined and robust
governance standards across all
registered clearing agencies.
B. Regulatory Framework for Registered
Clearing Agencies
The regulatory framework for
registered clearing agencies has evolved
over the last decade. Existing elements
of the regulatory framework establish
policies and procedures requirements
for minimum standards to help promote
participation in registered clearing
agencies.36 Other rules require that
certain clearing agencies have policies
and procedures for governance
arrangements that support the objectives
of owners and participants and consider
the interests of participants’ customers,
securities issuers and holders, and other
relevant stakeholders.37
35 See Regulation MC Proposing Release, supra
note 1, at 65885.
36 See, e.g., 17 CFR 240.17Ad–22(b)(5)–(7).
37 See, e.g., 17 CFR 240.17Ad–22(e)(2)(iii), (vi).
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Following the enactment of the DoddFrank Act, the Commission has taken
multiple steps to strengthen its
regulatory framework for clearing
agencies by: (i) establishing minimum
requirements for governance,
operations, and risk management
practices of registered clearing
agencies; 38 (ii) enhancing the
Commission’s oversight and
enforcement of the technology and
systems infrastructure that supports
clearing agencies; 39 (iii) establishing an
enhanced regulatory framework for
systemically important clearing agencies
and clearing agencies for security-based
swaps; 40 and (iv) expanding the
enhanced regulatory framework from
systemically important clearing agencies
to all registered clearing agencies that
provide CCP or CSD services so that the
set of covered clearing agencies includes
the seven active clearing agencies
registered with the Commission.41 In
addition, the Commission has adopted
rules to help promote access to
registered clearing agencies, including
rules that require a registered clearing
agency that performs CCP services to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to: (i) provide the
opportunity for a person that does not
perform any dealer or security-based
swap dealer services to obtain
membership on fair and reasonable
terms at the clearing agency to clear
securities for itself or on behalf of other
persons; (ii) have membership standards
that do not require that participants
maintain a minimum portfolio size or
minimum transaction volume; and (iii)
provide that a person maintaining net
capital equal to or greater than $50
million may obtain membership at the
clearing agency, provided that such
person is able to comply with other
reasonable membership standards.42
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1. Current Requirements and Past
Proposals on Clearing Agency
Governance
In the recent past, the Commission
addressed clearing agency governance
with the adoption of two rules. In 2016,
the Commission adopted a rule that
requires a covered clearing agency to
establish, implement, maintain and
38 See 17 CFR 240.17Ad–22; see also Clearing
Agency Standards Adopting Release, supra note 8;
CCA Standards Adopting Release, supra note 13;
CCA Definition Adopting Release, supra note 17.
39 See 17 CFR 242.1000 et seq.; see also Exchange
Act Release No. 73639 (Nov. 19, 2014), 79 FR 72251
(Dec. 5, 2014) (‘‘Regulation SCI Adopting Release’’).
40 See 17 CFR 240.17Ad–22(e); CCA Standards
Adopting Release, supra note 13.
41 See CCA Definition Adopting Release, supra
note 17.
42 17 CFR 240.17Ad–22(b)(5)–(7).
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enforce written policies and procedures
reasonably designed to provide for
governance arrangements that are clear
and transparent, clearly prioritize the
safety and efficiency of the covered
clearing agency, support the public
interest requirements in Section 17A of
the Exchange Act, and the objectives of
owners and participants, establish that
the board of directors and senior
management have appropriate
experience and skills to discharge their
duties and responsibilities, specify clear
and direct lines of responsibility, and
consider the interests of participants’
customers, securities issuers and
holders, and other relevant stakeholders
of the covered clearing agency.43 In
2012, the Commission adopted a rule
that requires all registered clearing
agencies aside from covered clearing
agencies to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
have governance arrangements that are
clear and transparent to fulfill the
public interest requirements in Section
17A of the Exchange Act, to support the
objectives of owners and participants,
and to help promote the effectiveness of
the clearing agency’s risk management
procedures.44 The Commission took a
broad, principles-based approach to
these governance rules to give a clearing
agency the discretion to consider its
unique characteristics and
circumstances, including ownership
and governance structures, effect on
direct and indirect participants,
membership base, markets served, and
the risks inherent in products cleared,
while at the same time, largely being
subject to the requirements of the SRO
rule filing process, which requires
public notice and comment and
consideration by the Commission.45
43 See 17 CFR 240.17Ad–22(e)(2); see also CCA
Standards Adopting Release, supra note 13, at
70802. The Commission also issued guidance on
Rule 17Ad–22(e)(2) ‘‘because . . . [as] there may be
a number of ways to address compliance with Rule
17Ad–22(e)(2), the Commission . . . provid[ed] the
following guidance that a covered clearing agency
generally should consider in establishing and
maintaining its policies and procedures: . . .
whether the roles and responsibilities of its board
of directors are clearly specified, and whether there
are documented procedures for the functioning of
the board of directors, such as procedures for
identifying, addressing, and managing member
conflicts of interest, and for reviewing the board’s
overall performance and the performance of its
individual members regularly.’’ CCA Standards
Adopting Release, supra note 13, at 70806–07.
44 See 17 CFR 240.17Ad–22(d)(8); see also
Clearing Agency Standards Adopting Release, supra
note 8, at 66251–52.
45 See generally CCA Standards Adopting Release,
supra note 13, at 70800 (‘‘With a number of
exceptions, Rule 17Ad–22(e) does not prescribe a
specific tool or arrangement to achieve its
requirements. The Commission believes that when
determining the content of its policies and
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51817
The Commission also proposed, but
did not adopt, other rules directed to
clearing agency governance: proposed
Regulation MC, which contemplated
limitations on ownership and minimum
requirements for independent directors
intended to satisfy a requirement for
Commission rulemaking set forth in
Section 765 of the Dodd-Frank Act
(‘‘Section 765’’); 46 proposed Rule
17Ad–25, which included additional
requirements for a clearing agency to
mitigate conflicts of interest; 47 and
proposed Rule 17Ad–26, which
included requirements for a clearing
agency to establish standards for
directors on the board and committees
thereof.48 The Commission did not
adopt those proposals, which were
issued in 2010 and 2011, and is now
withdrawing them because of the
multiple changes that the Commission
has made to its regulatory framework for
clearing agencies as stated above.
As part of the incremental evolution
of the Commission’s clearing agency
regulatory framework that has occurred
over the past decade, the Commission
now believes that updated rules are
warranted to build upon and strengthen
the existing clearing agency governance
framework, given the trends the
Commission has observed in the
securities markets and during its
supervisory processes.49 Specifically,
procedures, each covered clearing agency must
have the ability to consider its unique
characteristics and circumstances, including
ownership and governance structures, effect on
direct and indirect participants, membership base,
markets served, and the risks inherent in products
cleared. This ability, however, is subject to the
requirements of the SRO rule filing and advance
notice processes, which provide some opportunities
for the public and participants to comment on the
covered clearing agency’s rules, policies, and
procedures. The Commission does not believe that
a granular or prescriptive approach to its regulation
of covered clearing agencies would be appropriate,
nor would such an approach ensure that a covered
clearing agency does not become a transmission
mechanism for systemic risk. Moreover, the
Commission believes that the primarily principlesbased approach reflected in Rule 17Ad–22(e) will
help a covered clearing agency continue to develop
policies and procedures that can effectively meet
the evolving risks and challenges in the markets
that the covered clearing agency serves.’’); Clearing
Agency Standards Adopting Release, supra note 8,
at 66252 (‘‘We appreciate the perspective of
commenters who prefer the more general policies
and procedures design of Rule 17Ad–22(d)(8) to any
more prescriptive rulemaking by the Commission in
the area of clearing agency governance.’’).
46 See Regulation MC Proposing Release, supra
note 1, at 65893–904.
47 See Clearing Agency Standards Proposing
Release, supra note 2, at 14497–98.
48 See id. at 14498–99.
49 As discussed further below, the Commission
believes that the targeted set of proposed rules for
governance included in this release can help ensure
that the framework effectively addresses the
considerations set forth in Section 765 with respect
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the Commission believes that
addressing the composition of a board
and its committees will help ensure
effective governance, help promote
transparency into decision-making
processes, facilitate fair representation
of owners and participants, and mitigate
the potential effects of conflicts of
interest between owners and
participants, large and small
participants, and direct and indirect
participants. For these reasons,
proposed Rule 17Ad–25 includes
provisions directed to all registered
clearing agencies.
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2. Commodity Futures Trading
Commission’s Governance Framework
for Derivatives Clearing Organizations
Three clearing agencies registered
with the Commission are also registered
as derivatives clearing organizations
(‘‘DCOs’’) with the Commodity Futures
Trading Commission (‘‘CFTC’’). The
Commission acknowledges that, while
other agency rules and regulations on
governance may apply to a clearing
agency registered with the Commission
that are similar in scope or purpose to
proposed Rule 17Ad–25, the
Commission remains obligated to ensure
that risk in the U.S. securities markets
is appropriately managed—including
through promulgation of its own rules
and regulations—consistent with the
purposes of the Exchange Act.
Additionally, because Rule 17Ad–22(e)
under the Exchange Act and other
comparable regulations—including DCO
governance rules adopted by the CFTC
in January 2020 50—are based on the
same international standards, namely
the PFMI, the potential for inconsistent
regulation is low. In this regard, the
Commission believes its existing
governance rules for covered clearing
agencies and registered clearing
agencies other than covered clearing
agencies are consistent with the CFTC’s
governance rule for DCOs.51 Certain
to clearing of security-based swaps. Although
Section 765 directed the Commission to focus on
conflicts of interest specifically with respect to
security-based swap clearing agencies, the
Commission believes that conflicts of interest
concerns can arise across all registered clearing
agencies regardless of the asset classes served.
50 See DCO General Provisions and Core
Principles, 85 FR 4800 (Jan. 27, 2020), https://
www.cftc.gov/sites/default/files/2020/01/202001065a.pdf.
51 See 17 CFR 39.24 (requiring DCOs to, among
other things, have governance arrangements that are
written, clear and transparent, place a high priority
on the safety and efficiency of the derivatives
clearing organization, and explicitly support the
stability of the broader financial system and other
relevant public interest considerations of clearing
members, customers of clearing members, and other
relevant stakeholders; the board of directors shall
make certain that the DCO’s design, rules, overall
strategy, and major decisions appropriately reflect
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proposed requirements in this
rulemaking are also consistent with the
requirements in the CFTC’s DCO
regime, which provides conflicts of
interest and board composition rules.52
Further, in developing these rules,
Commission staff has consulted with the
CFTC and the Board of Governors of the
Federal Reserve System (‘‘FRB’’).
C. Risks Associated With Clearance and
Settlement
The Commission also believes that the
proposed governance rules would help
ensure that registered clearing agencies
make more effective risk management
decisions that take into account relevant
stakeholder perspectives and concerns.
Recent episodes of increased market
volatility—in March 2020 following the
outbreak of the COVID–19 pandemic,
and in January 2021 following
heightened interest in certain ‘‘meme’’
stocks—have revealed potential
vulnerabilities in the U.S. securities
market and highlight the essential role
of registered clearing agencies in
managing the risk that securities
transactions may fail to clear or settle.53
These events underscore the importance
of a strong regulatory framework to
oversee registered clearing agencies that
clear or settle securities transactions and
provide transparency to the markets.
Among other things, the rules of a
registered clearing agency generally
require its participants to transfer
collateral to the clearing agency, which
the legitimate interests of clearing members,
customers of clearing members, and other relevant
stakeholders).
52 See 17 CFR 39.25 (requiring DCOs to establish
and enforce rules to minimize conflicts of interest
in the decision-making process of the derivatives
clearing organization, establish a process for
resolving such conflicts of interest, and describe
procedures for identifying, addressing, and
managing conflicts of interest involving members of
the board of directors); 17 CFR 39.26 (requiring
DCOs to ensure that the composition of the
governing board or board-level committee of the
DCO includes market participants and individuals
who are not executives, officers, or employees of
the derivatives clearing organization or an affiliate
thereof). We note that the CFTC recently proposed
amendments to its DCO governance framework
relating to risk management committee
requirements. See Governance Requirements for
Derivatives Clearing Organizations, Release Number
8565–22 (July 27, 2022), https://www.cftc.gov/
PressRoom/PressReleases/8565-22.
53 See, e.g., SEC, Staff Report on Equity and
Options Market Structure Conditions in Early 2021
(Oct. 14, 2021) (‘‘2021 Staff Report’’), https://
www.sec.gov/files/staff-report-equity-optionsmarket-struction-conditions-early-2021.pdf. Staff
reports, Investor Bulletins, and other staff
documents (including those cited herein) represent
the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The
Commission has neither approved nor disapproved
the content of these staff documents and, like all
staff statements, they have no legal force or effect,
do not alter or amend applicable law, and create no
new or additional obligations for any person.
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may include different types of collateral,
such as margin payments, funds, or
other assets, and the requirements
associated with these rules may change
in response to changes in market
volatility. The terms of these rules, and
the related policies and procedures of
the registered clearing agency that
implement them, are generally approved
by the board as part of the clearing
agency’s governance arrangements.
These rules, policies, and procedures
are also subject to Commission review
as proposed rule changes under Section
19 of the Exchange Act and Rule 19b–
4 thereunder.54 The potential for
sudden and large increases in the
margin required by a registered clearing
agency of its participants, as evidenced
in the March 2020 and January 2021
events stated above, have increased
scrutiny by a wide variety of market
participants into the way a registered
clearing agency establishes, implements,
maintains, and enforces its rules that
impose margin requirements.55 Some
market participants have suggested that
such margin requirements are too
conservative; 56 others have suggested
that margin requirements do not
sufficiently consider the range of
participants in a clearing agency and the
downstream effect such requirements
may have on other types of investors.57
In response to this increased attention,
the Basel Committee on Banking
Supervision (‘‘BCBS’’), the Committee
on Payments and Market Infrastructure
(‘‘CPMI’’), and the International
Organization of Securities Commissions
(‘‘IOSCO’’) jointly released a
consultative paper on CCP margin
practices, focused on, among other
things, recent market volatility and the
apparent drivers of the size and
composition of margin calls.58
Concerns about the size and timing of
margin requirements are only one
example of an area in which direct and
indirect participants that rely on the
clearance and settlement process have
expressed concerns about clearing
54 15
U.S.C. 78s; 17 CFR 240.19b–4.
e.g., Fitch Ratings, Margin Call Disparity,
Breaches Could Drive Clearinghouse Scrutiny (July
20, 2020), https://www.fitchratings.com/research/
non-bank-financial-institutions/margin-calldisparity-breaches-could-drive-clearinghousescrutiny-20-07-2020.
56 See Alexander Campbell, CCP Margin Buffers
Too Big, Research Suggests (July 9, 2019), https://
www.risk.net/risk-management/6783941/ccpmargin-buffers-too-big-research-suggests.
57 See Glenn Hubbard et al., Report of the Task
Force on Financial Stability, Brookings Institution
(June 2021), https://www.brookings.edu/wpcontent/uploads/2021/06/financial-stability_
report.pdf.
58 See BCBS–CPMI–IOSCO, Consultative Report,
Review of Margining Practices (Oct. 2021), https://
www.bis.org/bcbs/publ/d526.pdf.
55 See,
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agency governance and, in particular,
the way that such governance would
oversee or employ risk management
tools under stressed market conditions.
Two other areas of heightened attention
concern a clearing agency’s process for
loss allocation in the event of a
participant default and an event other
than a participant default (hereinafter a
‘‘non-default loss’’), such as an
operational failure, cyber-attack, or
theft. For example, participants and
others have expressed concerns about
the extent to which existing governance
structures at registered clearing agencies
would function during a potential
recovery or resolution scenario, which
would occur in the event that a clearing
agency’s prefunded financial resources
available to absorb any loss—sometimes
referred to as the ‘‘clearing fund’’ or
‘‘guaranty fund’’—are insufficient to
close out a defaulting participant’s
portfolio without allocating losses
among the non-defaulting participants
of the clearing agency.59 Based on its
supervisory experience, the Commission
believes that this loss allocation process
could thus have significant implications
for the risk management of its nondefaulting participants.
Further, although concerns about the
size and timing of margin requirements
are, at one level, concerns about the risk
management practices of a clearing
agency, they also implicate clearing
agency governance because the
governance arrangements of a registered
clearing agency will determine the
process for developing and approving
policies and procedures for imposing
margin requirements, and the
governance and management of the
registered clearing agency will also
implement these policies and
procedures, whether during normal
market conditions or periods of
increased market volatility.
In this regard, proposed Rule 17Ad–
25 is intended to help ensure that in
periods of market stress or stress on the
registered clearing agency, the
governance process of all registered
clearing agencies is transparent,
objective, and addresses conflicts of
interest. Trust among market
participants in the national system for
clearance and settlement, particularly in
times of market stress, necessarily
depends on trust in the ability of
59 In 2018, a default at a European CCP increased
scrutiny of the auction process through which a
CCP may choose to close out a defaulted portfolio.
CPMI–IOSCO issued a report on issues for
consideration in 2020. See Bank for International
Settlements, Central Counterparty Default
Management Auctions—Issues for Consideration
(June 2020), https://www.bis.org/cpmi/publ/
d192.pdf.
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registered clearing agencies to more
effectively manage the risk flowing from
that market stress and, when necessary,
transparently and objectively impose
increased margin requirements or
employ loss allocation mechanisms.
III. Proposed Rules
The Commission is proposing rules
under the Exchange Act and to address
the considerations set forth in Section
765 of the Dodd-Frank Act. Section
17(a) of the Exchange Act directs
registered clearing agencies to make and
keep for prescribed periods such
records, furnish such copies, and make
and disseminate such reports as the
Commission, by rule, prescribes as
necessary or appropriate in the public
interest, for the protection of investors,
or in furtherance of the Exchange Act.60
Section 17A of the Exchange Act directs
the Commission to facilitate the
establishment of a national system for
the prompt and accurate clearance and
settlement of securities transactions and
provides the Commission with the
authority to regulate those entities
critical to the clearance and settlement
process.61 Section 23(a) of the Exchange
Act authorizes the Commission to make
rules and regulations as necessary or
appropriate to implement the provisions
of the Exchange Act.62 The enactment of
the Payment, Clearing, and Settlement
Supervision Act (‘‘Clearing Supervision
Act’’) in 2010 (Title VIII of the DoddFrank Act) reaffirmed the importance of
the national system for clearance and
settlement.63 Specifically, Congress
found that the ‘‘proper functioning of
the financial markets is dependent upon
safe and efficient arrangements for the
clearing and settlement of payments,
securities, and other financial
transactions.’’ 64 In addition, Section
765 of the Dodd-Frank Act specifically
directs the Commission to adopt rules to
mitigate conflicts of interest for securitybased swap clearing agencies.65
Accordingly, the Commission is
proposing these rules pursuant to
overlapping statutory authorities,
because although the Commission is
able to propose these rules pursuant to
Section 17A of the Exchange Act, the
Commission is also meeting the
mandatory rulemaking requirements of
Section 765. The Commission
preliminarily has determined that these
proposed rules are necessary and
appropriate to improve the governance
60 See
15 U.S.C. 78q(a).
15 U.S.C. 78q–1(a)(2)(A).
62 See 15 U.S.C. 78w(a).
63 See 12 U.S.C. 5461–5472.
64 12 U.S.C. 5461(a)(1).
65 See 15 U.S.C. 8343.
61 See
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of a clearing agency that clears securitybased swaps and in which a major
security-based swap participant has a
material debt or equity investment.
The Commission had previously
reviewed the potential for conflicts of
interest at security-based swap clearing
agencies in accordance with Section 765
of the Dodd-Frank Act when it proposed
Regulation MC, and had identified those
conflicts that could affect access to
clearing agency services, products
eligible for clearing, and risk
management practices of the clearing
agencies.66 The Commission had
identified three key areas where it
believed a conflict of interest of
participants who exercise undue control
or influence over a security-based swap
clearing agency could adversely affect
the central clearing of security-based
swaps.67 First, participants could limit
access to the security-based swap
clearing agency, either by restricting
direct participation in the securitybased swap clearing agency or
restricting indirect access by controlling
the ability of non-participants to enter
into correspondent clearing
arrangements. Second, participants
could limit the scope of products
eligible for clearing at the security-based
swap clearing agency, particularly if
there is a strong economic incentive to
keep a product traded in the over-thecounter (‘‘OTC’’) market for securitybased swaps. Third, participants could
use their influence to reduce the amount
of collateral they would be required to
contribute and liquidity resources they
would have to expend as margin or
guaranty fund to the security-based
swap clearing agency. Although the
Commission does not believe that the
participants of security-based swap
clearing agencies are engaged in these
types of activities, the Commission
recognizes that these three potential
conflicts of interest could limit the
benefits of a security-based swap
clearing agency in the security-based
swaps market, and even potentially
cause substantial harm to that market
and the broader financial markets.
Nevertheless, there are benefits to
having participant incentives known
and reflected in the decision making
activity of a board of directors.
Employees of participants—in
particular, chief risk officers or their
equivalent—are likely to bring technical
expertise to a board of directors.
Participants are often exposed to
enormous financial liability in the event
of a default, and so they have strong
66 See Regulation MC Proposing Release, supra
note 1, at 65885.
67 See id.
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incentives to have sound risk
management at the clearing agencies. In
order to promote the utility of having
directors who are familiar with
participant operations, the proposed
rule does not prohibit directors who,
among other things, receive
compensation from participants from
meeting the definition of independent
director (provided all other
requirements of the proposed rules are
met).68
For the reasons discussed throughout
this release, the Commission is
proposing rules for all registered
clearing agencies to establish
requirements for governance, including
requirements for the composition of the
board of directors, to mitigate conflicts
of interest, to establish certain
obligations of the board to oversee
service provider relationships, and to
establish an obligation of the board to
consider the views of participants and
other relevant stakeholders. Each of
these proposed rules are discussed
further below.
A. Board Composition and
Requirements for Independent Directors
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1. Proposed Rules 17Ad–25(b), (e) and
(f)
Proposed Rules 17Ad–25(b), (e), and
(f) would establish requirements related
to independent directors. First,
proposed Rule 17Ad–25(b)(1) would
require that a majority of the directors
of a registered clearing agency must be
independent directors, as defined in
proposed Rule 17Ad–25(a). The
proposed rule would also provide that,
if a majority of the voting interests
issued as of the immediately prior
record date are directly or indirectly
held by participants, then at least 34
percent of the members of the board of
directors must be independent directors.
Proposed Rule 17Ad–25(a) would define
an ‘‘independent director’’ to mean a
director that has no material
relationship with the registered clearing
agency, or any affiliate thereof.
Proposed Rule 17Ad–25(a) also would
define ‘‘material relationship’’ to mean
a relationship, whether compensatory or
otherwise, that reasonably could affect
the independent judgment or decisionmaking of the director, and includes
relationships during a lookback period
of one year counting back from making
the initial determination in proposed
Rule 17Ad–25(b)(2). In addition,
proposed Rule 17Ad–25(a) would define
‘‘affiliate’’ to mean a person that directly
or indirectly controls, is controlled by,
68 Other jurisdictions have chosen a different
approach, as discussed below. See infra Part IV.B.2.
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or is under common control with the
registered clearing agency. Proposed
Rule 17Ad–25(b)(2) would require each
registered clearing agency to broadly
consider all the relevant facts and
circumstances, including under
proposed Rule 17Ad–25(g), on an
ongoing basis, to affirmatively
determine that a director does not have
a material relationship with the
registered clearing agency or an affiliate
of the registered clearing agency to
qualify as an independent director. In
making such determination, a registered
clearing agency must (i) identify the
relationships between a director, the
registered clearing agency, any affiliate
thereof, along with the circumstances
set forth in proposed Rule 17Ad–25(f);
(ii) evaluate whether any relationship is
likely to impair the independence of the
director in performing the duties of
director; and (iii) document this
determination in writing. Such
documentation requirements would be
subject to the recordkeeping and
retention requirements that apply to all
SROs under Section 17(a)(2) of the
Exchange Act.69
The Commission believes that
proposed Rules 17Ad–25(a) and 17Ad–
25(b)(2) could provide registered
clearing agencies with a broad pool of
potential candidates to serve as
independent directors. For example, an
employee of a participant of the
registered clearing agency, a
professional in the securities or
financial services industries, an
academic, and other such qualified
persons would be eligible for
consideration as an independent
director as long as the candidate meets
the other criteria under the definition of
material relationship and proposed Rule
17Ad–25(f).
Proposed Rule 17Ad–25(e) would
require that, if any committee has the
authority to act on behalf of the board
of directors, the composition of that
committee must have at least the same
percentage of independent directors as
is required under these rules for the
board of directors, as set forth in
proposed paragraph (b)(1).
Proposed Rule 17Ad–25(f) would
describe certain circumstances that
would always exclude a director from
being an independent director. These
circumstances would include: (1) the
director is subject to rules, policies, and
procedures by the registered clearing
agency that may undermine the
director’s ability to operate unimpeded,
such as removal by less than a majority
vote of shares that are entitled to vote
in such director’s election; (2) the
69 See
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director, or a family member, has an
employment relationship with or
otherwise receives compensation, other
than as a director, from the registered
clearing agency or any affiliate thereof,
or the holder of a controlling voting
interest of the registered clearing
agency; (3) the director, or a family
member, is receiving payments from the
registered clearing agency, or any
affiliate thereof, or the holder of a
controlling voting interest of the
registered clearing agency that
reasonably could affect the independent
judgment or decision-making of the
director, other than the following: (i)
compensation for services as a director
to the board of directors or a committee
thereof; or (ii) pension and other forms
of deferred compensation for prior
services not contingent on continued
service; (4) the director, or a family
member, is a partner in, or controlling
shareholder of, any organization to or
from which the registered clearing
agency, or any affiliate thereof, or the
holder of a controlling voting interest of
the registered clearing agency, is making
or receiving payments for property or
service, other than the following: (i)
payments arising solely from
investments in the securities of the
registered clearing agency, or affiliate
thereof; or (ii) payments under nondiscretionary charitable contribution
matching programs; (5) the director, or
a family member is employed as an
executive officer of another entity where
any executive officers of the registered
clearing agency serve on that entity’s
compensation committee; or (6) the
director, or a family member, is a
partner of the outside auditor of the
registered clearing agency, or an
employee of the outside auditor who is
working on the audit of the registered
clearing agency, or any affiliate thereof.
Proposed Rules 17Ad–25(f)(2)–(6)
would be subject to a lookback period
of one year (counting back from making
the initial determination in proposed
Rule 17Ad–25(b)(2)). Family member
would be defined to include any child,
stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling,
niece, nephew, mother-in-law, father-inlaw, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law,
including adoptive relationships, any
person (other than a tenant or employee)
sharing a household with the director or
a nominee for director, a trust in which
these persons (or the director or a
nominee for director) have more than
fifty percent of the beneficial interest, a
foundation in which these persons (or
the director or a nominee for director)
control the management of assets, and
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any other entity in which these persons
(or the director or a nominee for
director) own more than fifty percent of
the voting interests.
At the time of the 2016 CCA
Standards Adopting Release, the
Commission declined to incorporate
more prescriptive governance elements
into the rule as urged by commenters,
including specific requirements on
independent representation on the
board or risk committee or governance
relating to business relationships and
affiliates,70 based on the premise that
the requirements in Section 17A of the
Exchange Act relating to fair
representation and the public interest
provided sufficient grounds to hold
covered clearing agencies accountable to
these concerns.71 Similarly, with regard
to the 2012 governance rule for all
registered clearing agencies that are not
covered clearing agencies, the
Commission declined to adopt more
prescriptive elements to its approach on
governance with regard to board
composition.72 However, given the
growing concentration of clearing and
settlement participants among a small
70 See CCA Standards Adopting Release, supra
note 13, at 70804 (stating that ‘‘[a]fter careful
consideration of the comments, the Commission has
determined not to modify Rule 17Ad–22(e)(2) to
include specific requirements related to public or
independent representation on the covered clearing
agency’s board or risk committee . . . . The
Commission is declining to modify Rule 17Ad–
22(e)(2) to further specify that a particular director
represent the interests of buy-side or sell-side
market participants . . . . In addition, and for the
same reasons, the Commission is declining to
modify Rule 17Ad–22(e)(2) to provide further
specification regarding business relationships and
affiliates because these topics, like the above, are
already addressed by the fair representation
requirement in Section 17A(b)(3)(C) and the public
interest requirements of Section 17A of the
Exchange Act’’).
71 See 15 U.S.C. 78q–1(b)(3)(C).
72 See Clearing Agency Standards Adopting
Release, supra note 8, at 66251 (adopting the rule
largely as proposed and declining to incorporate
prescriptive requirements as suggested by
commenters, including ‘‘[o]ne commenter [who]
urged the Commission to ensure that Rule 17Ad–
22(d)(8) as well as any requirements adopted from
the Commission’s proposed Regulation MC
pertaining to the mitigation of conflicts of interest
are designed to ensure that buy-side market
participants have a meaningful voice in the
operating committees of clearing agencies because
that representation is critical to promoting robust
governance arrangements at clearing agencies and
serving the best interests of the U.S. financial
system. Another commenter stated that proposed
Rules 17Ad–22(d)(8), 17Ad–25, and 17Ad–26
reflect a better approach to governance, conflicts of
interest, and board and committee composition
than the Commission’s proposed requirements for
clearing agencies under Regulation MC. One
commenter urged the Commission to consider
complementing proposed Rule 17Ad–22(d)(8) with
a minimum board independence requirement so
that at least two-thirds of all board directors would
be required to be independent’’).
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number of firms 73 and the
concentration of differing perspectives
into distinct groups of clearing agency
stakeholders, the Commission believes
it is appropriate to propose
requirements on independent
representation to facilitate the
consideration and management of
diverse stakeholder interests in the
decision-making of the clearing agency.
2. Discussion
(a) Board of Director Oversight of
Management
Several current requirements under
the Exchange Act and regulations are
applicable to a clearing agency’s board
of directors. Section 17A of the
Exchange Act requires that the rules of
a clearing agency assure the fair
representation of owners and
participants in the selection of directors
and the administration of the clearing
agency’s affairs.74 Rule 17Ad–22(e)(2) 75
under the Exchange Act requires a
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that, in
relevant part, (i) support the public
interest requirements in Section 17A of
the Exchange Act applicable to clearing
agencies, and the objectives of owners
and participants; (ii) establish that the
board of directors and senior
management have appropriate
experience and skills to discharge their
duties and responsibilities; and (iii)
consider the interests of participants’
customers, securities issuers and
holders, and other relevant stakeholders
of the covered clearing agency.
Given the importance of the board
oversight function,76 CPMI–IOSCO has
issued guidance regarding the board’s
obligations with respect to oversight of
management.77 This guidance provides
73 See Staff Report on Clearing Agencies, supra
note 27, at 21.
74 See 15 U.S.C. 78q–1(b)(3)(C).
75 See 17 CFR 240.17Ad–22(e)(2)(iii)–(iv), (vi).
76 As a foundational principle of U.S. state
corporate law, a board of directors of a corporation
has ultimate responsibility for the oversight of
management, consistent with a director’s fiduciary
duties of loyalty and care to a company. See, e.g.,
Del. Code tit. 8, sec. 141 (2022) (establishing that
the board is ultimately responsible for the
corporation’s management). In the context of a
registered clearing agency incorporated under such
principles, this means that the board has ultimate
responsibility for ensuring an effective framework
for the management of risk by the registered
clearing agency, so that the clearing agency can
facilitate the prompt and accurate clearance and
settlement of securities transactions. To discharge
this duty effectively, the board must necessarily
work closely with management, but also effectively
oversee it.
77 See CPMI–IOSCO, Final Report, Resilience of
central counterparties (CCPs): Further guidance on
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51821
several examples of effective oversight
of management by clearing agency
boards. For example, the guidance
highlights the board’s responsibility for:
(i) carefully overseeing, monitoring and
evaluating management’s
implementation of the risk-management
framework; (ii) taking appropriate steps
to help ensure that management is
performing risk-management tasks
properly and effectively; (iii) ensuring
that processes are in place for effective
and timely communication, reporting
and information flow between
management and the board; (iv)
communicating with management about
risk management processes; and (v)
when assessing the risk-management
framework, appropriately challenging
management to demonstrate the
effectiveness of risk-management
processes.78 Likewise, the report stated
that while a board may not delegate its
ultimate responsibilities regarding risk
management, it may assign certain tasks,
so long as the board clearly defines the
assigned tasks and retains ultimate
responsibility over such tasks.79
(b) Requirement for Independent
Directors
Corporate governance tools exist to
help ensure that the board performs
more effective oversight of the
management of the company. One such
tool is the independent director, which
could bolster the board’s ability to
perform effectively by reducing the
potential for financial or other
relationships between directors and
those persons who are overseen by
directors, such as management.80 The
Commission is proposing a definition of
‘‘independent director’’ that retains
elements of the definition used in
Regulation MC, but with
modifications.81 The Commission
continues to believe that as part of the
definition, the key operating elements
are the concepts of material
relationships and affiliates, so those
elements would be retained. However,
at the same time, the Commission
proposes using a modified definition of
the PFMI (July 2017) (‘‘CCP Resilience Guidance’’),
https://www.bis.org/cpmi/publ/d163.pdf.
78 See id. at 5.
79 See id.
80 See, e.g., Bruce Dravis, Director Independence
and the Governance Process (Aug. 14, 2018),
https://www.americanbar.org/groups/business_law/
publications/blt/2018/08/05_dravis/. In the United
States, independent directors traditionally are not
selected from among management and are not
intended to serve as representatives of management,
and therefore they do not carry the same financial
or other relationships that might create a conflict of
interest between the director’s interests and the
director’s duties to the company.
81 See Regulation MC Proposing Release, supra
note 1, at 65897.
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‘‘independent directors’’ because of
changes in scope of this proposed
rulemaking. Regulation MC resulted
from a public roundtable discussion and
meetings held with interested persons,
in part, to gain further insight into the
sources of conflicts of interest at
security-based swap clearing agencies.82
Regulation MC had proposed a narrower
definition of independent director,
which would have excluded directors
who had material relationships with
participants and their affiliates as
well,83 and the proposal would have
covered only one class of registered
clearing agencies: security-based swap
clearing agencies. Pursuant to Section
765, Regulation MC was designed to
address anticipated governance
concerns relating to participant
activity 84 that existed in the OTC
derivatives market. At the time of the
proposal, the Commission also proposed
Rules 17Ad–25 and 17Ad–26 for
registered clearing agencies that took a
broad, principles-based approach to
clearing agency governance. Because
some registered clearing agencies that
would be subject to this proposal have
participants who are also owners, the
Commission’s current proposal, under
proposed Rule 17Ad–25(b)(1), creates a
carve-out from the majority
independence requirement when a
majority of voting interests are owned
by participant-owners, as set forth
below.
The Commission believes that
requiring a registered clearing agency to
include independent directors on the
board can improve the board’s ability to
conduct more effective oversight of
management, which is a critical
component of the effectiveness of a
registered clearing agency. Independent
82 See
id. at 65885.
id. at 65928 (defining independent director
as ‘‘(1) A director who has no material relationship
with: (i) The security-based swap execution facility
or national securities exchange or facility thereof
that posts or makes available for trading securitybased swaps, or security-based swap clearing
agency, as applicable; (ii) Any affiliate of the
security-based swap execution facility or national
securities exchange or facility thereof that posts or
makes available for trading security-based swaps, or
security-based swap clearing agency, as applicable;
(iii) A security-based swap execution facility
participant, a member of a national securities
exchange that posts or makes available for trading
security-based swaps, or a participant in the
security-based swap clearing agency, as applicable;
or (iv) Any affiliate of a security-based swap
execution facility participant, a member of a
national securities exchange that posts or makes
available for trading security-based swaps, or a
participant in the security-based swap clearing
agency, as applicable.’’).
84 See id. at 65885 (‘‘These [security-based swap]
entities are not wholly-owned by participants or
exchanges and may have different governance
related issues than the securities clearing agencies
currently registered with the Commission.’’).
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83 See
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directors constitute a set of directors
that do not have potential conflicts of
interest resulting from their
relationships with management. This
helps the board manage conflicts of
interest among directors because
independent directors do not have the
existing relationships or accompanying
incentives that might, for example,
discourage or dis-incentivize the board
to review management’s decisions in a
thorough, transparent, and consistent
way. The appearance of conflicts of
interest can reduce confidence among
direct and indirect participants, other
stakeholders, and the public in the
functioning of the clearing agency,
particularly during periods of market
stress when general confidence in
market resilience may be low.
The practice of employing
independent directors is common across
the financial industry and across public
companies more generally.85 Although
Commission rules do not currently
require the boards of registered clearing
agencies to include independent
directors, each of the registered clearing
agencies already require directors with
some independence characteristics
(such as ‘‘nonexecutive,’’ or ‘‘public’’
directors).86
In that vein, in addition to the above
dynamic that exists between the board
and management, registered clearing
agencies must also manage the
competing and sometimes divergent
interests of owners and participants, as
previously discussed in Part II.A.87 The
85 See, e.g., Quoc Trung Tran, Independent
Directors and Corporate Investment: Evidence from
an Emerging Market, 21 J. Econ. & Dev. 30 (2019),
https://www.emerald.com/insight/content/doi/
10.1108/JED-06-2019-0008/full/html (noting that
‘‘independent directors have become a common
approach of corporate governance’’ in recent years).
For example, the NYSE listing standards require
that a majority of the board of directors of a listed
company be independent, and they preclude
managers or employees of the company from
meeting the independence standard, among other
criteria. See, e.g., Weil, Gotshal & Manges LLP,
Requirements for Public Company Boards (Jan. 3,
2022), https://www.weil.com/-/media/files/pdfs/
2022/january/requirements_for_public_company_
boards_including_ipo_transition_rules.pdf.
86 See DTCC, Board Mission Statement and
Charter (Oct. 2021), at 5, https://www.dtcc.com/-/
media/Files/Downloads/legal/policy-andcompliance/DTCC-BOD-Mission-and-Charter.pdf;
ICC, Regulation and Governance Fact Sheet (Sept.
2021), at 2, https://www.theice.com/publicdocs/
clear_credit/ICE_Clear_Credit_Regulation_and_
Governance.pdf; ICEEU, Disclosure Framework
(Jan. 31, 2021), at 20, https://www.theice.com/
publicdocs/clear_europe/ICE_Clear_Europe_
Disclosure_Framework.pdf; OCC, Board of Directors
Charter and Corporate Governance Principles (Sept.
22, 2021), at 4–5, https://www.theocc.com/
getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/
board_of_directors_charter.pdf; LCH SA, Board of
Directors (2022), https://www.lch.com/about-us/
structure-and-governance/board-directors-0.
87 See, e.g., Securities Industry Study, Report of
the Subcommittee on Commerce and Finance, H.R.
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structure of a registered clearing agency,
and the risk management tools that it
employs, affect how the interests of
owners, participants, and other types of
stakeholders align. For example, the risk
mutualizing and trade guaranty features
provided by covered clearing agencies
provide for the shift of the consequences
of one party’s actions to another,
binding disparate interests together in
certain circumstances, such as a
participant default. These features both
affect how different stakeholders
maximize their own self-interest and
also distinguish the governance of a
clearing agency from other corporate
structures, such as those of other
financial services companies or, more
generally, publicly traded companies,
who are unable to legally bind their
customers with financial obligations
that are theoretically uncapped. In
particular, the owners of a clearing
agency may seek to shift risks to the
participants of the clearing agency to
decrease the level of exposure that the
owners face by capitalizing the clearing
agency. Meanwhile, participants in the
registered clearing agency may seek to
raise the cost of participation to exclude
competitors from the benefits of the
clearing agency’s risk mutualizing and
mitigating tools, or they may seek to
reduce their exposure to the clearing
agency by not making certain assets
available for use by the clearing agency
during loss allocation. As described
below, there can be countervailing
benefits to having the interests of a
director and the interests of an owner
aligned, so as to increase the likelihood
that decisions made will benefit
shareholders. Likewise, there are
benefits to having the interests of a
director and the interests of a
participant aligned, in order to increase
the likelihood that decisions will take
into account the long-term needs of
participants. The requirement in Section
17A for fair representation recognizes
that clearing agencies may serve
competing stakeholders, such as owners
and participants, both in the selection of
directors and administration of their
affairs.88 Directors may carry these
perspectives when they serve on the
board, and these perspectives may
influence the ultimate decision-making
of the board. For example, one set of
Rep. No. 92–1519, at 84 (1972) (‘‘1972 House
Report’’) (stating generally about SROs such as
clearing agencies, ‘‘[s]elf-regulators may be
parochial in adjustment and accommodating
competing aims and policies. Furthermore, since
self-regulatory bodies are composed of disparate
subsidiary groups, the legitimate interests of a
particular group may be overridden, or the tugging
and pulling may result in inaction or impasse’’).
88 See 15 U.S.C. 78q–1(b)(3)(C).
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stakeholders could use the board to shift
costs and risk exposure to others (e.g.,
owners shifting them to participants), in
ways that could undermine the risk
mutualizing and mitigating purpose of
the clearing agency.89 The Commission
is also mindful that ultimately, owners
(as holders of voting interests) are
generally in the position of electing
directors (subject to any restrictions on
ownership, classes of shares, etc.),
meaning that any director who has a
material relationship with a participant
and who has been nominated as a
potential independent director must
nonetheless be voted onto the board of
directors by the owners; so ultimate
approval of a director would remain in
the hands of owners, creating an
incentive for even a director who is
employed by a participant to take into
account the views of owners.
Nonetheless, the criteria for
independent directors under the
proposed rules would help ensure that
independent directors retain those
features that distinguish their interests
from those of other directors because,
for example, an independent director
cannot have an employment
relationship with or otherwise receive
compensation (other than as a director)
from the registered clearing agency or
any affiliate thereof, or the holder of a
controlling voting interest of the
registered clearing agency. In addition,
although independent directors may be
elected, in part, by owners, the views of
owners would not be the only
stakeholders’ views that independent
directors would consider.
Given the above dynamics between
owners and participants, the
Commission believes that registered
clearing agency processes involving risk
management or director nominations are
also implicated in managing the
dynamics between owners and
participants. Therefore, the
relationships affecting the
independence of a director in the
context of a registered clearing agency
also include those between the director
and the registered clearing agency itself
or its affiliates.90 The ability of a
89 See, e.g., PFMI, supra note 4, at 11 (‘‘FMIs and
their participants do not necessarily bear all the
risks and costs associated with their payment,
clearing, settlement, and recording activities.
Moreover, the institutional structure of an FMI may
not provide strong incentives or mechanisms for
safe and efficient design and operation, fair and
open access, or the protection of participant and
customer assets. In addition, participants may not
consider the full impact of their actions on other
participants, such as the potential costs of delaying
payments or settlements.’’).
90 Affiliate is proposed to mean a person that
directly or indirectly controls, is controlled by, or
is under common control with the registered
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registered clearing agency to help
ensure effective risk management and
loss allocation in the event of a default
or non-default loss is linked to the
interests of the owners of the clearing
agency, who may also have financial
relationships with the participants (or
be the participants) of such registered
clearing agency.91 For example, The
Options Clearing Corporation (‘‘OCC’’)
is owned by certain options exchanges,
whose customers may also be
participants of OCC.92 Similarly,
participants in the registered clearing
agencies that are subsidiaries of The
Depository Trust & Clearing Corporation
(‘‘DTCC’’) are required to purchase
common shares of DTCC as part of
periodic efforts to keep ownership
proportionate to such owners’ use of
clearing agency services.93 Such
provisions that require common shares
to be periodically re-allocated to reflect
levels of use of the clearing agency
services create financial and other
relationships between a registered
clearing agency, its participants, its
affiliates, and its owners. In this sense,
registered clearing agencies are not
organized in a way that reflects the
corporate ownership of the typical
publicly traded company, where the
shareholder base is a dispersed
population that may have coordination
problems, and therefore the scope of
inquiry cannot end simply at whether a
director is independent from
management alone.94 Rather, the owners
of a registered clearing agency reflect a
few key groups, who may be owners or
participants of the clearing agency, and
board composition will thus necessarily
reflect these different stakeholder
groups and their views on risk
management.
clearing agency. A director would, of course, have
a relationship with the clearing agency that arises
from service as a director, and the accompanying
duties to the company such as the fiduciary duties
of the duty of care or the duty of loyalty. These
relationships and duties, however, do not create a
potential conflict of interest that might impair the
independent judgment of the director.
91 In Part III.A.2.f) below, the Commission
discusses how participant-owners may have
interests that are well-aligned with the risk
management function of the clearing agency,
supporting a lower threshold of independent
directors when a majority of owners are participantowners.
92 See OCC, Annual Report (2019), https://
annualreport.theocc.com/About-OCC.
93 See DTCC, NSCC Important Notice No. A8986
(Apr. 5, 2021) (regarding the period common stock
reallocation process), https://www.dtcc.com/-/
media/Files/pdf/2021/4/5/A8986.pdf.
94 See, e.g., Donald C. Clarke, Three Concepts of
the Independent Director, 32 Del. J. Corp. L. 73
(2007), https://scholarship.law.gwu.edu/cgi/view
content.cgi?article=1045&context=faculty_
publications.
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In the context of a registered clearing
agency, the Commission believes that
requiring independent directors helps
promote the ability of the board to
perform its oversight of management
function and to support a plurality of
viewpoints voiced at the board level.
Independent directors would help
ensure that, when the interests between
owners and participants diverge, the
impact of such divergence is more
manageable because the board would
not be composed entirely of directors
who have material relationships either
to management (such as under a
situation where managers approve
compensation or other payments from
the registered clearing agency to such
director), owners, or participants.
Balance between stakeholders with
divergent views could help the board to
adequately consider the respective
needs of all stakeholders, and help
promote the integrity of the clearing
agency’s risk management function.
With respect to independent directors
serving on the boards of public
companies, some studies have
questioned whether independent
directors succeed in improving
shareholder value.95 For registered
clearing agencies, the Commission is
proposing a requirement for
independent directors for reasons
unrelated to improving shareholder
value. Rather, registered clearing
agencies are subject to an expansive
regulatory framework in which they
operate as critical and often
systemically important financial market
utilities.96 They are subject to
requirements under the Exchange Act to
facilitate prompt and accurate clearance
and settlement, promote the public
interest,97 and help ensure the fair
representation of owners and
participants (regardless of whether these
owners and participants are the
controlling owner or the clearing
agency’s largest participant). As long as
a majority of directors are not solely
motivated by the needs of one category
of stakeholders, this structure can help
ensure that the board addresses the full
95 See,
e.g., id. at 75–77.
e.g., 12 U.S.C. 5461; see also Board of
Governors of the Federal Reserve System,
Designated Financial Market Utilities, https://
www.federalreserve.gov/paymentsystems/
designated_fmu_about.htm (providing the list of
designated financial market utilities, including five
SEC-regulated registered clearing agencies).
97 See 15 U.S.C. 78q–1(b)(3)(C). See also Clarke,
supra note 94, at 82–83 (noting that although there
are situations where an independent director may
not make an appreciable difference in outcomes,
that provided there is a mechanism for
accountability, ‘‘[a] director serving the ‘public
interest’ should arguably be independent of
everyone [such that a director is able to] . . . follow
only the dictates of her conscience’’).
96 See,
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set of owners and participants, even
smaller participants,98 in fulfilling these
statutory objectives. In this way, a
requirement for independent directors is
well-suited to help promote more
effective governance of a registered
clearing agency and meet the purposes
of the Exchange Act.99
(c) Definition of ‘‘Material Relationship’’
To be an independent director
consistent with the proposed rules, a
director must have no material
relationships with a registered clearing
agency or its affiliate. As defined in
proposed Rule 17Ad–25(a), which was
carried forward from the Commission’s
previous proposal in Regulation MC,100
a ‘‘material relationship’’ means a
relationship, whether compensatory or
otherwise, that reasonably could affect
the independent judgment or decisionmaking of the director. The scope covers
relationships during a lookback period
of one year counting back from making
the initial determination in proposed
Rule 17Ad–25(b)(2). The proposed
definition is identical to the definition
proposed in Regulation MC, except for
the addition of a one-year look back
period, which is intended to address
recently terminated business or personal
relationships to prevent evasion of the
purposes of this provision, as discussed
further below. The Commission is
retaining its prior proposed definition of
material relationship because the
definition of material relationship is not
impacted by the type of security cleared
(i.e., expanding this proposal to cover
all registered clearing agencies rather
than security-based swap clearing
agencies does not alter the rationale
provided under the Regulation MC).
Establishing a materiality and
reasonableness threshold for such
relationships provides a registered
clearing agency with discretion to apply
this requirement across a range of fact
patterns while ensuring that they
ultimately facilitate the fair
representation of owners and
participants.
The proposed rule includes
relationships both compensatory and
otherwise to help ensure that the
evaluation of a director’s independence
is thorough. Such scope of relationships
would include not only pecuniary
transactions but other types of quid pro
quo arrangements, biases, or obligations
between persons. Under the
98 See id. at 80 (stating that non-management
directors are viewed as potentially protecting small
shareholders from big shareholders).
99 See infra Part IV.C.1 (discussing proposed
Rules 17Ad–25(b), (e), and (f)).
100 See Regulation MC Proposing Release, supra
note 1, at 65897.
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Commission’s proposed rule, however,
such non-compensatory relationships
must reach the level of materiality to
affect a director’s status as an
independent director. In addition, the
proposed rule would carve out any past
relationships that have terminated at
least one year prior because the
Commission believes such past
relationships are unlikely to have a
material effect on a director’s future
decision-making. The proposed
definition includes a lookback period,
which is meant to cover recently
terminated relationships as a method to
avoid circumvention of the proposed
independent director requirements. As
discussed below, the Commission has
experience with a one-year lookback
period applied to employment
relationships between auditors and
former audit clients, and the
Commission believes that the same
objectives underpinning that lookback
period would apply here.101
Finally, the definition would require
consideration of material relationships
between a director and any affiliate that
directly or indirectly controls, is
controlled by, or is under common
control with the registered clearing
agency. The purpose of this provision is
to address potential conflicts of interest
that would arise when a director is
serving in a management or director role
for an affiliate, such as a parent
company, of the registered clearing
agency,102 or when a director has a
material level of investment in a
registered clearing agency or its affiliate.
The Commission is not including a
bright-line test as to what is a material
101 See generally Sarbanes-Oxley Act of 2002,
Public Law 107–204, sec. 206, 116 Stat. 745, 774
(2002) (‘‘SOX’’).
102 The potential implications of a director of a
registered clearing agency having a material
relationship with an affiliated company have been
discussed in the context of European Union-based
CCPs under the 2012 Regulatory Technical
Standards (‘‘RTS’’), adopted by the European
Commission as part of the European Market
Infrastructure Regulation (‘‘EMIR’’). Chapter III,
Article 3 of the RTS states, ‘‘[a] CCP that is part of
a group shall take into account any implications of
the group for its own governance arrangements
including whether it has the necessary level of
independence to meet its regulatory obligations as
a distinct legal person and whether its
independence could be compromised by the group
structure or by any board member also being a
member of the board of other entities of the same
group. In particular, such a CCP shall consider
specific procedures for preventing and managing
conflicts of interest including with respect to
outsourcing arrangements.’’ See Commission
Delegated Regulation (EU) No 153/2013 of 19
December 2012 supplementing Regulation (EU) No
648/2012 of the European Parliament and of the
Council with regard to regulatory technical
standards on requirements for central
counterparties, 2013 O.J. (L 52), at art. 3(4), https://
eur-lex.europa.eu/legal-content/EN/TXT/PDF/
?uri=CELEX:32013R0153&from=EN.
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level of investment because such an
investment could be either material to
the director, such as a financial
investment that is a material percentage
of an individual’s wealth, or material to
the registered clearing agency or its
affiliate, such as a material percentage of
ownership of a company. For example,
if a director held ownership in an
affiliated company of a registered
clearing agency, this investor
relationship should be evaluated for
materiality and whether it could affect
the independent judgment or decisionmaking of the director, even if such
investment did not amount to such
director being a controlling shareholder
of such affiliate (which is specifically
prohibited for independent directors
under proposed rule 17Ad–25(f)(4), as
discussed further below). If such
relationships were not considered, then
a director who serves on the
management of the parent company and
therefore indirectly manages the
registered clearing agency itself through
the holding structure could nonetheless
be considered independent. The
proposed definition would help mitigate
evasion of the spirit of the independent
director requirement through the use of
multi-tier holding company structures
that place management responsibility at
multiple levels of the organizational
structure. If the functional role of
managing a clearing agency was housed
in a parent company, thereby allowing
a manager to claim to be an independent
director by virtue of not being an
employee of the registered clearing
agency itself but instead of the parent
company, then the Commission’s intent
in this proposed rule could be easily
circumvented.
(d) Process for Assessing Relationships
Proposed Rule 17Ad–25(b)(2)
establishes a process by which a
registered clearing agency must identify,
evaluate, and document its
determinations regarding director
independence. These requirements have
been included in the rule because
achieving director independence
necessarily requires an assessment of a
director’s relationships. The provisions
of Rule 17Ad–25(b)(2) include
requirements to establish a process to
identify and evaluate any such
relationships and to document that
process to help ensure that a registered
clearing agency has considered a wide
range of potential relationships, and
applied its analysis transparently and
consistently over time.
The proposed rule also requires a
registered clearing agency to
affirmatively determine that no material
relationships exist, broadly considering
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all the relevant facts and circumstances.
The Commission believes that
establishing a process helps ensure
more effective identification and
evaluation of any material relationships.
The Commission also believes that
affirmatively determining that a director
is independent helps promote a
thorough review of the director’s
relationships and helps promote
confidence in the governance
arrangements of the clearing agency
because each such director’s
independence status will have been
evaluated by the registered clearing
agency. The Commission has not
specified in the rule the particular
sources of information to be reviewed or
the particular approach to inquiring
about relationships because the facts
and circumstances of each director or
candidate’s relationships are likely to
differ. The Commission is not specifying
a checklist of sources to consult and
searches to perform, in order to avoid
inadvertently leaving off such checklist
a source that cannot be foreseen.
(e) Excluded Relationships
The process set forth under Rule
17Ad–25(b)(2) would also require
analysis of certain circumstances
pursuant to which a director would be
precluded from being an independent
director, regardless of any
determinations otherwise made
pursuant to Rule 17Ad–25(b)(2). These
scenarios are intended to address cases
where, in the Commission’s view, the
circumstances clearly prevent a director
from exercising independent judgment
or decision-making.
Currently, owners of registered
clearing agencies are predominantly
non-natural persons such as
participants, exchanges, or a parent
company. The Commission does not
expect that a natural person serving as
a director would typically be a
controlling shareholder of such
registered clearing agency, although
there may be future registered clearing
agencies with this organizational
structure. However, due to the fact that
directors are natural persons, but
owners of registered clearing agencies
currently tend to be non-natural
persons, many of the circumstances
described below seek to address the
connection between the natural person
director and the non-natural person
owner.
Proposed Rule 17Ad–25(f)(1) limits
the ability for a registered clearing
agency to undercut the authority of
independent directors, such as through
provisions established by a registered
clearing agency in the bylaws or other
organizational documents. For example,
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if one director who happened to be
associated with management was
authorized to remove independent
directors him or herself, rather than
through the normal channels of
removing a director via a majority vote
of the shareholders, then any
independent directors might be
beholden to such director. Likewise, if
some directors—such as those with
relationships to management—could
conduct closed meetings that exclude
independent directors to discuss matters
before the board, the ability of
independent directors to perform their
duties could be undercut. This
provision would not limit the ability of
a registered clearing agency to manage
or mitigate conflicts of interests among
its directors, such as by implementing
through policies and procedures a
requirement that conflicted directors
recuse themselves from a matter
pursuant to a conflicts of interest policy,
if such recusal would be necessary for
that director to operate more effectively.
Rather, the provision addresses whether
independent directors would be limited,
restricted, or chilled in expressing their
views because they were subject to
removal by a management director or
denied information relevant to the
decision-making process.
Proposed Rules 17Ad–25(f)(2) through
(5) identify circumstances where a
director is precluded from being an
independent director because the
director has an employment
relationship or has received a payment
from the clearing agency, its affiliates, or
its holders of controlling voting
interests, either directly or through
indirect channels. Several of the
provisions reference a family member,
which the Commission is proposing to
define broadly, to include natural
persons who are related by blood,
marriage, or household, including living
antecedents and descendants, as well an
non-natural persons (trusts and other
legal entities) that are controlled by
such natural persons. The Commission
is intending for the prohibition to be
comprehensive as to the relationship in
order to cover potentially meaningful
relationships. Although the list includes
non-natural persons controlled by an
extensive list of natural persons, a
director would not necessarily need to
compile a list of trusts or companies
controlled by various in-laws and
relatives. Instead, if the director
compiled the list of natural persons
referenced in the definition, a registered
clearing agency could determine
whether those persons (or legal entities
under their control) were doing business
with the registered clearing agency, any
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51825
of its affiliates, the holder of a
controlling voting interest of the
registered clearing agency, the outside
auditor, or an entity where an executive
officer of the registered clearing agency
serves on such entity’s compensation
committee, in a manner that would
exclude a person from being considered
an independent director under proposed
Rule 17Ad–25(f), as described below. A
registered clearing agency is likely
already determining who it is
conducting business with as part of
evaluating whether to enter into
contracts with those companies.
Proposed Rule 17Ad–25(f)(2)
precludes a director from being an
independent director when the director
is also an employee of the registered
clearing agency or its affiliates, a
requirement intended to reflect the
traditional concept of director
independence from management,
discussed above. Proposed Rule 17Ad–
25(f)(3) and (4) preclude a director from
being an independent director when
receiving certain types of payments,
such as in a scenario where the director
is a partner or a controlling shareholder
of a consulting firm that contracts with
the registered clearing agency, or where
the director’s spouse is a partner or
controlling shareholder of a service
provider that is hired by the registered
clearing agency. These proposed rules
address circumstances where payments
would create a conflict of interest and
undermine the ability of the director to
maintain independent judgment. The
proposed rules would carve out certain
types of payments, such as payments
from pensions or deferred compensation
for prior services. The Commission
believes that such payments are
generally made in response to past,
rather than future, activity and therefore
do not have the potential to create
conflicts of interest by affecting future
decision-making by the director.
The list of payments for property or
services in proposed Rule 17Ad–25(f)(4)
scopes in participant clearing fees as
well. The Commission is restricting the
ability of a director to be independent
if he or she is a partner or controlling
shareholder of a participant because he
or she could directly profit from
reducing the size of the clearing fees
even if that impairs the quality of the
risk management of the clearing agency.
Proposed Rule 17Ad–25(f)(5) would
preclude independence if a director, or
a family member, is employed the as an
executive officer of another entity where
any executive officers of the registered
clearing agency serve on that entity’s
compensation committee. The intent of
this provision would prevent circular
arrangements whereby compensation
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could be elevated among a chain of
interested persons.
Proposed Rule 17Ad–25(f)(6) would
preclude a director from being an
independent director when the director
is a partner of an outside auditor or is
an employee working on an audit of the
registered clearing agency. As above,
these limitations are designed to reduce
the potential for conflicts of interest that
would impair an independent director’s
independent judgment.
Finally, proposed Rule 17Ad–25(f)
would subject paragraphs (f)(2)–(6) to a
one-year lookback period, which is
intended to capture conflicts of interest
that may arise from relationships that
have recently terminated (such as
departure from a job). As with the
lookback period in the ‘‘material
relationship’’ definition, the purpose of
this lookback period is the same for all
provisions, as well as in the material
relationship definition, which is to
cover relationships that have recently
terminated, while not reaching back so
far in time as to impede the registered
clearing agency’s ability to select from a
large pool of skilled and experienced
candidates for independent director.
The Commission believes that a oneyear lookback period is consistent with
similar requirements in other statutes
and Commission rules.103
(f) Majority of Independent Directors
In assessing the appropriate quantum
of independent directors to be required
under the proposed rule, the
Commission has considered the
potential impact of divergent interests
between owners and participants, or the
potential in which the interests of
owners and participants might diverge.
The Commission believes that requiring
a majority of independent directors is
most likely to result in the board acting
from a position where the interests of all
the stakeholders of the clearing agency
are considered, rather than the interests
of a particular subset of owners or
participants. Having a majority of
independent directors reduces the
potential misalignment of interests
among directors and management, and
among owners and participants, helping
to ensure that a majority of directors are
unattached to these dynamics. In other
words, an unattached or ‘‘disinterested’’
majority helps promote consideration of
the risk management purposes of the
clearing agency, and helps decrease the
likelihood that other interests that may
arise from a potential conflict of interest
are the determinative factor in board
decisions. If a majority of directors are
non-independent directors, then a
103 See
SOX, supra note 101.
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majority of directors influenced by
potential or perceived conflicts of
interest could sway the outcome of
board decisions.
The Commission recognizes, however,
that the interests of an owner and a
participant can overlap in some cases,
such as when a participant also owns a
portion of its equity. For example, the
Exchange Act provides that the
Commission may determine that the
representation of participants is fair if
they are afforded a reasonable
opportunity to acquire voting stock of
the clearing agency, directly or
indirectly, in reasonable proportion to
their use of such clearing agency.104 The
opportunity for a participant to become
such an owner of a clearing agency is
one method to mitigate the potential for
conflicts of interest among these two
groups, by more closely aligning the
interests of a participant with those of
a voting interest holder (i.e., owner).
In this structure, owners and
participants would be one and the same,
and the dynamic where diverging
interests between owners and
participants undermine the risk
management function of the clearing
agency is less likely because participantowners would necessarily internalize
and synthesize the divergent interests
resulting from ownership and
participation. In other words,
participant-owners are less likely to use
their equity share to shift the burdens of
risk management to the participants of
the clearing agency because they are
themselves participants. When a
majority of voting shares are held by
participant-owners, the Commission
believes that the interests of the board
will be more closely aligned with
ensuring more effective risk
management. In this circumstance, the
Commission believes it is appropriate to
reduce the number of independent
directors required under the rule to
promote the selection of directors by
participant-owners because directors
voted by a majority of persons intended
to represent the clearing agency’s
participant-owners would mitigate
against the possibility of a divergence of
interests. Accordingly, the Commission
is proposing a lower requirement for
independent directors of at least 34
percent of directors when the registered
clearing agency has a majority of its
voting interests directly or indirectly
held by participants; indirectly held by
participants refers to participant
ownership of a parent company. For
example, if a registered clearing agency
is wholly-owned by a holding company,
and the holding company is majority
104 See
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owned by the participants of the
registered clearing agency, then a 34
percent threshold would apply.
Alternatively, if a registered clearing
agency was 51 percent owned by a
holding company, and that holding
company was 100 percent owned by the
participants of the registered clearing
agency, then that would also amount to
a majority ownerships of participants,
which would cause the 34 percent
independent director provision to
apply. The Commission proposes to
require 34 percent, or greater than onethird of directors, to encourage a
significant portion of directors to meet
the independence requirement but to
provide a comparatively higher level of
discretion to the clearing agency to
select non-independent directors. A
requirement for greater than one-third
independent directors would align with
the requirement for independence in
other jurisdictions for clearing
agencies.105 In addition, if 34 percent of
directors are independent directors, and
participants and owners of the
registered clearing agency are
predominantly the same entity (i.e.,
participant-owners), then it remains less
likely that any one of the three distinct
groups seeking to influence the
registered clearing agency—owners,
management, and participants—will
establish an outsized influence over the
remaining non-independent directors.
Finally, the proposed rule defines the
34 percent requirement using the term
‘‘holders of voting interests’’ rather than
simply ‘‘owners’’ so that the lower
threshold only applies when
participant-owners are entitled to vote
to elect a director, irrespective of
whether someone is otherwise entitled
to the financial attributes of such
ownership. The Commission is not
using the term owner as the equivalent
concept of holder of a voting interest,
because the financial attributes of a
security can be separated from the
voting rights of a security. The
Commission is focused on who has the
ability to influence who is voted onto
the board—which accompanies voting
rights, not financial attributes—as the
relevant factor in deciding whether
105 See EMIR at art. 27(2), https://eurlex.europa.eu/legal-content/EN/TXT/PDF/
?uri=CELEX:32012R0648&from=EN (stating that
‘‘[a] CCP shall have a board. At least one third, but
no less than two, of the members of that board shall
be independent’’); see also id. at art. 2(28) (defining
independent member of the board to mean a
member of the board who has no business, family
or other relationship that raises a conflict of
interests regarding the CCP concerned or its
controlling shareholders, its management or its
clearing members, and who has had no such
relationship during the five years preceding his
membership of the board).
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participants can enjoy that benefit of
ownership as participant-owners.
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(g) Other Committees of the Board
Generally
Proposed Rule 17Ad–25(e) would
impose the independent director
requirement as applied to the full board
of directors under Rule 17Ad–25(b)(1) to
any board committee that has the
authority to act on behalf of the board.
For example, if 34 percent of the board
must be composed of independent
directors, any committee that is taking
action based on a board delegation also
should have at least 34 percent of its
members be independent directors,
unless otherwise required to meet a
higher standard under the rules.106 The
purpose of the proposed rule is to
prevent a registered clearing agency
from circumventing the proposed
requirement for independent directors
by delegating key decisions of the board
to a committee with fewer independent
directors than those required of the full
board under Rule 17Ad–25(b)(1).
3. Request for Comment
The Commission requests comment
on all aspects of proposed Rules 17Ad–
25(b), (e), and (f). In particular, the
Commission requests comment on the
following specific topics:
1. Is requiring that the boards of
registered clearing agencies have a
majority of independent directors an
effective tool for ensuring a transparent
and objective governance process that
balances the potentially competing or
divergent interests of owners and
participants? Has the Commission
accurately described the benefits of
independent directors, as defined in this
release, to the board of a registered
clearing agency? Why or why not?
2. Are there other ways to define
‘‘independent director’’ or ‘‘material
relationship’’ that would achieve the
Commission’s goals? If so, what are
they? Should the Commission establish
a numerical threshold, such as $100,000
annually, for compensatory
relationships in order for them to be
considered material under this rule? If
so, what should that numerical
threshold be? Please be specific. Should
the Commission create a list of the types
of relationships that should be
considered either material or that could
affect the independent judgment or
decision-making of a director under this
106 For example, to help ensure that evaluations
of director nominees made by the nominating
committee reflect independent judgment, proposed
Rule 17Ad–25(c)(2) would require that the
nominating committee be composed of a majority
of independent directors in all cases. See infra Part
III.B.1 (discussing the proposed rule).
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rule, and should that list distinguish
between compensatory and noncompensatory relationships? Why or
why not?
3. Should the Commission define the
term ‘‘control’’ in the proposed rules? If
so, would it be appropriate to adopt a
definition similar to the one in 17 CFR
246.2, which states that control means
the possession, direct or indirect, of the
power to direct or cause the direction of
the management and policies of a
person, whether through the ownership
of voting securities, by contract, or
otherwise?
4. What is the appropriate percentage
of independent directors on the board of
a registered clearing agency? Does the
requirement for a majority of directors
to be independent directors support the
goals discussed in this proposal? Would
another threshold be more effective at
addressing diverging views among
owners, participants, and other relevant
stakeholders in the registered clearing
agency? For example, would a
requirement that one-third of the
directors be independent (which has
been adopted by European jurisdictions)
provide the benefits of independent
directors without any of the potential
drawbacks? Please explain.
5. Is the application of director
independence requirements appropriate
for all registered clearing agencies, or
should there be distinctions made
among registered clearing agencies
based on certain factors, such as
organizational structure or products
cleared? If so, what factors are relevant
and why? Would these proposed rules
apply to all types of organizational
structures in a consistent manner, or
would they impede a registered clearing
agency from changing its organizational
structure into a more innovative or
efficient structure?
6. Is a one-year lookback period
adequate for purposes of the ‘‘material
relationship’’ definition and proposed
Rules 17Ad–25(f)(2)–(6)? For example,
is a one-year time period for the receipt
of certain payments by clearing agencies
the appropriate length of time to
determine that a director is precluded
from being considered independent?
How will this impact the ability of
clearing agencies to recruit experienced
persons to serve as directors? More
generally, how large is the pool of
potential directors that could serve as
independent directors, as defined in this
release, on the boards of registered
clearing agencies? Are there particular
elements of the independent director
definition that limit the pool of
potential independent directors? Should
those elements be modified to expand
the pool?
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7. Is it appropriate to include affiliates
of registered clearing agencies as
relevant to the consideration of material
relationships of independent directors,
as well as certain scenarios that
preclude independence?
8. Is the scope of the scenario in
proposed Rule 17Ad–25(f)(4) overly
broad or overly narrow in covering all
partners, regardless of relative holdings,
and controlling shareholders? Should
this provision cover all shareholders, or
non–managing partners, instead? Why
or why not?
9. The Commission is proposing in
Rule 17Ad–25(f)(3) to carve out
directors who are serving as directors on
other boards from the list of scenarios
that explicitly preclude independence.
Is this carve-out appropriate in order to
permit a director of a registered clearing
agency who also serves as a director of
another legal entity to qualify as
independent (provided all other
requirements are met), or should there
be some restrictions, such as restrictions
on serving as a director of an affiliate,
or participant? Why or why not?
10. The Commission requests
comment on whether the proposal to
require independent directors raises any
potential legal issues for those directors
or clearing agency governance
committee members. Specifically, as a
matter of corporate law, would
independent directors or committee
members be forced to contend with
competing duties or obligations to the
clearing agency such as under laws of
another jurisdiction, including any
duties or obligations that would
foreclose participation in the board or
the committees? If so, how may the goal
of receiving independent, diverse
opinions be achieved?
11. The Commission requests
comment on whether the proposed
approach to board composition and
board member independence may raise
compliance issues with respect to being
registered with the Commission and the
CFTC or a non-U.S. regulatory authority.
If so, what steps should the Commission
take to continue to facilitate duallyregistered clearing agencies?
12. The Commission requests
comment on whether the requirement to
undergo a broad consideration of facts
and circumstances when determining
whether a board member is independent
is sufficiently clear. Is there additional
guidance needed on what sources could
be consulted or what types of
relationships could be considered?
13. The Commission is applying the
lowered threshold applicable to
registered clearing agencies whose
voting interests are majority-held by
participants, or whose parent company’s
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voting interests are majority-held by the
registered clearing agency’s participants.
Does this scope strike the right balance
between permitting flexibility in
ownership structures versus providing
the lowered threshold of 34 percent
independent directors only when
warranted (i.e., when the interests of
participants and owners are less likely
to diverge when participant-owners are
the holders of voting interests)? Why or
why not?
14. Should the Commission permit
directors who have material
relationships with participants (such as
being an employee of a participant),
other than those relationships that are
explicitly precluded in Rule 17Ad–25(f),
to meet the definition of independent
director, or should these relationships
be precluded as well? Should the
Commission be more restrictive, as is
proposed in paragraph (f)(2), with
respect to compensation and payments
received from the registered clearing
agency or its affiliates, rather than
participants? Why or why not?
15. The Commission is soliciting
comment on how to view participant
clearing fees or other payments from
participants that generate revenue for
the clearing agency as a potential
scenario that precludes director
independence. Is it sufficiently clear in
the text of proposed Rule 17Ad–22(f)(4)
that revenues from participants are
covered under the scope of this
prohibition? Should the Commission
treat revenues from participants
differently from other sources of
revenues or expenditures? Should the
Commission create a carve out for lower
levels of revenues in order to promote
the opportunity for partners or
controlling shareholders of small
participants to be able to qualify as an
independent director, such as by
creating a minimum threshold of
payments covered by this provision?
Why or why not?
16. The Commission is proposing an
extensive list of natural persons who fall
within the definition of family member
for this rulemaking, along with legal
entities under their control. Has the
Commission chosen an appropriate
scope for the definition of family
member, or is the definition
unworkable, either because it is
overbroad, or because it misses an
important category of persons?
17. Should the Commission define
‘‘family member’’ to refer to ‘‘spouse or
spousal equivalent’’? Why or why not?
Is adding ‘‘spousal equivalent’’
unnecessary because such person would
be covered as ‘‘any person (other than
a tenant or employee) sharing a
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household,’’ which is already part of the
definition? Please explain.
18. The Commission is not specifying
particular roles for several aspects of
this rulemaking, such as who makes the
determination that a director is an
independent director. Should the
Commission be more prescriptive and
specify whose responsibility it is to
make such a determination? Why or
why not?
B. Nominating Committee
1. Proposed Rule 17Ad–25(c)
Proposed Rule 17Ad–25(c)(1) would
require each registered clearing agency
to establish a nominating committee and
a written evaluation process whereby
such nominating committee shall
evaluate individual nominees to serve
as directors. Proposed Rule 17Ad–
25(c)(2) would require that (i)
independent directors comprise a
majority of the nominating committee,
and (ii) an independent director chair
the nominating committee. Proposed
Rule 17Ad–25(c)(3) would require the
nominating committee to specify and
document fitness standards approved by
the board. Such fitness standards for
serving as a director would need to be
consistent with all the requirements of
proposed Rule 17Ad–25, and also
would include that the individual
nominee is not subject to any statutory
disqualification as defined under
Section 3(a)(39) of the Exchange Act.107
Proposed Rule 17Ad–25(c)(4) would
require the nominating committee to
document the outcome of the clearing
agency’s written evaluation process in a
manner that is consistent with the
nominating committee’s written fitness
standards required under proposed Rule
17Ad–25(c)(3). The process would
require the nominating committee to: (i)
take into account each nominee’s
expertise, availability, and integrity, and
demonstrate that the board, taken as a
whole, has a diversity of skills,
knowledge, experience, and
perspectives; (ii) demonstrate that the
nominating committee has considered
whether a particular nominee would
complement the other board members,
such that, if elected, the board of
directors, taken as a whole, would
represent the views of the owners and
participants, including a selection of
directors that reflects the range of
different business strategies, models,
and sizes across participants, as well as
107 Section
3(a)(39) of the Exchange Act lists the
particular events that would subject a person to
‘‘statutory disqualification’’ with respect to
membership or participation in, or association with
a member of, a self-regulatory organization, such as
a registered clearing agency. 15 U.S.C. 78q–
1(a)(3)(C).
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the range of customers and clients the
participants serve; (iii) demonstrate that
the nominating committee considered
the views of other stakeholders who
may be impacted by the decisions of the
registered clearing agency, including
transfer agents, settlement banks, nostro
agents, liquidity providers, technology
or other service providers; and (iv)
identify whether each selected nominee
would meet the definition of
independent director in proposed Rules
17Ad–25(a) and (f), and whether each
selected nominee has a known material
relationship with the registered clearing
agency or any affiliate thereof, an
owner, a participant, or a representative
of another type of stakeholder of the
registered clearing agency described in
(iii) above.
2. Discussion
In Part III.A.2, the Commission
discussed the importance of requiring
independent directors on the board of a
registered clearing agency to help
manage the dynamics that exist between
owners and participants. To help ensure
that the nomination process for the
selection of independent directors is
thoughtful and transparent, promote the
integrity of determinations that a
nominee is independent and is qualified
to serve, and also promote more
effective governance, the Commission is
proposing to require a nominating
committee that is composed of a
majority of independent directors and
chaired by an independent director. The
Commission is proposing to require that
the nominating committee be composed
of a majority of independent directors in
all cases, even where a clearing agency
is majority-owned by participants, to
help ensure that the evaluation of
director nominees by the nominating
committee reflects independent
judgment.108
(a) Requirement for Nominating
Committee
Many registered clearing agencies
already have a designated nominating
committee.109 However, these
nominating committees may not serve
as the exclusive governing body for
evaluating director nominees. To create
a record that would help to ensure the
integrity of the nominating committee’s
consideration of each potential
nominee’s qualifications, including
108 See supra note 106 and accompanying text
(explaining that, despite the composition
requirements for certain board committees under
proposed Rule 17Ad–25(e), the lower independence
threshold under proposed Rule 17Ad–25(b)(1) will
not apply to the nominating committee).
109 See infra Part IV.B.4.a)(2) (discussing the
current baseline for the proposed rule).
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whether such nominee would qualify as
an independent director under proposed
Rules 17Ad–25(b), (e), and (f), the
Commission believes that requiring the
nominating committee to be the
exclusive governing body for evaluating
director nominees helps ensure that
director selections are made consistent
with the proposed requirements and
without influence from potential
conflicts of interest. Some registered
clearing agencies currently allow other
governing bodies and/or constituents of
their organizational structure to select
certain directors.110 While the proposed
rule would not prohibit such
approaches, it would require that any
such nominees be submitted first to the
nominating committee for evaluation—
before being considered by the board—
pursuant to a written evaluation process
established by the registered clearing
agency. This proposed requirement
would help ensure that nominees are
evaluated in a manner consistent with
the requirements for independent
directors and other qualifications to
serve.
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(b) Role of Independent Directors
Not all registered clearing agencies
require that the nominating committee
be chaired by an independent director
or composed of a majority of
independent directors. As discussed
above, however, independent directors
are well-suited to help manage the
divergent interests that exist among
management, owners, and
participants,111 and are also best
incentivized to help ensure that
nominees do not have conflicts of
interest that would preclude
independent decision-making or
otherwise undermine the decisions of
the board.112 Because a majority of
independent directors can help provide
perspectives broader than owners and
110 For example, OCC currently allows certain
participant exchanges to select Exchange Director
nominees for election to OCC’s board. See OCC, ByLaws (rev. Apr. 11, 2022), at 39, https://
www.theocc.com/getmedia/3309eceb-56cf-48fcb3b3-498669a24572/occ_bylaws.pdf (‘‘An
individual may be nominated by, elected by, and
serve as an Exchange Director for more than one
Equity Exchange.’’); see also OCC, Board of
Directors Charter and Corporate Governance
Principles (rev. Sept. 22, 2021), at 4, 6, https://
www.theocc.com/getmedia/99ed48a4-aa44-45ac8dee-9399b479a1c8/board_of_directors_charter.pdf
(providing that Public Director and Member
Director nominees are selected by OCC’s
Governance and Nominating Committee, but
Exchange Director nominees are instead selected by
OCC’s Equity Exchanges).
111 See supra Part III.A.2 (discussing independent
directors as a governance tool to address such
divergent interests).
112 See supra Part III.A.2 (discussing independent
directors as a governance tool to address such
conflicts).
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participants, constituting the
nominating committee with a majority
of independent directors would help
promote the fair representation of
owners and participants in the selection
of directors. In addition, independent
directors would facilitate a fair
evaluation of a nominee’s qualifications,
including whether such individual
would meet the Commission’s proposed
criteria for being an independent
director, as such an evaluation would be
conducted by a body that is free from
influence in the performance of its
duties and whose majority would itself
satisfy the proposed criteria for being
independent directors. By contrast,
when evaluating nominees, directors
serving on the nominating committee
who are not independent directors may
be more likely to favor board candidates
whose views align with those persons
with whom the director has a material
relationship, reducing the likelihood
that the nominating committee will
consider a set of director nominees that
represent the different stakeholders in a
clearing agency. Thus, having a
nominating committee that is composed
of majority independent directors
should help to address and facilitate
both the selection of independent
directors, as well as the selection of a
broad range of directors that reflect the
different stakeholder groups in a fair
and more representative way.
(c) Fitness Standards
Fitness standards for directors help
ensure that directors have the necessary
qualifications and experience to
contribute more effectively to board
governance, and most clearing agencies
already have documented fitness
standards for serving as director. The
Commission believes that codifying this
practice by requiring documented
fitness standards will help ensure that
directors are subject to consistent
standards, fairly applied over time by
the nominating committee and the
board. Because the Commission is
proposing rules to require independent
directors, the Commission also believes
requiring documented fitness standards
will help ensure that a nominee’s
qualifications and relationships are
reviewed pursuant to a consistent set of
standards before the nomination is
voted on by the board. In addition, the
Commission is establishing that the
nominating committee is responsible for
maintaining the fitness standards
because the composition of the
nominating committee, in which a
majority of directors must be
independent directors, helps ensure that
the standards are objective and evenly
applied across nominees and over time
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because they will be maintained by a
majority of directors from among the
objective and disinterested group of
independent directors.
Although many registered clearing
agencies already have documented
fitness standards for selecting nominees
to serve as directors generally, not all
registered clearing agencies have an
existing requirement to forbid directors
who have been subject to a statutory
disqualification. Because such
individuals have been found in
violation of applicable laws or
suspended from membership or
participation in an SRO, the
Commission does not believe such an
individual should serve in the capacity
of a director, where functionally the
individual would be in a position to
advise and direct the decisions of a
registered clearing agency. The
Commission believes that adding such a
requirement helps ensure a nominee’s
fitness to serve on the board.
(d) Selection Criteria for Directors
Based on its supervisory experience,
the Commission believes that
enhancements to clearing agency
governance practices would facilitate
the ability of clearing agencies to obtain
and address input from a broader array
of market participants, especially on
risk management issues, to improve
resilience. Additionally, based on its
supervisory experience, the Commission
believes that clearing agencies should
consider the views of relevant
stakeholders, such as clearing members
and clients, in their decision-making, as
these groups will ultimately bear the
majority of any losses incurred as a
result of decisions affecting the clearing
agency’s risk profile. Further, based on
its supervisory experience, the
Commission believes that smaller
participants and clients of participants
should be represented on clearing
agency boards and board committees,
including the risk management
committee, such that their views and
perspectives are formally considered in
board decisions that may impact them.
In the Commission’s view, the diverse
perspectives and expertise that smaller
participants and clients of participants
can provide will help inform a clearing
agency’s operations and thereby
improve the resilience of the registered
clearing agency. Therefore, the
Commission believes that board
governance of the risk management
function of the clearing agency will be
enhanced when it has the benefit of
more diverse perspectives on relevant
risk management issues from across the
range of stakeholders—owners, direct
participants, and indirect participants—
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in a registered clearing agency.
Accordingly, proposed Rules 17Ad–
25(c)(4)(i), (ii), and (iii) would require
that clearing agencies take steps to
facilitate diverse perspectives and
expertise on the board of directors, as
well as greater involvement by these
stakeholders.
In the Commission’s view, the
proposed rules would complement the
Exchange Act requirements for fair
representation of owners and
participants in the clearing agency’s
selection of directors and the
administration of the clearing agency’s
affairs.113 Proposed Rule 17Ad–
25(c)(4)(ii) would help ensure that,
when evaluating director nominees, the
nominating committee considers
nominees that represent the views of a
broad range of participants with
different business strategies, models,
and sizes—such as smaller participants
and clients of participants—for director
positions. The Commission believes that
it is useful for the nominating
committee to also consider nominees
who are representatives from
participants and their clients for
director positions because directors
representative of a diverse cross-section
of the clearing agency’s participants and
clients of participants are more likely to
identify and understand the disparate
impacts of different risks and risk
management practices across the full set
of participants and their clients.
While proposed Rule 17Ad–
25(c)(4)(iii) does not require a registered
clearing agency to include other types of
stakeholders in the selection of
directors, the Commission understands
that other stakeholders—including
transfer agents, settlement banks, nostro
agents, liquidity providers, technology
or other service providers—may be
impacted by board decisions concerning
risk management and other significant
operational issues. Therefore, the
Commission believes that board
governance may benefit in some
instances from considering such
stakeholders’ perspectives in the
evaluation process for director
nominees. Accordingly, proposed Rule
17Ad–25(c)(4)(iii) would help ensure
that the nominating committee
considers the views of other
stakeholders who may be impacted by
the decisions of the clearing agency into
the evaluation process for director
nominees. In this regard, the
Commission believes that proposed
Rule 17Ad–25(c)(4)(iii) would facilitate
a process that considers the wide variety
of perspectives that may have an
113 See
15 U.S.C. 78q–1(b)(3)(C).
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interest in the risk management purpose
of the clearing agency.
Proposed Rule 17Ad–25(c)(4)(iii)
would give the nominating committee
discretion to determine how to consider
the views of other stakeholders, in part
based on the markets served by the
clearing agency and the relevant
interested stakeholders. In the
Commission’s view, relevant
stakeholders generally would include
persons and entities that access the
national system for clearance and
settlement indirectly (e.g., institutional
and retail investors), entities that rely on
the national system for clearance and
settlement to more effectively provide
services to investors and market
participants, and other market
infrastructures.114 The Commission
believes that considering the views of
such persons and entities in particular
would support the Exchange Act
requirements that clearing agencies be
able to facilitate prompt and accurate
clearance and settlement, protect
investors and the public interest, and
ensure the safeguarding of securities
and funds in the custody or control of
the clearing agency or for which the
clearing agency is responsible.115 The
Commission understands that the scope
of relevant stakeholders who may be
impacted by the decisions of the
registered clearing agency will vary for
each registered clearing agency and
could include direct participants,
indirect participants, and other
stakeholders described in proposed Rule
17Ad–25(c)(4)(iii).
Finally, proposed Rule 17Ad–
25(c)(4)(iv) would require the
nominating committee’s process to
identify whether each selected nominee
would meet the independent director
definition in proposed Rules 17Ad–
25(a) and (f), and whether each selected
nominee has a known material
relationship with the registered clearing
agency or any affiliate thereof, an
owner, a participant, or a representative
of another stakeholder of the registered
clearing agency described in proposed
Rule 17Ad–25(c)(4)(iii). Such record
would help to ensure and verify the
integrity and consistency of the
nominating committee’s process and
adherence to the clearing agency’s
standards for independent directors,
consistent with proposed Rules 17Ad–
25(b), (e), and (f).
114 See CCA Standards Adopting Release, supra
note 13, at 70803 (‘‘Other relevant stakeholders
currently include, for example, transfer agents,
liquidity providers, and other linked market
infrastructures, including exchanges, matching
service providers, and payment systems.’’).
115 See supra Part I and Part II.A; see also 15
U.S.C 78q–1(b)(3)(A).
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3. Request for Comment
The Commission requests comment
on all aspects of proposed Rule 17Ad–
25(c). In particular, the Commission
requests comment on the following
specific topics:
19. Is it appropriate for the
Commission to require that the
nominating committee be the exclusive
venue for evaluating nominees for
director to the board of directors? What
alternative arrangements or processes
might also be appropriate for evaluating
director nominees? Should the rules
incorporate such arrangements? Why or
why not? Please explain.
20. Should the Commission be more
prescriptive in requiring that certain
types of stakeholders, such as smaller
participants and customers, be afforded
a right of participation in the board of
a clearing agency? Why or why not? If
so, which types of stakeholders? Please
explain with specific information.
21. Do commenters agree with the
Commission’s assessment that requiring
a majority of independent directors on
the nominating committee will improve
the quality of nominees? Please explain.
22. Do commenters believe that the
proposed rule will help ensure that the
nominating committee considers
nominees that represent the views of
smaller participants and clients of
participants? Please explain. Should the
Commission consider additional
specific composition requirements?
Why or why not? If so, what should
those requirements be?
23. Has the Commission provided
sufficient specificity regarding the scope
and content of the evaluation process
for director nominees? Please identify
and explain other types of criteria, if
any, that should be included in the
evaluation process for director
nominees. Please identify and explain
any proposed criteria that should be
excluded from the evaluation process
for director nominees.
C. Risk Management Committee
1. Proposed Rule 17Ad–25(d)
Proposed Rule 17Ad–25(d)(1) would
require each registered clearing agency
to establish a risk management
committee (or committees) to assist the
board of directors in overseeing the risk
management of the registered clearing
agency. Proposed Rule 17Ad–25(d)(1)
would also require each risk
management committee to reconstitute
its membership on a regular basis and
at all times include representatives from
the owners and participants of the
registered clearing agency. Proposed
Rule 17Ad–25(d)(2) would require that
a risk management committee, in the
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performance of its duties, be able to
provide a risk-based, independent, and
informed opinion on all matters
presented to it for consideration in a
manner that supports the safety and
efficiency of the registered clearing
agency.
2. Discussion
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(a) Purpose and Experience of the Risk
Management Committee
Covered clearing agencies are subject
to the requirements of Rule 17Ad–22(e)
under the Exchange Act, while all
registered clearing agencies other than
covered clearing agencies are subject to
the requirements of Rule 17Ad–22(d)
under the Exchange Act.116 Currently,
all registered clearing agencies are
covered clearing agencies and, as such,
they are required to have risk
management committees as a part of
their governance arrangements under
Rule 17Ad–22(e)(3)(iv).117 While Rule
17Ad–22(e)(3)(iv) requires covered
clearing agencies to have a risk
management committee, no parallel
requirement exists for registered
clearing agencies that are subject to Rule
17Ad–22(d). The Commission
recognizes that there may be future
registered clearing agencies that are not
covered clearing agencies and, as a
result, would be subject to Rule 17Ad–
22(d). The Commission believes that
clearing agencies subject to Rule 17Ad–
22(d) will also likely face risk
management issues related to their
activities and, therefore, that any
clearing agency subject to Rule 17Ad–
22(d) will likely benefit from having a
risk management committee.
Accordingly, the Commission is
proposing Rule 17Ad–25(d) so that
clearing agencies subject to Rule 17Ad–
22(d) will also be required to have risk
management committees as a part of
their governance arrangements.118
Additionally, because the general
requirement for a risk management
committee under Rule 17Ad–22(e)(3)(iv)
does not outline minimum requirements
116 See supra notes 17–23 and accompanying text
(explaining that there are two categories of clearing
agencies: covered clearing agencies and all
registered clearing agencies other than covered
clearing agencies).
117 See 17 CFR 240.17Ad–22(e)(3)(iv); see also
CCA Standards Adopting Release, supra note 13, at
70807–09 (discussing that, under Rule 17Ad–
22(e)(3)(iv), a registered clearing agency’s risk
management framework must provide risk
management personnel with a direct reporting line
to, and oversight by, a risk management committee
of the board of directors).
118 See supra Part III.C.1 (discussing proposed
Rule 17Ad–25(d)(1), which requires a risk
management committee to assist the board in
overseeing the risk management of a registered
clearing agency); infra Part VIII (providing the
proposed rule text).
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for such committee, proposed Rule
17Ad–25(d) establishes more defined
requirements related to the purpose and
function of risk management
committees. The specific requirements
imposed by proposed Rule 17Ad–25(d)
will help enhance risk management
governance across all registered clearing
agencies.
As discussed above, each registered
clearing agency is also a covered
clearing agency and, therefore, has
established some form of risk
management committee to consider risk
issues generally.119 Critical to the
effective functioning of a clearing
agency is the board’s ability to
understand and engage with the risks
that a registered clearing agency faces
and the risk management practices it
employs to mitigate those risks. The
Commission recognizes that while the
board has ultimate responsibility over
risk management matters, it may assign
certain tasks to a board committee to
assist the board in discharging its
ultimate responsibility.120 Therefore,
the Commission believes that a risk
management committee of the board is
a more effective way to help ensure that
the board is engaged with and informed
of the ongoing risk management of the
clearing agency, and that a dedicated
committee of the board remains focused
exclusively on matters related to risk
management. The Commission believes
that requiring registered clearing
agencies to establish a risk management
committee of the board would help
ensure that the board can more
effectively oversee management’s
decisions concerning matters that
implicate the clearing agency’s risk
management, including its policies,
procedures, and tools for mitigating risk.
In addition, for the risk management
committee itself to be effective, it must
have a clearly defined purpose and
obligations to the board. Accordingly,
proposed Rule 17Ad–25(d)(2) would
require that a risk management
committee, in the performance of its
duties, be able to provide a risk-based,
independent, and informed opinion on
all matters presented to it for
consideration in a manner that supports
the safety and efficiency of the
registered clearing agency. The
proposed rule is intended to specify the
role of the risk management committee
by stating the committee’s purpose—
namely, to provide a risk-based,
independent, and informed opinion on
all matters presented to it in a way that
supports the safety and efficiency of the
119 See
120 See
infra Part IV.B.4.a)(3).
CCP Resilience Guidance, supra note 77,
at 5.
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51831
registered clearing agency. The
Commission believes the proposed rule
helps ensure that the committee has a
clear scope and sufficient direction to
more effectively address risk
management related matters, regardless
of the participants, markets, and
products that a clearing agency serves.
First, with respect to its purpose, the
risk management committee’s opinions
must be risk-based, meaning that its
opinions are focused on both the risks
that the clearing agency faces and the
tools at its disposal to mitigate and
address such risks. To facilitate such an
approach, the proposed rule provides
that the risk management committee
must be able to provide an opinion that
supports the safety and efficiency of the
clearing agency itself. As a result, the
Commission believes that when the risk
management committee makes
recommendations to the board, its
opinions should reflect how the
decisions support the safety and
efficiency of the clearing agency. In the
Commission’s view, the stated objective
of supporting the safety and efficiency
of the clearing agency helps ensure that
the risk management committee’s
recommendations represent the best
interests of the clearing agency. Second,
the risk management committee’s
opinions must be independent. That is,
when making recommendations to the
board, the risk management committee’s
decisions or opinions must be its own,
mindful of the objective discussed
above, and not merely a rubber stamp
for the recommendations presented to
the committee by management. The
Commission believes that, by requiring
the risk management committee to
provide an independent opinion,
irrespective of its composition, the
proposed rule helps ensure that the
committee is free from influence in the
performance of its duties.
Finally, the risk management
committee’s opinions must be informed.
That is, when making recommendations
to the board, the risk management
committee’s opinions should
demonstrate that the committee was
able to engage thoughtfully and
knowledgeably with the matters
presented to it. In this regard, for the
risk management committee to provide
an informed opinion, its members
should have a clear understanding of
the clearing agency’s operations and risk
management procedures, including the
risks that it faces and its methods of
addressing such risks. Accordingly, the
Commission believes that, in complying
with this proposed requirement, the risk
management committee generally
should include directors with specific
risk management expertise and
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experience related to the risks that the
clearing agency faces.121 Because the
risks a clearing agency faces will vary
depending on the products it clears and
the markets it serves, the Commission
believes that a clearing agency should
have discretion to determine the
appropriate qualifications and expertise
needed for the risk management
committee to provide an informed
opinion. The Commission also believes
that, by requiring the risk management
committee to provide an informed
opinion, the proposed rule helps ensure
that the committee’s recommendations
are more reliable and effective. In the
Commission’s view, the risk
management committee’s ability to
provide risk-based, independent, and
informed opinions is critical to the
proper functioning and effectiveness of
the committee.
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(b) Representation of Owners and
Participants
Commission rules do not currently
require a registered clearing agency to
include representatives from the
clearing agency’s owners and
participants on the risk management
committee. Based on its supervisory
experience, the Commission believes
that clearing agencies will benefit from
the diverse perspectives and expertise
that representatives from owners and
participants can provide, which
enhances the effectiveness of their risk
management practices. With this in
mind, the Commission is proposing that
the risk management committee at all
times include representatives from the
owners and participants of the
registered clearing agency.122 In the
Commission’s view, these
representatives would be persons who
have a relationship with the clearing
agency’s owners and participants, such
as employees of the owners and
participants or those who have an
ownership interest in the owners and
participants. Based on its supervisory
experience, the Commission believes
that representatives from a clearing
agency’s owners and participants will
likely have an understanding of the
clearing agency’s operations and
procedures, as well as the complex risk
121 The Commission has previously recognized
that, because clearing and settlement is a highly
specialized area, specific risk management expertise
and experience are needed to serve on the risk
management committee and make informed
decisions. See Regulation MC Proposing Release,
supra note 1, at 65899, 65921 (discussing the
‘‘highly specialized risk management expertise
required of directors serving on [the risk
management] committee’’).
122 See supra Part III.C.1 (discussing proposed
Rule 17Ad–25(d)(1)); infra Part VIII (providing the
proposed rule text).
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management issues that the clearing
agency’s board must consider. In this
regard, requiring the risk management
committee to include representatives
from the clearing agency’s owners and
participants helps ensure that the risk
management committee’s
recommendations to the board reflect
these stakeholders’ unique perspectives
and expertise on risk management
issues.
Proposed Rule 17Ad–25(d)(1) requires
that the risk management committee at
all times include multiple
representatives from the owners and
participants of the registered clearing
agency. By requiring the risk
management committee to include
representatives from the clearing
agency’s owners and participants, the
Commission believes that the committee
will likely include representation from
a broad range of participants with
different business strategies, models,
and sizes. The committee generally
should include both small and large
participants. The Commission
recognizes that, other than requiring
that multiple representatives from the
clearing agency’s owners and
participants serve on the committee at
all times, the proposed rule does not
require that a certain percentage or
number of such representatives serve on
the committee. Accordingly, the
Commission believes that the proposed
rule provides a registered clearing
agency with some discretion to
determine the appropriate composition
for the risk management committee with
respect to representation from its
owners and participants. By requiring
that the risk management committee
include multiple representatives from
the owners and participants of the
clearing agency, the proposed rule helps
ensure a minimum standard for the
inclusion of market participants on risk
management committees while
providing sufficient flexibility to
registered clearing agencies given the
range of different sizes, business
models, and governance structures
across clearing agencies.
(c) Requirement To Reconstitute
Membership
Many registered clearing agencies
have established policies and
procedures for governance arrangements
that help promote participation from a
broader array of owners and participants
on the risk management committee
through the use of regular
reconstitution.123 The Commission
123 See, e.g., ICC, ICE Clear Credit Regulation and
Governance Fact Sheet, at 3 (April 2022), https://
www.theice.com/publicdocs/clear_credit/ICE_
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believes that codifying this practice will
set a minimum standard for the
reconstitution of the risk management
committee’s membership. Therefore, the
Commission is proposing that the risk
management committee reconstitute its
membership on a regular basis.124
Requiring the risk management
committee to regularly reconstitute its
membership helps ensure that a broad
range of owners and participants will be
able to provide their risk management
expertise and participate in the
decision-making of the risk management
committee over time. In the
Commission’s view, the proposed
reconstitution requirement achieves the
above objective of ensuring a broad
range of participation on the risk
management committee without
imposing specific obligations related to
owners, participants, or independent
directors that may be suitable in some,
but not necessarily all, cases.
Because the risk management
committee is broadly responsible for
providing recommendations to the
board on all risk management related
matters, it is important that the
committee’s membership reflects a wide
range of owners and participants with
relevant experience and expertise on a
variety of risk management issues. By
requiring the risk management
committee to regularly reconstitute its
membership, proposed Rule 17Ad–
25(d)(1) helps ensure ongoing diversity
of perspectives across owners and
participants and expertise on the risk
management committee. The
Commission believes the proposed
reconstitution requirement helps ensure
that the risk management committee is
well-positioned to provide more
effective recommendations to the board
on all risk management matters. The
Commission also believes the proposed
reconstitution requirement helps ensure
that the committee is able to provide
fresh perspectives on risk management
matters, which, in turn, helps promote
more effective and reliable risk
management practices at a registered
clearing agency.
The Commission acknowledges that
proposed Rule 17Ad–25(d)(1) only
requires the risk management committee
to reconstitute its membership ‘‘on a
regular basis.’’ In this regard, the
proposed rule provides a registered
clearing agency with discretion to
Clear_Credit_Regulation_and_Governance.pdf;
OCC, Risk Committee Charter, at 1 (rev. Sept. 22,
2021), https://www.theocc.com/getmedia/e71a4c1d52dc-4c95-aeb1-98dab9159f41/risk_committee_
charter.pdf.
124 See supra Part III.C.1 (discussing proposed
Rule 17Ad–25(d)(1)); infra Part VIII (providing the
proposed rule text).
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determine the appropriate timing for
reconstitution. For example, the charter
for a registered clearing agency’s risk
management committee could establish
that the committee will conduct a
review of its members on an annual
basis, or other specified length of time,
to assess whether the committee
continues to be an accurate reflection of
the clearing agency’s owners and
participants. The charter could also
establish that members of the committee
serve for a specified term, or that the
committee would rotate or replace
directors on the committee at certain
intervals absent a specified turnover
threshold among directors.
Additionally, registered clearing
agencies could stagger terms in order to
have regular turnover of participants
and other members of the risk
management committee.
3. Request for Comment
The Commission generally requests
comments on all aspects of proposed
Rule 17Ad–25(d). In addition, the
Commission requests comments on the
following specific issues:
24. The Commission is not proposing
to carve out the risk management
committee from the director
independence requirements under
proposed Rule 17Ad–25(e). Should the
Commission include such a carve-out
for the risk management committee so
that a registered clearing agency would
not be required to include independent
directors on the committee? Why or
why not? If not, should there be separate
director independence requirements
applicable only to the risk management
committee that reflect the highly
specialized risk management expertise
needed to serve on the committee? Why
or why not?
25. Is the proposed requirement that
the registered clearing agency’s risk
management committee be a committee
of the board a more effective way to
structure the risk management
committee than requiring that the risk
management committee be an external
committee, such as a management
committee or an advisory committee?
Why or why not? If not, should the risk
management committee be structured to
represent more participants, regardless
of whether those participants are
represented on a clearing agency’s
board? Why or why not?
26. The Commission is not specifying
whose responsibility it is to determine
the matters presented to the risk
management committee for
consideration. Should the Commission
be more prescriptive and specify whose
responsibility it is to make such
determinations? If so, should the
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Commission require the risk
management committee to designate
thresholds or identify the types of risk
management related matters that
warrant consideration by the
committee? Why or why not? Please
explain.
27. Is the proposed requirement that
the risk management committee include
at all times representatives from the
registered clearing agency’s owners and
participants sufficient to help ensure
that the directors serving on the
committee will have the specific risk
management expertise and relevant
experience needed to make effective risk
management decisions? Why or why
not? In requiring that the risk
management committee include such
representatives at all times, should the
Commission require that a specific
percentage or number of representatives
from the clearing agency’s owners and
participants serve on the risk
management committee? Why or why
not? If so, what percentage or number?
Please explain with specific
information.
28. Should the Commission require
the risk management committee to
include at all times a specific percentage
or number of representatives from small
participants of the clearing agency in
addition to representatives from the
owners and participants more generally,
as proposed? Why or why not? If so,
what percentage or number? Please
explain with specific information.
29. The Commission is not specifying
whose responsibility it is to determine
the appropriate qualifications and
expertise needed for a director to serve
on the risk management committee.
Should the Commission be more
prescriptive and specify whose
responsibility it is to make this
determination, such as the nominating
committee, or should this determination
remain up to the discretion of the
registered clearing agency? Why or why
not? Please explain.
30. The Commission requests
comment on whether the requirement
that a risk management committee
‘‘reconstitute’’ its membership on a
regular basis is sufficiently clear. Is
there additional guidance needed on
what ‘‘reconstitute’’ means? Is it
sufficiently clear that the term
‘‘reconstitute’’ refers to the membership
of the risk management committee and
not to the form of the committee? Why
or why not? Should the Commission
instead require that the membership be
‘‘rotated’’? 125 Please explain.
125 The CFTC’s proposal would require a risk
management committee to ‘‘rotate’’ its membership
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51833
31. Has the Commission provided a
sufficient explanation for what
constitutes ‘‘on a regular basis’’ with
respect to how often a risk management
committee is required to reconstitute its
membership? Why or why not? Would
a more specific reconstitution
requirement be appropriate? For
example, should this requirement
specify a frequency for the risk
management committee’s reconstitution
(e.g., annually)? Why or why not? If so,
please explain what the appropriate
frequency should be.
D. Conflicts of Interest
1. Proposed Rules 17Ad–25(g) and (h)
Proposed Rule 17Ad–25(g) would
require each registered clearing agency
to establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to identify and
document existing or potential conflicts
of interest in the decision-making
process of the clearing agency involving
directors or senior managers of the
registered clearing agency; and mitigate
or eliminate and document the
mitigation or elimination of such
conflicts of interest. Additionally,
proposed Rule 17Ad–25(h) would
require registered clearing agencies to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to require a
director to document and inform the
registered clearing agency promptly of
the existence of any relationship or
interest that reasonably could affect the
independent judgment or decisionmaking of the director.
2. Discussion
At the time of the 2016 CCA
Standards Adopting Release, the
Commission declined to incorporate
more prescriptive governance elements
into the rule as urged by commenters,
including specific requirements on
conflicts of interest,126 based on the
premise that the requirements in
Section 17A of the Exchange Act
relating to fair representation and the
public interest provided sufficient
on a regular basis. See supra note 52 and
accompanying text.
126 See CCA Standards Adopting Release, supra
note 13, at 70804 (stating that ‘‘[o]ne commenter
stated that proposed Rule 17Ad–22(e)(2) does not
require covered clearing agencies to resolve
conflicts of interests among board members and
management and urged the Commission explicitly
to require covered clearing agencies to document
and maintain policies and procedures governing the
resolution of conflicts of interests that may impact
certain decisions by the board of directors. The
Commission notes . . . that the commenter’s
concern is addressed by Section 17A(b)(3)(F) of the
Exchange Act, which requires that the rules of a
clearing agency be designed, in general, to protect
investors and the public interest’’).
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grounds to hold covered clearing
agencies accountable to these
concerns.127 At the time, the
Commission also observed that as a
general matter, the market for clearing
agency services demonstrates evidence
of a significant volume of activity being
concentrated in a small number of large
financial institutions.128 The
concentration of clearing and settlement
services within a handful of entities
continues, suggesting that additional
interventions may be appropriate.129
The Commission is concerned that this
characteristic could impede the
continued development of open,
transparent, and competitive markets
and, therefore, believes it is appropriate
to propose requirements on registered
clearing agencies on mitigating or
eliminating conflicts of interest so that
such conflicts do not undermine the
integrity of decisions made in the
governance of the clearing agency. The
proposed rules are intended to address
concerns that the institutions that
currently dominate the securities
markets would have conflicts of interest
that influence their participation in the
development of centralized trading and
clearance and settlement systems for
securities. As they relate to clearing
agencies that clear security-based
swaps, the proposed rules would also
advance the policy objectives set forth
in Section 765 by establishing new
requirements for policies and
procedures that require such clearing
agencies to identify, mitigate or
eliminate, and document the
identification and mitigation or
elimination of conflicts of interest.
With the above in mind, requirements
on registered clearing agencies to
address conflicts of interest would
strengthen the integrity of a registered
clearing agency’s governance
arrangements, including those regarding
director independence, the fitness
standards applied and nominations
made by the nominating committee, and
the independent opinions and
recommendations made by the risk
management committee previously
discussed. Proposed Rules 17Ad–25(g)
127 See
15 U.S.C. 78q–1(b)(3)(C).
CCA Standards Adopting Release, supra
note 13, at 70793 (stating that ‘‘the Commission has
considered the level of concentration in the
provision of clearing agency services’’ and
acknowledging concerns ‘‘that at present the
clearance and settlement industry, like much of the
financial sector, can be described as highly
concentrated, and . . . that it is paramount . . . [to]
promote the proliferation of viable new clearing
agencies, given that existing clearing agencies
typically serve as intermediaries for trillions of
dollars in trading volumes’’).
129 See Staff Report on Clearing Agencies, supra
note 27, at 21.
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128 See
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and (h) help promote the integrity of
these governance arrangements by
helping ensure that a registered clearing
agency is capable of both identifying
potential conflicts when they arise and
subjecting conflicts to a transparent and
uniform process of review, mitigation or
elimination, and documentation.
Specifically, the proposed rules would
help ensure that potential conflicts of
interest are identified and documented,
that policies and procedures for their
management have been established ex
ante to help ensure a consistent
approach over time, and that cases are
subject to established processes for
review and mitigation or elimination. In
some cases, for example, a conflicts of
interest policy may simply require that
a director or senior manager recuse
herself from a particular decision to
mitigate or eliminate the conflict of
interest. At the same time, the
Commission believes that disclosure,
while an effective tool for the clearing
agency to identify and recognize a
conflict of interest, is insufficient by
itself to reduce the potential harm a
conflict of interest may have on the
clearing agency. Instead, the
Commission believes that as the clearing
agency is best positioned to identify and
address conflicts of interest that may
arise in its operations and risk
management and decision-making, the
clearing agency is best positioned
through reasonable policies and
procedures to mitigate—namely,
reduce—or eliminate these conflicts of
interest so that such conflicts do not
undermine the integrity of decisions
made in the governance of the clearing
agency. In addition, the policies and
procedures approach helps ensure the
documentation of conflicts of interest
and their mitigation or elimination,
helping the Commission to assess and
compare the types of conflicts that arise
across clearing agencies to help promote
more effective oversight and regulation
of clearing agencies.
In the absence of policies and
procedures to address conflicts of
interest, directors and senior managers
of a registered clearing agency could
undermine the purpose of requiring
independent directors and centralizing
the nominating process for new
directors in a nominating committee
composed of a majority of independent
directors. More broadly, the proposed
rules help to ensure that when directors
and senior managers develop
relationships that create potential
conflicts of interest, the clearing agency
has a process to manage those
relationships to mitigate or eliminate
conflicts so that they do not undermine
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the integrity of decisions made in the
governance of the clearing agency.
(a) Potential Conflicts
Under proposed Rule 17Ad–25(g), the
registered clearing agency must be able
to identify and document both existing
and potential conflicts of interest
involving directors or senior managers
of the registered clearing agency. The
rule is intended to address the conflicts
of interests of directors and senior
managers that could undermine the
decision-making process within a
registered clearing agency or interfere
with fair representation and equitable
treatment of clearing members or other
market participants by a registered
clearing agency. Being able to identify
potential conflicts of interest is critical
to ensuring the effective identification
and management of actual conflicts of
interest. In other words, a clearing
agency must be able to spot close cases,
where another director, manager,
employee, or observer might perceive a
conflict of interest, in order to more
effectively manage actual conflicts and
help ensure the integrity of decisions
made in the governance of the clearing
agency.
As previously discussed in Part II.A,
it is important for the registered clearing
agency to consider the differing
incentives and interests of individual
directors, once they are on the board,
when they are governing the registered
clearing agency. The board as a whole
is ultimately responsible for overseeing
the clearing agency’s compliance with
the regulatory obligations under the
Dodd-Frank Act and the Exchange Act,
including the open and fair access
requirements.130 Yet, depending on
their affiliation with owners, large
participants, small participants, or
indirect participants, individual
directors may be subject to different
perspectives and motivations when
fulfilling these duties and roles. Like
participants themselves, direct
participant directors may on balance be
more likely to favor reducing or
minimizing the risk exposure of the
clearing agency, potentially at the
expense of more open access; in
contrast, indirect participant directors
may be inclined to favor expanded
access to products and services, which
may increase the amount of risk that the
clearing agency must successfully
manage.131
The Commission believes that
because interests and incentives may
vary among directors and over time for
130 See Regulation MC Proposing Release, supra
note 1, at 65888.
131 See id.
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a range of reasons, it is not possible to
predict how any individual director will
address particular matters. For this
reason, the approach taken in proposed
Rule 17Ad–25(g)—as well as proposed
Rule 17Ad–25(h)—is intended to
achieve an appropriate balance among
these various considerations by taking a
principles-based approach to addressing
conflicts of interest. While the proposed
rule provides the registered clearing
agency with a certain level of discretion
to address specific facts and
circumstances it faces in light of its
governance structure, the product it
clears, and the market it serves, it is
designed to complement other
applicable, more prescriptive
requirements in this proposal, which
the registered clearing agency may also
separately apply where relevant.
Additionally, the proposed rule is
intended to limit the clearing agency’s
discretion through more prescriptive
procedural requirements the clearing
agency must undertake to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to document the
identification, mitigation or elimination
of conflicts of interest under proposed
Rule 17Ad–25(g).
(b) Obligation of Directors To Report
Because a registered clearing agency
may not have access to information
necessary to identify a potential conflict
of interest, proposed Rule 17Ad–25(h)
would also require a registered clearing
agency to have policies and procedures
that require a director to document and
inform the registered clearing agency
promptly of the existence of any
relationship or interest that reasonably
could affect the independent judgment
or decision-making of the director. The
proposed rule takes elements from the
‘‘material relationship’’ definition,
which was carried forward from the
Commission’s previous proposal in
Regulation MC,132 without
incorporating the definition into the
proposed rule itself. Specifically, the
Commission is requiring policies and
procedures that focus on any
relationship or interest that reasonably
could affect the independent judgment
or decision-making of the director,
rather than material relationships or
interests, so that the registered clearing
agency—not the party with a reporting
obligation—can determine whether a
relationship or interest is subject to
mitigation or elimination under the
conflicts of interest policy. This
approach helps ensure that the
registered clearing agency has sufficient
132 See
id. at 65896–97.
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information to investigate, identify and
address potential conflicts.
(c) Policies and Procedures Approach
Because organizational structures vary
across clearing agencies, as do the
products, markets, and market
participants served by the clearing
agency, the Commission has taken a
policies and procedures approach in the
proposed rule to manage conflicts. This
provides registered clearing agencies
with discretion to design policies that fit
their particular structure and
circumstances, and help ensure that
policies and procedures remain effective
over time as circumstances change.
While the Commission has identified
some specific circumstances in
proposed Rules 17Ad–25(f) that
preclude a director from being an
independent director because they
present a clear conflict of interest, as a
general matter the Commission believes
that a clearing agency should have
discretion to assess conflicts and
determine how to mitigate or eliminate
them.
3. Request for Comment
The Commission generally requests
comments on all aspects of proposed
Rules 17Ad–25(g) and (h). In addition,
the Commission requests comments on
the following specific issues:
32. Are proposed Rules 17Ad–25(g)
and (h) sufficient to have registered
clearing agencies address conflicts of
interest within their governance
arrangements? Why or why not? Please
provide specific examples to illustrate
your points, if possible.
33. Do commenters agree with the
potential conflict concerns that the
Commission has identified? What effect
would the identified conflicts of interest
likely have? Should the Commission
focus on any of these conflicts more
than others? Are there other existing
conflicts concerns that commenters
believe warrant scrutiny? If so, what are
they and how are they likely to affect
registered clearing agencies? Which
conflicts of interest could potentially
cause the greatest harm to a registered
clearing agency? Please explain.
34. What potential new conflicts of
interest could arise that the Commission
should consider? What other parties
may have conflicts of interest that
would affect whether they should
control or participate in the governance
of a registered clearing agency? In what
circumstances do these conflicts of
interest arise?
35. Are there any additional
requirements and/or guidance that the
Commission could provide to help
registered clearing agencies evaluate the
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relationships of their directors and
senior managers to identify potential
sources of conflicts? Please explain with
specifics in terms of processes that
would help identify both existing and
potential conflicts of interest involving
directors or senior managers of the
registered clearing agency.
36. In requiring registered clearing
agencies to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
require a director to document and
inform the registered clearing agency
promptly of the existence of any
relationship or interest that reasonably
could affect the independent judgment
or decision-making of the director, does
proposed Rule 17Ad–25(h) provide
sufficient requirements to have directors
document and inform the registered
clearing agency promptly of potential
conflicts of interest? Why or why not?
37. Is the ‘‘reasonably could affect’’
standard proposed in Rule 17Ad–25(h)
sufficient? Why or why not?
E. Board Obligation To Oversee Service
Providers for Critical Services
1. Proposed Rule 17Ad–25(i)
Proposed Rule 17Ad–25(a) would
define the term ‘‘service provider for
critical services’’ to mean any person
that is contractually obligated to the
registered clearing agency for the
purpose of supporting clearance and
settlement functionality or any other
purposes material to the business of the
registered clearing agency.133 Proposed
Rule 17Ad–25(i)(1) would require each
registered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to enable the board
to confirm and document that risks
133 The proposed rule would not apply to utility
companies, such as a power company providing
general power services for the registered clearing
agency, although general power services are
necessary to allow a registered clearing agency to
function and operate, as a general matter. The
Commission believes that such services neither
support the core clearance and settlement
functionality of the registered clearing agency nor
are material to the clearing agency’s business, in
that the power company does not perform the core
clearance and settlement functionality or material
clearing agency business functions itself. At the
same time, the registered clearing agency should be
aware of how issues relating to such services may
impact its obligations under the Exchange Act. This
is consistent with Commission staff’s views. See,
e.g., Division of Trading and Markets: Responses to
Frequently Asked Questions Concerning Regulation
SCI (rev. Aug. 21, 2019), https://www.sec.gov/
divisions/marketreg/regulation-sci-faq.shtml
(stating that ‘‘an issue at a power utility may
interrupt the electric power supplied to an SCI
entity’s SCI systems. Even if the outage at the power
utility’s system would not itself be an SCI event,
there is a significant likelihood that an SCI entity
would nonetheless experience an SCI event
following such an outage’’).
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related to critical service provider
relationships are managed in a manner
consistent with the registered clearing
agency’s risk management framework,
and to review senior management’s
monitoring of relationships with service
providers for critical services. Proposed
Rule 17Ad–25(i)(2) would require each
registered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to enable the board
to approve policies and procedures that
govern the relationship with service
providers for critical services. Proposed
Rule 17Ad–25(i)(3) would require each
registered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to enable the board
to review and approve plans for entering
into third-party relationships where the
engagement entails being a service
provider for critical services to the
registered clearing agency. Proposed
Rule 17Ad–25(i)(4) would require each
registered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to enable the board
to, through regular reporting to the
board by senior management, confirm
that senior management takes
appropriate actions to remedy
significant deterioration in performance
or address changing risks or material
issues identified through ongoing
monitoring.
2. Discussion
Under existing requirements, the
Commission requires registered clearing
agencies to manage operational risk,
which can include risks associated with
relationships with service providers for
critical services. Rule 17Ad–22(d)(4)
under the Exchange Act requires a
registered clearing agency that is not a
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to identify sources
of operational risk and minimize them
through the development of appropriate
systems, controls, and procedures;
implement systems that are reliable,
resilient and secure, and have adequate,
scalable capacity; and have business
continuity plans that allow for timely
recovery of operations and fulfillment of
a clearing agency’s obligations.134 Rule
17Ad–22(e)(17) under the Exchange Act
requires a covered clearing agency to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to manage the
covered clearing agency’s operational
134 See
17 CFR 240.17Ad–22(d)(4).
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risks by, among other things, identifying
the plausible sources of operational risk,
both internal and external, and
mitigating their impact through the use
of appropriate systems, policies,
procedures, and controls.135
Additionally, under Regulation SCI, the
Commission requires registered clearing
agencies as SCI entities to conduct risk
assessments of SCI systems at least once
per year and report the findings to
senior management and the board of
directors.136
Based on its supervisory experience,
the Commission has observed that
clearing agencies have used service
providers to help ensure the prompt and
accurate clearance and settlement of
securities transactions, and that in some
cases, service providers are affiliates or
a parent company within the same
holding company structure as the
registered clearing agency itself. Service
providers may also be third party
entities, such as technology providers,
data providers, or providers of other
services. Because of the range of
relationships and needs of a registered
clearing agency, service providers can
perform a wide variety of functions. For
example, a clearing agency may contract
with its parent company to staff the
registered clearing agency.137 A clearing
agency may contract with one or more
investment advisers to help facilitate the
closing out of a defaulting participant’s
portfolio.138 A clearing agency may use
one or more data service providers to
help calculate pricing information for
securities.139 A clearing agency may
also purchase technology services from
135 See
17 CFR 240.17Ad–22(e)(17).
17 CFR 242.1000–1007.
137 See, e.g., DTCC, Businesses and Subsidiaries,
https://www.dtcc.com/about/businesses-andsubsidiaries; see also Part IV.B.1 (explaining that
DTC, FICC, and NSCC are clearing agency
subsidiaries of DTCC).
138 See, e.g., NSCC, Disclosure Framework for
Covered Clearing Agencies and Financial Market
Infrastructures (Dec. 2021), at 84, https://
www.dtcc.com/-/media/Files/Downloads/legal/
policy-and-compliance/NSCC_Disclosure_
Framework.pdf (‘‘NSCC utilizes the services of
investment advisors and executing brokers to
facilitate such [close-out purchase and sale]
transactions [for open Continuous Net Settlement
(CNS) positions] promptly following its
determination to cease to act. NSCC may engage in
hedging transactions or otherwise take action to
minimize market disruption as a result of such
purchases and sales.’’).
139 See, e.g., FICC, Disclosure Framework for
Covered Clearing Agencies and Financial Market
Infrastructures (Dec. 2021), at 58, 65, https://
www.dtcc.com/-/media/Files/Downloads/legal/
policy-and-compliance/FICC_Disclosure_
Framework.pdf (‘‘Collateral securities are re-priced
every night, from pricing sources utilized by FRM’s
[Financial Risk Management’s] Securities Valuation
unit . . . . FICC utilizes multiple third-party
vendors to price its eligible securities and uses a
pricing hierarchy to determine a price for each
security.’’).
136 See
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service providers that may help to
facilitate clearance and settlement in a
number of ways. In each of the cases
described above, failure of the service
provider to perform its obligations
would pose significant operational risks
and have critical effects on the ability of
the registered clearing agency to
perform its risk management function
and facilitate prompt and accurate
clearance and settlement. In this regard,
under existing requirements, including
Regulation SCI, outsourcing a clearance
and settlement functionality to a service
provider for critical services does not
relieve the registered clearing agency of
its statutory and regulatory obligations,
which remain with the registered
clearing agency.140
As firms explore new technologies
that can facilitate prompt and accurate
clearance and settlement in new and
innovative ways, clearing agencies may
increasingly determine that service
providers will offer the most effective
technology to perform key functions.141
Reliance on service providers will
require careful oversight of these
relationships because service provider
relationships are a key source of
operational risk to a registered clearing
agency, risk which can result in service
outages that, due to the centralizing
nature of registered clearing agencies,
could have implications for the national
system for clearance and settlement.
Ultimately, it is the responsibility of
the board to oversee the relationships
that management establishes with
service providers to help ensure that
management is performing its function
more effectively and that the clearing
agency can facilitate prompt and
accurate clearance and settlement.
Accordingly, the Commission believes it
is appropriate to propose certain
requirements relating to the board
oversight of service providers for critical
services.
(a) Definition of Service Providers for
Critical Services
Registered clearing agencies perform
some oversight of certain service
provider relationships, pursuant to
existing Commission requirements with
respect to these relationships.142
Against this backdrop and as part of the
evolution of the registered clearing
agency regulatory framework, the
140 See Regulation SCI Adopting Release, supra
note 39, at 77276 (expressing that an ‘‘SCI entity
should be responsible for managing its relationship
with third parties operating systems on behalf of the
SCI entity through due diligence, contract terms,
and monitoring of third party performance’’).
141 See id. at 72252–53.
142 See 17 CFR 240.17Ad–22(d)(4) and (e)(17); 17
CFR 242.1000–1007.
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Commission proposes a companion
governance requirement to these
existing rules that makes explicit the
registered clearing agency’s board
obligation to oversee the range of its
service providers for critical services. In
this regard, proposed Rule 17Ad–25(a)
would define the scope of ‘‘service
provider for critical services’’ to mean
any person that is contractually
obligated to the registered clearing
agency for the purpose of supporting
clearance and settlement functionality
or any other purposes material to the
business of the registered clearing
agency. Absent regular monitoring and
oversight, these relationships could
endanger the operational resilience of a
registered clearing agency and call into
question the registered clearing agency’s
ability to meet its obligations under the
Exchange Act.
(b) Obligations of the Board
In addition, proposed Rule 17Ad–
25(i) would explicitly obligate the
registered clearing agency to have
policies and procedures that require its
board to oversee a registered clearing
agency’s relationships with service
providers for critical services. Proposed
Rule 17Ad–25(i) includes a policies and
procedures approach because, the
Commission believes that, given the
range of potential service provider
relationships, the risks that they pose,
and the different ways in which they
might interact with different types of
products, markets, and market
participants, a registered clearing
agency will need to exercise its
discretion and judgment in managing
these risks and reviewing steps taken by
management.
Accordingly, under paragraphs (1)
and (2), the board would be charged
with reviewing senior management’s
monitoring of each relationship with a
service provider for critical services,
confirming and documenting that the
risks related to such relationships have
been considered and addressed
consistent with the clearing agency’s
risk management framework, and, more
generally, approving policies and
procedures that govern such
relationships. One method of
confirming and documenting the risks
posed by a service provider for critical
services to the registered clearing
agency would be for the board to
complete a self-assessment based on the
format and substance of Annex F in the
PFMI 143 that highlights oversight
expectations applicable to critical
service providers. Annex F, in its form
as of the date of this publication,
143 See
PFMI, supra note 4, at 170–71.
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provides a comprehensive basis for the
board of a registered clearing agency to
use to assess a service provider’s risk
identification and management,
information security management,
reliability and resilience, technology
planning, and the strength of
communications with users. Completing
such a self-assessment is not mandatory
but may be helpful for the registered
clearing agency to demonstrate
compliance with this element of
proposed Rule 17Ad–25(i)(1).
Paragraph (1) would also require
review of senior management’s
oversight of a service provider
relationship. The Commission believes
that the board should be aware of the
risks flowing into the registered clearing
agency, including through its
relationships with service providers for
critical services, and maintain
awareness of those risks over time by
monitoring management’s oversight of
the relationship. In its traditional
function as a check on management, the
board can help ensure that, for example,
management assesses and addresses
performance issues by the provider
under any agreement with the provider
and helps to ensure that product or
other deliverables are provided timely
and consistent with the terms of the
agreement.
Under paragraph (3), the board should
review and approve plans for entering
into third-party relationships where the
engagement entails being a service
provider for critical services to the
registered clearing agency. The
Commission believes the board’s
participation in this regard is required
as part of sound risk management when
the clearing agency enters into
contractual relationships with third
parties. Board involvement would help
ensure that the terms of performance for
the service provider are sufficient to
support the needs of the registered
clearing agency and any increased level
of risk to the registered clearing agency
is evaluated, assessed, and accounted
for. If renewal of third-party contracts or
performance issues are called into
question, the Commission believes that
the Board should generally review such
matters as part of its oversight
responsibilities in existing governance
arrangements and requirements.144
Finally, under paragraph (4), the
board would have responsibility for
144 See generally 17 CFR 240.17Ad–22(d)(8),
(e)(2). Existing Rules 17Ad–22(d)(8) and (e)(2)
impose obligations on a governance arrangements of
the clearing agency to promote the effectiveness of
the clearing agency’s risk management procedures.
Proposed Rule 17Ad–25(i)(3) would impose
obligations on the Board when initiating a thirdparty relationship.
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overseeing the extent to which senior
management remedies performance
issues under a service provider contract.
A key source of risk in any service
provider relationship to a registered
clearing agency is the operational risks
that may arise if a service provider is
not performing pursuant to the agreed
terms of the contractual relationship.
Without the board’s effective ongoing
monitoring of such risks and oversight
of management’s remedial actions to
control such risks, the registered
clearing agency may be faced with
increasing levels of risk that undermine
sound risk management and operational
resilience. Accordingly, the Commission
believes that policies and procedures
should specifically provide for regular
reporting to the board by senior
management to ascertain whether senior
management is taking appropriate
remedial actions to mitigate or eliminate
the risks of a critical service provider’s
significant performance deterioration or
other material changes in the
relationship that would result in an
unacceptable increase in risk to the
registered clearing agency if not
remedied in a timely manner.
3. Request for Comment
The Commission generally requests
comments on all aspects of proposed
Rule 17Ad–25(i). In addition, the
Commission requests comments on the
following specific issues:
38. Is the definition of ‘‘service
provider for critical services’’
sufficiently clear and properly scoped?
Why or why not? Please explain and
include alternative definitions, if
possible.
39. In requiring registered clearing
agencies to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
enable the board to oversee
relationships with service providers of
critical services, should the Commission
provide specific guidance regarding the
means and measures by which the board
performs such oversight
responsibilities? Why or why not?
40. In requiring registered clearing
agencies to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
confirm and document that risks related
to relationships with service providers
for critical services are managed in a
manner consistent with its risk
management framework, should the
Commission require—rather than
provide as guidance, as currently
formulated—that the board confirm and
document the risks through a selfassessment as discussed above? Why or
why not?
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1. Proposed Rule 17Ad–25(j)
Proposed Rule 17Ad–25(j) would
require each registered clearing agency
to establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to solicit, consider,
and document its consideration of the
views of participants and other relevant
stakeholders of the registered clearing
agency regarding material developments
in its governance and operations on a
recurring basis.
2. Discussion
Currently, all registered clearing
agencies are covered clearing agencies
and, as such, they are subject to
requirements for their governance
arrangements to include policies and
procedures that support the public
interest and the objectives of owners
and participants, as well as that
consider the interests of participants’
customers, securities issuers and
holders, and other relevant
stakeholders.145 However, no parallel
requirement exists for registered
clearing agencies that are subject to Rule
17Ad–22(d). Based on its supervisory
experience, the Commission believes
that enhancing clearing agency
governance practices will facilitate the
ability of clearing agencies subject to
Rule 17Ad–22(d) to obtain and consider
the views of a diverse cross-section of
their participants and stakeholders, who
will likely bear any of the losses
incurred as a result of the clearing
agency’s decisions with respect to its
governance and operations.
Accordingly, the proposed rule would
supplement existing Commission
requirements by also requiring that a
registered clearing agency have policies
and procedures to solicit, consider, and
document its consideration of the views
of participants and other relevant
stakeholders regarding material
developments in the clearing agency’s
governance and operations. The
Commission believes that other relevant
stakeholders generally would include
investors, customers of participants, as
well as securities issuers.
The Commission understands that
many registered clearing agencies
already have established committees,
working groups, and other fora of
varying size, scope, and formality to
share and solicit information with
participants, the customers of their
participants, and other stakeholders
regarding changes to risk management
and other services offered by the
145 See
17 CFR 240.17Ad–22(e)(2)(iii) and (vi).
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clearing agency. These groups and fora
are useful tools for information sharing
and gathering, and help promote an
open dialogue between the clearing
agency, its participants, and other
relevant stakeholders. Accordingly, the
Commission is proposing Rule 17Ad–
25(j) to help promote the formalization
of these processes and structures to help
ensure their ongoing use, both for the
existing set of registered clearing
agencies and for potential future
registrants. The Commission believes
that the proposed rule would help
ensure that these types of groups have
a clear purpose and scope by requiring
that registered clearing agencies solicit
views from relevant stakeholders in
addition to their participants and
document their consideration of views
expressed, and that the views solicited
concern topics related to material
developments in a clearing agency’s
governance and operations. Soliciting
and considering viewpoints from
participants and other relevant
stakeholders helps ensure that the board
of a registered clearing agency is
informed of the full range of views
across its participants and stakeholders
while making decisions related to
material developments in the clearing
agency’s governance and operations.
In addition, the Commission believes
that requiring registered clearing
agencies to document their
consideration of such viewpoints would
help ensure that a record exists of the
viewpoints provided by participants
and other relevant stakeholders
regarding material developments in a
clearing agency’s governance and
operations, ensuring that the clearing
agency indicated that it had received
such viewpoints and evaluated their
merits. Such a requirement also helps
promote confidence in the use of such
fora and other structures because
records will help demonstrate the ways
in which registered clearing agencies
consider and engage with stakeholder
viewpoints. Building a record of such
engagements also would help the
Commission itself evaluate the ways in
which clearing agencies consider
stakeholder viewpoints and balance
potentially competing viewpoints,
facilitating the Commission’s
monitoring and oversight of registered
clearing agencies and their impact on
the U.S. securities market.
41. The Commission understands that
some registered clearing agencies have
established multiple groups or fora to
target specific topics or types of
participants when sharing and soliciting
information. What should a registered
clearing agency consider when
determining to establish one versus
multiple fora for soliciting viewpoints?
Why? How should it select the types of
stakeholders or market participants from
whom it solicits information? Are there
particular topics for which a group or
fora should be required under the rule?
Are there any merits in limiting the
number of different groups or fora to
avoid overly fragmenting the discussion
of topics and solicitation of viewpoints?
Please explain with specific examples, if
possible.
42. Should the rule include specific
requirements applicable to committees,
working groups, or other fora when
established by a clearing agency? Please
explain.
43. The proposed rule would require
that a registered clearing agency solicit
viewpoints regarding material
developments in its governance and
operations. Does limiting the topics for
soliciting viewpoints to ‘‘material’’
aspects of a clearing agency’s
governance and operations provide for
the appropriate scope of topics for
which a clearing agency should solicit
viewpoints? Why or why not? Should
the rule limit the topics for soliciting
viewpoints only to risk management?
Why or why not? Conversely, should
the set of topics be expanded to include
topics such as participation
requirements, products cleared, fees,
new technologies, services, or other
topics relevant to participants and other
stakeholders? Please explain with
specific examples, if possible.
44. The proposed rule would require
that the registered clearing agency
solicit viewpoints on a recurring basis.
How frequently should a registered
clearing agency solicit viewpoints?
Should the requirement apply on an
annual basis, a quarterly basis, or some
other frequency? How should a clearing
agency balance the frequency of its
outreach against the obligation to
document its consideration of
viewpoints received?
45. Does the proposed rule interact
with the board’s fiduciary duty to the
clearing agency? If so, how? Please
explain with specific information.
3. Request for Comment
G. Considerations Related to
Implementation and Compliance
The Commission believes it is
important to establish governance
requirements for registered clearing
agencies given the potentially
The Commission generally requests
comments on all aspects of proposed
Rule 17Ad–25 (j). In addition, the
Commission requests comments on the
following specific issues:
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significant risks posed by their size,
systemic importance, and/or the risks
inherent in the products they clear, and
therefore believes that implementation
of any of the requirements in proposed
Rule 17Ad–25, if adopted, should be
prompt. However, the Commission also
recognizes that additional time may be
warranted to address any new
requirements, if adopted, by both
clearing agencies currently registered
with the Commission and those entities
that intend to register as clearing
agencies with the Commission while the
rules are being finalized.
The Commission intends to review
any application for registration as a
clearing agency pursuant to the
requirements of Section 17A of the
Exchange Act and the rules and
regulations thereunder, including Rule
17Ad–22 and any amendments thereto,
and notes that the compliance date
would apply to all clearing agencies,
including an applicant for registration
as a clearing agency whose application
is pending upon the compliance date. In
reviewing such an application, Section
17A(b)(3) of the Exchange Act requires
that a clearing agency shall not be
registered unless the Commission
determines that an applicant’s rules and
operations satisfy each of the
requirements set forth in Section
17A(b)(3).146 Following registration, any
registered clearing agency would need
to address compliance with any of the
requirements in proposed Rule 17Ad–
25, if adopted.
The Commission is also mindful of
the time and costs that may be incurred
by registered clearing agencies to
implement aspects of proposed Rule
17Ad–25, if adopted, namely the
independence requirements for the
board and board committees.
Implementation of these proposed
requirements could require changes to
policies and procedures currently
utilized to comply with the
Commission’s clearing agency rules.
These burdens could be exacerbated if
affected clearing agencies must begin
complying with any proposed Rule
17Ad–25, if adopted, in their existing
policies and procedures at or near the
same time that they are making changes
to their board and board committee
composition by undertaking the steps to
identify and select candidates to
146 See
15 U.S.C. 78q–1(b)(3).
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accommodate these proposed
requirements. The Commission believes
that implementation of the proposed
rules, if adopted, can and should be
done in a manner that carries out the
fundamental policy goals of the rules
while minimizing burdens and
disruptions as much as practicable,
including minimizing the prospect of
current directors having to resign before
their terms expire. The Commission
believes that this should be done
pursuant to a phased-in compliance
schedule whereby the proposed rules, if
adopted, would have a compliance date
that is 180 days from publication of the
final rules in the Federal Register for all
the provisions other than proposed Rule
17Ad–25(b)(1), (c)(2), and (e), and 24
months from publication of the final
rules in the Federal Register for the
independence requirement for the board
and board committees under proposed
Rule 17Ad–25(b)(1), (c)(2), and (e).
1. Request for Comment
46. Are the 180-day and 24-month
compliance periods appropriate? Why
or why not? Please be specific.
47. Does the phased-in compliance
date envisioned by the Commission
adequately address the time and
resources needed for clearing agencies
to comply with proposed Rule 17Ad–25
if adopted? Please explain. Should
specific requirements be phased in over
time, such as to allow current directors
to serve their complete term rather than
needing to resign early in order to adjust
the number of independent directors on
a board? If so, what is the appropriate
number of days that would allow
current directors to serve their complete
terms?
H. General Request for Comment
The Commission generally requests
comments on all aspects of proposed
Rule 17Ad–25.
IV. Economic Analysis
A. Introduction
The Commission is sensitive to the
economic consequences and effects of
the proposed rules, including their
benefits and costs.147 The Commission
147 Under Section 3(f) of the Exchange Act,
whenever the Commission engages in rulemaking
under the Exchange Act and is required to consider
or determine whether an action is necessary or
appropriate in the public interest, it must consider,
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acknowledges that, since many of these
proposals could require a clearing
agency to adopt new policies and
procedures, the economic effects and
consequences of these rules include
those flowing from the substantive
results of those new policies and
procedures. Further, as stated above,
Section 17A of the Exchange Act directs
the Commission to have due regard for
the public interest, the protection of
investors, the safeguarding of securities
and funds, and maintenance of fair
competition among brokers and dealers,
clearing agencies, and transfer agents
when using its authority to facilitate the
establishment of a national system for
clearance and settlement of transactions
in securities.148
This section addresses the likely
economic effects of the proposed rules,
including their anticipated and
estimated benefits and costs and their
likely effects on efficiency, competition,
and capital formation. Many of the
benefits and costs are difficult to
quantify. For example, the issue of
misaligned incentives is a core
economic matter that is persistent across
many different types of economic
interactions among clearing agency
stakeholders. Incentives affect the
economic outcome of a transaction but
there is little data about how decisionmaking processes directly affect
monetary gains and losses. In addition,
quantification of these incentive effects
is particularly challenging due to the
number of assumptions that would be
needed to forecast how clearing
agencies would respond to the proposed
rules, and how those responses would,
in turn, affect the broader market for
cleared securities products. While the
Commission has attempted to quantify
economic effects where possible, much
of the discussion of economic effects is
qualitative in nature. The Commission
also discusses the potential economic
effects of certain alternatives to the
approaches recommended in this
proposal.
in addition to the protection of investors, whether
the action will promote efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f). In addition,
Section 23(a)(2) of the Exchange Act prohibits the
Commission from adopting any rule that would
impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the
Exchange Act. See 15 U.S.C. 78w(a)(2).
148 See 15 U.S.C. 78q–1(a)(2)(A).
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B. Economic Baseline
To consider the effect of the proposed
rules, the Commission first explains the
current state of affairs in the market (the
economic baseline). All the potential
benefits and costs from adopting the
proposed rules are changes relative to
the economic baseline. The economic
baseline in this proposal considers (1)
the current market for registered
clearing agency activities, including the
number of registered clearing agencies,
the distribution of participants across
these clearing agencies, and the volume
of transactions these clearing agencies
process, (2) the current regulatory
framework for registered clearing
agencies, and (3) the current practices of
registered clearing agencies that relate to
the proposed rules.
1. Description of Market
Of the nine registered clearing
agencies, there are currently seven
operating businesses.149 Six provide
CCP services and one provides CSD
services.150 NSCC, FICC, and DTC are
all registered clearing agencies that are
DTCC subsidiaries. Together they offer
clearance and settlement services for
equities, corporate and municipal
bonds, government and mortgagebacked securities, derivatives, money
market instruments, syndicated loans,
mutual funds, and alternative
investment products in the United
States. ICC and ICEEU are both
registered clearing agencies for credit
default swaps (‘‘CDS’’), and are both
subsidiaries of Intercontinental
Exchange, Inc. (‘‘ICE’’). LCH SA, a
France-based subsidiary of LCH Group
Holdings Ltd, is a registered clearing
agency that also offers clearing for CDS.
The seventh registered clearing agency,
OCC, offers clearing services for
exchange-traded U.S. equity options.
Registered clearing agencies broadly
operate under one of two models.
Specifically, the clearing agency may be
organized so that the participants are
owners of the clearing agency,151 or so
that participants are not owners of the
clearing agency.152
Registered clearing agencies currently
feature specialization and limited
competition. For example, there is only
one registered clearing agency serving as
a central counterparty for each of the
following asset classes: Exchange-traded
equity options (OCC), government
securities (FICC), mortgage-backed
securities (FICC), and equity securities
(NSCC). There is also only one
registered clearing agency providing
central securities depository services
(DTC). Registered clearing agency
activities exhibit high barriers to entry
and economies of scale. These features
of the existing market, and the resulting
concentration of clearing and settlement
services within a handful of entities,
informs the Commission’s examination
of the effects of the proposed rules on
competition, efficiency, and capital
formation, as discussed below. Table 1
summarizes the most recent data on the
number of participants at each
registered clearing agency.153
TABLE 1—NUMBER OF PARTICIPANTS AT REGISTERED CLEARING AGENCIES
Number of
participants
Registered clearing agency
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Subsidiaries of The Depository Trust & Clearing Corporation
National Securities Clearing Corporation .........................................................................................................................................
The Depository Trust Company .......................................................................................................................................................
Fixed Income Clearing Corporation (Government Securities Division) ...........................................................................................
Fixed Income Clearing Corporation (Mortgage Backed Securities Division) ..................................................................................
Subsidiaries of Intercontinental Exchange
ICE Clear Credit ...............................................................................................................................................................................
ICE Clear Europe (CDS Participants Only) .....................................................................................................................................
Subsidiaries of LCH
LCH SA (CDSClear Participants Only) ............................................................................................................................................
The Options Clearing Corporation .......................................................................................................................................................
149 There are two registered but inactive clearing
agencies: BSECC and SCCP. Neither has provided
clearing services in well over a decade. See
Exchange Act Release No. 63629 (Jan. 3, 2011)
(BSECC ‘‘returned all clearing funds to its members
by September 30, 2010, and [] no longer maintains
clearing members or has any other clearing
operations as of that date. [] BSECC [] maintain[s]
its registration as a clearing agency with the
Commission for possible active operations in the
future.’’); Exchange Act Release No. 63268 (Nov. 8,
2010) (‘‘SCCP ‘‘returned all clearing fund deposits
by September 30, 2009; [and] as of that date SCCP
no longer maintains clearing members or has any
other clearing operations. [] SCCP [] maintain[s] its
registration as a clearing agency for possible active
operations in the future.’’). Because they do not
provide clearing services, BSECC and SCCP are not
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included in the economic baseline or the
consideration of benefits and costs. They are
included in the PRA for purposes of the PRA
estimate, see infra at Section V.
150 See supra note 17 (summarizing typical CCP
services) and note 18 (summarizing typical CSD
services).
151 See supra note 32 (explaining the ownership
structure of DTCC and its subsidiary clearing
agencies).
152 OCC is owned by certain options exchanges.
ICC and ICEEU are both subsidiaries of ICE, which
is listed on the New York Stock Exchange. LCH SA
is a subsidiary of LCH Group Holdings, Ltd., which
is majority-owned by London Stock Exchange
Group plc (a publicly traded company).
153 Participant statistics are taken from the
websites of each of the listed clearing agencies as
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3,532
841
204
140
29
30
25
184
of August 2021, September 2021, or October 2021.
See DTCC, NSCC Member Directories, https://
www.dtcc.com/client-center/nscc-directories;
DTCC, DTC Member Directories, https://
www.dtcc.com/client-center/dtc-directories; DTCC,
FICC–GOV Member Directories, https://
www.dtcc.com/client-center/ficc-gov-directories;
DTCC, FICC–MBS Member Directories, https://
www.dtcc.com/client-center/ficc-mbs-directories;
ICE, ICE Clear Credit Participants, https://
www.theice.com/clear-credit/participants; ICE, ICE
Clear Europe Membership, https://www.theice.com/
clear-europe/membership; LCH, LCH SA
Membership, https://www.lch.com/membership/
member-search; OCC, Member Directory, https://
www.theocc.com/Company-Information/MemberDirectory.
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Registered clearing agencies have
become an essential part of the
infrastructure of the U.S. securities
markets due to their role as
intermediaries.154 Many securities
transactions are centrally cleared by
clearing agencies. For example, in 2021
approximately $1.1 trillion (65%) of the
notional amount of all single-name CDS
transactions in the United States were
centrally cleared.155 In addition, in 2021
DTCC processed $2.4 quadrillion in
securities transactions, and OCC cleared
9.9 billion individual options
contracts.156
Central clearing generally benefits the
markets in which it is available through
significantly reducing participants’
counterparty risk and through more
efficient netting of margin.
Consequently, central clearing also
benefits the financial system as a whole
by increasing financial resilience and
the ability to monitor and manage
risk.157 Notwithstanding the benefits,
central clearing concentrates risk in the
clearing agency.158 Disruption to a
clearing agency’s operations, or failure
on the part of a clearing agency to meet
its obligations, could serve as a source
of contagion, resulting in significant
costs not only to the clearing agency
itself or its participants but also to other
market participants and the broader U.S.
154 See
supra Part I.
from DTCC’s Trade Information
Warehouse, compiled by Commission staff.
156 See OCC, Annual Report (2021), https://
annualreport.theocc.com; DTCC, Annual Report
(2021), https://www.dtcc.com/∼/media/files/
downloads/about/annual-reports/DTCC-2021Annual-Report. Within DTCC, NSCC cleared $2.0
trillion of equity trades every day on average, FICC
cleared a total of $1.4 quadrillion of government
securities transactions and $69 trillion of agency
mortgage-backed securities transactions, and DTC
settled a total of $152 trillion of securities.
157 See Darrell Duffie, Still the World’s Safe
Haven? Redesigning the U.S. Treasury Market After
the COVID–19 Crisis, Hutchins Center Working
Paper No. 62 (June 2020), at 15, https://
www.brookings.edu/wp-content/uploads/2020/05/
wp62_duffie_v2.pdf (‘‘Central clearing increases the
transparency of settlement risk to regulators and
market participants, and in particular allows the
CCP to identify concentrated positions and crowded
trades, adjusting margin requirements accordingly.
Central clearing also improves market safety by
lowering exposure to settlement failures. . . . As
depicted, settlement failures rose less in March
[2020] for [U.S. Treasury] trades that were centrally
cleared by FICC than for all trades involving
primary dealers. A possible explanation is that
central clearing reduces ‘daisy-chain’ failures,
which occur when firm A fails to deliver a security
to firm B, causing firm B to fail to firm C, and so
on.’’).
158 See generally Albert J. Menkveld & Guillaume
Vuillemey, The Economics of Central Clearing, 13
Ann. Rev. Fin. Econ. 153 (2021).
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155 Data
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financial system.159 As a result, proper
management of the risks associated with
central clearing helps ensure the
stability of the U.S. securities markets
and the broader U.S. financial
system.160
2. Overview of the Existing Regulatory
Framework
The existing regulatory framework for
clearing agencies registered with the
Commission includes Section 17A of
the Exchange Act and the Dodd-Frank
Act, and the related rules adopted by
the Commission. The current regulatory
159 See generally Dietrich Domanski, Leonardo
Gambacorta & Cristina Picillo, Central Clearing:
Trends and Current Issues, BIS Q. Rev. (Dec. 2015),
https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf
(describing links between CCP financial risk
management and systemic risk); Darrell Duffie, Ada
Li & Theo Lubke, Policy Perspectives on OTC
Derivatives Market Infrastructure, Fed. Res. Bank
N.Y. Staff Rep. No. 424, at 9 (Mar. 2010), https://
www.newyorkfed.org/research/staff_reports/
sr424.pdf (‘‘If a CCP is successful in clearing a large
quantity of derivatives trades, the CCP is itself a
systemically important financial institution. The
failure of a CCP could suddenly expose many major
market participants to losses. Any such failure,
moreover, is likely to have been triggered by the
failure of one or more large clearing agency
participants, and therefore to occur during a period
of extreme market fragility.’’); Craig Pirrong, The
Inefficiency of Clearing Mandates, Policy Analysis
No. 655, at 11–14, 16–17, 24–26 (July 2010), https://
www.cato.org/pubs/pas/PA665.pdf (stating, among
other things, that ‘‘CCPs are concentrated points of
potential failure that can create their own systemic
risks,’’ that ‘‘[a]t most, creation of CCPs changes the
topology of the network of connections among
firms, but it does not eliminate these connections,’’
that clearing may lead speculators and hedgers to
take larger positions, that a CCP’s failure to
effectively price counterparty risks may lead to
moral hazard and adverse selection problems, that
the main effect of clearing would be to ‘‘redistribute
losses consequent to a bankruptcy or run,’’ and that
clearing entities have failed or come under stress in
the past, including in connection with the 1987
market break); Hubbard supra note 57, at 96 (‘‘In
short, the systemic consequences from a failure of
a major CCP, or worse, multiple CCPs, would be
severe. Pervasive reforms of derivatives markets
following 2008 are, in effect, unfinished business;
the systemic risk of CCPs has been exacerbated and
left unaddressed.’’); Froukelien Wendt, Central
Counterparties: Addressing their Too Important to
Fail Nature, IMF Working Paper No. 15/21 (Jan.
2015), https://papers.ssrn.com/sol3/Delivery.cfm/
wp1521.pdf (assessing the potential channels for
contagion arising from CCP interconnectedness);
Manmohan Singh, Making OTC Derivatives Safe—
A Fresh Look, IMF Working Paper No. 11/66 (Mar.
2011), at 5–11, https://www.imf.org/external/pubs/ft/
wp/2011/wp1166.pdf (addressing factors that could
lead central counterparties to be ‘‘risk nodes’’ that
may threaten systemic disruption).
160 See Paolo Saguato, Financial Regulation,
Corporate Governance, and the Hidden Costs of
Clearinghouses, 82 Ohio St. L.J. 1071, 1074–75
(2022), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3269060 (‘‘[T]he decision
to centralize risk in clearinghouses made them
critical for the stability of the financial system, to
the point that they are considered not only too-bigto-fail, but also too-important-to-fail institutions.’’).
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system is discussed in Parts I, II and III
of this proposal.
The Commission is aware that
clearing agencies registered in the U.S.
may also be subject to other domestic or
foreign regulators. Specifically, clearing
agencies operating in the U.S. may also
be subject to regulation by the CFTC (as
clearing agencies for futures or swaps)
and the Board of Governors of the
Federal Reserve System (as systemically
important financial market utilities or
state member banks).161 In addition,
clearing agencies operating in the U.S.
may be subject to foreign clearing
agency regulators. For example, LCH SA
is regulated by l’Autorite´ des marche´s
financiers, l’Autorite´ de Controˆle
Prudentiel et de Re´solution, and the
Banque de France, and is subject to
EMIR.162 ICEEU is regulated by the
Bank of England and is subject to
EMIR.163
The Commission also considers
relevant international standards when
engaged in rulemaking for clearing
agencies. For example, in 2012, the
Committee on Payments and Market
Infrastructure (CPMI) and the
International Organization of Securities
Commissions (IOSCO) issued the PFMI,
a set of international standards for
financial market infrastructures.164 In
connection with rulemaking required by
Section 805(a)(2)(A) of the Clearing
Supervision Act, 12 U.S.C.
5464(a)(2)(A), the Commission
considered the principles and
responsibilities in the PFMI when
adopting Rule 17Ad–22(e).165
Table 2 summarizes the board
composition and independent director
requirements of the CFTC, the Board of
Governors of the Federal Reserve
System, and EMIR, as well as the related
principle in the PFMI.
161 Currently, ICC, ICEEU, LCH SA, and OCC are
regulated by the CFTC. DTC, FICC, NSCC, ICC, and
OCC have been designated systemically important
financial market utilities. DTC is also a state
member bank of the Federal Reserve System.
162 See LCH, Company Structure, https://
www.lch.com/about-us/structure-and-governance/
company-structure.
163 See ICE, ICEEU Regulation, https://
www.theice.com/clear-europe/regulation.
164 See PFMI, supra note 4.
165 CCA Standards Adopting Release, supra note
13, at 70789, 70796–97. A CPMI–IOSCO assessment
report also has assessed that the Commission’s rules
are consistent with the PFMI principles. See CPMI–
IOSCO, Implementation monitoring of PFMI:
Assessment report for the United States—Payment
systems, central securities depositories and
securities settlement systems (May 31, 2019), at 2,
https://www.bis.org/cpmi/publ/d184.pdf
(presenting the conclusions drawn by the CPMI and
IOSCO from a Level 2 assessment).
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TABLE 2—BOARD COMPOSITION AND INDEPENDENT DIRECTOR REQUIREMENTS OF CFTC, BOARD OF GOVERNORS, EMIR,
AND CPMI–IOSCO (PFMI)
Organization
Board composition and independence requirements
CFTC ....................................
‘‘A derivatives clearing organization shall ensure that the composition of the governing board or board-level committee of the derivatives clearing organization includes market participants and individuals who are not executives, officers, or employees of the derivatives clearing organization or an affiliate thereof.’’ (17 CFR 39.26).
‘‘ . . . the designated financial market utility has governance arrangements that are designed to ensure . . . [t]he
board of directors includes a majority of individuals who are not executives, officers, or employees of the designated financial market utility or an affiliate of the designated financial market utility’’ (12 CFR
234.3(a)(2)(iv)(D)).
‘‘A CCP shall have a board. At least one third, but no less than two, of the members of that board shall be independent. Representatives of the clients of clearing members shall be invited to board meetings for matters relevant to Articles 38 and 39. The compensation of the independent and other non-executive members of the
board shall not be linked to the business performance of the CCP’’ (Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012, Title IV, Article 27).
‘‘ ‘independent member’ of the board means a member of the board who has no business, family or other relationship that raises a conflict of interests regarding the CCP concerned or its controlling shareholders, its management or its clearing members, and who has had no such relationship during the five years preceding his
membership of the board’’ (Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4
July 2012, Title I, Article 2(28)).
‘‘[Board] members should be able to exercise objective and independent judgment. Independence from the views
of management typically requires the inclusion of non-executive board members, including independent board
members, as appropriate. Definitions of an independent board member vary and often are determined by local
laws and regulations, but the key characteristic of independence is the ability to exercise objective, independent judgment after fair consideration of all relevant information and views and without undue influence
from executives or from inappropriate external parties or interests. The precise definition of independence used
by an F[inancial] M[arket] I[nfrastructure (FMI)] should be specified and publicly disclosed, and should exclude
parties with significant business relationships with the FMI, cross-directorships, or controlling shareholdings, as
well as employees of the organization’’ (PFMI, § 3.2.10, footnotes omitted).
Board of Governors of the
Federal Reserve System.
European Market Infrastructure Regulation (EMIR).
CPMI–IOSCO .......................
In addition to Federal regulation, as
noted earlier, clearing agencies must
also follow state laws applicable to their
choice of organization, such as limited
liability companies, corporations, or
trusts.166
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3. Divergent Incentives of Clearing
Agency Stakeholders
Several researchers have commented
that the misalignment of interests
between clearing agency stakeholders
(owners and non-owner participants, for
example) weakens the effectiveness of
clearing agencies’ risk management
under the existing regulatory
framework.167 Less effective risk
166 For example, ‘‘The New York State
Department of Financial Services supervises DTC as
a New York State-chartered trust company.’’ See
Board of Governors of the Federal Reserve System,
Designated Financial Market Utilities. https://
www.federalreserve.gov/paymentsystems/
designated_fmu_about.htm. The OCC is a Delaware
corporation. See OCC, Certificate of Incorporation,
https://www.theocc.com/Company-Information/
Documents-and-Archives/OCC-Certificate-ofIncorporation.
167 See Saguato, supra note 160, at 5, 13 (stating
that ‘‘effective risk management in financial
institutions can be achieved only if the final risk
bearers have a voice in the governance of the firm’’
and that ‘‘the existing regulatory framework
underestimates and does not address the misaligned
incentives that spill from the agency costs of the
separation of risk and control and from the membershareholder divide . . .’’); Hester Peirce,
Derivatives Clearinghouses: Clearing the Way to
Failure, 64 Clev. St. L. Rev. 589 (2016), https://
engagedscholarship.csuohio.edu/cgi/
viewcontent.cgi?article=3915&context=clevstlrev
(arguing that clearing members must play a central
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management, in turn, impedes the
resilience of individual clearing
agencies, the clearing services market,
and the broader financial markets, as
well as competition among participants.
However, academic literature has not
coalesced around a standard model
describing clearing agency governance,
leaving some uncertainty about the
theoretically best way to mitigate
divergent incentives.168
As discussed more fully below, the
Commission is aware of divergent
incentives at some clearing agencies
between clearing agency owners and
non-owner participants, and the
importance of actively addressing these
divergent incentives through proactive
measures to achieve sound governance
and resilience. In the 2020 Staff Report
on the Regulation of Clearing Agencies,
Commission staff emphasized that
‘‘robust written rules, policies, and
procedures are important to clearing
agency functioning, but represent only
the first step in achieving resilience and
role in risk management); Craig Pirrong, The
Economics of Central Clearing: Theory and Practice,
ISDA Discussion Papers Series No. 1 (May 2011),
at 3, https://www.isda.org/a/yiEDE/isdadiscussionccp-pirrong.pdf (‘‘CCPs should be organized so as
to align the control of risks with those who bear the
consequences of risk management decisions.’’).
168 See Menkveld & Vuillemey, supra note 158, at
21 (‘‘While the literature on central clearing has
made significant progress over the past ten years,
a number of important questions remain open. On
the theoretical front, there is still no standard model
of . . . [CCP] governance.’’).
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compliance. To achieve real-life
outcomes that help promote resilience
and compliance, rules, policies, and
procedures must be . . . subject to
sound governance that ensures they will
be executed promptly and
effectively.’’ 169
(a) Divergent Incentives of Owners vs.
Non-Owner Participants
Because clearing agencies mutualize
risk among participants but not all
participants necessarily hold an equity
interest in the clearing agencies,170 the
incentives of clearing agency owners
can differ from the incentives of clearing
agency participants.171 For example,
owners have an incentive to transfer as
much risk of loss as possible to nonowner participants or to lower risk
management standards.172 In such
169 Staff Report on Clearing Agencies, supra note
27, at 25.
170 For example, OCC, ICC, ICEEU, and LCH SA
are not owned by participants.
171 See Saguato, supra note 160, at 1099 (‘‘This
new agency conflict that stems from the separation
of risk and control and from the ‘membershareholder divide’ misaligns the incentives of the
clearinghouse from those of its members . . .’’).
This specific agency conflict is less of a concern in
cases where clearing agency participants own
shares of the clearing agency, because there is less
separation of risk and control. For example, DTC,
NSCC, and FICC operate under a utility model,
where the participants own shares of the parent
company, DTCC.
172 See Menkveld & Vuillemey, supra note 158, at
20 (noting that because participants are a ‘‘captive
clientele,’’ clearing agencies could be incentivized
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cases, the owners benefit by receiving
higher profits or tying up less capital in
their investment while participants are
left with greater potential losses in the
event of a counterparty default or nondefault loss and potentially higher
margin and default fund requirements.
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(b) Divergent Incentives Among
Participants
In addition, different types of
participants (direct vs indirect
participants or large vs small
participants, for example) have
divergent incentives. For example, large
direct participants have incentives to
influence the clearing agency to adopt
policies that would exclude smaller
dealers from participating directly in the
clearing agency.173 Because there is only
one registered clearing agency serving as
a central counterparty for some asset
classes, such policies could negatively
affect competition among clearing
agency participants. The diverging
incentives of large direct participants
compared to smaller indirect
participants are mitigated by Rule
17Ad–22, which in part generally
requires a clearing agency to admit
participants who meet minimum
standards.174
Large participants also have
incentives to influence the clearing
agency to adopt policies that could
allocate a disproportionately large risk
of loss to smaller participants by
allowing the large participant to
contribute lower quality collateral to
satisfy margin or default fund
to relax risk management standards); Saguato, supra
note 160, at 1099, 1102. However, it is possible that
a captive clientele could also incentivize a clearing
agency to increase its risk management standards if
there is participant representation in the
governance structure.
173 See Kristin N. Johnson, Commentary on the
Abraham L. Pomerantz Lecture: Clearinghouse
Governance: Moving Beyond Cosmetic Reform, 77
Brook. L. Rev. 2, 698 (2012), https://
brooklynworks.brooklaw.edu/blr/vol77/iss2/5
(‘‘Large dealers have incentives to limit smaller
dealers’ access to clearinghouse membership. When
large dealers act as brokers for the smaller
nonmember dealers, the larger dealers earn
revenues for executing transactions for dealers who
are nonmembers and ineligible for membership. If
eligibility standards preclude smaller dealers from
gaining the full benefits of membership, then small
dealers who desire to execute transactions must
seek the assistance of the larger dealers who are
members. Thus, large dealers have commercial
incentives to ensure that smaller dealers remain
ineligible for membership.’’); Sean Griffith,
Governing Systemic Risk: Towards a Governance
Structure for Derivatives Clearinghouses, 61 Emory
L. J. 1153, 1197 (2012), https://
scholarlycommons.law.emory.edu/elj/vol61/iss5/3
(‘‘The major dealers may also use their influence
over clearinghouses to protect [their] trading profits,
using the clearinghouse as a means of increasing
their market share and excluding competitors.’’).
174 See 17 CFR 240.17Ad–22(b)(5)–(b)(7) and
(e)(18).
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requirements or by promoting margin
requirements that are not commensurate
with the risks and particular attributes
of each participant’s specific products,
portfolio, and market. The diverging
incentives of large participants
compared to smaller direct participants
are also mitigated by Rule 17Ad–22,
which in part generally requires a
clearing agency to establish minimum
margin and liquidity requirements.175
By establishing minimum margin and
liquidity requirements, Rule 17Ad–22
reduces a large participant’s ability to
obtain or maintain a competitive
advantage through activities such as
providing lower quality collateral or
promoting margin requirements that are
not commensurate with the risks and
particular attributes of each
participant’s specific products,
portfolio, and market.
(c) Incentives of Clearing Agency
Stakeholders Could Diverge From the
Interest of the Broader Financial
Markets
Clearing agency stakeholders, such as
owners and direct and indirect
participants, also have incentives that
may not be in alignment with the
interests of the broader financial
markets.176 Any such misalignment, if
left unmitigated, could limit the benefits
of central clearing and hinder the
resilience of other financial market
intermediaries and the broader financial
market.177 For example, in securities
markets where all or part of a
transaction may not be subject to a
central clearing requirement, a single
participant or a small group of
participants may have a profit incentive
to select bi-lateral clearing over central
clearing 178 or seek to influence a
175 See
17 CFR 240.17Ad–22(e)(5)–(e)(6).
Bank of England, The Bank of England’s
supervision of financial market infrastructures—
Annual Report (Mar. 2015), at Chapter 2.1.4
(‘‘Strong user and independent representation in
[UK CCPs] governance structures should help
ensure that UK CCPs focus not only on the
management of microprudential risks to themselves
but also on systemic risks.’’).
177 See Griffith, supra note 173, at 1210 (‘‘[T]he
containment of systemic risk [is] a public good. . . .
Because no private party can enjoy the full benefit
of eliminating systemic risk, no private party has an
incentive to fully internalize the cost of doing so.
As a result, no private party can simply be
entrusted with the means of doing so because it is
more likely to use those means to some other
ends. . . . In other words, none of the commercial
parties has the right incentives.’’).
178 Cf. Treasury Market Practices Group (TMPG),
Best Practice Guidance on Clearing and Settlement,
at 3 (July 2019), https://www.newyorkfed.org/
medialibrary/Microsites/tmpg/files/CS_
BestPractices_071119.pdf (in commenting on the
‘‘potential role for expanded central clearing’’ in the
secondary U.S. Treasuries market, the TMPG noted
that ‘‘changes to market structure that have
occurred have also resulted in a substantial
176 Cf.
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51843
clearing agency to not clear a security
that would profit the participants more
if the security were cleared bi-laterally.
Not only could such incentives limit the
benefits of central clearing, but they
could also impede resilience in the
broader financial market by increasing
systemic risk.179 In addition, indirect
participants that are not permitted to
directly access clearing services have
incentives to ‘‘avoid clearing and seek
higher-margin trading activity through
faux customization.’’ 180 This, too, could
hinder resilience in the broader
financial market by increasing systemic
risk. Lastly, as pointed out in a BIS and
IOSCO report, ‘‘. . . an FMI and its
participants may generate significant
negative externalities for the entire
financial system and real economy if
they do not adequately manage their
risks.’’ 181 To the extent these negative
externalities are not adequately
internalized by the clearing agency or
otherwise mitigated, they could present
systemic risks to the broader financial
markets.182
4. Current Governance Practices
Registered clearing agencies must
operate in compliance with Rule 17Ad–
22, though they may vary in the
particular ways they achieve such
compliance. Some variation in practices
across registered clearing agencies
derives from the products they clear and
the markets they serve.
An overview of current practices at
the seven operating clearing agencies is
set forth below and includes discussion
of clearing agency boards’ policies and
procedures related to the composition of
the board and board committees,
increase, in both absolute and percentage terms, in
the number of trades that clear bilaterally rather
than through a central counterparty. This
principally stems from the increased prevalence of
P[rincipal] T[rading] F[irm] activity on
I[nter]D[ealer ]B[roker] platforms.’’).
179 See Griffith, supra note 173, at 1197
(‘‘[D]ealers have a clear incentive to protect the
profits they receive from the bilateral market . . .
by keeping trades off of clearinghouses. Keeping
trades off of clearinghouses has obvious systemic
risk implications: a clearinghouse cannot contain
the risk of trades that it does not clear.’’). Though
bi-lateral clearing serves a well-defined function in
eliminating basis risk and allowing for more precise
hedging, its benefits in terms of systemic risk
mitigation are more limited relative to centralized
clearing.
180 See Griffith, supra note 173, at 1200.
181 See PFMI, supra note 4, at 11.
182 Cf. id. at 128 (Noting that regulators have a
role in addressing negative externalities.
‘‘[R]egulation, supervision, and oversight of an FMI
are needed to . . . address negative externalities
that can be associated with the FMI, and to foster
financial stability generally.’’); Menkveld &
Vuillemey, supra note 158, at 22 (‘‘Network
externalities create a role for regulators to
coordinate investors on a socially desirable
equilibrium.’’).
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conflicts of interests involving directors
and senior managers, the obligations of
the board regarding overseeing
relationships with service providers for
critical services, and consideration of
stakeholders’ views. This discussion is
based on the Commission’s general
understanding of current practices as of
the date of this proposal and reflects the
Commission’s experience supervising
registered clearing agencies.
(a) Current Practices Regarding Board
Composition
Each registered clearing agency has a
board that governs its operations and
supervises senior management. Section
17A(b)(3)(C) of the Exchange Act
prohibits a clearing agency from
registering unless the Commission finds
that ‘‘the rules of the clearing agency
assure a fair representation of its
shareholders (or members) and
participants in the selection of its
directors and administration of its
affairs. (The Commission may determine
that the representation of participants is
fair if they are afforded a reasonable
opportunity to acquire voting stock of
the clearing agency, directly or
indirectly, in reasonable proportion to
their use of such clearing agency.).’’ 183
In addition, Rule 17Ad–22(e)(2) requires
governance arrangements that support
the objectives of owners and
participants and consider the interests
of other relevant stakeholders.
(1) Independent Directors
Clearing agencies currently use
various definitions of independence and
independent director. In addition,
current practices vary widely regarding
the board and board committee
requirements for independent directors
(as the term is currently used by
clearing agencies). For example, clearing
agencies’ existing requirements for the
minimum percentage of independent
directors on the board ranges from 0%
to 55%. Table 3 summarizes the general
board composition and independent
director requirements of each operating
clearing agency.
TABLE 3—BOARD COMPOSITION AND INDEPENDENT DIRECTOR REQUIREMENTS OF OPERATING CLEARING AGENCIES
Clearing agency
Board composition requirements
Definition of independent director
DTC, FICC, and
NSCC (all use the
same board as
DTCC).
22 directors: 1 non-executive Chair, 1 DTCC executive
(DTCC’s Pres. & CEO), 14 participant-owner directors, 4
non-participant directors, 1 director designated by DTCC
preferred stock shareholder ICE, 1 director designated
by DTCC preferred stock shareholder FINRA. (See
https://www.dtcc.com/about/leadership.).
20 directors: 1 management director (Chair), 5 public directors, 9 participant directors, 5 exchange directors. (See
https://www.theocc.com/Company-Information/Board-ofDirectors; OCC Board Charter.b).
Independent director is not defined. Independence is listed
as one of a number of ‘‘characteristics essential for effectiveness as a Board member.’’ (See DTCC Board
Election Procedures.a)
OCC .........................
...............................................................................................
ICE Clear Credit .......
9 directors (a/k/a Board of Managers): at least 5 independent directors and 2 management directors.
5 directors elected by ICE US Holding Company L.P. (3 of
5 are independent and the remaining 2 are from ICE
management). The Risk Committee designates four
nominees (two must be independent and two may be
non-independent). (See ICC Regulation and Governance
Fact Sheet c at 2.).
...............................................................................................
ICE Clear Europe .....
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LCH SA ....................
6 to 12 directors (currently 10): at least 1⁄3 independent directors (excluding the Chair), 1 director approved by the
Bank of England, and the president of ICEEU. (See
ICEEU Organizational Structure Disclosure f at 1; ICEEU
Articles of Association g at paragraph 26.).
3 to 18 directors (currently 11 with 5 independent): ‘‘the
board shall be composed of the following categories of
Directors:’’ an independent Chair, independent directors,
executive directors, a director proposed by Euronext,
user directors, and a director representing London Stock
Exchange Group plc. (See https://www.lch.com/about-us/
structure-and-governance/board-directors-0; LCH SA
Terms of Reference of the Board h at 4–5.).
A public director ‘‘lacks material relationships to OCC,
OCC’s senior management, and other directors’’ and is
‘‘not affiliated with any national securities exchange or
national securities association or with any broker or dealer in securities.’’ (OCC Board Charter at 4, 6).
‘‘A substantial portion of directors shall be ‘independent’ of
OCC and OCC’s management as defined by applicable
regulatory requirements and the judgment of the Board.’’
(OCC Board Charter at 4–5).
An independent director must satisfy the independence requirements in the NYSE Listed Company Manual.d An
independent director also may not (among other things):
• ‘‘have any material relationships with the Company and
its subsidiaries.’’
• be affiliated with a Member Organization or, within the
last year, (a) be employed by a Member Organization,
(b) have an immediate family member who was an executive officer of a Member Organization, or (c) have received from any Member Organization more than
$100,000 per year in direct compensation. (See ICC
Independence Policy.e)
Independent director ‘‘means a person who meets the
independence criteria for a director, as defined under relevant applicable legislation and who is appointed as a
non-executive director’’ (ICEEU Articles of Association at
paragraph 3).
Independent director ‘‘means an independent director, who
satisfies applicable Regulatory Requirements regarding
independent directors and who is appointed in accordance with the Nomination Committee terms of reference’’
(LCH SA Terms of Reference of the Board at 2).
a. DTCC, Procedure for the Annual Nomination and Election of the Board of Directors (Feb. 11, 2021), (‘‘DTCC Nomination and Election Procedure’’), https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Election-Procedure.pdf.
183 15
U.S.C. 78q–1(b)(3)(C).
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51845
b. OCC, Board of Directors Charter and Corporate Governance Principles (Sept. 22, 2021), https://www.theocc.com/getmedia/99ed48a4-aa4445ac-8dee-9399b479a1c8/board_of_directors_charter.pdf.
c. ICE, ICC Regulation and Governance Fact Sheet, https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.
d. See Section 303.A.02 of the NYSE Listed Company Manual, https://nyseguide.srorules.com/listed-company-manual (‘‘No director qualifies
as ‘independent’ unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).’’ The independence requirements
also list five situations that would preclude a director from being considered independent).
e. ICE, Independence Policy of the Board of Directors of Intercontinental Exchange, Inc., https://s2.q4cdn.com/154085107/files/doc_downloads/
governance_docs/ICE-Independence-Policy.pdf.
f. ICE, ICEEU Organizational Structure, Objectives and Strategy, https://www.theice.com/publicdocs/clear_europe/Organisational_Structure_Objectives_Strategy.pdf.
g. ICE, Articles of Association of ICEEU (Jan. 29, 2021), https://www.theice.com/publicdocs/regulatory_filings/ICEEU-2021-013.pdf.
h. LCH SA, Terms of Reference of the Board (Aug. 18, 2020), https://www.lch.com/system/files/media_root/LCHSA_
Governance%20Arrangements_CFTC%20Self-Certif_18%20Aug%202020.pdf.
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(2) Nominating Committee
Six of the seven operating clearing
agency boards have a nominating
committee or a committee that serves a
similar function. Current practices
regarding the minimum level of
independent directors on the
nominating committee vary widely. For
example, DTC, NSCC, and FICC require
that the nominating committee be
composed entirely of ‘‘nonmanagement’’ directors; ICEEU requires
that a majority of the nominating
committee be independent directors (as
defined by ICEEU); LCH SA requires
that its nomination committee include
an independent chair, at least two
independent directors (as defined by
LCH SA), and one user director; and
OCC requires only that the chairman of
the nominating committee be a ‘‘public
director.’’ 184 As stated previously, the
definition of independent director
varies across clearing agencies.185
All seven boards have fitness
standards for directors and processes for
identifying and selecting directors. The
184 See DTCC Governance Committee Charter 1
(Feb. 2020), https://www.dtcc.com/-/media/Files/
Downloads/legal/policy-and-compliance/DTCCBOD-Governance-Committee-Charter.pdf (‘‘All
members of the Committee shall be members of the
Board who are not employed by DTCC (‘nonmanagement’ directors).’’); ICEEU Compliance with
PFMI 17 (Jan. 31, 2021), https://www.theice.com/
publicdocs/clear_europe/ICE_Clear_Europe_
Disclosure_Framework.pdf (‘‘[T]he Nominations
and Compensation Committee may consist of up to
five Committee Members the majority of which
must be [Independent Non-Executive Directors].’’);
LCH SA Terms of Reference of the Nomination
Committee of the Board of Directors (Sept. 9, 2020),
https://www.lch.com/system/files/media_root/
LCH%20SA%20-%20NomCom%20ToRs.pdf
(‘‘[The] membership shall comprise the Chairman,
at least two Independent Directors, one User
Director and the LSEG Director. The size of the
Committee . . . for the current time, will comprise
four to six directors.’’); OCC Governance and
Nominating Committee Charter 1 (Sept. 22, 2021),
https://www.theocc.com/getmedia/483ac739-0d4346d2-a1ca-7ed38094975c/governance_nominating_
charter.pdf (‘‘The Committee will be composed of
at least one Public Director, one Exchange Director,
and one Member Director. No Management Director
will be a member of the Committee . . . . The
Committee Chair will be designated by the Board
from among the Public Director Committee
members.’’).
185 See supra Table 3 and accompanying text.
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fitness standards and processes for
identifying and selecting directors vary
across clearing agencies. For example,
OCC’s nominating committee is
required to ‘‘identify, screen and review
individuals qualified to be elected or
appointed [to the Board] after
consultation with the Chairman,’’ 186
whereas DTCC’s governance committee,
which serves as the nominating
committee for DTC, NSCC, and FICC, is
not required to consult with the
chairman. Instead, DTCC’s governance
committee ‘‘considers possible
nominations on its own initiative and
invites suggestions from all participants
of each of DTCC’s clearing and
depository subsidiaries . . . . The
Governance Committee may also use a
professional director search consultant
to assist in identifying candidates for
the non-participant Board positions.’’ 187
(3) Risk Management Committee
The Commission already requires that
all seven operating clearing agencies
have risk management committees,
because they are covered clearing
agencies.188 All seven clearing agencies
include representatives from
participants on the risk management
committee, though only four clearing
agencies require it.189 Six of the seven
operating clearing agencies identify the
risk management committee as a board
committee.190 Three of the seven
operating clearing agencies require the
186 OCC Governance and Nominating Committee
Charter, supra note 184, at 3.
187 DTCC, Procedure for the Annual Nomination
and Election of the Board of Directors (Feb. 11,
2021), at 2, https://www.dtcc.com/-/media/Files/
Downloads/legal/policy-and-compliance/DTCCBOD-Election-Procedure.pdf.
188 Covered clearing agencies are required to have
risk management committees to comply with 17
CFR 240.17Ad–22(e)(3)(iv).
189 OCC, ICC, ICEEU, and LCH SA each require
that the risk committee include representatives
from participants. Article 28 of EMIR requires that
a clearing agency have a risk committee that
includes representatives of its clearing members.
See EMIR, supra note 105, at art. 28(1).
190 DTC, NSC, FICC, OCC, ICEEU, and LCH SA.
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risk management committee to be
reconstituted on a regular basis.191
(b) Current Practices Regarding Conflicts
of Interest Involving Directors or Senior
Managers
The boards of all seven operating
clearing agencies have policies and
procedures in place to identify and
mitigate conflicts of interests involving
directors or senior managers. All seven
boards also require directors to notify
the clearing agency if a conflict of
interest arises.
(c) Current Practices Regarding Board
Oversight of Relationships With Service
Providers for Critical Services
The Commission already requires
registered clearing agencies to manage
risks from operations,192 which can
include risks associated with
relationships with service providers.193
The Commission is aware that at least
some clearing agencies periodically
inform their boards regarding risk
management associated with service
providers for critical services.
The Commission also requires that
SCI entities—including registered
clearing agencies—conduct risk
assessments of ‘‘SCI systems’’ at least
once per year in accordance with
Regulation SCI and report the findings
to senior management and the board of
191 OCC, ICC, and LCH SA require that the
committee be reconstituted annually.
192 See 17 CFR 240.17Ad–22(d)(4), (e)(17).
193 In addition, DTC, as a state member bank of
the Federal Reserve System, has received guidance
from the Board of Governors of the Federal Reserve
System regarding managing service provider risks.
See SR Letter 13–19/CA Letter 13–21, Guidance on
Managing Outsourcing Risk (Dec. 5, 2013, rev. Feb.
26, 2021). The Board of Governors of the Federal
Reserve System, jointly with the Federal Deposit
Insurance Corporation and the Office of the
Comptroller of the Currency, proposed updated
guidance for banking organizations in 2021
regarding the management of risks arising from
third-party relationships. See Board of Governors of
the Federal Reserve System, Federal Deposit
Insurance Corporation, Office of the Comptroller of
the Currency, Proposed Interagency Guidance on
Third-Party Relationships: Risk Management, 86 FR
38182, 38193 (July 19, 2021). The proposed
guidance is not yet final.
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Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / Proposed Rules
directors.194 Insofar as service providers
for critical services are the providers of
SCI systems, each registered clearing
agency board likely already has written
policies and procedures reasonably
designed to enable the board of directors
to oversee service providers for critical
services, including confirming that the
risks related to service provider
relationships are managed in a manner
consistent with its risk management
framework, reviewing senior
management’s monitoring of
relationships with service providers for
critical services, and confirming that
senior management takes appropriate
actions to remedy significant
deterioration in performance or address
changing risks or material issues
identified through ongoing monitoring
of service providers for critical
services.195
(d) Current Practices Regarding Board
Consideration of Stakeholder
Viewpoints
Currently, each covered clearing
agency is required to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide
governance arrangements that consider
the interests of participants’ customers,
securities issuers and holders, and other
relevant stakeholders of the covered
clearing agency.196 The Commission
understands that clearing agency boards
currently use both formal and informal
channels to solicit, receive, and
consider the viewpoints of participants
and other relevant stakeholders.197
194 See
17 CFR 242.1000–1007.
Regulation SCI Adopting Release, supra
note 39, at 77276 (noting that ‘‘The Commission
agrees with the comment that an SCI entity should
be responsible for managing its relationship with
third parties operating systems on behalf of the SCI
entity through due diligence, contract terms, and
monitoring of third party performance. [. . .] The
Commission believes that it would be appropriate
for an SCI entity to evaluate the challenges
associated with oversight of third-party vendors
that provide or support its applicable systems
subject to Regulation SCI. If an SCI entity is
uncertain of its ability to manage a third-party
relationship (whether through due diligence,
contract terms, monitoring, or other methods) to
satisfy the requirements of Regulation SCI, then it
would need to reassess its decision to outsource the
applicable system to such third party.’’).
196 See 17 CFR 240.17Ad–22(e)(2)(vi).
197 See, e.g., OCC, Order Approving Proposed
Rule Change, Exchange Act Release No. 88029 (Jan.
24, 2020), 85 FR 5500, 5508 (Jan. 30, 2020) (‘‘OCC
also describes the formal and informal mechanisms
that OCC employs to solicit feedback from Clearing
Members and other interested stakeholders,
including its Financial Risk Advisory Committee,
Operations Roundtable, multiple letters and open
calls with Clearing Members and other interested
stakeholders, and routine in-person meetings with
trade groups and individual firms.’’); Cf. J.P.
Morgan et al., A Path Forward for CCP Resilience,
Recovery and Resolution (Mar. 10, 2020), https://
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195 See
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Clearing agency participants
acknowledge that their ability to offer
viewpoints has yielded positive but
mixed results.198
C. Consideration of Benefits and Costs
The discussion below sets forth the
potential economic effects stemming
from adopting the proposed rules,
including the effects on efficiency,
competition, and capital formation.
The benefits and costs discussed in
this section are relative to the economic
baseline discussed earlier, which
includes clearing agencies’ current
practices. In some instances, the
proposed rules reflect what we believe
to be current practices at many
registered clearing agencies. To the
extent that a clearing agency’s current
practices could reasonably be
considered to be in compliance with a
proposed rule, the clearing agency and
broader market would have already
absorbed the benefits of the proposed
rule and so might not experience any
direct benefits if the Commission adopts
the rule.199 In these cases, the
Commission believes that imposing
these requirements on all registered
clearing agencies would have the effect
of imposing consistent governance
standards across all registered clearing
agencies.
If adopted, many of the proposed
rules could result in a clearing agency
needing to amend its bylaws, rulebook,
or other governance documents.
Because clearing agencies are SROs, any
such amendments that constitute rule
changes would be subject to
Commission review pursuant to Rule
19b–4. Adopting the proposed rules
could also cause a clearing agency to
make different business decisions, such
as capital expenditure decisions, which
would not be subject to the same
Commission review process.
www.jpmorgan.com/content/dam/jpm/cib/
complex/content/news/a-path-forward-for-ccpresilience-recovery-and-resolution/pdf-0.pdf
(‘‘[C]learing participants have provided diverse
perspectives and detailed feedback to CCPs and
regulators through individual firm and industry
association position papers, targeted comment
letters, and participation in regulatory and industrysponsored forums on a global scale.’’).
198 See, e.g., J.P. Morgan et al., supra note 197, at
1 (explaining that ‘‘[w]hile CCPs and the regulatory
community have taken significant steps to address
the feedback received, there remain outstanding
issues that require additional attention’’ and
recommending ‘‘[e]nhancing governance practices
to obtain and address input from a broader array of
market participants on relevant risk issues’’ to
enhance CCP resilience).
199 However, a clearing agency whose current
practices could reasonably be considered to be in
compliance with the proposed rules might still be
required to expend resources if the Commission
adopted the rule, because the clearing agency
would likely need to review its policies and
procedures in response to the adoption.
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It is uncertain to what extent the costs
discussed in this section would be
borne by clearing agencies, as opposed
to participants. For clearing agencies
owned by participants, all of the costs
will ultimately be passed on to
participants because they are residual
beneficiaries of the clearing agency. For
clearing agencies not owned by
participants, the level of pass through
would depend upon a number of
factors, including the lack of
competition among clearing agencies.
1. Economic Considerations for Rule
Proposals Regarding Board Composition
As discussed in more detail above,
proposed Rules 17Ad–25(b), (e), and (f)
would (1) require that a majority of the
board (or 34 percent, if a majority of the
voting rights are directly or indirectly
held by participants) be independent
directors (as determined by the clearing
agency and precluding certain
circumstances that impact
independence), (2) establish minimum
independent director requirements for
the composition of certain board
committees, and (3) identify
circumstances that would exclude a
director from being an independent
director.200
To the extent an operating clearing
agency could determine that its current
board meets the proposed minimum
requirements for independent directors
on the board and board committees,
adopting the proposed rule will not
directly affect the effectiveness of the
clearing agency’s governance or directly
affect the management of divergent
interests between owners and
participants, among various types of
participants, and between clearing
agency stakeholders and the broader
financial markets.
To the extent operating clearing
agencies would need to change the
composition of their boards or board
committees to meet the proposed
minimum requirements, the proposed
rule could help promote more effective
governance by providing impartial
perspectives and helping mitigate the
impact of the divergent interests
between owners and participants,
among various types of participants, and
between clearing agency stakeholders
and the broader financial markets. The
Commission believes that more effective
governance will improve the
effectiveness of a clearing agency’s risk
management practices, which will
promote resilience at individual
clearing agencies and in the broader
200 See supra Part III.A.1 (discussing proposed
Rules 17Ad–25(b), (e), and (f)).
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financial markets.201 For example, more
effectively managing divergent interests
could help the clearing agency better
internalize the costs of participant
defaults and non-default losses, which
could mitigate a clearing agency’s
incentive to underinvest in risk
management services such as liquidity
arrangements and risk modelling. The
proposed rules could also help clearing
agencies ensure that an appropriate riskbased margin system is in place.
The Commission also believes that
better managing the divergent interests
could improve the ability of indirect
participants to compete with direct
participants of the clearing agency.
Given that the cleared derivatives
market is an imperfect substitute for
uncleared derivatives, some
commentators argue that large dealers
may have an incentive to protect
economic rents and therefore may urge
boards to adopt policies that restrict the
classes or volume of transactions that
may use clearinghouse platforms.202
Some academic literature on
corporate governance could be
interpreted to suggest that, under the
proposed definition of independent
director and the proposed minimum
requirements for independent directors
on the board and board committees,
divergent interests between owners and
participants, among various types of
participants, and between clearing
agency stakeholders and the broader
financial markets may continue to
adversely impact governance because
independent directors in closely held
companies will cede to the interests of
controlling shareholders unless they are
affirmatively incentivized to protect the
interests of one or more stakeholder
groups.203 One author suggests that
independent directors will be more
effective if (1) their explicit purpose is
201 See Paolo Saguato, The Unfinished Business
of Regulating Clearinghouses, 2020 Colum. Bus. L.
Rev. 449, 488 (2020), https://
journals.library.columbia.edu/index.php/CBLR/
article/view/7219/3838 (‘‘The agency costs between
clearinghouses’ shareholders and members (the
former participating in the profits of the business,
and the latter bearing its final costs) increase the
moral hazard of these institutions and threaten
clearinghouses’ systemic resilience.’’); Saguato,
supra note 160.
202 See Johnson, supra note 173, at 698–700.
203 See, e.g., Clarke, supra note 94, at 85 (‘‘The
dominant view has been that directors who are
responsible to many constituencies are in effect
responsible to none . . . ’’); Lucian A. Bebchuk &
Assaf Hamdani, Independent Directors and
Controlling Shareholders, 165 Univ. Pa. L. Rev.
1271, 1274 (2017), https://
scholarship.law.upenn.edu/penn_law_review/
vol165/iss6/1/ (taking the position that the best way
to help ensure an independent director does not
capitulate to controlling shareholders’ or
management’s interests is to help ensure the
independent director is accountable to (i.e.,
nominated by) another group of stakeholders).
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to ‘‘prevent minority expropriation at
the hands of the block-holders,’’ (2)
there is a strong regulation and
enforcement regime, and (3) the
nomination procedure and the design of
incentives guarantee the independent
director is accountable to a specific
constituency other than controlling
shareholders.204 Another author argues
that including independent directors in
the governance process provides a
roadmap, but does not guarantee results
in terms of favoritism and objectivity.205
While studies on the benefits of
independent directors offer mixed
results and while independence alone is
unlikely to be sufficient to motivate a
director to act in the public interest,206
director independence, particularly
when complemented with other
governance requirements, may help
mitigate divergent incentives.
The Commission believes that the
proposed independence rules will work
in conjunction with (1) existing
governance rules that emphasize the
clearing agency’s responsibility to
owners, participants and other
stakeholders,207 (2) Commission
enforcement of securities regulations,
and (3) the adoption of other rules in
this proposal (such as the proposed
nominating committee requirements) to
help independent directors mitigate the
effects of divergent interests between
owners and participants, among various
types of participants, and between
clearing agency stakeholders and the
broader financial markets.
In addition, the Commission believes
that standardizing the definition of
independent director could improve
204 See Maria Gutierrez & Maribel Saez,
Deconstructing Independent Directors, 13 J. Corp. L.
Stud. 63, 90 (2013).
205 See Dravis, supra note 80.
206 See Clarke, supra note 94, at 82–83 (‘‘If one
is to rely on NMDs [Non-Management Director’s] to
exercise their voting power in favor of compliance
with external standards, then there needs to be
some reason for believing that NMDs will be more
likely to do so than non-NMDs. Both kinds of
directors can be subject to sanctions for voting to
violate clear legal obligations. If the purpose is to
encourage corporations to act in accordance with
principles that do not constitute legal obligations
(for example, ‘‘maximize local employment’’), then
it is unlikely that NMDs elected by, and
accountable to, profit-maximizing shareholders will
produce this result. A director serving the ‘‘public
interest’’ should arguably be independent of
everyone—dominant shareholders, management,
and indeed all those who have an interest in the
company—and follow only the dictates of her
conscience. Assuming accountability to be a good
thing, however, it is hard to see how such a director
could properly be made accountable. In the real
world, of course, any director without security of
tenure will, in the absence of counterincentives and
assuming that the position is desirable, tend to be
accountable to whoever was responsible for
appointing her.’’).
207 See, e.g., Rule 17Ad–22(e)(2).
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51847
efficiency by reducing economic
frictions and search costs related to
monitoring by stakeholders.
The Commission is aware of three
primary costs associated with adopting
the proposed rules regarding the
composition of the board. First,
adopting the proposed rules would
cause clearing agency boards to
immediately expend resources
memorializing information that has
been gathered for consideration in
determining each director’s
independence, and then preserving the
records of the determination. The
Commission estimates that each
registered, operating clearing agency
would incur a one-time burden of
approximately $20,353 208 to comply
with proposed Rules 17Ad–25(b), (e),
and (f) if the rules were adopted.
Clearing agencies would also expend
future resources to repeat the above
process of memorializing information
and documenting a determination,
likely twice a year. The Commission
estimates that each registered, operating
clearing agency would incur an annual,
recurring burden of approximately
$40,706 209 to comply with proposed
Rules 17Ad–25(b), (e), and (f) if the
rules were adopted.
Second, clearing agencies may need to
add independent directors to the board,
either by replacing directors or
increasing the board size.210 As
mentioned earlier, approaches to
defining independence for directors
vary across clearing agencies. Thus, if
proposed Rules 17Ad–25(b), (e), and (f)
were adopted, to the extent that a
clearing agency’s definition of an
208 This figure is calculated as follows: Chief
Compliance Officer for 5 hours at $577 per hour +
Compliance Attorney for 44 hours at $397 per hour
= $2,885 + $17,468 = $20,353. No hours are
allocated to proposed Rules 17Ad–25(e) or (f). See
infra notes 236 and 237. The per-hour costs ($577
for a Chief Compliance Officer and $397 for a
Compliance Attorney) are from SIFMA’s
Management and Professional Earnings in the
Securities Industry—2013, modified by
Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits
and overhead. See SIFMA, Management and
Professional Earnings in the Securities Industry—
2013 (Oct. 7, 2013), https://www.sifma.org/
resources/research/management-and-professionalearnings-in-the-securities-industry-2013/.
209 This figure is calculated as follows: Chief
Compliance Officer for 10 hours at $577 per hour
+ Compliance Attorney for 88 hours at $397 per
hour = $5,770 + $34,936 = $40,706. No hours are
allocated to proposed Rules 17Ad–25(e) or (f). See
infra note 239. The per-hour costs ($577 for a Chief
Compliance Officer and $397 for a Compliance
Attorney) are from SIFMA’s Management and
Professional Earnings in the Securities Industry—
2013, supra note 208.
210 Alternatively, clearing agencies might achieve
compliance by reducing the board size and
eliminating a sufficient number of non-independent
directors.
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‘‘independent director’’ conflicts with
the proposed rules, including the
prohibitions in proposed Rule 17Ad–
25(f), a clearing agency currently
reporting a majority of its directors as
independent (or 34 percent, if a majority
of the voting rights are directly or
indirectly held by participants) on its
board may need to replace directors to
comply with the rule requirements.211
Adding independent directors would
require a clearing agency to expend
resources conducting a search for new
directors. The costs incurred by the
clearing agency may vary based on
whether it conducts its own search or
retains an outside consultant. The
Commission estimates that retaining a
recruitment specialist to secure an
independent director could cost
approximately $90,000 per director.212
Third, to the extent that nonindependent directors tend to have
more relevant knowledge and
experience than independent directors
do, requiring that a majority of directors
(or 34 percent, if a majority of the voting
rights are directly or indirectly held by
participants) be independent could
reduce the depth or breadth of relevant
expertise that can be brought to clearing
agency boards. A reduced level of
combined experience on a clearing
agency board might impair clearing
agency efficiency in the near term.
However, the Commission believes that
any such effect would be short-lived, as
new independent directors gain more
experience and prospective director
nominees to the board that may not
meet existing experience criteria would
qualify under the proposed new
independence requirements and fitness
standards.
The Commission believes that the
expected costs to implement proposed
Rules 17Ad–25(b), (e), and (f) are
sufficiently small that they would not
have a material effect on (1) competition
among the existing clearing agencies or
on a new entrant’s ability to enter the
market; (2) capital formation, including
clearing agencies’ ability to raise capital;
and (3) the efficiency of clearing
agencies or their participants. For
211 On the other hand, a clearing agency that does
not require a minimum percentage of independent
directors could determine that its current slate of
directors already satisfies the independence
requirements in the proposed rules.
212 The Commission is basing this estimate on a
report by The Good Search noting that the retainer
fee for outside directors is on average $90,000. See
The Good Search, Retained Search Fees, https://
tgsus.com/executive-search-blog/retained-searchfees/. The Commission believes that this amount
could serve as a proxy for the amount of any fee
to be charged by a recruitment firm that would
conduct a national search for an independent
director.
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example, the Commission estimates that
a clearing agency would spend
approximately $20,353 plus whatever
director search costs were necessary in
the first year if the rules were adopted
(which the Commission estimates to be
up to $90,000 per director), and $40,706
in each year thereafter.
2. Economic Considerations for Rule
Proposals Regarding the Nominating
Committee
As discussed in more detail above,
proposed Rule 17Ad–25(c) would
establish minimum requirements for
nominating committees, including a
minimum composition requirement,
fitness standards for serving on the
board, and a documented process for
evaluating board nominees, including
those who would meet the
Commission’s proposed independence
criteria.213
Given that six of the seven operating
clearing agencies already have
nominating committees (or a committee
that serves a similar function), the
primary benefit of adopting proposed
Rule 17Ad–25(c) would be to increase
the number of independent directors on
existing nominating committees. Insofar
as a lack of independent directors on a
clearing agency’s nominating committee
has prevented the clearing agency from
having a fairer representation of their
shareholders and participants in the
selection of their directors and the
administration of their affairs, proposed
Rule 17Ad–25(c) would help the
clearing agency better meet Section
17A’s fair representation requirements.
Adopting proposed Rule 17Ad–25(c)
would cause clearing agency boards to
immediately expend resources
reviewing, revising, and possibly
creating governance documents and
related policies and procedures. The
Commission estimates that each
registered, operating clearing agency
would incur a one-time burden of
approximately $35,060 214 to comply
with proposed Rule 17Ad–25(c) if the
rule was adopted. Clearing agencies
would also need to expend future
resources for monitoring, compliance,
and documentation activities related to
the new or revised policies and
procedures. The Commission estimates
213 See supra Part III.B (discussing proposed Rule
17Ad–25(c)); infra Part VIII (providing the proposed
rule text).
214 This figure is calculated as follows: Assistant
General Counsel for 30 hours at $507 per hour +
Compliance Attorney for 50 hours at $397 per hour
= $15,210 + $19,850 = $35,060. See infra note 242.
The per-hour costs ($507 for an Assistant General
Counsel, and $397 for a Compliance Attorney) are
from SIFMA’s Management and Professional
Earnings in the Securities Industry—2013, supra
note 208.
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that each registered, operating clearing
agency would incur an annual,
recurring burden of approximately
$11,910 215 to comply with proposed
Rule 17Ad–25(c) if the rule were
adopted.
The Commission believes that the
expected costs to implement proposed
Rule 17Ad–25(c) are sufficiently small
that they would not have a material
effect on (1) competition among the
existing clearing agencies or on a new
entrant’s ability to enter the market; (2)
capital formation, including clearing
agencies’ ability to raise capital; and (3)
the efficiency of clearing agencies or
their participants.
3. Economic Considerations for Rule
Proposals Regarding the Risk
Management Committee
As discussed in more detail above,
proposed Rule 17Ad–25(d) would
require each registered clearing agency
to establish a risk management
committee (or committees) and establish
minimum requirements for the
composition, reconstitution, and
function of such risk management
committees. Based on the Commission
staff’s review of relevant governance
documents, the Commission
understands that many registered
clearing agencies currently have written
governance arrangements that largely
conform to the requirements for risk
management committees in proposed
Rule 17Ad–25(d). The Commission
believes that each clearing agency’s
governance documents and related
policies and procedures would need
minimal modifications if proposed Rule
17Ad–25(d) were adopted. To the extent
that a clearing agency’s existing
governance documents and related
policies and procedures could
reasonably be considered to be in
compliance with the proposed rules, the
benefits of the proposed rule would
already be incorporated by market
participants.
Adopting proposed Rule 17Ad–25(d)
would cause clearing agency boards to
immediately expend resources
reviewing, revising, and possibly
creating governance documents and
related policies and procedures. The
Commission estimates that each
registered, operating clearing agency
would incur a one-time burden of
approximately $3,506 216 to comply
215 This figure is calculated as follows:
Compliance Attorney for 30 hours at $397 per hour
= $11,910. See infra note 244. The $577 per hour
cost for a Chief Compliance Officer is from SIFMA’s
Management and Professional Earnings in the
Securities Industry—2013, supra note 208.
216 This figure is calculated as follows: Assistant
General Counsel for 3 hours at $507 per hour +
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with proposed Rule 17Ad–25(d) if the
rule was adopted. Clearing agencies
would also need to expend future
resources for monitoring, compliance,
and documentation activities related to
the new or revised governance
documents and related policies and
procedures. The Commission estimates
that each registered, operating clearing
agency would incur an annual,
recurring burden of approximately
$1,191 217 to comply with proposed
Rule 17Ad–25(d) if the rule was
adopted.
The Commission believes that the
expected costs to implement proposed
Rule 17Ad–25(d) are sufficiently small
that they would not have a material
effect on (1) competition among the
existing clearing agencies or on a new
entrant’s ability to enter the market; (2)
capital formation, including clearing
agencies’ ability to raise capital; and (3)
the efficiency of clearing agencies or
their participants.
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4. Economic Considerations for Rule
Proposals Regarding Conflicts of Interest
Involving Directors or Senior Managers
As discussed in more detail above,
proposed Rules 17Ad–25(g) and (h)
would (1) require policies and
procedures that identify and document
existing or potential conflicts of interest,
mitigate or eliminate the conflicts of
interest and document the actions
taken,218 and (2) require policies and
procedures that obligate directors to
report potential conflicts.219
The Commission believes that each
clearing agency’s existing policies and
procedures for identifying, reporting,
and mitigating conflicts of interest by
directors or senior managers would
need minimal modifications if the
proposed rules were adopted. To the
extent a clearing agency’s existing
policies and procedures could
reasonably be considered to be in
compliance with the proposed rules, the
benefits discussed below would already
be incorporated by market participants.
The Commission believes that
adopting the proposed rules regarding
Compliance Attorney for 5 hours at $397 per hour
= $1,521 + $1,985 = $3,506. See infra note 248. The
per-hour costs ($507 for an Assistant General
Counsel, and $397 for a Compliance Attorney) are
from SIFMA’s Management and Professional
Earnings in the Securities Industry—2013, supra
note 208.
217 This figure is calculated as follows:
Compliance Attorney for 3 hours at $397 per hour
= $1,191. See infra note 250. The per-hour cost is
from SIFMA’s Management and Professional
Earnings in the Securities Industry—2013, supra
note 208.
218 See supra Part III.D.1 (discussing proposed
Rule 17Ad–25(g)).
219 See supra Part III.D.1 (discussing proposed
Rule 17Ad–25(h)).
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conflicts of interest would help clearing
agencies continue to identify and
mitigate conflicts of interest by directors
and senior managers as circumstances
change. For example, by codifying
current best practices, the proposed
rules would reduce the future ability of
clearing agencies to change a clearing
agency’s conflict of interest disclosure
requirements to the detriment of
participants and the economic
efficiency of the clearing market.
In addition, to the extent that
adopting the proposed rule would
require clearing agencies to strengthen
policies and procedures that deal with
identifying, reporting, mitigating or
eliminating, and documenting conflicts
of interest, strengthening those policies
and procedures could reduce the
monitoring costs borne by clearing
agency stakeholders.
Finally, to the extent a previously
undisclosed conflict of interest resulted
in less favorable outcomes for the
clearing agency—such as higher
expenses with service providers or the
loss of business from smaller
participants—adopting the proposed
rule would improve the clearing
agency’s profitability (operating
efficiency) and the economic efficiency
of the clearing market.
Adopting the proposed rules
regarding conflicts of interest would
cause clearing agency boards to
immediately expend resources
reviewing, revising, and possibly
creating governance documents and
related policies and procedures. The
Commission estimates that each
registered, operating clearing agency
would incur a one-time burden of
approximately $6,945 220 to comply
with proposed Rules 17Ad–25(g) and (h)
if the rules were adopted. Clearing
agencies would also need to expend
future resources for monitoring,
compliance, and documentation
activities related to the new or revised
policies and procedures. The
Commission estimates that each
registered, operating clearing agency
would incur an annual, recurring
220 This figure is calculated as follows: Assistant
General Counsel for 9 hours at $507 per hour +
Compliance Attorney for 6 hours at $397 per hour
= $4,563 + $2,382 = $6,945. The Assistant General
Counsel’s 9 hours are allocated among the proposed
rules: 8 hours for proposed Rule 17Ad–25(g) and 1
hour for proposed Rule 17Ad–25(h). The
Compliance Attorney’s 6 hours are allocated among
the proposed rules: 5 hours for proposed Rule
17Ad–25(g) and 1 hour for proposed Rule 17Ad–
25(h). See infra notes 251, 253, and 255. The perhour costs ($507 for an Assistant General Counsel
and $397 for a Compliance Attorney) are from
SIFMA’s Management and Professional Earnings in
the Securities Industry—2013, supra note 208.
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51849
burden of approximately $2,382 221 to
comply with proposed Rules 17Ad–
25(g) and (h) if the rules were adopted.
The Commission believes that the
expected costs to implement proposed
Rules 17Ad–25(g) and (h) are
sufficiently small that they would not
have a material effect on (1) competition
among the existing clearing agencies or
on a new entrant’s ability to enter the
market; (2) capital formation, including
clearing agencies’ ability to raise capital;
and (3) the efficiency of clearing
agencies or their participants.
5. Economic Considerations for Rule
Proposals Regarding Oversight of
Service Providers for Critical Services
As discussed in more detail above,
proposed Rule 17Ad–25(i) would
require policies and procedures
enabling the board to oversee
relationships with service providers for
critical services.
The Commission believes that, to the
extent a clearing agency’s risk
management framework does not
already consider how reliance on an
affiliated or third-party service provider
might affect clearing agency’s risks,
adopting the proposed rule would
enhance the effectiveness of a clearing
agency’s risk management framework. A
more effective risk management
framework would reduce the probability
of clearing agency failure or financial
distress. The reduced probability of
these outcomes directly and positively
affects the stability of the broader
financial system.
Adopting the proposed rules
regarding the board’s ultimate
responsibility for the oversight of
relationships with service providers for
critical services would cause clearing
agency boards to immediately expend
resources reviewing, revising, and
possibly creating governance documents
and related policies and procedures. For
example, boards might need to create or
revise policies for overseeing
relationships with service providers for
critical services. The Commission
estimates that each registered, operating
clearing agency would incur a one-time
burden of approximately $35,060 222 to
221 This figure is calculated as follows:
Compliance Attorney for 6 hours at $397 per hour
= $2,382. The Compliance Attorney’s 6 hours are
allocated among the proposed rules: 5 hours for
proposed Rule 17Ad–25(g) and 1 hour for proposed
Rule 17Ad–25(h). See infra notes 252, 254, and 256.
The per-hour cost is from SIFMA’s Management
and Professional Earnings in the Securities
Industry—2013, supra note 208.
222 This figure is calculated as follows: Assistant
General Counsel for 30 hours at $507 per hour +
Compliance Attorney for 50 hours at $397 per hour
= $15,210 + $19,850 = $35,060. See infra note 261.
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comply with proposed Rule 17Ad–25(i)
if the rule was adopted. Clearing agency
boards would also need to expend
future resources for monitoring,
compliance, and documentation
activities related to the new or revised
policies and procedures. The
Commission estimates that each
registered, operating clearing agency
would incur an annual, recurring
burden of approximately $11,910 223 to
comply with proposed Rule 17Ad–25(i)
if the rule was adopted.
The Commission believes that the
expected costs to implement proposed
Rule 17Ad–25(i) are sufficiently small
that they would not have a material
effect on (1) competition among the
existing clearing agencies or on a new
entrant’s ability to enter the market; (2)
capital formation, including clearing
agencies’ ability to raise capital; and (3)
the efficiency of clearing agencies or
their participants.
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6. Economic Considerations for Rule
Proposals Regarding Formalized
Solicitation, Consideration, and
Documentation of Stakeholders’
Viewpoints
As discussed in more detail above,
proposed Rule 17Ad–25(j) would
require policies and procedures to
solicit, consider, and document the
registered clearing agency’s
consideration of the views of its
participants and other relevant
stakeholders regarding material
developments in its governance and
operations.
The Commission believes that, to the
extent clearing agency boards’
inadequate solicitation of stakeholder
viewpoints has caused some stakeholder
views not to be considered, adopting the
proposed rules regarding the
solicitation, consideration, and
documentation of stakeholders’ views
would improve boards’ consideration of
different stakeholder views. The
Commission believes the improved
consideration of different views would
help persuade stakeholders with
divergent interests to assert their needs
more vigorously, which would
encourage debate amongst actors with
different goals. More informed debates
would, in turn, help to foster consensus
agreements with mandates and other
The per-hour costs ($507 for an Assistant General
Counsel and $397 for a Compliance Attorney) are
from SIFMA’s Management and Professional
Earnings in the Securities Industry—2013, supra
note 208.
223 This figure is calculated as follows:
Compliance Attorney for 30 hour at $397 per hour
= $11,910. See infra note 263. The per-hour cost is
from SIFMA’s Management and Professional
Earnings in the Securities Industry—2013, supra
note 208.
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decisions that are supported by a
broader spectrum of stakeholders.
Consequently, clearing agencies would
identify and develop rule proposals that
(to the extent the Commission considers
them) would be more likely to meet the
public interest requirements under
Section 17A of the Exchange Act.224
Adopting the proposed rules
regarding obligations of the board would
cause clearing agency boards to
immediately expend resources
reviewing, revising, and possibly
creating governance documents and
related policies and procedures. For
example, boards might need to create
policies for soliciting, considering, and
documenting the consideration of
stakeholders’ views. The Commission
estimates that each registered, operating
clearing agency would incur a one-time
burden of approximately $6,438 225 to
comply with proposed Rule 17Ad–25(j)
if the rule was adopted. Clearing agency
boards would also need to expend
future resources for monitoring,
compliance, and documentation
activities related to the new or revised
policies and procedures. The
Commission estimates that each
registered, operating clearing agency
would incur an annual, recurring
burden of approximately $1,588 226 to
comply with proposed Rule 17Ad–25(j)
if the rule was adopted.
The Commission believes that the
expected costs to implement proposed
Rule 17Ad–25(j) are sufficiently small
that they would not have a material
effect on (1) competition among the
existing clearing agencies or on a new
entrant’s ability to enter the market; (2)
capital formation, including clearing
agencies’ ability to raise capital; and (3)
the efficiency of clearing agencies or
their participants.
D. Reasonable Alternatives to the
Proposed Rule
1. More Flexibility in Governance,
Operations, and Risk Management
The Commission believes that when
determining the content of its policies
and procedures, each clearing agency
224 See
15 U.S.C. 78q–1(b)(3)(F).
225 This figure is calculated as follows: Assistant
General Counsel for 8 hours at $507 per hour +
Compliance Attorney for 6 hours at $397 per hour
= $4,056 + $2,382 = $6,438. See infra note 267. The
per-hour costs ($507 for an Assistant General
Counsel and $397 for a Compliance Attorney) are
from SIFMA’s Management and Professional
Earnings in the Securities Industry—2013, supra
note 208.
226 This figure is calculated as follows:
Compliance Attorney for 4 hours at $397 per hour
= $1,588. See infra note 269. The per-hour cost is
from SIFMA’s Management and Professional
Earnings in the Securities Industry—2013, supra
note 208.
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must have the ability to consider the
effects of its unique characteristics and
circumstances, including ownership
and governance structures, on direct
and indirect participants, markets
served, and the risks inherent in
products cleared.227
It has been the Commission’s
experience that particular securities
markets (e.g., equities, fixed income,
and options) have unique conventions,
characteristics, and structures that are
best addressed on a market-by-market
basis. The Commission recognizes that a
less prescriptive approach can help
promote efficient and effective practices
and encourage regulated entities to
consider how to manage their regulatory
obligations and risk management
practices in a way that complies with
Commission rules, while considering
the particular characteristics of their
business.228
Even where current practices at
clearing agencies do not significantly
differ from the proposed rules, clearing
agencies could still potentially face
costs associated with the limitations on
discretion that would result from the
rules, including costs related to limiting
a clearing agency’s flexibility to respond
to changing economic environments.
For example, to the extent that clearing
agencies having boards with a majority
of independent directors value the
ability to sometimes have less than a
majority of independent directors on the
board of directors, they may incur
additional costs because, if proposed
rules were adopted, they would lose the
option to do so.
Although there may be costs to
limiting the degree of discretion clearing
agencies have over governance,
operations, and risk management, the
Commission believes there are also
potential benefits. For example, clearing
agencies may not fully internalize the
social costs of differing incentives
between owners and participants,
among various types of participants, and
between clearing agency stakeholders
and the broader financial markets and
thus, without more granular regulations,
227 See CCA Standards Adopting Release, supra
note 13, at 70806 (‘‘The Commission believes it is
appropriate to provide covered clearing agencies
with flexibility, subject to their obligations and
responsibilities as SROs under the Exchange Act, to
structure their default management processes to
take into account the particulars of their financial
resources, ownership structures, and risk
management frameworks.’’).
228 See CCA Standards Adopting Release, supra
note 13, at 70801; see also Randall S. Kroszner,
Central Counterparty Clearing: History, Innovation,
and Regulation, 30 Econ. Persp. 37, 39 (2006) (‘‘[37,
39 (2006) (‘‘[M]ore intense government regulation of
CCPs may prove counterproductive if it creates
moral hazard or impedes the ability of CCPs to
develop new approaches to risk management.’’).
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may not appropriately address the needs
and incentives of the direct or indirect
participants or the broader financial
market.
2. Ownership Limits
In 2010, the Commission proposed
Regulation MC, which was ‘‘designed to
mitigate potential conflicts of interest
. . . through conditions and structures
related to ownership, voting, and
governance.’’ 229 Regulation MC
proposed mitigating divergent
incentives, especially between larger
and smaller owners, by imposing
maximum ownership limits.
Specifically, Regulation MC proposed
that security-based swap clearing
agencies be required to choose one of
two governance alternatives. The Voting
Interest Alternative in part prevented
any single participant from having more
than 20 percent ownership or voting
interest in a clearing agency, and
limited total participant ownership or
voting rights to no more than 40
percent. The Voting Interest Alternative
also required that at least 35 percent of
the board be independent directors.
The Governance Interest Alternative
in part limited any participant to no
more than 5 percent ownership or
voting rights in the clearing agency, and
required that at least 51 percent of the
board be independent directors.
The Commission has not proposed
ownership limits in the current proposal
because (1) rules during the intervening
time have significantly altered how
clearing agencies must treat smaller
participants 230 and (2) bright-line
ownership limits are easy to
manipulate, for example by obfuscating
beneficial ownership or by getting
extremely close to the limit.
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3. Increase Shareholders’ At-Risk
Capital (‘‘Skin in the Game’’)
The proposed rules are intended, in
part, to better manage divergent
incentives of clearing agency owners
and non-owner participants. One
suggested cause of the incentive
misalignment is owners’ lack of at-risk
capital (‘‘skin in the game’’).231 Under
the existing regulatory structure, for229 See Regulation MC Proposing Release, supra
note 1, at 65882.
230 See supra Part II.B. (discussing, in part, how
the Commission has adopted rules to promote
access to registered clearing agencies, including
access for smaller participants).
231 See, e.g., Saguato, supra note 201, at 488
(‘‘[There is] significant imbalance of the economic
exposure of clearing members vis-a`-vis
clearinghouses and their holding groups. This
imbalance . . . results in the misaligned incentives
of members and share-holders, which creates
agency costs between the firms’ primary
stakeholders that threaten clearinghouses’ systemic
resilience.’’).
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profit clearing agencies can bifurcate
risk from reward, sending the reward
(e.g., profits) to owners and requiring
participants to hold disproportionate
risks (e.g., responsibility for non-default
losses or participants’ defaulted
positions). Thus, it is reasonable to
consider using skin in the game to
correct the incentive alignment.232
The Commission is not currently
proposing skin-in-the-game
requirements. Instead, the Commission
is proposing using governance
requirements to help manage the
divergent incentives of clearing agency
shareholders and participants. The
Commission believes that the improved
management of misaligned incentives
will help facilitate clearing agencies’
ability to adopt policies, such as skinin-the-game requirements, that can
further ameliorate the divergent
incentives of shareholders and
participants.
4. Increase Public Disclosure
One of the purposes of the proposed
rules is to increase transparency into
board governance. Increased
transparency could also be achieved by
requiring clearing agencies to enhance
their governance disclosures. For
example, the Commission could require
clearing agencies to publicly disclose,
for each director, the existence of any
relationship or interest that reasonably
could affect the independent judgment
or decision-making of the director. This
requirement could include each
director’s affiliation with clearing
agency participants. The Commission
could require these disclosures to be
submitted in a structured (i.e., machinereadable) data language, which could
augment any transparency benefits
resulting from the disclosures by
increasing the efficiency with which
they are processed.
E. Request for Comment
The Commission requests comment
on all aspects of this initial economic
analysis, including the potential
benefits and costs, all effects on
efficiency, competition (including any
effects on barriers to entry), and capital
formation, and reasonable alternatives
to the proposed rules. We request and
encourage any interested person to
submit comments regarding the
proposed rules, our analysis of the
232 See OCC, Order Approving Proposed Rule
Change to Establish OCC’s Persistent Minimum
Skin-In-The-Game, Exchange Act Release No. 92038
(May 27, 2021), 86 FR 29861, 29863 (June 3, 2021)
(‘‘The Commission continues to regard skin-in-thegame as a potential tool to align the various
incentives of a covered clearing agency’s
stakeholders, including management and clearing
members.’’).
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51851
potential effects of the proposed rules,
and other matters that may have an
effect on the proposed rules. We request
that commenters identify sources of data
and information as well as provide data
and information to assist us in analyzing
the economic consequences of the
proposed rules and each reasonable
alternative. We also are interested in
comments on the qualitative benefits
and costs we have identified and any
benefits and costs we may have
overlooked, including those associated
with each reasonable alternative. In
addition, we are interested in comments
on any other reasonable alternative,
including any alternative that would
distinguish registered clearing agencies
based on certain factors, such as
organizational structure or products
cleared.
V. Paperwork Reduction Act
Certain provisions of the proposed
rules contain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995 (‘‘PRA’’).233 We are
submitting the proposed collections of
information to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with the PRA.234
The title for the collection of
information is: ‘‘Clearing Agency
Standards for Operation and
Governance’’ (OMB Control No. 3235–
0695).235 An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid OMB
control number.
As discussed further below, proposed
Rules 17Ad–25(b) through (d) and ((g)
through (j) each contain collections of
information. The collections in
proposed Rules 17Ad–25(b) through (d)
and (g) through (j) are mandatory.
Respondents under these rules are
registered clearing agencies, of which
there are currently nine. The
Commission estimates for purposes of
the PRA that one additional entity may
seek to register as a clearing agency in
the next three years, and so for purposes
of this proposal the Commission has
assumed ten respondents.
A. Rule 17Ad–25(b)
The elements of proposed Rule 17Ad–
25(b) are discussed in Part III.A.1. The
purpose of the rule is to require either
a majority or 34 percent of independent
directors, depending on the
circumstances set forth in the rule.
Proposed Rule 17Ad–25(b)(2) would
233 44
234 44
U.S.C. 3502.
U.S.C. 3507.
235 Id.
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impose a collection of information
requirement.
The Commission estimates that
proposed Rule 17Ad–25(b)(2) would
require respondent clearing agencies to
incur a one-time burden of 44 hours 236
to memorialize information that has
been gathered for the person(s) making
the determination to consider prior to
making it, as well as 5 hours 237 to
document and preserve the records of
the determination. The Commission
estimates that the initial activities
required by Rule 17Ad–25(b)(2) would
impose an aggregate initial burden on
respondent clearing agencies of 490
hours.238 Due to the fact that board
composition changes on occasion after
elections or due to unexpected events
such as restructuring, resignations, or
deaths, the Commission estimates that
respondent clearing agencies would
incur an ongoing annual burden of 98
hours to repeat the above process of
memorializing information and
documenting a determination twice a
year.239 The Commission estimates that
the ongoing activities required by Rule
17Ad–25(b)(2) would impose an
aggregate ongoing burden on respondent
clearing agencies of 980 hours.240
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B. Rule 17Ad–25(c)
As discussed in Part III.B above, the
Commission is proposing certain
composition and process requirements
for nominating committees of registered
clearing agencies. As proposed, Rule
17Ad–25(c)(1) through (4) would add
governance requirements regarding the
nominating committee of the Board that
do not appear in the existing
requirements for governance
arrangements in Rules 17Ad–22(d)(8)
and 17Ad–22(e)(2).241 Based on the
Commission staff’s review of relevant
governance documents, the Commission
understands that many registered
clearing agencies currently have written
governance arrangements broadly
similar to the requirements for
nominating committees in proposed
Rule 17Ad–25(c)(1) through (4).
Therefore, the Commission would
expect that the PRA burden for a
respondent clearing agency includes the
236 This figure is calculated as follows: ((Chief
Compliance Officer for 4 hours) + (Compliance
Attorney for 40 hours)) = 44 hours.
237 This figure is calculated as follows: ((Chief
Compliance Officer for 1 hours) + (Compliance
Attorney for 4 hours)) = 5 hours.
238 This figure is calculated as follows: 49 hours
× 10 respondent clearing agencies = 490 hours.
239 This figure is calculated as follows: ((Chief
Compliance Officer for 10 hours) + (Compliance
Attorney for 88 hours)) = 98 hours.
240 This figure is calculated as follows: 98 hours
× 10 respondent clearing agencies = 980 hours.
241 17 CFR 240.17Ad–22(d)(8), (e)(2).
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incremental burdens of reviewing and
revising existing governance documents
and related policies and procedures,
and creating new governance
documents and related policies and
procedures, as necessary, pursuant to
the proposed rule. Accordingly, the
Commission estimates that respondent
clearing agencies would incur an
aggregate one-time burden of
approximately 800 hours to review and
revise existing governance documents
and related policies and procedures and
to create new governance documents
and related policies and procedures, as
necessary.242
Proposed Rule 17Ad–25(c)(1) through
(4) would also impose ongoing burdens
on a respondent clearing agency. The
proposed rule would require ongoing
monitoring and compliance activities
with respect to governance documents
and related policies and procedures
created in response to the proposed
rule. The proposed rule would also
require ongoing documentation
activities with respect to the
implementation of a written process for
a nominating committee to evaluate
board nominees, including those who
would meet the definition of an
independent director, pursuant to the
proposed rule. Based on the
Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to Rule 17Ad–
22,243 the Commission estimates that
the ongoing activities required by
proposed Rule 17Ad–25(c)(1) through
(4) would impose an aggregate annual
burden on respondent clearing agencies
of 300 hours.244
C. Rule 17Ad–25(d)
Proposed Rule 17Ad–25(d)(1) would
require a registered clearing agency to
establish a risk management committee
(or committees) to assist the board of
directors in overseeing the risk
management of the registered clearing
agency. Under proposed Rule 17Ad–
25(d)(1), each risk management
committee would be required to
reconstitute its membership on a regular
basis and at all times include
representatives from shareholders (or
members) and participants of the
registered clearing agency. Proposed
Rule 17Ad–25(d)(2) would require each
242 This figure is calculated as follows: ((Assistant
General Counsel for 30 hours) + (Compliance
Attorney for 50 hours)) = 80 hours × 10 respondent
clearing agencies = 800 hours.
243 See Clearing Agency Standards Adopting
Release, supra note 8, at 66260–63; CCA Standards
Adopting Release, supra note 13, at 70891–99.
244 This figure is calculated as follows:
(Compliance Attorney for 30 hours) × 10 respondent
clearing agencies = 300 hours.
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Fmt 4701
Sfmt 4702
risk management committee, in the
performance of its duties, to be able to
provide a risk-based, independent, and
informed opinion on all matters
presented to it for consideration in a
manner that supports the safety and
efficiency of the registered clearing
agency.245
The purpose of this collection of
information is to promote sound risk
management and governance
arrangements at registered clearing
agencies, to help ensure diversity of
perspective across shareholders (or
members) and participants in the
oversight of registered clearing agencies’
risk management practices, and to
mitigate potential or existing conflicts of
interest that could undermine the
recommendations of risk management
committees.
Proposed Rule 17Ad–25(d)(1) through
(2) would add governance requirements
regarding the risk management
committee (or committees) of a
registered clearing agency’s board of
directors that do not appear in the
existing requirements for governance
arrangements in Rules 17Ad–22(d)(8)
and 17Ad–22(e)(2).246 Based on the
Commission staff’s review of relevant
governance documents, the Commission
understands that many registered
clearing agencies currently have written
governance arrangements that largely
conform to the requirements for risk
management committees in proposed
Rule 17Ad–25(d)(1) through (2).
Therefore, the Commission would
expect that the PRA burden for a
respondent clearing agency includes the
incremental burdens of reviewing and
revising its existing governance
documents and related policies and
procedures and creating new
governance documents and related
policies and procedures, as necessary,
pursuant to the proposed rule.247
Accordingly, the Commission estimates
that respondent clearing agencies would
incur an aggregate one-time burden of
approximately 80 hours to review and
revise existing governance documents
and related policies and procedures and
to create new governance documents
245 See supra Part III.C.1 (discussing proposed
Rule 17Ad–25(d)); infra Part VIII (providing the
proposed rule text).
246 See 17 CFR 240.17Ad–22(d)(8), (e)(2).
247 Because the written governance arrangements
at many registered clearing agencies already largely
conform to the proposed requirements for risk
management committees, the Commission believes
that registered clearing agencies may need to make
only limited changes to update their governing
documents and related policies and procedures to
help ensure compliance with proposed Rule 17Ad–
25(d)(1) through (2).
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and related policies and procedures, as
necessary.248
Proposed Rule 17Ad–25(d)(1) through
(2) would also impose ongoing burdens
on a respondent clearing agency. The
proposed rule would require ongoing
monitoring and compliance activities
with respect to the governance
documents and related policies and
procedures created in response to the
proposed rule. The proposed rule would
also require ongoing documentation
activities with respect to the
establishment of a risk management
committee (or committees) pursuant to
the proposed rule. Based on the
Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to Rule 17Ad–
22,249 the Commission estimates that
the ongoing activities required by
proposed Rule 17Ad–25(d)(1) through
(2) would impose an aggregate annual
burden on respondent clearing agencies
of 30 hours.250
D. Rule 17Ad–25(g)
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Proposed Rule 17Ad–25(g)(1) would
contain similar provisions to Rules
17Ad–22(d)(8) and 17Ad–22(e)(2) in
that they reference clear and transparent
governance arrangements, but also adds
additional requirements that do not
appear in those rules. The Commission
therefore would expect that a
respondent clearing agency may have
written rules, policies, and procedures
similar to the requirements in the rule,
and the PRA burden includes the
incremental burdens of reviewing and
revising current policies and procedures
and creating new policies and
procedures, as necessary, pursuant to
the rule. Accordingly, based on the
similar provisions and the
corresponding burden estimates
previously made by the Commission for
Rules 17Ad–22(d)(8) and 17Ad–22(e)(2),
the Commission estimates that
respondent clearing agencies would
incur an aggregate one-time burden of
approximately 80 hours to review and
revise existing policies and procedures
and to create new policies and
procedures as necessary to help ensure
compliance with proposed Rule 17Ad–
25(g)(1).251
248 This figure is calculated as follows: ((Assistant
General Counsel for 3 hours) + (Compliance
Attorney for 5 hours)) = 8 hours × 10 respondent
clearing agencies = 80 hours.
249 See Clearing Agency Standards Adopting
Release, supra note 8, at 66260–63; CCA Standards
Adopting Release, supra note 13, at 70891–99.
250 This figure is calculated as follows:
(Compliance Attorney for 3 hours) × 10 respondent
clearing agencies = 30 hours.
251 This figure is calculated as follows: ((Assistant
General Counsel for 5 hours) + (Compliance
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Rule 17Ad–25(g)(1) also imposes
ongoing burdens on a respondent
clearing agency. The rule requires
ongoing monitoring and compliance
activities with respect to its policies and
procedures under the rule. Based on the
Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to Rules 17Ad–
22(d)(8) and 17Ad–22(e)(2) and because
the modifications to Rule 17Ad–25(g)(1)
will require updating current policies
and procedures or establishing new
policies and procedures to help ensure
compliance, the Commission estimates
that the ongoing activities required by
Rule 17Ad–25(g)(1) would impose an
aggregate annual burden on respondent
clearing agencies of 30 hours.252
Proposed Rule 17Ad–25(g)(2) would
contain similar provisions to Rules
17Ad–22(d)(8) and 17Ad–22(e)(2) in
that they reference clear and transparent
governance arrangements, but also adds
additional requirements that do not
appear in those rules. The Commission
therefore would expect that a
respondent clearing agency may have
written rules, policies, and procedures
similar to the requirements in the rule
and that the PRA burden includes the
incremental burdens of reviewing and
revising current policies and procedures
and creating new policies and
procedures, as necessary, pursuant to
the rule. The Commission recognizes
that while registered clearing agencies
may have existing policies and
procedures to comply with proposed
Rule 17Ad–25(g)(1), they may not have
current policies and procedures
designed specifically to mitigate and
document the how the conflict of
interest was mitigated, as required by
Rule 17Ad–25(g)(2). Accordingly, based
on the similar provisions and the
corresponding burden estimates
previously made by the Commission for
Rules 17Ad–22(d)(8) and 17Ad–22(e)(2),
the Commission estimates that
respondent clearing agencies would
incur an aggregate one-time burden of
approximately 50 hours to review and
revise existing policies and procedures
and to create new policies and
procedures as necessary to help ensure
compliance with proposed Rule 17Ad–
25(g)(2).253
Rule 17Ad–25(g)(2) also imposes
ongoing burdens on a respondent
Attorney for 3 hours)) = 8 hours × 10 respondent
clearing agencies = 80 hours.
252 This figure is calculated as follows:
(Compliance Attorney for 3 hours) × 10 respondent
clearing agencies = 30 hours.
253 This figure is calculated as follows: ((Assistant
General Counsel for 3 hours) + (Compliance
Attorney for 2 hours)) = 5 hours × 10 respondent
clearing agencies = 50 hours.
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51853
clearing agency. The rule requires
ongoing monitoring and compliance
activities with respect to its policies and
procedures under the rule. Based on the
Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to Rules 17Ad–
22(d)(8) and 17Ad–22(e)(2) and because
the modifications to Rule 17Ad–25(g)(2)
will require updating current policies
and procedures or establishing new
policies and procedures to help ensure
compliance, the Commission estimates
that the ongoing activities required by
Rule 17Ad–25(g)(2) would impose an
aggregate annual burden on respondent
clearing agencies of 20 hours.254
E. Rule 17Ad–25(h)
Proposed Rule 17Ad–25(h) would
contain similar provisions to Rules
17Ad–22(d)(8) and 17Ad–22(e)(2) in
that they reference clear and transparent
governance arrangements, but also adds
additional requirements that do not
appear in those rules. The Commission
therefore would expect that a
respondent clearing agency may have
written rules, policies, and procedures
similar to the requirements in the rule
and that the PRA burden includes the
incremental burdens of reviewing and
revising current policies and procedures
and creating new policies and
procedures, as necessary, pursuant to
the rule. Accordingly, based on the
similar provisions and the
corresponding burden estimates
previously made by the Commission for
Rules 17Ad–22(d)(8) and 17Ad–22(e)(2),
the Commission estimates that
respondent clearing agencies would
incur an aggregate one-time burden of
approximately 20 hours to review and
revise existing policies and procedures
and to create new policies and
procedures as necessary to help ensure
compliance with proposed Rule 17Ad–
25(h).255
Rule 17Ad–25(h) also imposes
ongoing burdens on a respondent
clearing agency. The rule requires
ongoing monitoring and compliance
activities with respect to its policies and
procedures under the rule. Based on the
Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to Rules 17Ad–
22(d)(8) and 17Ad–22(e)(2) and because
the modifications to Rule 17Ad–25(h)
will require updating current policies
and procedures or establishing new
254 This figure is calculated as follows:
(Compliance Attorney for 2 hours) × 10 respondent
clearing agencies = 20 hours.
255 This figure is calculated as follows: ((Assistant
General Counsel for 1 hours) + (Compliance
Attorney for 1 hours)) = 2 hours × 10 respondent
clearing agencies = 20 hours.
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Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / Proposed Rules
policies and procedures to help ensure
compliance, the Commission estimates
that the ongoing activities required by
Rule 17Ad–25(h) would impose an
aggregate annual burden on respondent
clearing agencies of 10 hours.256
F. Rule 17Ad–25(i)
As discussed in Section III.F above,
the Commission is proposing certain
obligations of the board to oversee
service providers for critical services to
a registered clearing agency under
proposed Rule 17Ad–25(i). Such
obligation does not appear in the
existing requirements for governance
arrangements in Rules 17Ad–22(d)(8)
and 17Ad–22(e)(2),257 but certain
aspects of the proposed rule may be
addressed in existing requirements. For
example, proposed rule 17Ad–25(i)(1)
references the existence of a risk
management framework but does not
itself require the creation of such
framework. Instead, maintenance of a
risk management framework is already
required for all currently registered
clearing agencies under Rule 17Ad–
22(e)(3)(i).258 Additionally, as discussed
above, there are existing requirements
for managing operational risk under
Rule 17Ad–22(d)(4) 259 and Rule 17Ad–
22(e)(17).260 Therefore, the Commission
would expect that the PRA burden for
a respondent clearing agency includes
the incremental burdens of reviewing
and revising its existing governance
documents and related policies and
procedures and creating new
governance documents and related
policies and procedures, as necessary,
pursuant to the proposed rule.
Accordingly, the Commission estimates
that respondent clearing agencies would
incur an aggregate one-time burden of
Name of information
collection
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17Ad–25(b) .........................
17Ad–25(c) ..........................
17Ad–25(d) .........................
17Ad–25(g) .........................
17Ad–25(h) .........................
17Ad–25(i) ...........................
17Ad–25(j) ...........................
G. Rule 17Ad–25(j)
Proposed Rule 17Ad–25(j) would
require a registered clearing agency to
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to solicit, consider,
and document its consideration of the
views of participants and other relevant
stakeholders of the registered clearing
agency regarding material developments
in the clearing agency’s governance and
operations on a recurring basis.264
Proposed Rule 17Ad–25(j) contains
similar provisions to Rules 17Ad–
22(d)(8) and 17Ad–22(e)(2) but would
also impose additional governance
obligations that do not appear in the
existing requirements for governance
arrangements in Rule 17Ad–22.265
Therefore, the Commission would
expect that a respondent clearing agency
Number of
respondents
Type of burden
Recordkeeping
Recordkeeping
Recordkeeping
Recordkeeping
Recordkeeping
Recordkeeping
Recordkeeping
256 This figure is calculated as follows:
(Compliance Attorney for 1 hours) × 10 respondent
clearing agencies = 10 hours.
257 17 CFR 240.17Ad–22(d)(8), (e)(2).
258 17 CFR 240.17Ad–22(e)(3)(i).
259 17 CFR 240.17Ad–22(d)(4).
260 17 CFR 240.17Ad–22(e)(17).
261 This figure is calculated as follows: ((Assistant
General Counsel for 30 hours) + (Compliance
Attorney for 50 hours)) = 80 hours × 10 respondent
clearing agencies = 800 hours.
VerDate Sep<11>2014
approximately 800 hours to review and
revise existing governance documents
and related policies and procedures and
to create new governance documents
and related policies and procedures, as
necessary.261
Proposed Rule 17Ad–25(i) would also
impose ongoing burdens on a
respondent clearing agency. The
proposed rule would require ongoing
documentation, monitoring, and
compliance activities with respect to the
governance documents and related
policies and procedures created in
response to the proposed rule. Based on
the Commission’s previous estimates for
ongoing monitoring and compliance
burdens with respect to Rule 17Ad–
22,262 the Commission estimates that
the ongoing activities required by Rule
17Ad–25(i) would impose an aggregate
annual burden on respondent clearing
agencies of 300 hours.263
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...................
...................
...................
...................
...................
...................
...................
Initial burden
per entity
(hours)
10
10
10
10
10
10
10
Frm 00044
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H. Chart of Total PRA Burdens
Ongoing
burden per
entity
(hours)
49
80
8
13
2
80
14
262 See Clearing Agency Standards Adopting
Release, supra note 38, at 66260–63; CCA Standards
Adopting Release, supra note 38, at 70891–99.
263 This figure is calculated as follows:
(Compliance Attorney for 30 hours) × 10 respondent
clearing agencies = 300 hours.
264 See supra Part III.F.2 (discussing proposed
Rule 17Ad–25(j)); infra Part VIII (providing the
proposed rule text).
265 See 17 CFR 240.17Ad–22(d)(8), (e)(2).
266 See Clearing Agency Standards Adopting
Release, supra note 8, at 66260; CCA Standards
Adopting Release, supra note 13, at 70891–92.
PO 00000
may have written rules, policies, and
procedures similar to some of the
requirements in the proposed rule and
that the PRA burden includes the
incremental burdens of reviewing and
revising existing policies and
procedures and creating new policies
and procedures, as necessary, pursuant
to the proposed rule. Accordingly, based
on the similar policies and procedures
requirements and the corresponding
burden estimates previously made by
the Commission for Rules 17Ad–
22(d)(8) and 17Ad–22(e)(2),266 the
Commission estimates that respondent
clearing agencies would incur an
aggregate one-time burden of
approximately 140 hours to review and
revise existing policies and procedures
and to create new policies and
procedures, as necessary.267
Rule 17Ad–25(j) also imposes ongoing
burdens on a respondent clearing
agency. The proposed rule would
require ongoing monitoring and
compliance activities with respect to the
written policies and procedures created
in response to the proposed rule. The
proposed rule would also require
ongoing documentation activities with
respect to the board’s consideration of
participants’ and relevant stakeholders’
views pursuant to the proposed rule.
Based on the Commission’s previous
estimates for ongoing monitoring and
compliance burdens with respect to
Rule 17Ad–22,268 the Commission
estimates that the ongoing activities
required by proposed Rule 17Ad–25(j)
would impose an aggregate annual
burden on respondent clearing agencies
of 40 hours.269
98
30
3
5
1
30
4
Total annual
burden per
entity
(hours)
147
110
11
18
3
110
18
Total industry
burden
(hours)
1,470
1,100
110
180
30
1,100
180
267 This figure was calculated as follows:
((Assistant General Counsel for 8 hours) +
(Compliance Attorney for 6 hours)) = 14 hours × 10
respondent clearing agencies = 140 hours.
268 See Clearing Agency Standards Adopting
Release, supra note 8, at 66260–63; CCA Standards
Adopting Release, supra note 13, at 70891–99.
269 This figure was calculated as follows:
(Compliance Attorney for 4 hours) × 10 respondent
clearing agencies = 40 hours.
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I. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to:
1. Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
Commission’s functions, including
whether the information shall have
practical utility;
2. Evaluate the accuracy of the
Commission’s estimates of the burden of
the proposed collection of information;
3. Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected;
4. Evaluate whether there are ways to
minimize the burden of collection of
information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology;
and
5. Evaluate whether the proposed
rules would have any effects on any
other collection of information not
previously identified in this section.
Persons wishing to submit comments
on the collection of information
requirements should direct them to the
OMB Desk Officer for the Securities and
Exchange Commission,
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov, and should also send a
copy of their comments to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090, with reference to File
Number S7–21–22. Requests for
materials submitted to OMB by the
Commission with regard to this
collection of information should be in
writing, with reference to File Number
S7–21–22 and be submitted to the
Securities and Exchange Commission,
Office of FOIA/PA Services, 100 F Street
NE, Washington, DC 20549–2736. As
OMB is required to make a decision
concerning the collection of information
between 30 and 60 days after
publication, a comment to OMB is best
assured of having its full effect if OMB
receives it within 30 days of
publication.
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VI. Small Business Regulatory
Enforcement Fairness Act
Under the Small Business Regulatory
Enforcement Fairness Act of 1996, a rule
is considered ‘‘major’’ where, if
adopted, it results or is likely to result
in (i) an annual effect on the economy
of $100 million or more (either in the
form of an increase or a decrease); (ii)
a major increase in costs or prices for
consumers or individual industries; or
(iii) significant adverse effect on
competition, investment, or
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innovation.270 The Commission requests
comment on the potential impact of
proposed Rule 17Ad–25 on the
economy on an annual basis, any
potential increase in costs or prices for
consumers or individual industries, and
any potential effect on competition,
investment, or innovation. Commenters
are requested to provide empirical data
and other factual support for their views
to the extent possible.
VII. Regulatory Flexibility Act
Certification
The Regulatory Flexibility Act
(‘‘RFA’’) requires the Commission, in
promulgating rules, to consider the
impact of those rules on small
entities.271 Section 603(a) of the
Administrative Procedure Act,272 as
amended by the RFA, generally requires
the Commission to undertake a
regulatory flexibility analysis of all
proposed rules to determine the impact
of such rulemaking on ‘‘small
entities.’’ 273 Section 605(b) of the RFA
states that this requirement shall not
apply to any proposed rule which, if
adopted, would not have a significant
impact on a substantial number of small
entities.274
A. Registered Clearing Agencies
Proposed Rule 17Ad–25 would apply
to all registered clearing agencies. For
the purposes of Commission rulemaking
and as applicable to proposed Rule
17Ad–25, a small entity includes, when
used with reference to a clearing agency,
a clearing agency that (i) compared,
cleared, and settled less than $500
million in securities transactions during
the preceding fiscal year, (ii) had less
than $200 million of funds and
securities in its custody or control at all
times during the preceding fiscal year
(or at any time that it has been in
business, if shorter), and (iii) is not
affiliated with any person (other than a
natural person) that is not a small
business or small organization.275
Based on the Commission’s existing
information about the clearing agencies
currently registered with the
270 Public Law 104–121, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C.
and as a note to 5 U.S.C. 601).
271 See 5 U.S.C. 601 et seq.
272 5 U.S.C. 603(a).
273 Section 601(b) of the RFA permits agencies to
formulate their own definitions of ‘‘small entities.’’
See 5 U.S.C. 601(b). The Commission has adopted
definitions for the term ‘‘small entity’’ for the
purposes of rulemaking in accordance with the
RFA. These definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0–10, 17 CFR
240.0–10.
274 See 5 U.S.C. 605(b).
275 See 17 CFR 240.0–10(d).
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51855
Commission,276 the Commission
believes that all such registered clearing
agencies exceed the thresholds defining
‘‘small entities’’ set out above. While
other clearing agencies may emerge and
seek to register as clearing agencies with
the Commission, the Commission
believes that no such entities would be
‘‘small entities’’ as defined in Exchange
Act Rule 0–10.277
B. Certification
For the reasons described above, the
Commission certifies that proposed Rule
17Ad–25 would not have a significant
economic impact on a substantial
number of small entities for purposes of
the RFA. The Commission requests
comment regarding this certification.
The Commission requests that
commenters describe the nature of any
impact on small entities and provide
empirical data to support the extent of
the impact. Persons wishing to submit
written comments should refer to the
instructions for submitting comments in
the front of this release.
VIII. Statutory Authority and Text of
Proposed Rule
The Commission is proposing Rule
17Ad–25 under the Commission’s
rulemaking authority in the Exchange
Act, particularly Section 17(a), 15 U.S.C.
78q(a), Section 17A, 15 U.S.C. 78q–1,
Section 23(a), 15 U.S.C. 78w(a), Section
765 of the Dodd-Frank Act, and 805 of
the Clearing Supervision Act, 15 U.S.C.
8343 and 15 U.S.C. 5464 respectively.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping
requirements, Securities.
Text of Amendment
In accordance with the foregoing, title
17, chapter II of the Code of Federal
Regulations is proposed to be amended
as follows:
276 In 2021, DTCC processed $2.37 quadrillion in
financial transactions. Within DTCC, DTC settled
$152 trillion of securities and held securities valued
at $87.1 trillion, NSCC processed an average daily
value of $2.029 trillion in equity securities, and
FICC cleared $1.4 quadrillion of transactions in
government securities and $69 trillion of
transactions in agency mortgage-backed securities.
See DTCC, 2021 Annual Report, https://
www.dtcc.com/annuals/2021/. ICE averaged daily
trade volume of 5.97 million contracts and total
revenues of $7.1 billion in 2021. See ICE, 2021
Annual Report, https://s2.q4cdn.com/154085107/
files/doc_financials/2021/ar/250217_009_Web_
BMK-(1).pdf. In addition, OCC cleared more than
7.5 billion contracts and held margin of $180 billion
at the end of 2020. See OCC, 2020 Annual Report,
https://annualreport.theocc.com/. These trade
volumes exceed the $500 million threshold for
small entities.
277 See 17 CFR 240.0–10(d). The Commission
based this determination on its review of public
sources of financial information about registered
clearing agencies.
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Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / Proposed Rules
making of the director. A material
relationship also includes a relationship
that existed during a lookback period of
one year counting back from making the
■ 1. The authority citation for part 240
initial determination in paragraph (b)(2)
continues to read in part as follows:
of this section.
Service provider for critical services
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
means any person that is contractually
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
obligated to the registered clearing
77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
agency for the purpose of supporting
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
clearance and settlement functionality
78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll,
or any other purposes material to the
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– business of the registered clearing
3, 80b–4, 80b–11, and 7201 et seq., and 8302;
agency.
7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18
(b) Composition of the board of
U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat.
directors. (1) A majority of the members
1376 (2010); and Pub. L. 112–106, sec. 503
of the board of directors of a registered
and 602, 126 Stat. 326 (2012), unless
clearing agency must be independent
otherwise noted.
directors, unless a majority of the voting
*
*
*
*
*
rights issued as of the immediately prior
■ 2. Section 240.17Ad–25 is added to
record date are directly or indirectly
read as follows:
held by participants, in which case at
§ 240.17Ad–25 Clearing agency boards of
least 34 percent of the members of the
directors and conflicts of interest.
board of directors must be independent
(a) Definitions. All terms used in this
directors.
section have the same meaning as in the
(2) Each registered clearing agency
Securities Exchange Act of 1934, and
shall broadly consider all the relevant
unless the context otherwise requires,
facts and circumstances, including
the following definitions apply for
under paragraph (g) of this section, on
purposes of this section:
an ongoing basis, to affirmatively
Affiliate means a person that directly
determine that a director does not have
or indirectly controls, is controlled by,
a material relationship with the
or is under common control with the
registered clearing agency or an affiliate
registered clearing agency.
of the registered clearing agency, and is
Board of directors means the board of not precluded from being an
directors or equivalent governing body
independent director under paragraph
of the registered clearing agency.
(f) of this section, in order to qualify as
Director means a member of the board an independent director. In making
of directors or equivalent governing
such determination, a registered
body of the registered clearing agency.
clearing agency must:
Family member means any child,
(i) Identify the relationships between
stepchild, grandchild, parent,
a director, the registered clearing
stepparent, grandparent, spouse, sibling, agency, and any affiliate thereof and any
niece, nephew, mother-in-law, father-in- circumstances under paragraph (f) of
law, son-in-law, daughter-in-law,
this section;
brother-in-law, or sister-in-law,
(ii) Evaluate whether any relationship
including adoptive relationships, any
is likely to impair the independence of
person (other than a tenant or employee) the director in performing the duties of
sharing a household with the director or director; and
a nominee for director, a trust in which
(iii) Document this determination in
these persons (or the director or a
writing.
nominee for director) have more than
(c) Nominating committee. (1) Each
fifty percent of the beneficial interest, a
registered clearing agency must
foundation in which these persons (or
establish a nominating committee and a
the director or a nominee for director)
written evaluation process whereby
control the management of assets, and
such nominating committee shall
any other entity in which these persons
evaluate nominees for serving as
(or the director or a nominee for
directors.
(2) A majority of the directors serving
director) own more than fifty percent of
on the nominating committee must be
the voting interests.
Independent director means a director independent directors, and the chair of
of the registered clearing agency who
the nominating committee must be an
has no material relationship with the
independent director.
(3) The fitness standards for serving as
registered clearing agency or any
a director shall be specified by the
affiliate thereof.
nominating committee, documented in
Material relationship means a
writing, and approved by the board of
relationship, whether compensatory or
directors. Such fitness standards must
otherwise, that reasonably could affect
be consistent with the requirements of
the independent judgment or decision-
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REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
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this section and include that the
individual is not subject to any statutory
disqualification as defined under
Section 3(a)(39) of the Act.
(4) The nominating committee must
document the outcome of the written
evaluation process consistent with the
fitness standards required under
paragraph (c)(3) of this section. Such
process shall:
(i) Take into account each nominee’s
expertise, availability, and integrity, and
demonstrate that the board of directors,
taken as a whole, has a diversity of
skills, knowledge, experience, and
perspectives;
(ii) Demonstrate that the nominating
committee has considered whether a
particular nominee would complement
the other board members, such that, if
elected, the board of directors, taken as
a whole, would represent the views of
the owners and participants, including
a selection of directors that reflects the
range of different business strategies,
models, and sizes across participants, as
well as the range of customers and
clients the participants serve;
(iii) Demonstrate that the nominating
committee considered the views of other
stakeholders who may be impacted by
the decisions of the registered clearing
agency, including transfer agents,
settlement banks, nostro agents,
liquidity providers, technology or other
service providers; and
(iv) Identify whether each selected
nominee would meet the definition of
independent director in paragraphs (a)
and (f) of this section, and whether each
selected nominee has a known material
relationship with the registered clearing
agency or any affiliate thereof, an
owner, a participant, or a representative
of another stakeholder of the registered
clearing agency described in paragraph
(c)(4)(iii) of this section.
(d) Risk management committee. (1)
Each registered clearing agency must
establish a risk management committee
(or committees) to assist the board of
directors in overseeing the risk
management of the registered clearing
agency. The membership of each risk
management committee must be
reconstituted on a regular basis and at
all times include representatives from
the owners and participants of the
registered clearing agency.
(2) In the performance of its duties,
the risk management committee must be
able to provide a risk-based,
independent, and informed opinion on
all matters presented to the committee
for consideration in a manner that
supports the safety and efficiency of the
registered clearing agency.
(e) Committees generally. If any
committee has the authority to act on
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behalf of the board of directors, the
composition of that committee must
have at least the same percentage of
independent directors as is required for
the board of directors, as set forth in
paragraph (b)(1) of this section.
(f) Circumstances that preclude
directors from being independent
directors. In addition to how the
definition of independent director set
forth in this section is applied by a
registered clearing agency, the following
circumstances preclude a director from
being an independent director, subject
to a lookback period of one year
(counting back from making the initial
determination in paragraph (b)(2) of this
section) applying to paragraphs (f)(2)
through (6) of this section:
(1) The director is subject to rules,
policies, or procedures by the registered
clearing agency that may undermine the
director’s ability to operate unimpeded,
such as removal by less than a majority
vote of shares that are entitled to vote
in such director’s election;
(2) The director, or a family member,
has an employment relationship with or
otherwise receives compensation other
than as a director from the registered
clearing agency or any affiliate thereof,
or the holder of a controlling voting
interest of the registered clearing
agency;
(3) The director, or a family member,
is receiving payments from the
registered clearing agency, or any
affiliate thereof, or the holder of a
controlling voting interest of the
registered clearing agency, that
reasonably could affect the independent
judgment or decision-making of the
director, other than the following:
(i) Compensation for services as a
director on the board of directors or a
committee thereof; or
(ii) Pension and other forms of
deferred compensation for prior services
not contingent on continued service;
(4) The director, or a family member,
is a partner in, or controlling
shareholder of, any organization to or
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from which the registered clearing
agency, or any affiliate thereof, or the
holder of a controlling voting interest of
the registered clearing agency, is making
or receiving payments for property or
services, other than the following:
(i) Payments arising solely from
investments in the securities of the
registered clearing agency, or affiliate
thereof; or
(ii) Payments under non-discretionary
charitable contribution matching
programs;
(5) The director, or a family member,
is employed as an executive officer of
another entity where any executive
officers of the registered clearing agency
serve on that entity’s compensation
committee; or
(6) The director, or a family member,
is a partner of the outside auditor of the
registered clearing agency, or any
affiliate thereof, or an employee of the
outside auditor who is working on the
audit of the registered clearing agency,
or any affiliate thereof.
(g) Conflicts of interest. Each
registered clearing agency must
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to:
(1) Identify and document existing or
potential conflicts of interest in the
decision-making process of the clearing
agency involving directors or senior
managers of the registered clearing
agency; and
(2) Mitigate or eliminate and
document the mitigation or elimination
of such conflicts of interest.
(h) Obligation of directors to report
conflicts. Each registered clearing
agency must establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
require a director to document and
inform the registered clearing agency
promptly of the existence of any
relationship or interest that reasonably
could affect the independent judgment
or decision-making of the director.
(i) Obligation of board of directors to
oversee relationships with service
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51857
providers for critical services. Each
registered clearing agency must
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to enable the board
of directors to:
(1) Confirm and document that risks
related to relationships with service
providers for critical services are
managed in a manner consistent with its
risk management framework, and
review senior management’s monitoring
of relationships with service providers
for critical services;
(2) Approve policies and procedures
that govern the relationship with service
providers for critical services;
(3) Review and approve plans for
entering into third-party relationships
where the engagement entails being a
service provider for critical services to
the registered clearing agency; and
(4) Through regular reporting to the
board of directors by senior
management, confirm that senior
management takes appropriate actions
to remedy significant deterioration in
performance or address changing risks
or material issues identified through
ongoing monitoring.
(j) Obligation of board of directors to
solicit and consider viewpoints of
participants and other relevant
stakeholders. Each registered clearing
agency must establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
solicit, consider, and document its
consideration of the views of
participants and other relevant
stakeholders of the registered clearing
agency regarding material developments
in its governance and operations on a
recurring basis.
By the Commission.
Dated: August 8, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022–17316 Filed 8–22–22; 8:45 am]
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 87, Number 162 (Tuesday, August 23, 2022)]
[Proposed Rules]
[Pages 51812-51857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17316]
[[Page 51811]]
Vol. 87
Tuesday,
No. 162
August 23, 2022
Part III
Securities and Exchange Commission
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17 CFR Part 240
Clearing Agency Governance and Conflicts of Interest; Proposed Rule
Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 /
Proposed Rules
[[Page 51812]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 242
[Release No. 34-95431; File No. S7-21-22]
RIN 3235-0695
Clearing Agency Governance and Conflicts of Interest
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; partial withdrawal of proposed rule; withdrawal
of applicability of proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing rules under the Securities Exchange Act of 1934 (``Exchange
Act'') to help improve the governance of clearing agencies registered
with the Commission (``registered clearing agencies'') by reducing the
likelihood that conflicts of interest may influence the board of
directors or equivalent governing body (``board'') of a registered
clearing agency. The proposed rules would identify certain
responsibilities of the board, increase transparency into board
governance, and, more generally, improve the alignment of incentives
among owners and participants of a registered clearing agency. In
support of these objectives, the proposed rules would establish new
requirements for board and committee composition, independent
directors, management of conflicts of interest, and board oversight.
DATES: As of August 23, 2022, SEC withdraws amendatory instructions # 7
and 8 (Sec. Sec. 240.17Ad-25 and 240.17Ad-26 in Release No. 34-64017),
published at 76 FR 14472 on March 16, 2011. Also as of August 23, 2022,
SEC withdraws the applicability of the proposed rule published at 75 FR
65881 on October 26, 2010 (Release No. 34-63107) as it pertained to
clearing agencies.
Comments on this proposal should be received on or before October
7, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File Number S7-21-22 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-21-22. This file
number should be included on the subject line if email is used. To help
us process and review your comments more efficiently, please use only
one method. The Commission will post all comments on the Commission's
website (https://www.sec.gov/rules/proposed.shtml). Comments are also
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Operating
conditions may limit access to the Commission's public reference room.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director,
Stephanie Park, Senior Special Counsel, Claire Noakes, Special Counsel,
or Tanin Kazemi, Attorney-Adviser, Office of Clearance and Settlement
at (202) 551-5710, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is withdrawing the following
proposed rules under the Exchange Act: Regulation MC as proposed for
security-based swap clearing agencies,\1\ and rules proposed for
clearing agencies at 17 CFR 240.17Ad-25 (``Rule 17Ad-25'') and
240.17Ad-26 (``Rule 17Ad-26'').\2\ In their place, the Commission is
proposing a new Rule 17Ad-25 to mitigate conflicts of interest, promote
the fair representation of owners and participants in the governance of
a clearing agency, identify responsibilities of the board, and increase
transparency into clearing agency governance.
---------------------------------------------------------------------------
\1\ Exchange Act Release No. 63107 (Oct. 14, 2010), 75 FR 65882
(Oct. 26, 2010) (``Regulation MC Proposing Release'').
\2\ Exchange Act Release No. 64017 (Mar. 3, 2011), 76 FR 14471
(Mar. 16, 2011) (``Clearing Agency Standards Proposing Release'')
(proposing Rules 17Ad-25 and 17Ad-26).
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The Commission is also mindful of the differing perspectives that
exist at registered clearing agencies among stakeholders, including
owners and participants (some of whom also are clearing agency owners),
small and large participants, and direct participants (who are clearing
members) and indirect participants.\3\ Proposed Rule 17Ad-25 would
establish new requirements for clearing agency boards to address and
mitigate conflicts of interest and to help ensure more effective
oversight of the clearing agency by the board. The Commission believes
these requirements would help ensure that a clearing agency's
governance arrangements can more effectively manage these different
perspectives so that the clearing agency can, among other things, help
ensure that the design and implementation of risk management decisions
are effective. Specifically, the proposed rule would: (i) define
independence in the context of a director serving on the board of a
registered clearing agency and require that a majority of directors on
the board be independent, unless a majority of the voting rights
distributed to shareholders of record are directly or indirectly held
by participants of the registered clearing agency, in which case at
least 34 percent of the board must be independent directors; (ii)
establish requirements for a nominating committee, including with
respect to the composition of the nominating committee, fitness
standards for serving on the board, and documenting the process for
evaluating board nominees; (iii) establish requirements for the
function, composition, and reconstitution of the risk management
committee; (iv) require policies and procedures that identify, mitigate
or eliminate, and document the identification and mitigation or
elimination of conflicts of interest; (v) require policies and
procedures that obligate directors to report potential conflicts
promptly; (vi) require policies and procedures for the board to oversee
relationships with service providers for critical services; and (vii)
require policies and procedures to solicit, consider, and document the
registered clearing agency's consideration of the views of its
participants and other
[[Page 51813]]
relevant stakeholders regarding its governance and operations.
---------------------------------------------------------------------------
\3\ Examples of indirect participants might be entities such as
customers or clients of direct participants or clearing members
since they rely on services provided by a direct participant to
access the services of the clearing agency.
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Table of Contents
I. Introduction
II. Background
A. Differing Perspectives at Registered Clearing Agencies
B. Regulatory Framework for Registered Clearing Agencies
C. Risks Associated with Clearance and Settlement
III. Proposed Rules
A. Board Composition and Requirements for Independent Directors
B. Nominating Committee
C. Risk Management Committee
D. Conflicts of Interest
E. Board Obligation to Oversee Service Providers for Critical
Services
F. Obligation to Formally Consider Stakeholder Viewpoints
G. Considerations Related to Implementation and Compliance
H. General Request for Comment
IV. Economic Analysis
A. Introduction
B. Economic Baseline
C. Consideration of Benefits and Costs
D. Reasonable Alternatives to the Proposed Rule
E. Request for Comment
V. Paperwork Reduction Act
A. Rule 17Ad-25(b)
B. Rule 17Ad-25(c)
C. Rule 17Ad-25(d)
D. Rule 17Ad-25(g)
E. Rule 17Ad-25(h)
F. Rule 17Ad-25(i)
G. Rule 17Ad-25(j)
H. Chart of Total PRA Burdens
I. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
A. Registered Clearing Agencies
B. Certification
VIII. Statutory Authority and Text of Proposed Rule
I. Introduction
Clearing agencies registered with the Commission play an important
role in the securities markets. They help ensure the prompt and
accurate clearance and settlement of securities transactions, including
the transfer of record ownership and the safeguarding of securities and
related funds, which has the effect of protecting investors and persons
facilitating transactions by and acting on behalf of investors.\4\ As
such, Section 17A of the Exchange Act requires that, before an entity
provides clearing agency services, it must register with the
Commission.\5\ Under the Commission's supervision, registered clearing
agencies, as self-regulatory organizations (``SROs'') under Section 19
of the Exchange Act,\6\ must submit to the Commission changes to their
rules for review and approval or to be deemed immediately effective
upon filing.\7\
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\4\ See 15 U.S.C. 78q-1(a)(1)(A); see, e.g., Committee on
Payment and Settlement Systems and Technical Committee of the
International Organization of Securities Commissions, Principles for
financial market infrastructures (Apr. 16, 2012), at 5 (``PFMI''),
https://www.bis.org/publ/cpss101a.pdf (stating that financial market
infrastructures (``FMIs''), which include clearing agencies like
central counterparties (``CCPs'') and central securities
depositories (``CSDs''), ``[w]hile safe and efficient . . .
contribute to maintaining and promoting financial stability and
economic growth, FMIs also concentrate risk. If not property
managed, FMIs can be sources of financial shocks, such as liquidity
dislocations and credit losses, or a major channel through which
these shocks are transmitted across domestic and international
financial markets'').
\5\ See 15 U.S.C. 78q-1(a)(2); see also 17 CFR 240.17Ab2-1.
\6\ Upon registration, registered clearing agencies are SROs
under Section 3(a)(26) of the Exchange Act. See 15 U.S.C.
78c(a)(26).
\7\ Except for certain rule changes that do not need approval,
set forth in 17 CFR 240.19b-4(f), an SRO must submit proposed rule
changes to the Commission for review and approval pursuant to Rule
19b-4 under the Exchange Act. A stated policy, practice, or
interpretation of an SRO, such as its written policies and
procedures, would generally be deemed to be a proposed rule change.
See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
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Given the important role of clearing agencies in the U.S. financial
system, the governance framework of each clearing agency is an integral
part in helping to ensure that the clearing agency is resilient and
strong. A transparent and reliable governance framework has a positive
and lasting cascading effect: Through the decision-making of the
clearing agency and to its effective and efficient supervision. From
the outset, an ideal governance framework that establishes a clear and
deliberative process would have the clearing agency consider a range of
stakeholder views as part of its rules and risk management practices,
resulting in more thorough and robust SRO rule proposals for the
Commission to consider in supervising the clearing agency. In essence,
improved governance would help promote optimum practices for all
registered clearing agencies to follow to help ensure that their
processes and decisions are clear, transparent, and reliable, that
risks are appropriately monitored, addressed, and managed, and that
their leadership is competent and accountable. When these fundamental
guiding principles on governance influence and permeate a clearing
agency's culture and operations, the clearing agency will instill
confidence in its participants, the markets, and the investing public,
thereby meeting and promoting the policy objectives in Section 17A of
the Exchange Act regarding the prompt and accurate clearance and
settlement of securities transactions, among other objectives.\8\
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\8\ See 15 U.S.C. 78q-1(a)(1)(A)-(D); see also Exchange Act
Release No. 68080 (Oct. 22, 2012), 77 FR 66219, 66252 (Nov. 2, 2012)
(``Clearing Agency Standards Adopting Release'') (noting that
``[g]overnance arrangements have the potential to play an important
role in making sure that clearing agencies fulfill the Exchange Act
requirements that the rules of a clearing agency be designed to
protect investors and the public interest and to support the
objectives of owners and participants. Similarly, governance
arrangements may promote the effectiveness of a clearing agency's
risk management procedures by creating an oversight framework that
fosters a focus on the critical role that risk management plays in
promoting prompt and accurate clearance and settlement'').
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The Commission has previously stated that clear and transparent
governance arrangements help promote accountability and reliability in
the decisions, rules and procedures of the clearing agency because they
provide interested parties (such as owners, direct and indirect
participants, and general members of the public) with information about
how such decisions are made and what the rules and procedures are
designed to accomplish.\9\ In turn, clear and transparent governance
arrangements help optimize the clearing agency's decisions, rules and
procedures that the Commission considers in the SRO rule filing process
because clearing agency transparency improves the quality of the
information shared with stakeholders, which in turn improves the public
comments submitted in response to rule filings. While the business
models of clearing agencies vary and include entities that are
affiliates of publicly traded companies and entities that function as
participant-owned utilities, the key components of a clearing agency's
governance arrangements include the
[[Page 51814]]
clearing agency's ownership structure, the composition and role of its
board, the structure and role of board committees, reporting lines
between management and the board, and the processes that help ensure
management is held accountable for the clearing agency's
performance.\10\ Regardless of the business model, the clearing agency
is more effective when it has governance arrangements that accomplish
the following: (1) help ensure that the clearing agency satisfies the
Exchange Act requirements and Commission rules that are designed to
protect investors and the public interest; and (2) support the
objectives of the clearing agency's owners, direct participants, and
indirect participants.\11\
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\9\ See Clearing Agency Standards Proposing Release, supra note
2, at 14488 (``Clear and transparent governance arrangements promote
accountability and reliability in the decisions, rules and
procedures of the clearing agency because they provide interested
parties (such as owners, participants, and general members of the
public) with information about how such decisions are made and what
the rules and procedures are designed to accomplish. The key
components of a clearing agency's governance arrangements include
the clearing agency's ownership structure, the composition and role
of its board, the structure and role of board committees, reporting
lines between management and the board, and the processes that
ensure management is held accountable for the clearing agency's
performance. Governance arrangements have the potential to play an
important role in making sure that clearing agencies fulfill the
Exchange Act requirements that the rules of a clearing agency be
designed to protect investors and the public interest and to support
the objectives of owners and participants. Similarly, governance
arrangements may promote the effectiveness of a clearing agency's
risk management procedures by creating an oversight framework that
fosters a focus on the critical role that risk management plays in
promoting prompt and accurate clearance and settlement.'').
\10\ See id. at 66269.
\11\ See id. at 66252.
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In recognizing the implications that a robust governance framework
has on the operations of clearing agencies, the Commission adopted a
series of clearing agency governance requirements. In 2012, the
Commission adopted a general governance rule for all registered
clearing agencies (that are not covered clearing agencies) under Rule
17Ad-22(d).\12\ In 2016, the Commission adopted a governance rule under
Rule 17Ad-22(e) as part of its heightened standards for covered
clearing agencies, defined as a registered clearing agency that
provides the services of a central counterparty or central securities
depository.\13\ The Commission took a broad, principles-based approach
in the design of both rules, and emphasized that governance remains an
area of continued consideration and interest, with the goal of
establishing an evolving regulatory framework for clearing
agencies.\14\
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\12\ See 17 CFR 240.17Ad-22(d)(8) (requiring that all registered
clearing agencies aside from covered clearing agencies establish,
implement, maintain and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear
and transparent to fulfill the public interest requirements in
Section 17A of the Exchange Act, to support the objectives of owners
and participants, and to promote the effectiveness of the clearing
agency's risk management procedures).
\13\ See 17 CFR 240.17Ad-22(e)(2) (requiring a covered clearing
agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for
governance arrangements that are clear and transparent, clearly
prioritize the safety and efficiency of the covered clearing agency,
support the public interest requirements in Section 17A of the
Exchange Act and the objectives of owners and participants,
establish that the board of directors and senior management have
appropriate experience and skills to discharge their duties and
responsibilities, specify clear and direct lines of responsibility,
and consider the interests of participants' customers, securities
issuers and holders, and other relevant stakeholders of the covered
clearing agency); see also Exchange Act Release No. 78961 (Sept. 28,
2016), 81 FR 70786 (Oct. 13, 2016) (``CCA Standards Adopting
Release'').
\14\ See Clearing Agency Standards Adopting Release, supra note
8, at 66252 (stating that ``[w]e continue to perform a careful
review and evaluation of the comments that the Commission received
on proposed Rules 17Ad-25, 17Ad-26 and Regulation MC, which
commenters rightly observed represent separate, and in some cases
more prescriptive, proposed requirements related to clearing agency
governance and mitigation of conflicts of interest . . . .We believe
it is more appropriate to consider those issues in connection with
the Commission's ongoing consideration of those rules'').
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During the ensuing years since the adoption of the 2016 covered
clearing agency governance rule, the Commission has observed and
learned from recurring tensions among incentive structures in the area
of clearing agency governance. The Commission understands that
differing views among clearing agency stakeholders can have a ripple
effect on the decisions that clearing agencies make, including risk
management decisions that, in turn, affect clearing members and the
larger financial community. Accordingly and for the reasons described
throughout this release, the Commission is proposing rules that would
build upon and strengthen the existing governance requirements adopted
by the Commission in the Clearing Agency Standards Adopting Release in
2012 and the CCA Standards Adopting Release in 2016.\15\ Specifically,
the Commission believes that the existing clearing agency governance
rules should be enhanced to help balance the differing incentives of
the registered clearing agencies, clearing members, and other key
stakeholders. While the governance requirements adopted by the
Commission at that time are broad and principles-based, the rules
proposed today would set more specific and defined parameters and
requirements for governance for all registered clearing agencies--both
covered clearing agencies under Rule 17Ad-22(e) under the Exchange Act
and all registered clearing agencies other than covered clearing
agencies that are subject to Rule 17Ad-22(d) under the Exchange Act.
Because all clearing agencies would face these tensions, the Commission
believes it is appropriate to have this governance proposal apply to
all registered clearing agencies. In this regard, the rules would
establish new governance requirements on board composition for
independent directors, nominating committees, risk management
committees, conflicts of interest, board obligations to oversee service
providers for critical services, and an obligation to formally consider
stakeholder viewpoints. The proposed rules are designed to address
governance issues specific to registered clearing agencies, due to
their distinct ownership structures and organizational forms. Moreover,
the rules are designed to take a multi-layered approach to governance
in that one rule alone would not necessarily capture and address an
issue relating to governance; each of the different rules proposed
today would provide one additional mitigation layer to help ensure that
registered clearing agencies are designed, managed, and operated under
a robust governance framework to protect investors and the public
interest and help promote the prompt and accurate clearance and
settlement of securities transactions. Each mitigation layer improves
the robustness of the governance framework by itself, with each
additional mitigation layer having a cumulative effect on robustness.
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\15\ See 17 CFR 240.17Ad-22; see also Clearing Agency Standards
Adopting Release, supra note 8; CCA Standards Adopting Release,
supra note 13.
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In Part II below, the Commission provides context for the rule
proposal by (i) discussing the different perspectives that exist among
various stakeholders at registered clearing agencies, (ii) briefly
summarizing changes to the regulatory framework for registered clearing
agencies following passage of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (``Dodd-Frank Act''),\16\ and (iii)
describing recent events that have increased focus among market
participants on the governance arrangements that direct risk management
policies and procedures at registered clearing agencies.
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\16\ Public Law 111-203, 124 Stat. 1376 (2010).
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II. Background
Rule 17Ad-22 under the Exchange Act provides for two categories of
registered clearing agencies and contains a set of rules that apply to
each category. The first category is covered clearing agencies, which
are registered clearing agencies that provide CCP \17\ or
[[Page 51815]]
CSD \18\ services.\19\ Rule 17Ad-22(e) applies to covered clearing
agencies and includes requirements intended to address the activity and
risks that their size, operation, and importance pose to the U.S.
securities markets, the risks inherent in the products they clear, and
the goals of both the Exchange Act and the Dodd-Frank Act.\20\ The
second category includes registered clearing agencies other than
covered clearing agencies; such clearing agencies must comply with Rule
17Ad-22(d).\21\ Rule 17Ad-22(d) establishes a regulatory regime to
govern registered clearing agencies that do not provide CCP or CSD
services.\22\ Currently, all clearing agencies registered with the
Commission that are actively providing clearance and settlement
services are covered clearing agencies.\23\ Although all currently
registered and active clearing agencies meet the definition of a
covered clearing agency, thereby making Rule 17Ad-22(d) not applicable
to any registered and active clearing agencies at present, clearing
agencies that are not covered clearing agencies may register with the
Commission in the future and would be subject to Rule 17Ad-22(d).\24\
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\17\ A CCP is a type of registered clearing agency that acts as
the buyer to every seller and the seller to every buyer, providing a
trade guaranty with respect to transactions submitted for clearing
by the CCP's participants. See 17 CFR 240.17Ad-22(a)(2); Exchange
Act Release No. 88616 (Apr. 9, 2020), 85 FR 28853, 28855 (May 14,
2020) (``CCA Definition Adopting Release''). A CCP may perform a
variety of risk management functions to manage the market, credit,
and liquidity risks associated with transactions submitted for
clearing. For example, CCPs help manage the effects of a participant
default by closing out the defaulting participant's open positions
and using financial resources available to the CCP to absorb any
losses. In this way, the CCP can prevent the onward transmission of
financial risk. See, e.g., Exchange Act Release No. 94196 (Feb. 9,
2022), 87 FR 10436, 10448 (Feb. 24, 2022) (``T+1 Proposing
Release''). If a CCP is unable to perform its risk management
functions effectively, however, it can transmit risk throughout the
financial system.
\18\ A CSD is a type of registered clearing agency that acts as
a depository for handling securities, whereby all securities of a
particular class or series of any issuer deposited within the system
are treated as fungible. Through use of a CSD, securities may be
transferred, loaned, or pledged by bookkeeping entry without the
physical delivery of certificates. A CSD also may permit or
facilitate the settlement of securities transactions more generally.
See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad-22(a)(3); CCA
Definition Adopting Release, supra note 17, at 28856. If a CSD is
unable to perform these functions, market participants may be unable
to settle their transactions, transmitting risk through the
financial system.
\19\ See 17 CFR 240.17Ad-22(a)(5).
\20\ See CCA Standards Adopting Release, supra note 13, at
70793. The Financial Stability Oversight Council (``FSOC'') has
designated certain financial market utilities (``FMUs'')--which
include clearing agencies that manage or operate a multilateral
system for the purpose of transferring, clearing, or settling
payments, securities, or other financial transactions among
financial institutions or between financial institutions and the
FMU--as systemically important or likely to become systemically
important (``SIFMUs''). See 12 U.S.C. 5463. An FMU is systemically
important if the failure of or a disruption to the functioning of
such FMU could create or increase the risk of significant liquidity
or credit problems spreading among financial institutions or markets
and thereby threaten the stability of the U.S. financial system. See
12 U.S.C. 5462(9).
\21\ See 17 CFR 240.17Ad-22(d).
\22\ See CCA Standards Adopting Release, supra note 13, at
70793.
\23\ They are The Depository Trust Company (``DTC''), FICC,
NSCC, ICE Clear Credit (``ICC''), ICE Clear Europe (``ICEEU''), The
Options Clearing Corporation (``OCC''), and LCH SA.
\24\ The Boston Stock Exchange Clearing Corporation (``BSECC'')
and Stock Clearing Corporation of Philadelphia (``SCCP'') are
currently registered with the Commission as clearing agencies but
conduct no clearance or settlement operations; both inactive
clearing agencies are subject to Rule 17Ad-22(d). See Exchange Act
Release No. 63629 (Jan. 3, 2011), 76 FR 1473, 1474 (Jan. 10, 2011)
(``BSECC Notice''); Exchange Act Release No. 63268 (Nov. 8, 2010),
75 FR 69730, 69731 (Nov. 15, 2010) (``SCCP Notice'').
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In establishing these regimes under Rule 17Ad-22 under the Exchange
Act, the Commission stated that the approach under Rules 17Ad-22(d) and
(e) takes into account clearing agency activities and the risks they
pose, while promoting robust risk management practices and the general
safety and soundness of registered clearing agencies and addressing
concerns relating to the level of concentration in the provision of
clearing agency services.\25\ The Commission recognized that Rule 17Ad-
22(d) would allow new entrants to more firmly establish themselves as
clearing agencies, which is important for the deconsolidation and
diffusion of risk across the market.\26\ Notwithstanding their
different risk profiles, all registered clearing agencies--whether
covered clearing agencies under Rule 17Ad-22(e) or registered clearing
agencies under Rule 17Ad-22(d)--are important to the U.S. financial
system, as evident in their obligations under Section 17A of the
Exchange Act. Effective governance--the primary way by which a clearing
agency develops and oversees the provision of its clearance and
settlement services--is the lynchpin to ensuring a well-functioning and
resilient clearing agency that can withstand periods of market
stress.\27\ In this regard, the Commission believes that the governance
requirements in proposed Rule 17Ad-25 should apply to all registered
clearing agencies. The Commission's intent with respect to proposed
Rule 17Ad-25 is, in part, to take another incremental step to help
ensure that risks posed by registered clearing agencies are
appropriately managed consistent with the purposes of the Exchange Act.
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\25\ See CCA Standards Adopting Release, supra note 13, at
70793.
\26\ See id.
\27\ See SEC Division of Trading and Markets and Office of
Compliance Inspections and Examinations, Staff Report on the
Regulation of Clearing Agencies (Oct. 1, 2020) (``Staff Report on
Clearing Agencies''), https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf.
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A. Differing Perspectives at Registered Clearing Agencies
The Exchange Act requires each registered clearing agency to be so
organized and have the capacity to facilitate prompt and accurate
clearance and settlement.\28\ It also requires each registered clearing
agency to have rules that assure the fair representation of
shareholders and participants in the selection of directors and the
administration of its affairs.\29\ These requirements highlight the
importance of a clearing agency's organization in facilitating prompt
and accurate clearance and settlement, and of the need for a clearing
agency to have rules that help ensure that both owners and participants
participate in the selection of directors and the administration of its
affairs, including board governance. Moreover, the Commission's recent
experience has revealed that differing perspectives among other
categories of stakeholders may influence the ways risk management
decisions and practices develop and are implemented by the registered
clearing agency. These differing views--whether between small and large
clearing members or between direct and indirect participants of the
clearing agency--warrant attention as they may manifest themselves in a
clearing agency's decision-making to benefit one category of
stakeholders at the expense of another category of stakeholders.
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\28\ 15 U.S.C. 78q-1(b)(3)(A).
\29\ 15 U.S.C. 78q-1(b)(3)(C). The Exchange Act specifically
states the ``fair representation of . . . shareholders (or members)
and participants'' in the selection of directors and the
administration of affairs, reflecting the fact that a clearing
agency could be either a for-profit or not-for-profit entity. See
Regulation of Clearing Agencies, Exchange Act Release No. 16900, 20
SEC Docket 415, 420 n.15 (June 17, 1980) (explaining that ``[t]he
fair representation requirement was adopted verbatim from S. 249,
the Senate bill that preceded the Securities Acts Amendments of
1975. The report of the Senate Committee on Banking, Housing and
Urban Affairs to accompany S. 249 states: `The rules of the clearing
agency must assure fair representation of its shareholders (or
members) and participants in the decision making process of the
clearing agency . . . . The reference to shareholders of [sic]
members makes it clear that the bill establishes no norm as to
whether clearing agencies should or should not be operated for
profit. The bill makes no attempt to set up particular standards of
representation or participation. Rather, it provides that the
Commission must assure itself that the rules of the clearing agency
regarding the manner in which decisions are made give fair voice to
participants as well as to shareholders or members. Fair
representation of participants may be found if they are afforded an
opportunity to acquire voting stock of the clearing agency in
proportion to their use of its facilities''). ``Members,'' however,
is a term often used to describe the participants of a clearing
agency. This release refers to ``shareholders (or members)''
collectively as ``owners'' of the registered clearing agency. In
some instances, owners and shareholders may differ in certain
respects, such as the nature and extent of their voting rights on
the board. To avoid confusion, in this release the Commission uses
only ``participants'' to refer to the direct users of a clearing
agency, which have met the standards for participation and have
executed a participation agreement.
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[[Page 51816]]
First, based on its supervisory experiences, the Commission has
observed that owners and participants may have structural incentives
that differ from one another, leading to differing views as to the
efficacy of certain risk management tools and the potential for
divergent interests in the risk management of the clearing agency. For
example, owners and participants may have differing views as to the
scope of products cleared by the clearing agency, the minimum standards
required for participation in the clearing agency, and the size,
timing, and nature of financial resource requirements applied as part
of the risk management framework.
Fundamentally, an owner's interest in protecting the equity and
continued operation of the clearing agency diverges from a
participant's interest in avoiding the allocation of losses from a
defaulting participant. Diverging interests and incentives among owners
and participants with respect to loss allocation or scope of products--
such as in the event that some participants may want to limit access to
a market by limiting access to clearing, while owners would like to
expand the scope of products to collect fees-could limit the benefits
of a clearing agency, and even potentially cause harm to the market it
serves as well as the broader financial system to the extent that they
might undermine the risk mitigating purpose of the clearing agency by
failing to achieve the right balance among competing interests.\30\
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\30\ For a discussion of the importance of aligning clearing
agency governance with the interests of those who bear the financial
risk, see infra note 167 and accompanying text.
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When a clearing agency chooses to mutualize the risk it faces among
its owners and participants, it may find a closer alignment of
incentives among owners and participants because both owners and
participants would bear losses associated with a failure of the
clearing agency.\31\ In considering how to mutualize the risk it faces,
a clearing agency may choose from a number of different approaches. For
example, a clearing agency may be organized so that the participants
are owners of the clearing agency,\32\ which may eliminate diverging
incentives between owners and participants. Regardless of the approach,
as stated above, the Exchange Act requires that a clearing agency be so
organized and have the capacity to facilitate prompt and accurate
clearance and settlement. In addition, the Exchange Act requires that
the rules of the clearing agency assure a fair representation of its
shareholders (or members) and participants in the selection of its
directors and administration of its affairs.\33\
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\31\ See Jorge Cruz Lopez & Mark Manning, Who Pays? CCP Resource
Provision in the Post-Pittsburgh World (Dec. 2017), https://www.bankofcanada.ca/wp-content/uploads/2017/12/sdp2017-17.pdf.
\32\ See, e.g., Exchange Act Release No. 52922 (Dec. 7, 2005),
70 FR 74070 (Dec. 14, 2005) (explaining that participants of DTC,
FICC, and NSCC that make full use of the services of one or more of
these clearing agency subsidiaries of DTCC are required to purchase
DTCC common shares).
\33\ See 15 U.S.C. 78q-1(b)(3)(C).
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Second, the Commission has observed differing views between large
and small participants in a registered clearing agency about risk
management practices. Consolidation among market participants in recent
years has resulted in the increased concentration of clearance and
settlement activity among a smaller set of firms. For example, over 90
percent of the total notional amount of the U.S. market in credit
derivatives is concentrated in four U.S. commercial banks.\34\ Large
clearing agency participants, especially participant-owners, often have
different incentives from smaller participants. When a small number of
dominant participants exercise control or influence over a registered
clearing agency with respect to the services provided by the registered
clearing agency or the rules applicable to its participants, these
participants may promote margin requirements that are not commensurate
with the risks and particular attributes of each participant's specific
products, portfolio, and market, thereby indirectly limiting
competition and increasing their ability to maintain higher profit
margins. Given such incentives, a registered clearing agency that is
dominated by a small number of large participants might make decisions
that are designed to provide them with a competitive advantage.
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\34\ See Staff Report on Clearing Agencies, supra note 27, at 21
(citing the Office of the Comptroller of the Currency, Quarterly
Report on Bank Trading and Derivatives Activities, Third Quarter
2019, graph 4 (Dec. 2019), https://www.occ.gov/publications-andresources/publications/quarterly-report-on-bank-trading-and-derivatives-activities/files/pub-derivativesquarterly-qtr3-2019.pdf).
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Third, the Commission's proposal is informed, in part, by its
experience overseeing registered clearing agencies with regard to the
concerns raised by certain participants that access criteria and risk
management standards may impose disproportionate costs relative to the
value of access to clearing agencies. In addition, when the Commission
proposed Regulation MC, the Commission identified a potential area
where a conflict of interest of participants that exercise undue
control or influence over a security-based swap clearing agency could
adversely affect the central clearing of security-based swaps by
limiting access to the security-based swap clearing agency, either by
restricting direct participation in the security-based swap clearing
agency or restricting indirect access by controlling the ability of
non-participants to enter into correspondent clearing arrangements.\35\
The resulting conflicts of interest could limit the benefits of a
registered security-based swap clearing agency in the securities market
to indirect participants. As a result, the Commission believes it
should continue to implement measures that help ensure the decisions of
a registered clearing agency reflect the interests and perspectives of
the broadest cross-section of stakeholders as possible.
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\35\ See Regulation MC Proposing Release, supra note 1, at
65885.
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This proposal is intended to help ensure that a registered clearing
agency's governance arrangements can manage these differing
perspectives and interests more effectively. As discussed in detail
below, the Commission believes that the proposed rules would help
ensure that a registered clearing agency's governance arrangements can
more effectively manage the divergent interests between and among
clearing agency owners and participants, small and large participants,
and direct and indirect participants of a clearing agency, which, in
turn, would improve a clearing agency's risk management practices to be
fair and more effective. Imposing these requirements on all registered
clearing agencies would have the effect of building upon existing
governance requirements with consistent, more defined and robust
governance standards across all registered clearing agencies.
B. Regulatory Framework for Registered Clearing Agencies
The regulatory framework for registered clearing agencies has
evolved over the last decade. Existing elements of the regulatory
framework establish policies and procedures requirements for minimum
standards to help promote participation in registered clearing
agencies.\36\ Other rules require that certain clearing agencies have
policies and procedures for governance arrangements that support the
objectives of owners and participants and consider the interests of
participants' customers, securities issuers and holders, and other
relevant stakeholders.\37\
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\36\ See, e.g., 17 CFR 240.17Ad-22(b)(5)-(7).
\37\ See, e.g., 17 CFR 240.17Ad-22(e)(2)(iii), (vi).
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[[Page 51817]]
Following the enactment of the Dodd-Frank Act, the Commission has
taken multiple steps to strengthen its regulatory framework for
clearing agencies by: (i) establishing minimum requirements for
governance, operations, and risk management practices of registered
clearing agencies; \38\ (ii) enhancing the Commission's oversight and
enforcement of the technology and systems infrastructure that supports
clearing agencies; \39\ (iii) establishing an enhanced regulatory
framework for systemically important clearing agencies and clearing
agencies for security-based swaps; \40\ and (iv) expanding the enhanced
regulatory framework from systemically important clearing agencies to
all registered clearing agencies that provide CCP or CSD services so
that the set of covered clearing agencies includes the seven active
clearing agencies registered with the Commission.\41\ In addition, the
Commission has adopted rules to help promote access to registered
clearing agencies, including rules that require a registered clearing
agency that performs CCP services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to: (i)
provide the opportunity for a person that does not perform any dealer
or security-based swap dealer services to obtain membership on fair and
reasonable terms at the clearing agency to clear securities for itself
or on behalf of other persons; (ii) have membership standards that do
not require that participants maintain a minimum portfolio size or
minimum transaction volume; and (iii) provide that a person maintaining
net capital equal to or greater than $50 million may obtain membership
at the clearing agency, provided that such person is able to comply
with other reasonable membership standards.\42\
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\38\ See 17 CFR 240.17Ad-22; see also Clearing Agency Standards
Adopting Release, supra note 8; CCA Standards Adopting Release,
supra note 13; CCA Definition Adopting Release, supra note 17.
\39\ See 17 CFR 242.1000 et seq.; see also Exchange Act Release
No. 73639 (Nov. 19, 2014), 79 FR 72251 (Dec. 5, 2014) (``Regulation
SCI Adopting Release'').
\40\ See 17 CFR 240.17Ad-22(e); CCA Standards Adopting Release,
supra note 13.
\41\ See CCA Definition Adopting Release, supra note 17.
\42\ 17 CFR 240.17Ad-22(b)(5)-(7).
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1. Current Requirements and Past Proposals on Clearing Agency
Governance
In the recent past, the Commission addressed clearing agency
governance with the adoption of two rules. In 2016, the Commission
adopted a rule that requires a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for governance arrangements that are
clear and transparent, clearly prioritize the safety and efficiency of
the covered clearing agency, support the public interest requirements
in Section 17A of the Exchange Act, and the objectives of owners and
participants, establish that the board of directors and senior
management have appropriate experience and skills to discharge their
duties and responsibilities, specify clear and direct lines of
responsibility, and consider the interests of participants' customers,
securities issuers and holders, and other relevant stakeholders of the
covered clearing agency.\43\ In 2012, the Commission adopted a rule
that requires all registered clearing agencies aside from covered
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to have governance
arrangements that are clear and transparent to fulfill the public
interest requirements in Section 17A of the Exchange Act, to support
the objectives of owners and participants, and to help promote the
effectiveness of the clearing agency's risk management procedures.\44\
The Commission took a broad, principles-based approach to these
governance rules to give a clearing agency the discretion to consider
its unique characteristics and circumstances, including ownership and
governance structures, effect on direct and indirect participants,
membership base, markets served, and the risks inherent in products
cleared, while at the same time, largely being subject to the
requirements of the SRO rule filing process, which requires public
notice and comment and consideration by the Commission.\45\
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\43\ See 17 CFR 240.17Ad-22(e)(2); see also CCA Standards
Adopting Release, supra note 13, at 70802. The Commission also
issued guidance on Rule 17Ad-22(e)(2) ``because . . . [as] there may
be a number of ways to address compliance with Rule 17Ad-22(e)(2),
the Commission . . . provid[ed] the following guidance that a
covered clearing agency generally should consider in establishing
and maintaining its policies and procedures: . . . whether the roles
and responsibilities of its board of directors are clearly
specified, and whether there are documented procedures for the
functioning of the board of directors, such as procedures for
identifying, addressing, and managing member conflicts of interest,
and for reviewing the board's overall performance and the
performance of its individual members regularly.'' CCA Standards
Adopting Release, supra note 13, at 70806-07.
\44\ See 17 CFR 240.17Ad-22(d)(8); see also Clearing Agency
Standards Adopting Release, supra note 8, at 66251-52.
\45\ See generally CCA Standards Adopting Release, supra note
13, at 70800 (``With a number of exceptions, Rule 17Ad-22(e) does
not prescribe a specific tool or arrangement to achieve its
requirements. The Commission believes that when determining the
content of its policies and procedures, each covered clearing agency
must have the ability to consider its unique characteristics and
circumstances, including ownership and governance structures, effect
on direct and indirect participants, membership base, markets
served, and the risks inherent in products cleared. This ability,
however, is subject to the requirements of the SRO rule filing and
advance notice processes, which provide some opportunities for the
public and participants to comment on the covered clearing agency's
rules, policies, and procedures. The Commission does not believe
that a granular or prescriptive approach to its regulation of
covered clearing agencies would be appropriate, nor would such an
approach ensure that a covered clearing agency does not become a
transmission mechanism for systemic risk. Moreover, the Commission
believes that the primarily principles-based approach reflected in
Rule 17Ad-22(e) will help a covered clearing agency continue to
develop policies and procedures that can effectively meet the
evolving risks and challenges in the markets that the covered
clearing agency serves.''); Clearing Agency Standards Adopting
Release, supra note 8, at 66252 (``We appreciate the perspective of
commenters who prefer the more general policies and procedures
design of Rule 17Ad-22(d)(8) to any more prescriptive rulemaking by
the Commission in the area of clearing agency governance.'').
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The Commission also proposed, but did not adopt, other rules
directed to clearing agency governance: proposed Regulation MC, which
contemplated limitations on ownership and minimum requirements for
independent directors intended to satisfy a requirement for Commission
rulemaking set forth in Section 765 of the Dodd-Frank Act (``Section
765''); \46\ proposed Rule 17Ad-25, which included additional
requirements for a clearing agency to mitigate conflicts of interest;
\47\ and proposed Rule 17Ad-26, which included requirements for a
clearing agency to establish standards for directors on the board and
committees thereof.\48\ The Commission did not adopt those proposals,
which were issued in 2010 and 2011, and is now withdrawing them because
of the multiple changes that the Commission has made to its regulatory
framework for clearing agencies as stated above.
---------------------------------------------------------------------------
\46\ See Regulation MC Proposing Release, supra note 1, at
65893-904.
\47\ See Clearing Agency Standards Proposing Release, supra note
2, at 14497-98.
\48\ See id. at 14498-99.
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As part of the incremental evolution of the Commission's clearing
agency regulatory framework that has occurred over the past decade, the
Commission now believes that updated rules are warranted to build upon
and strengthen the existing clearing agency governance framework, given
the trends the Commission has observed in the securities markets and
during its supervisory processes.\49\ Specifically,
[[Page 51818]]
the Commission believes that addressing the composition of a board and
its committees will help ensure effective governance, help promote
transparency into decision-making processes, facilitate fair
representation of owners and participants, and mitigate the potential
effects of conflicts of interest between owners and participants, large
and small participants, and direct and indirect participants. For these
reasons, proposed Rule 17Ad-25 includes provisions directed to all
registered clearing agencies.
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\49\ As discussed further below, the Commission believes that
the targeted set of proposed rules for governance included in this
release can help ensure that the framework effectively addresses the
considerations set forth in Section 765 with respect to clearing of
security-based swaps. Although Section 765 directed the Commission
to focus on conflicts of interest specifically with respect to
security-based swap clearing agencies, the Commission believes that
conflicts of interest concerns can arise across all registered
clearing agencies regardless of the asset classes served.
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2. Commodity Futures Trading Commission's Governance Framework for
Derivatives Clearing Organizations
Three clearing agencies registered with the Commission are also
registered as derivatives clearing organizations (``DCOs'') with the
Commodity Futures Trading Commission (``CFTC''). The Commission
acknowledges that, while other agency rules and regulations on
governance may apply to a clearing agency registered with the
Commission that are similar in scope or purpose to proposed Rule 17Ad-
25, the Commission remains obligated to ensure that risk in the U.S.
securities markets is appropriately managed--including through
promulgation of its own rules and regulations--consistent with the
purposes of the Exchange Act. Additionally, because Rule 17Ad-22(e)
under the Exchange Act and other comparable regulations--including DCO
governance rules adopted by the CFTC in January 2020 \50\--are based on
the same international standards, namely the PFMI, the potential for
inconsistent regulation is low. In this regard, the Commission believes
its existing governance rules for covered clearing agencies and
registered clearing agencies other than covered clearing agencies are
consistent with the CFTC's governance rule for DCOs.\51\ Certain
proposed requirements in this rulemaking are also consistent with the
requirements in the CFTC's DCO regime, which provides conflicts of
interest and board composition rules.\52\ Further, in developing these
rules, Commission staff has consulted with the CFTC and the Board of
Governors of the Federal Reserve System (``FRB'').
---------------------------------------------------------------------------
\50\ See DCO General Provisions and Core Principles, 85 FR 4800
(Jan. 27, 2020), https://www.cftc.gov/sites/default/files/2020/01/2020-01065a.pdf.
\51\ See 17 CFR 39.24 (requiring DCOs to, among other things,
have governance arrangements that are written, clear and
transparent, place a high priority on the safety and efficiency of
the derivatives clearing organization, and explicitly support the
stability of the broader financial system and other relevant public
interest considerations of clearing members, customers of clearing
members, and other relevant stakeholders; the board of directors
shall 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).
\52\ See 17 CFR 39.25 (requiring DCOs to establish and enforce
rules to minimize conflicts of interest in the decision-making
process of the derivatives clearing organization, establish a
process for resolving such conflicts of interest, and describe
procedures for identifying, addressing, and managing conflicts of
interest involving members of the board of directors); 17 CFR 39.26
(requiring DCOs to ensure that the composition of the governing
board or board-level committee of the DCO includes market
participants and individuals who are not executives, officers, or
employees of the derivatives clearing organization or an affiliate
thereof). We note that the CFTC recently proposed amendments to its
DCO governance framework relating to risk management committee
requirements. See Governance Requirements for Derivatives Clearing
Organizations, Release Number 8565-22 (July 27, 2022), https://www.cftc.gov/PressRoom/PressReleases/8565-22.
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C. Risks Associated With Clearance and Settlement
The Commission also believes that the proposed governance rules
would help ensure that registered clearing agencies make more effective
risk management decisions that take into account relevant stakeholder
perspectives and concerns. Recent episodes of increased market
volatility--in March 2020 following the outbreak of the COVID-19
pandemic, and in January 2021 following heightened interest in certain
``meme'' stocks--have revealed potential vulnerabilities in the U.S.
securities market and highlight the essential role of registered
clearing agencies in managing the risk that securities transactions may
fail to clear or settle.\53\ These events underscore the importance of
a strong regulatory framework to oversee registered clearing agencies
that clear or settle securities transactions and provide transparency
to the markets.
---------------------------------------------------------------------------
\53\ See, e.g., SEC, Staff Report on Equity and Options Market
Structure Conditions in Early 2021 (Oct. 14, 2021) (``2021 Staff
Report''), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf. Staff reports, Investor
Bulletins, and other staff documents (including those cited herein)
represent the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these staff
documents and, like all staff statements, they have no legal force
or effect, do not alter or amend applicable law, and create no new
or additional obligations for any person.
---------------------------------------------------------------------------
Among other things, the rules of a registered clearing agency
generally require its participants to transfer collateral to the
clearing agency, which may include different types of collateral, such
as margin payments, funds, or other assets, and the requirements
associated with these rules may change in response to changes in market
volatility. The terms of these rules, and the related policies and
procedures of the registered clearing agency that implement them, are
generally approved by the board as part of the clearing agency's
governance arrangements. These rules, policies, and procedures are also
subject to Commission review as proposed rule changes under Section 19
of the Exchange Act and Rule 19b-4 thereunder.\54\ The potential for
sudden and large increases in the margin required by a registered
clearing agency of its participants, as evidenced in the March 2020 and
January 2021 events stated above, have increased scrutiny by a wide
variety of market participants into the way a registered clearing
agency establishes, implements, maintains, and enforces its rules that
impose margin requirements.\55\ Some market participants have suggested
that such margin requirements are too conservative; \56\ others have
suggested that margin requirements do not sufficiently consider the
range of participants in a clearing agency and the downstream effect
such requirements may have on other types of investors.\57\ In response
to this increased attention, the Basel Committee on Banking Supervision
(``BCBS''), the Committee on Payments and Market Infrastructure
(``CPMI''), and the International Organization of Securities
Commissions (``IOSCO'') jointly released a consultative paper on CCP
margin practices, focused on, among other things, recent market
volatility and the apparent drivers of the size and composition of
margin calls.\58\
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78s; 17 CFR 240.19b-4.
\55\ See, e.g., Fitch Ratings, Margin Call Disparity, Breaches
Could Drive Clearinghouse Scrutiny (July 20, 2020), https://www.fitchratings.com/research/non-bank-financial-institutions/margin-call-disparity-breaches-could-drive-clearinghouse-scrutiny-20-07-2020.
\56\ See Alexander Campbell, CCP Margin Buffers Too Big,
Research Suggests (July 9, 2019), https://www.risk.net/risk-management/6783941/ccp-margin-buffers-too-big-research-suggests.
\57\ See Glenn Hubbard et al., Report of the Task Force on
Financial Stability, Brookings Institution (June 2021), https://www.brookings.edu/wp-content/uploads/2021/06/financial-stability_report.pdf.
\58\ See BCBS-CPMI-IOSCO, Consultative Report, Review of
Margining Practices (Oct. 2021), https://www.bis.org/bcbs/publ/d526.pdf.
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Concerns about the size and timing of margin requirements are only
one example of an area in which direct and indirect participants that
rely on the clearance and settlement process have expressed concerns
about clearing
[[Page 51819]]
agency governance and, in particular, the way that such governance
would oversee or employ risk management tools under stressed market
conditions. Two other areas of heightened attention concern a clearing
agency's process for loss allocation in the event of a participant
default and an event other than a participant default (hereinafter a
``non-default loss''), such as an operational failure, cyber-attack, or
theft. For example, participants and others have expressed concerns
about the extent to which existing governance structures at registered
clearing agencies would function during a potential recovery or
resolution scenario, which would occur in the event that a clearing
agency's prefunded financial resources available to absorb any loss--
sometimes referred to as the ``clearing fund'' or ``guaranty fund''--
are insufficient to close out a defaulting participant's portfolio
without allocating losses among the non-defaulting participants of the
clearing agency.\59\ Based on its supervisory experience, the
Commission believes that this loss allocation process could thus have
significant implications for the risk management of its non-defaulting
participants.
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\59\ In 2018, a default at a European CCP increased scrutiny of
the auction process through which a CCP may choose to close out a
defaulted portfolio. CPMI-IOSCO issued a report on issues for
consideration in 2020. See Bank for International Settlements,
Central Counterparty Default Management Auctions--Issues for
Consideration (June 2020), https://www.bis.org/cpmi/publ/d192.pdf.
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Further, although concerns about the size and timing of margin
requirements are, at one level, concerns about the risk management
practices of a clearing agency, they also implicate clearing agency
governance because the governance arrangements of a registered clearing
agency will determine the process for developing and approving policies
and procedures for imposing margin requirements, and the governance and
management of the registered clearing agency will also implement these
policies and procedures, whether during normal market conditions or
periods of increased market volatility.
In this regard, proposed Rule 17Ad-25 is intended to help ensure
that in periods of market stress or stress on the registered clearing
agency, the governance process of all registered clearing agencies is
transparent, objective, and addresses conflicts of interest. Trust
among market participants in the national system for clearance and
settlement, particularly in times of market stress, necessarily depends
on trust in the ability of registered clearing agencies to more
effectively manage the risk flowing from that market stress and, when
necessary, transparently and objectively impose increased margin
requirements or employ loss allocation mechanisms.
III. Proposed Rules
The Commission is proposing rules under the Exchange Act and to
address the considerations set forth in Section 765 of the Dodd-Frank
Act. Section 17(a) of the Exchange Act directs registered clearing
agencies to make and keep for prescribed periods such records, furnish
such copies, and make and disseminate such reports as the Commission,
by rule, prescribes as necessary or appropriate in the public interest,
for the protection of investors, or in furtherance of the Exchange
Act.\60\ Section 17A of the Exchange Act directs the Commission to
facilitate the establishment of a national system for the prompt and
accurate clearance and settlement of securities transactions and
provides the Commission with the authority to regulate those entities
critical to the clearance and settlement process.\61\ Section 23(a) of
the Exchange Act authorizes the Commission to make rules and
regulations as necessary or appropriate to implement the provisions of
the Exchange Act.\62\ The enactment of the Payment, Clearing, and
Settlement Supervision Act (``Clearing Supervision Act'') in 2010
(Title VIII of the Dodd-Frank Act) reaffirmed the importance of the
national system for clearance and settlement.\63\ Specifically,
Congress found that the ``proper functioning of the financial markets
is dependent upon safe and efficient arrangements for the clearing and
settlement of payments, securities, and other financial transactions.''
\64\ In addition, Section 765 of the Dodd-Frank Act specifically
directs the Commission to adopt rules to mitigate conflicts of interest
for security-based swap clearing agencies.\65\ Accordingly, the
Commission is proposing these rules pursuant to overlapping statutory
authorities, because although the Commission is able to propose these
rules pursuant to Section 17A of the Exchange Act, the Commission is
also meeting the mandatory rulemaking requirements of Section 765. The
Commission preliminarily has determined that these proposed rules are
necessary and appropriate to improve the governance of a clearing
agency that clears security-based swaps and in which a major security-
based swap participant has a material debt or equity investment.
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\60\ See 15 U.S.C. 78q(a).
\61\ See 15 U.S.C. 78q-1(a)(2)(A).
\62\ See 15 U.S.C. 78w(a).
\63\ See 12 U.S.C. 5461-5472.
\64\ 12 U.S.C. 5461(a)(1).
\65\ See 15 U.S.C. 8343.
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The Commission had previously reviewed the potential for conflicts
of interest at security-based swap clearing agencies in accordance with
Section 765 of the Dodd-Frank Act when it proposed Regulation MC, and
had identified those conflicts that could affect access to clearing
agency services, products eligible for clearing, and risk management
practices of the clearing agencies.\66\ The Commission had identified
three key areas where it believed a conflict of interest of
participants who exercise undue control or influence over a security-
based swap clearing agency could adversely affect the central clearing
of security-based swaps.\67\ First, participants could limit access to
the security-based swap clearing agency, either by restricting direct
participation in the security-based swap clearing agency or restricting
indirect access by controlling the ability of non-participants to enter
into correspondent clearing arrangements. Second, participants could
limit the scope of products eligible for clearing at the security-based
swap clearing agency, particularly if there is a strong economic
incentive to keep a product traded in the over-the-counter (``OTC'')
market for security-based swaps. Third, participants could use their
influence to reduce the amount of collateral they would be required to
contribute and liquidity resources they would have to expend as margin
or guaranty fund to the security-based swap clearing agency. Although
the Commission does not believe that the participants of security-based
swap clearing agencies are engaged in these types of activities, the
Commission recognizes that these three potential conflicts of interest
could limit the benefits of a security-based swap clearing agency in
the security-based swaps market, and even potentially cause substantial
harm to that market and the broader financial markets.
---------------------------------------------------------------------------
\66\ See Regulation MC Proposing Release, supra note 1, at
65885.
\67\ See id.
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Nevertheless, there are benefits to having participant incentives
known and reflected in the decision making activity of a board of
directors. Employees of participants--in particular, chief risk
officers or their equivalent--are likely to bring technical expertise
to a board of directors. Participants are often exposed to enormous
financial liability in the event of a default, and so they have strong
[[Page 51820]]
incentives to have sound risk management at the clearing agencies. In
order to promote the utility of having directors who are familiar with
participant operations, the proposed rule does not prohibit directors
who, among other things, receive compensation from participants from
meeting the definition of independent director (provided all other
requirements of the proposed rules are met).\68\
---------------------------------------------------------------------------
\68\ Other jurisdictions have chosen a different approach, as
discussed below. See infra Part IV.B.2.
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For the reasons discussed throughout this release, the Commission
is proposing rules for all registered clearing agencies to establish
requirements for governance, including requirements for the composition
of the board of directors, to mitigate conflicts of interest, to
establish certain obligations of the board to oversee service provider
relationships, and to establish an obligation of the board to consider
the views of participants and other relevant stakeholders. Each of
these proposed rules are discussed further below.
A. Board Composition and Requirements for Independent Directors
1. Proposed Rules 17Ad-25(b), (e) and (f)
Proposed Rules 17Ad-25(b), (e), and (f) would establish
requirements related to independent directors. First, proposed Rule
17Ad-25(b)(1) would require that a majority of the directors of a
registered clearing agency must be independent directors, as defined in
proposed Rule 17Ad-25(a). The proposed rule would also provide that, if
a majority of the voting interests issued as of the immediately prior
record date are directly or indirectly held by participants, then at
least 34 percent of the members of the board of directors must be
independent directors. Proposed Rule 17Ad-25(a) would define an
``independent director'' to mean a director that has no material
relationship with the registered clearing agency, or any affiliate
thereof. Proposed Rule 17Ad-25(a) also would define ``material
relationship'' to mean a relationship, whether compensatory or
otherwise, that reasonably could affect the independent judgment or
decision-making of the director, and includes relationships during a
lookback period of one year counting back from making the initial
determination in proposed Rule 17Ad-25(b)(2). In addition, proposed
Rule 17Ad-25(a) would define ``affiliate'' to mean a person that
directly or indirectly controls, is controlled by, or is under common
control with the registered clearing agency. Proposed Rule 17Ad-
25(b)(2) would require each registered clearing agency to broadly
consider all the relevant facts and circumstances, including under
proposed Rule 17Ad-25(g), on an ongoing basis, to affirmatively
determine that a director does not have a material relationship with
the registered clearing agency or an affiliate of the registered
clearing agency to qualify as an independent director. In making such
determination, a registered clearing agency must (i) identify the
relationships between a director, the registered clearing agency, any
affiliate thereof, along with the circumstances set forth in proposed
Rule 17Ad-25(f); (ii) evaluate whether any relationship is likely to
impair the independence of the director in performing the duties of
director; and (iii) document this determination in writing. Such
documentation requirements would be subject to the recordkeeping and
retention requirements that apply to all SROs under Section 17(a)(2) of
the Exchange Act.\69\
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\69\ See 15 U.S.C. 78q(a)(2).
---------------------------------------------------------------------------
The Commission believes that proposed Rules 17Ad-25(a) and 17Ad-
25(b)(2) could provide registered clearing agencies with a broad pool
of potential candidates to serve as independent directors. For example,
an employee of a participant of the registered clearing agency, a
professional in the securities or financial services industries, an
academic, and other such qualified persons would be eligible for
consideration as an independent director as long as the candidate meets
the other criteria under the definition of material relationship and
proposed Rule 17Ad-25(f).
Proposed Rule 17Ad-25(e) would require that, if any committee has
the authority to act on behalf of the board of directors, the
composition of that committee must have at least the same percentage of
independent directors as is required under these rules for the board of
directors, as set forth in proposed paragraph (b)(1).
Proposed Rule 17Ad-25(f) would describe certain circumstances that
would always exclude a director from being an independent director.
These circumstances would include: (1) the director is subject to
rules, policies, and procedures by the registered clearing agency that
may undermine the director's ability to operate unimpeded, such as
removal by less than a majority vote of shares that are entitled to
vote in such director's election; (2) the director, or a family member,
has an employment relationship with or otherwise receives compensation,
other than as a director, from the registered clearing agency or any
affiliate thereof, or the holder of a controlling voting interest of
the registered clearing agency; (3) the director, or a family member,
is receiving payments from the registered clearing agency, or any
affiliate thereof, or the holder of a controlling voting interest of
the registered clearing agency that reasonably could affect the
independent judgment or decision-making of the director, other than the
following: (i) compensation for services as a director to the board of
directors or a committee thereof; or (ii) pension and other forms of
deferred compensation for prior services not contingent on continued
service; (4) the director, or a family member, is a partner in, or
controlling shareholder of, any organization to or from which the
registered clearing agency, or any affiliate thereof, or the holder of
a controlling voting interest of the registered clearing agency, is
making or receiving payments for property or service, other than the
following: (i) payments arising solely from investments in the
securities of the registered clearing agency, or affiliate thereof; or
(ii) payments under non-discretionary charitable contribution matching
programs; (5) the director, or a family member is employed as an
executive officer of another entity where any executive officers of the
registered clearing agency serve on that entity's compensation
committee; or (6) the director, or a family member, is a partner of the
outside auditor of the registered clearing agency, or an employee of
the outside auditor who is working on the audit of the registered
clearing agency, or any affiliate thereof. Proposed Rules 17Ad-
25(f)(2)-(6) would be subject to a lookback period of one year
(counting back from making the initial determination in proposed Rule
17Ad-25(b)(2)). Family member would be defined to include any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse,
sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, any person (other than a tenant or employee) sharing a
household with the director or a nominee for director, a trust in which
these persons (or the director or a nominee for director) have more
than fifty percent of the beneficial interest, a foundation in which
these persons (or the director or a nominee for director) control the
management of assets, and
[[Page 51821]]
any other entity in which these persons (or the director or a nominee
for director) own more than fifty percent of the voting interests.
At the time of the 2016 CCA Standards Adopting Release, the
Commission declined to incorporate more prescriptive governance
elements into the rule as urged by commenters, including specific
requirements on independent representation on the board or risk
committee or governance relating to business relationships and
affiliates,\70\ based on the premise that the requirements in Section
17A of the Exchange Act relating to fair representation and the public
interest provided sufficient grounds to hold covered clearing agencies
accountable to these concerns.\71\ Similarly, with regard to the 2012
governance rule for all registered clearing agencies that are not
covered clearing agencies, the Commission declined to adopt more
prescriptive elements to its approach on governance with regard to
board composition.\72\ However, given the growing concentration of
clearing and settlement participants among a small number of firms \73\
and the concentration of differing perspectives into distinct groups of
clearing agency stakeholders, the Commission believes it is appropriate
to propose requirements on independent representation to facilitate the
consideration and management of diverse stakeholder interests in the
decision-making of the clearing agency.
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\70\ See CCA Standards Adopting Release, supra note 13, at 70804
(stating that ``[a]fter careful consideration of the comments, the
Commission has determined not to modify Rule 17Ad-22(e)(2) to
include specific requirements related to public or independent
representation on the covered clearing agency's board or risk
committee . . . . The Commission is declining to modify Rule 17Ad-
22(e)(2) to further specify that a particular director represent the
interests of buy-side or sell-side market participants . . . . In
addition, and for the same reasons, the Commission is declining to
modify Rule 17Ad-22(e)(2) to provide further specification regarding
business relationships and affiliates because these topics, like the
above, are already addressed by the fair representation requirement
in Section 17A(b)(3)(C) and the public interest requirements of
Section 17A of the Exchange Act'').
\71\ See 15 U.S.C. 78q-1(b)(3)(C).
\72\ See Clearing Agency Standards Adopting Release, supra note
8, at 66251 (adopting the rule largely as proposed and declining to
incorporate prescriptive requirements as suggested by commenters,
including ``[o]ne commenter [who] urged the Commission to ensure
that Rule 17Ad-22(d)(8) as well as any requirements adopted from the
Commission's proposed Regulation MC pertaining to the mitigation of
conflicts of interest are designed to ensure that buy-side market
participants have a meaningful voice in the operating committees of
clearing agencies because that representation is critical to
promoting robust governance arrangements at clearing agencies and
serving the best interests of the U.S. financial system. Another
commenter stated that proposed Rules 17Ad-22(d)(8), 17Ad-25, and
17Ad-26 reflect a better approach to governance, conflicts of
interest, and board and committee composition than the Commission's
proposed requirements for clearing agencies under Regulation MC. One
commenter urged the Commission to consider complementing proposed
Rule 17Ad-22(d)(8) with a minimum board independence requirement so
that at least two-thirds of all board directors would be required to
be independent'').
\73\ See Staff Report on Clearing Agencies, supra note 27, at
21.
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2. Discussion
(a) Board of Director Oversight of Management
Several current requirements under the Exchange Act and regulations
are applicable to a clearing agency's board of directors. Section 17A
of the Exchange Act requires that the rules of a clearing agency assure
the fair representation of owners and participants in the selection of
directors and the administration of the clearing agency's affairs.\74\
Rule 17Ad-22(e)(2) \75\ under the Exchange Act requires a covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for governance
arrangements that, in relevant part, (i) support the public interest
requirements in Section 17A of the Exchange Act applicable to clearing
agencies, and the objectives of owners and participants; (ii) establish
that the board of directors and senior management have appropriate
experience and skills to discharge their duties and responsibilities;
and (iii) consider the interests of participants' customers, securities
issuers and holders, and other relevant stakeholders of the covered
clearing agency.
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\74\ See 15 U.S.C. 78q-1(b)(3)(C).
\75\ See 17 CFR 240.17Ad-22(e)(2)(iii)-(iv), (vi).
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Given the importance of the board oversight function,\76\ CPMI-
IOSCO has issued guidance regarding the board's obligations with
respect to oversight of management.\77\ This guidance provides several
examples of effective oversight of management by clearing agency
boards. For example, the guidance highlights the board's responsibility
for: (i) carefully overseeing, monitoring and evaluating management's
implementation of the risk-management framework; (ii) taking
appropriate steps to help ensure that management is performing risk-
management tasks properly and effectively; (iii) ensuring that
processes are in place for effective and timely communication,
reporting and information flow between management and the board; (iv)
communicating with management about risk management processes; and (v)
when assessing the risk-management framework, appropriately challenging
management to demonstrate the effectiveness of risk-management
processes.\78\ Likewise, the report stated that while a board may not
delegate its ultimate responsibilities regarding risk management, it
may assign certain tasks, so long as the board clearly defines the
assigned tasks and retains ultimate responsibility over such tasks.\79\
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\76\ As a foundational principle of U.S. state corporate law, a
board of directors of a corporation has ultimate responsibility for
the oversight of management, consistent with a director's fiduciary
duties of loyalty and care to a company. See, e.g., Del. Code tit.
8, sec. 141 (2022) (establishing that the board is ultimately
responsible for the corporation's management). In the context of a
registered clearing agency incorporated under such principles, this
means that the board has ultimate responsibility for ensuring an
effective framework for the management of risk by the registered
clearing agency, so that the clearing agency can facilitate the
prompt and accurate clearance and settlement of securities
transactions. To discharge this duty effectively, the board must
necessarily work closely with management, but also effectively
oversee it.
\77\ See CPMI-IOSCO, Final Report, Resilience of central
counterparties (CCPs): Further guidance on the PFMI (July 2017)
(``CCP Resilience Guidance''), https://www.bis.org/cpmi/publ/d163.pdf.
\78\ See id. at 5.
\79\ See id.
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(b) Requirement for Independent Directors
Corporate governance tools exist to help ensure that the board
performs more effective oversight of the management of the company. One
such tool is the independent director, which could bolster the board's
ability to perform effectively by reducing the potential for financial
or other relationships between directors and those persons who are
overseen by directors, such as management.\80\ The Commission is
proposing a definition of ``independent director'' that retains
elements of the definition used in Regulation MC, but with
modifications.\81\ The Commission continues to believe that as part of
the definition, the key operating elements are the concepts of material
relationships and affiliates, so those elements would be retained.
However, at the same time, the Commission proposes using a modified
definition of
[[Page 51822]]
``independent directors'' because of changes in scope of this proposed
rulemaking. Regulation MC resulted from a public roundtable discussion
and meetings held with interested persons, in part, to gain further
insight into the sources of conflicts of interest at security-based
swap clearing agencies.\82\ Regulation MC had proposed a narrower
definition of independent director, which would have excluded directors
who had material relationships with participants and their affiliates
as well,\83\ and the proposal would have covered only one class of
registered clearing agencies: security-based swap clearing agencies.
Pursuant to Section 765, Regulation MC was designed to address
anticipated governance concerns relating to participant activity \84\
that existed in the OTC derivatives market. At the time of the
proposal, the Commission also proposed Rules 17Ad-25 and 17Ad-26 for
registered clearing agencies that took a broad, principles-based
approach to clearing agency governance. Because some registered
clearing agencies that would be subject to this proposal have
participants who are also owners, the Commission's current proposal,
under proposed Rule 17Ad-25(b)(1), creates a carve-out from the
majority independence requirement when a majority of voting interests
are owned by participant-owners, as set forth below.
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\80\ See, e.g., Bruce Dravis, Director Independence and the
Governance Process (Aug. 14, 2018), https://www.americanbar.org/groups/business_law/publications/blt/2018/08/05_dravis/. In the
United States, independent directors traditionally are not selected
from among management and are not intended to serve as
representatives of management, and therefore they do not carry the
same financial or other relationships that might create a conflict
of interest between the director's interests and the director's
duties to the company.
\81\ See Regulation MC Proposing Release, supra note 1, at
65897.
\82\ See id. at 65885.
\83\ See id. at 65928 (defining independent director as ``(1) A
director who has no material relationship with: (i) The security-
based swap execution facility or national securities exchange or
facility thereof that posts or makes available for trading security-
based swaps, or security-based swap clearing agency, as applicable;
(ii) Any affiliate of the security-based swap execution facility or
national securities exchange or facility thereof that posts or makes
available for trading security-based swaps, or security-based swap
clearing agency, as applicable; (iii) A security-based swap
execution facility participant, a member of a national securities
exchange that posts or makes available for trading security-based
swaps, or a participant in the security-based swap clearing agency,
as applicable; or (iv) Any affiliate of a security-based swap
execution facility participant, a member of a national securities
exchange that posts or makes available for trading security-based
swaps, or a participant in the security-based swap clearing agency,
as applicable.'').
\84\ See id. at 65885 (``These [security-based swap] entities
are not wholly-owned by participants or exchanges and may have
different governance related issues than the securities clearing
agencies currently registered with the Commission.'').
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The Commission believes that requiring a registered clearing agency
to include independent directors on the board can improve the board's
ability to conduct more effective oversight of management, which is a
critical component of the effectiveness of a registered clearing
agency. Independent directors constitute a set of directors that do not
have potential conflicts of interest resulting from their relationships
with management. This helps the board manage conflicts of interest
among directors because independent directors do not have the existing
relationships or accompanying incentives that might, for example,
discourage or dis-incentivize the board to review management's
decisions in a thorough, transparent, and consistent way. The
appearance of conflicts of interest can reduce confidence among direct
and indirect participants, other stakeholders, and the public in the
functioning of the clearing agency, particularly during periods of
market stress when general confidence in market resilience may be low.
The practice of employing independent directors is common across
the financial industry and across public companies more generally.\85\
Although Commission rules do not currently require the boards of
registered clearing agencies to include independent directors, each of
the registered clearing agencies already require directors with some
independence characteristics (such as ``nonexecutive,'' or ``public''
directors).\86\
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\85\ See, e.g., Quoc Trung Tran, Independent Directors and
Corporate Investment: Evidence from an Emerging Market, 21 J. Econ.
& Dev. 30 (2019), https://www.emerald.com/insight/content/doi/10.1108/JED-06-2019-0008/full/html (noting that ``independent
directors have become a common approach of corporate governance'' in
recent years). For example, the NYSE listing standards require that
a majority of the board of directors of a listed company be
independent, and they preclude managers or employees of the company
from meeting the independence standard, among other criteria. See,
e.g., Weil, Gotshal & Manges LLP, Requirements for Public Company
Boards (Jan. 3, 2022), https://www.weil.com/-/media/files/pdfs/2022/january/requirements_for_public_company_boards_including_ipo_transition_rules.pdf.
\86\ See DTCC, Board Mission Statement and Charter (Oct. 2021),
at 5, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Mission-and-Charter.pdf; ICC, Regulation and
Governance Fact Sheet (Sept. 2021), at 2, https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf; ICEEU, Disclosure
Framework (Jan. 31, 2021), at 20, https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Disclosure_Framework.pdf; OCC, Board
of Directors Charter and Corporate Governance Principles (Sept. 22,
2021), at 4-5, https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf; LCH SA, Board of
Directors (2022), https://www.lch.com/about-us/structure-and-governance/board-directors-0.
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In that vein, in addition to the above dynamic that exists between
the board and management, registered clearing agencies must also manage
the competing and sometimes divergent interests of owners and
participants, as previously discussed in Part II.A.\87\ The structure
of a registered clearing agency, and the risk management tools that it
employs, affect how the interests of owners, participants, and other
types of stakeholders align. For example, the risk mutualizing and
trade guaranty features provided by covered clearing agencies provide
for the shift of the consequences of one party's actions to another,
binding disparate interests together in certain circumstances, such as
a participant default. These features both affect how different
stakeholders maximize their own self-interest and also distinguish the
governance of a clearing agency from other corporate structures, such
as those of other financial services companies or, more generally,
publicly traded companies, who are unable to legally bind their
customers with financial obligations that are theoretically uncapped.
In particular, the owners of a clearing agency may seek to shift risks
to the participants of the clearing agency to decrease the level of
exposure that the owners face by capitalizing the clearing agency.
Meanwhile, participants in the registered clearing agency may seek to
raise the cost of participation to exclude competitors from the
benefits of the clearing agency's risk mutualizing and mitigating
tools, or they may seek to reduce their exposure to the clearing agency
by not making certain assets available for use by the clearing agency
during loss allocation. As described below, there can be countervailing
benefits to having the interests of a director and the interests of an
owner aligned, so as to increase the likelihood that decisions made
will benefit shareholders. Likewise, there are benefits to having the
interests of a director and the interests of a participant aligned, in
order to increase the likelihood that decisions will take into account
the long-term needs of participants. The requirement in Section 17A for
fair representation recognizes that clearing agencies may serve
competing stakeholders, such as owners and participants, both in the
selection of directors and administration of their affairs.\88\
Directors may carry these perspectives when they serve on the board,
and these perspectives may influence the ultimate decision-making of
the board. For example, one set of
[[Page 51823]]
stakeholders could use the board to shift costs and risk exposure to
others (e.g., owners shifting them to participants), in ways that could
undermine the risk mutualizing and mitigating purpose of the clearing
agency.\89\ The Commission is also mindful that ultimately, owners (as
holders of voting interests) are generally in the position of electing
directors (subject to any restrictions on ownership, classes of shares,
etc.), meaning that any director who has a material relationship with a
participant and who has been nominated as a potential independent
director must nonetheless be voted onto the board of directors by the
owners; so ultimate approval of a director would remain in the hands of
owners, creating an incentive for even a director who is employed by a
participant to take into account the views of owners. Nonetheless, the
criteria for independent directors under the proposed rules would help
ensure that independent directors retain those features that
distinguish their interests from those of other directors because, for
example, an independent director cannot have an employment relationship
with or otherwise receive compensation (other than as a director) from
the registered clearing agency or any affiliate thereof, or the holder
of a controlling voting interest of the registered clearing agency. In
addition, although independent directors may be elected, in part, by
owners, the views of owners would not be the only stakeholders' views
that independent directors would consider.
---------------------------------------------------------------------------
\87\ See, e.g., Securities Industry Study, Report of the
Subcommittee on Commerce and Finance, H.R. Rep. No. 92-1519, at 84
(1972) (``1972 House Report'') (stating generally about SROs such as
clearing agencies, ``[s]elf-regulators may be parochial in
adjustment and accommodating competing aims and policies.
Furthermore, since self-regulatory bodies are composed of disparate
subsidiary groups, the legitimate interests of a particular group
may be overridden, or the tugging and pulling may result in inaction
or impasse'').
\88\ See 15 U.S.C. 78q-1(b)(3)(C).
\89\ See, e.g., PFMI, supra note 4, at 11 (``FMIs and their
participants do not necessarily bear all the risks and costs
associated with their payment, clearing, settlement, and recording
activities. Moreover, the institutional structure of an FMI may not
provide strong incentives or mechanisms for safe and efficient
design and operation, fair and open access, or the protection of
participant and customer assets. In addition, participants may not
consider the full impact of their actions on other participants,
such as the potential costs of delaying payments or settlements.'').
---------------------------------------------------------------------------
Given the above dynamics between owners and participants, the
Commission believes that registered clearing agency processes involving
risk management or director nominations are also implicated in managing
the dynamics between owners and participants. Therefore, the
relationships affecting the independence of a director in the context
of a registered clearing agency also include those between the director
and the registered clearing agency itself or its affiliates.\90\ The
ability of a registered clearing agency to help ensure effective risk
management and loss allocation in the event of a default or non-default
loss is linked to the interests of the owners of the clearing agency,
who may also have financial relationships with the participants (or be
the participants) of such registered clearing agency.\91\ For example,
The Options Clearing Corporation (``OCC'') is owned by certain options
exchanges, whose customers may also be participants of OCC.\92\
Similarly, participants in the registered clearing agencies that are
subsidiaries of The Depository Trust & Clearing Corporation (``DTCC'')
are required to purchase common shares of DTCC as part of periodic
efforts to keep ownership proportionate to such owners' use of clearing
agency services.\93\ Such provisions that require common shares to be
periodically re-allocated to reflect levels of use of the clearing
agency services create financial and other relationships between a
registered clearing agency, its participants, its affiliates, and its
owners. In this sense, registered clearing agencies are not organized
in a way that reflects the corporate ownership of the typical publicly
traded company, where the shareholder base is a dispersed population
that may have coordination problems, and therefore the scope of inquiry
cannot end simply at whether a director is independent from management
alone.\94\ Rather, the owners of a registered clearing agency reflect a
few key groups, who may be owners or participants of the clearing
agency, and board composition will thus necessarily reflect these
different stakeholder groups and their views on risk management.
---------------------------------------------------------------------------
\90\ Affiliate is proposed to mean a person that directly or
indirectly controls, is controlled by, or is under common control
with the registered clearing agency. A director would, of course,
have a relationship with the clearing agency that arises from
service as a director, and the accompanying duties to the company
such as the fiduciary duties of the duty of care or the duty of
loyalty. These relationships and duties, however, do not create a
potential conflict of interest that might impair the independent
judgment of the director.
\91\ In Part III.A.2.f) below, the Commission discusses how
participant-owners may have interests that are well-aligned with the
risk management function of the clearing agency, supporting a lower
threshold of independent directors when a majority of owners are
participant-owners.
\92\ See OCC, Annual Report (2019), https://annualreport.theocc.com/About-OCC.
\93\ See DTCC, NSCC Important Notice No. A8986 (Apr. 5, 2021)
(regarding the period common stock reallocation process), https://www.dtcc.com/-/media/Files/pdf/2021/4/5/A8986.pdf.
\94\ See, e.g., Donald C. Clarke, Three Concepts of the
Independent Director, 32 Del. J. Corp. L. 73 (2007), https://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=1045&context=faculty_publications.
---------------------------------------------------------------------------
In the context of a registered clearing agency, the Commission
believes that requiring independent directors helps promote the ability
of the board to perform its oversight of management function and to
support a plurality of viewpoints voiced at the board level.
Independent directors would help ensure that, when the interests
between owners and participants diverge, the impact of such divergence
is more manageable because the board would not be composed entirely of
directors who have material relationships either to management (such as
under a situation where managers approve compensation or other payments
from the registered clearing agency to such director), owners, or
participants. Balance between stakeholders with divergent views could
help the board to adequately consider the respective needs of all
stakeholders, and help promote the integrity of the clearing agency's
risk management function. With respect to independent directors serving
on the boards of public companies, some studies have questioned whether
independent directors succeed in improving shareholder value.\95\ For
registered clearing agencies, the Commission is proposing a requirement
for independent directors for reasons unrelated to improving
shareholder value. Rather, registered clearing agencies are subject to
an expansive regulatory framework in which they operate as critical and
often systemically important financial market utilities.\96\ They are
subject to requirements under the Exchange Act to facilitate prompt and
accurate clearance and settlement, promote the public interest,\97\ and
help ensure the fair representation of owners and participants
(regardless of whether these owners and participants are the
controlling owner or the clearing agency's largest participant). As
long as a majority of directors are not solely motivated by the needs
of one category of stakeholders, this structure can help ensure that
the board addresses the full
[[Page 51824]]
set of owners and participants, even smaller participants,\98\ in
fulfilling these statutory objectives. In this way, a requirement for
independent directors is well-suited to help promote more effective
governance of a registered clearing agency and meet the purposes of the
Exchange Act.\99\
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\95\ See, e.g., id. at 75-77.
\96\ See, e.g., 12 U.S.C. 5461; see also Board of Governors of
the Federal Reserve System, Designated Financial Market Utilities,
https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm (providing the list of designated financial
market utilities, including five SEC-regulated registered clearing
agencies).
\97\ See 15 U.S.C. 78q-1(b)(3)(C). See also Clarke, supra note
94, at 82-83 (noting that although there are situations where an
independent director may not make an appreciable difference in
outcomes, that provided there is a mechanism for accountability,
``[a] director serving the `public interest' should arguably be
independent of everyone [such that a director is able to] . . .
follow only the dictates of her conscience'').
\98\ See id. at 80 (stating that non-management directors are
viewed as potentially protecting small shareholders from big
shareholders).
\99\ See infra Part IV.C.1 (discussing proposed Rules 17Ad-
25(b), (e), and (f)).
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(c) Definition of ``Material Relationship''
To be an independent director consistent with the proposed rules, a
director must have no material relationships with a registered clearing
agency or its affiliate. As defined in proposed Rule 17Ad-25(a), which
was carried forward from the Commission's previous proposal in
Regulation MC,\100\ a ``material relationship'' means a relationship,
whether compensatory or otherwise, that reasonably could affect the
independent judgment or decision-making of the director. The scope
covers relationships during a lookback period of one year counting back
from making the initial determination in proposed Rule 17Ad-25(b)(2).
The proposed definition is identical to the definition proposed in
Regulation MC, except for the addition of a one-year look back period,
which is intended to address recently terminated business or personal
relationships to prevent evasion of the purposes of this provision, as
discussed further below. The Commission is retaining its prior proposed
definition of material relationship because the definition of material
relationship is not impacted by the type of security cleared (i.e.,
expanding this proposal to cover all registered clearing agencies
rather than security-based swap clearing agencies does not alter the
rationale provided under the Regulation MC). Establishing a materiality
and reasonableness threshold for such relationships provides a
registered clearing agency with discretion to apply this requirement
across a range of fact patterns while ensuring that they ultimately
facilitate the fair representation of owners and participants.
---------------------------------------------------------------------------
\100\ See Regulation MC Proposing Release, supra note 1, at
65897.
---------------------------------------------------------------------------
The proposed rule includes relationships both compensatory and
otherwise to help ensure that the evaluation of a director's
independence is thorough. Such scope of relationships would include not
only pecuniary transactions but other types of quid pro quo
arrangements, biases, or obligations between persons. Under the
Commission's proposed rule, however, such non-compensatory
relationships must reach the level of materiality to affect a
director's status as an independent director. In addition, the proposed
rule would carve out any past relationships that have terminated at
least one year prior because the Commission believes such past
relationships are unlikely to have a material effect on a director's
future decision-making. The proposed definition includes a lookback
period, which is meant to cover recently terminated relationships as a
method to avoid circumvention of the proposed independent director
requirements. As discussed below, the Commission has experience with a
one-year lookback period applied to employment relationships between
auditors and former audit clients, and the Commission believes that the
same objectives underpinning that lookback period would apply
here.\101\
---------------------------------------------------------------------------
\101\ See generally Sarbanes-Oxley Act of 2002, Public Law 107-
204, sec. 206, 116 Stat. 745, 774 (2002) (``SOX'').
---------------------------------------------------------------------------
Finally, the definition would require consideration of material
relationships between a director and any affiliate that directly or
indirectly controls, is controlled by, or is under common control with
the registered clearing agency. The purpose of this provision is to
address potential conflicts of interest that would arise when a
director is serving in a management or director role for an affiliate,
such as a parent company, of the registered clearing agency,\102\ or
when a director has a material level of investment in a registered
clearing agency or its affiliate. The Commission is not including a
bright-line test as to what is a material level of investment because
such an investment could be either material to the director, such as a
financial investment that is a material percentage of an individual's
wealth, or material to the registered clearing agency or its affiliate,
such as a material percentage of ownership of a company. For example,
if a director held ownership in an affiliated company of a registered
clearing agency, this investor relationship should be evaluated for
materiality and whether it could affect the independent judgment or
decision-making of the director, even if such investment did not amount
to such director being a controlling shareholder of such affiliate
(which is specifically prohibited for independent directors under
proposed rule 17Ad-25(f)(4), as discussed further below). If such
relationships were not considered, then a director who serves on the
management of the parent company and therefore indirectly manages the
registered clearing agency itself through the holding structure could
nonetheless be considered independent. The proposed definition would
help mitigate evasion of the spirit of the independent director
requirement through the use of multi-tier holding company structures
that place management responsibility at multiple levels of the
organizational structure. If the functional role of managing a clearing
agency was housed in a parent company, thereby allowing a manager to
claim to be an independent director by virtue of not being an employee
of the registered clearing agency itself but instead of the parent
company, then the Commission's intent in this proposed rule could be
easily circumvented.
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\102\ The potential implications of a director of a registered
clearing agency having a material relationship with an affiliated
company have been discussed in the context of European Union-based
CCPs under the 2012 Regulatory Technical Standards (``RTS''),
adopted by the European Commission as part of the European Market
Infrastructure Regulation (``EMIR''). Chapter III, Article 3 of the
RTS states, ``[a] CCP that is part of a group shall take into
account any implications of the group for its own governance
arrangements including whether it has the necessary level of
independence to meet its regulatory obligations as a distinct legal
person and whether its independence could be compromised by the
group structure or by any board member also being a member of the
board of other entities of the same group. In particular, such a CCP
shall consider specific procedures for preventing and managing
conflicts of interest including with respect to outsourcing
arrangements.'' See Commission Delegated Regulation (EU) No 153/2013
of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the
European Parliament and of the Council with regard to regulatory
technical standards on requirements for central counterparties, 2013
O.J. (L 52), at art. 3(4), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0153&from=EN.
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(d) Process for Assessing Relationships
Proposed Rule 17Ad-25(b)(2) establishes a process by which a
registered clearing agency must identify, evaluate, and document its
determinations regarding director independence. These requirements have
been included in the rule because achieving director independence
necessarily requires an assessment of a director's relationships. The
provisions of Rule 17Ad-25(b)(2) include requirements to establish a
process to identify and evaluate any such relationships and to document
that process to help ensure that a registered clearing agency has
considered a wide range of potential relationships, and applied its
analysis transparently and consistently over time.
The proposed rule also requires a registered clearing agency to
affirmatively determine that no material relationships exist, broadly
considering
[[Page 51825]]
all the relevant facts and circumstances. The Commission believes that
establishing a process helps ensure more effective identification and
evaluation of any material relationships. The Commission also believes
that affirmatively determining that a director is independent helps
promote a thorough review of the director's relationships and helps
promote confidence in the governance arrangements of the clearing
agency because each such director's independence status will have been
evaluated by the registered clearing agency. The Commission has not
specified in the rule the particular sources of information to be
reviewed or the particular approach to inquiring about relationships
because the facts and circumstances of each director or candidate's
relationships are likely to differ. The Commission is not specifying a
checklist of sources to consult and searches to perform, in order to
avoid inadvertently leaving off such checklist a source that cannot be
foreseen.
(e) Excluded Relationships
The process set forth under Rule 17Ad-25(b)(2) would also require
analysis of certain circumstances pursuant to which a director would be
precluded from being an independent director, regardless of any
determinations otherwise made pursuant to Rule 17Ad-25(b)(2). These
scenarios are intended to address cases where, in the Commission's
view, the circumstances clearly prevent a director from exercising
independent judgment or decision-making.
Currently, owners of registered clearing agencies are predominantly
non-natural persons such as participants, exchanges, or a parent
company. The Commission does not expect that a natural person serving
as a director would typically be a controlling shareholder of such
registered clearing agency, although there may be future registered
clearing agencies with this organizational structure. However, due to
the fact that directors are natural persons, but owners of registered
clearing agencies currently tend to be non-natural persons, many of the
circumstances described below seek to address the connection between
the natural person director and the non-natural person owner.
Proposed Rule 17Ad-25(f)(1) limits the ability for a registered
clearing agency to undercut the authority of independent directors,
such as through provisions established by a registered clearing agency
in the bylaws or other organizational documents. For example, if one
director who happened to be associated with management was authorized
to remove independent directors him or herself, rather than through the
normal channels of removing a director via a majority vote of the
shareholders, then any independent directors might be beholden to such
director. Likewise, if some directors--such as those with relationships
to management--could conduct closed meetings that exclude independent
directors to discuss matters before the board, the ability of
independent directors to perform their duties could be undercut. This
provision would not limit the ability of a registered clearing agency
to manage or mitigate conflicts of interests among its directors, such
as by implementing through policies and procedures a requirement that
conflicted directors recuse themselves from a matter pursuant to a
conflicts of interest policy, if such recusal would be necessary for
that director to operate more effectively. Rather, the provision
addresses whether independent directors would be limited, restricted,
or chilled in expressing their views because they were subject to
removal by a management director or denied information relevant to the
decision-making process.
Proposed Rules 17Ad-25(f)(2) through (5) identify circumstances
where a director is precluded from being an independent director
because the director has an employment relationship or has received a
payment from the clearing agency, its affiliates, or its holders of
controlling voting interests, either directly or through indirect
channels. Several of the provisions reference a family member, which
the Commission is proposing to define broadly, to include natural
persons who are related by blood, marriage, or household, including
living antecedents and descendants, as well an non-natural persons
(trusts and other legal entities) that are controlled by such natural
persons. The Commission is intending for the prohibition to be
comprehensive as to the relationship in order to cover potentially
meaningful relationships. Although the list includes non-natural
persons controlled by an extensive list of natural persons, a director
would not necessarily need to compile a list of trusts or companies
controlled by various in-laws and relatives. Instead, if the director
compiled the list of natural persons referenced in the definition, a
registered clearing agency could determine whether those persons (or
legal entities under their control) were doing business with the
registered clearing agency, any of its affiliates, the holder of a
controlling voting interest of the registered clearing agency, the
outside auditor, or an entity where an executive officer of the
registered clearing agency serves on such entity's compensation
committee, in a manner that would exclude a person from being
considered an independent director under proposed Rule 17Ad-25(f), as
described below. A registered clearing agency is likely already
determining who it is conducting business with as part of evaluating
whether to enter into contracts with those companies.
Proposed Rule 17Ad-25(f)(2) precludes a director from being an
independent director when the director is also an employee of the
registered clearing agency or its affiliates, a requirement intended to
reflect the traditional concept of director independence from
management, discussed above. Proposed Rule 17Ad-25(f)(3) and (4)
preclude a director from being an independent director when receiving
certain types of payments, such as in a scenario where the director is
a partner or a controlling shareholder of a consulting firm that
contracts with the registered clearing agency, or where the director's
spouse is a partner or controlling shareholder of a service provider
that is hired by the registered clearing agency. These proposed rules
address circumstances where payments would create a conflict of
interest and undermine the ability of the director to maintain
independent judgment. The proposed rules would carve out certain types
of payments, such as payments from pensions or deferred compensation
for prior services. The Commission believes that such payments are
generally made in response to past, rather than future, activity and
therefore do not have the potential to create conflicts of interest by
affecting future decision-making by the director.
The list of payments for property or services in proposed Rule
17Ad-25(f)(4) scopes in participant clearing fees as well. The
Commission is restricting the ability of a director to be independent
if he or she is a partner or controlling shareholder of a participant
because he or she could directly profit from reducing the size of the
clearing fees even if that impairs the quality of the risk management
of the clearing agency.
Proposed Rule 17Ad-25(f)(5) would preclude independence if a
director, or a family member, is employed the as an executive officer
of another entity where any executive officers of the registered
clearing agency serve on that entity's compensation committee. The
intent of this provision would prevent circular arrangements whereby
compensation
[[Page 51826]]
could be elevated among a chain of interested persons.
Proposed Rule 17Ad-25(f)(6) would preclude a director from being an
independent director when the director is a partner of an outside
auditor or is an employee working on an audit of the registered
clearing agency. As above, these limitations are designed to reduce the
potential for conflicts of interest that would impair an independent
director's independent judgment.
Finally, proposed Rule 17Ad-25(f) would subject paragraphs (f)(2)-
(6) to a one-year lookback period, which is intended to capture
conflicts of interest that may arise from relationships that have
recently terminated (such as departure from a job). As with the
lookback period in the ``material relationship'' definition, the
purpose of this lookback period is the same for all provisions, as well
as in the material relationship definition, which is to cover
relationships that have recently terminated, while not reaching back so
far in time as to impede the registered clearing agency's ability to
select from a large pool of skilled and experienced candidates for
independent director. The Commission believes that a one-year lookback
period is consistent with similar requirements in other statutes and
Commission rules.\103\
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\103\ See SOX, supra note 101.
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(f) Majority of Independent Directors
In assessing the appropriate quantum of independent directors to be
required under the proposed rule, the Commission has considered the
potential impact of divergent interests between owners and
participants, or the potential in which the interests of owners and
participants might diverge. The Commission believes that requiring a
majority of independent directors is most likely to result in the board
acting from a position where the interests of all the stakeholders of
the clearing agency are considered, rather than the interests of a
particular subset of owners or participants. Having a majority of
independent directors reduces the potential misalignment of interests
among directors and management, and among owners and participants,
helping to ensure that a majority of directors are unattached to these
dynamics. In other words, an unattached or ``disinterested'' majority
helps promote consideration of the risk management purposes of the
clearing agency, and helps decrease the likelihood that other interests
that may arise from a potential conflict of interest are the
determinative factor in board decisions. If a majority of directors are
non-independent directors, then a majority of directors influenced by
potential or perceived conflicts of interest could sway the outcome of
board decisions.
The Commission recognizes, however, that the interests of an owner
and a participant can overlap in some cases, such as when a participant
also owns a portion of its equity. For example, the Exchange Act
provides that the Commission may determine that the representation of
participants is fair if they are afforded a reasonable opportunity to
acquire voting stock of the clearing agency, directly or indirectly, in
reasonable proportion to their use of such clearing agency.\104\ The
opportunity for a participant to become such an owner of a clearing
agency is one method to mitigate the potential for conflicts of
interest among these two groups, by more closely aligning the interests
of a participant with those of a voting interest holder (i.e., owner).
---------------------------------------------------------------------------
\104\ See 15 U.S.C. 78q-1(b)(3)(C).
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In this structure, owners and participants would be one and the
same, and the dynamic where diverging interests between owners and
participants undermine the risk management function of the clearing
agency is less likely because participant-owners would necessarily
internalize and synthesize the divergent interests resulting from
ownership and participation. In other words, participant-owners are
less likely to use their equity share to shift the burdens of risk
management to the participants of the clearing agency because they are
themselves participants. When a majority of voting shares are held by
participant-owners, the Commission believes that the interests of the
board will be more closely aligned with ensuring more effective risk
management. In this circumstance, the Commission believes it is
appropriate to reduce the number of independent directors required
under the rule to promote the selection of directors by participant-
owners because directors voted by a majority of persons intended to
represent the clearing agency's participant-owners would mitigate
against the possibility of a divergence of interests. Accordingly, the
Commission is proposing a lower requirement for independent directors
of at least 34 percent of directors when the registered clearing agency
has a majority of its voting interests directly or indirectly held by
participants; indirectly held by participants refers to participant
ownership of a parent company. For example, if a registered clearing
agency is wholly-owned by a holding company, and the holding company is
majority owned by the participants of the registered clearing agency,
then a 34 percent threshold would apply. Alternatively, if a registered
clearing agency was 51 percent owned by a holding company, and that
holding company was 100 percent owned by the participants of the
registered clearing agency, then that would also amount to a majority
ownerships of participants, which would cause the 34 percent
independent director provision to apply. The Commission proposes to
require 34 percent, or greater than one-third of directors, to
encourage a significant portion of directors to meet the independence
requirement but to provide a comparatively higher level of discretion
to the clearing agency to select non-independent directors. A
requirement for greater than one-third independent directors would
align with the requirement for independence in other jurisdictions for
clearing agencies.\105\ In addition, if 34 percent of directors are
independent directors, and participants and owners of the registered
clearing agency are predominantly the same entity (i.e., participant-
owners), then it remains less likely that any one of the three distinct
groups seeking to influence the registered clearing agency--owners,
management, and participants--will establish an outsized influence over
the remaining non-independent directors.
---------------------------------------------------------------------------
\105\ See EMIR at art. 27(2), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32012R0648&from=EN (stating that ``[a]
CCP shall have a board. At least one third, but no less than two, of
the members of that board shall be independent''); see also id. at
art. 2(28) (defining independent member of the board to mean a
member of the board who has no business, family or other
relationship that raises a conflict of interests regarding the CCP
concerned or its controlling shareholders, its management or its
clearing members, and who has had no such relationship during the
five years preceding his membership of the board).
---------------------------------------------------------------------------
Finally, the proposed rule defines the 34 percent requirement using
the term ``holders of voting interests'' rather than simply ``owners''
so that the lower threshold only applies when participant-owners are
entitled to vote to elect a director, irrespective of whether someone
is otherwise entitled to the financial attributes of such ownership.
The Commission is not using the term owner as the equivalent concept of
holder of a voting interest, because the financial attributes of a
security can be separated from the voting rights of a security. The
Commission is focused on who has the ability to influence who is voted
onto the board--which accompanies voting rights, not financial
attributes--as the relevant factor in deciding whether
[[Page 51827]]
participants can enjoy that benefit of ownership as participant-owners.
(g) Other Committees of the Board Generally
Proposed Rule 17Ad-25(e) would impose the independent director
requirement as applied to the full board of directors under Rule 17Ad-
25(b)(1) to any board committee that has the authority to act on behalf
of the board. For example, if 34 percent of the board must be composed
of independent directors, any committee that is taking action based on
a board delegation also should have at least 34 percent of its members
be independent directors, unless otherwise required to meet a higher
standard under the rules.\106\ The purpose of the proposed rule is to
prevent a registered clearing agency from circumventing the proposed
requirement for independent directors by delegating key decisions of
the board to a committee with fewer independent directors than those
required of the full board under Rule 17Ad-25(b)(1).
---------------------------------------------------------------------------
\106\ For example, to help ensure that evaluations of director
nominees made by the nominating committee reflect independent
judgment, proposed Rule 17Ad-25(c)(2) would require that the
nominating committee be composed of a majority of independent
directors in all cases. See infra Part III.B.1 (discussing the
proposed rule).
---------------------------------------------------------------------------
3. Request for Comment
The Commission requests comment on all aspects of proposed Rules
17Ad-25(b), (e), and (f). In particular, the Commission requests
comment on the following specific topics:
1. Is requiring that the boards of registered clearing agencies
have a majority of independent directors an effective tool for ensuring
a transparent and objective governance process that balances the
potentially competing or divergent interests of owners and
participants? Has the Commission accurately described the benefits of
independent directors, as defined in this release, to the board of a
registered clearing agency? Why or why not?
2. Are there other ways to define ``independent director'' or
``material relationship'' that would achieve the Commission's goals? If
so, what are they? Should the Commission establish a numerical
threshold, such as $100,000 annually, for compensatory relationships in
order for them to be considered material under this rule? If so, what
should that numerical threshold be? Please be specific. Should the
Commission create a list of the types of relationships that should be
considered either material or that could affect the independent
judgment or decision-making of a director under this rule, and should
that list distinguish between compensatory and non-compensatory
relationships? Why or why not?
3. Should the Commission define the term ``control'' in the
proposed rules? If so, would it be appropriate to adopt a definition
similar to the one in 17 CFR 246.2, which states that control means the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through
the ownership of voting securities, by contract, or otherwise?
4. What is the appropriate percentage of independent directors on
the board of a registered clearing agency? Does the requirement for a
majority of directors to be independent directors support the goals
discussed in this proposal? Would another threshold be more effective
at addressing diverging views among owners, participants, and other
relevant stakeholders in the registered clearing agency? For example,
would a requirement that one-third of the directors be independent
(which has been adopted by European jurisdictions) provide the benefits
of independent directors without any of the potential drawbacks? Please
explain.
5. Is the application of director independence requirements
appropriate for all registered clearing agencies, or should there be
distinctions made among registered clearing agencies based on certain
factors, such as organizational structure or products cleared? If so,
what factors are relevant and why? Would these proposed rules apply to
all types of organizational structures in a consistent manner, or would
they impede a registered clearing agency from changing its
organizational structure into a more innovative or efficient structure?
6. Is a one-year lookback period adequate for purposes of the
``material relationship'' definition and proposed Rules 17Ad-25(f)(2)-
(6)? For example, is a one-year time period for the receipt of certain
payments by clearing agencies the appropriate length of time to
determine that a director is precluded from being considered
independent? How will this impact the ability of clearing agencies to
recruit experienced persons to serve as directors? More generally, how
large is the pool of potential directors that could serve as
independent directors, as defined in this release, on the boards of
registered clearing agencies? Are there particular elements of the
independent director definition that limit the pool of potential
independent directors? Should those elements be modified to expand the
pool?
7. Is it appropriate to include affiliates of registered clearing
agencies as relevant to the consideration of material relationships of
independent directors, as well as certain scenarios that preclude
independence?
8. Is the scope of the scenario in proposed Rule 17Ad-25(f)(4)
overly broad or overly narrow in covering all partners, regardless of
relative holdings, and controlling shareholders? Should this provision
cover all shareholders, or non-managing partners, instead? Why or why
not?
9. The Commission is proposing in Rule 17Ad-25(f)(3) to carve out
directors who are serving as directors on other boards from the list of
scenarios that explicitly preclude independence. Is this carve-out
appropriate in order to permit a director of a registered clearing
agency who also serves as a director of another legal entity to qualify
as independent (provided all other requirements are met), or should
there be some restrictions, such as restrictions on serving as a
director of an affiliate, or participant? Why or why not?
10. The Commission requests comment on whether the proposal to
require independent directors raises any potential legal issues for
those directors or clearing agency governance committee members.
Specifically, as a matter of corporate law, would independent directors
or committee members be forced to contend with competing duties or
obligations to the clearing agency such as under laws of another
jurisdiction, including any duties or obligations that would foreclose
participation in the board or the committees? If so, how may the goal
of receiving independent, diverse opinions be achieved?
11. The Commission requests comment on whether the proposed
approach to board composition and board member independence may raise
compliance issues with respect to being registered with the Commission
and the CFTC or a non-U.S. regulatory authority. If so, what steps
should the Commission take to continue to facilitate dually-registered
clearing agencies?
12. The Commission requests comment on whether the requirement to
undergo a broad consideration of facts and circumstances when
determining whether a board member is independent is sufficiently
clear. Is there additional guidance needed on what sources could be
consulted or what types of relationships could be considered?
13. The Commission is applying the lowered threshold applicable to
registered clearing agencies whose voting interests are majority-held
by participants, or whose parent company's
[[Page 51828]]
voting interests are majority-held by the registered clearing agency's
participants. Does this scope strike the right balance between
permitting flexibility in ownership structures versus providing the
lowered threshold of 34 percent independent directors only when
warranted (i.e., when the interests of participants and owners are less
likely to diverge when participant-owners are the holders of voting
interests)? Why or why not?
14. Should the Commission permit directors who have material
relationships with participants (such as being an employee of a
participant), other than those relationships that are explicitly
precluded in Rule 17Ad-25(f), to meet the definition of independent
director, or should these relationships be precluded as well? Should
the Commission be more restrictive, as is proposed in paragraph (f)(2),
with respect to compensation and payments received from the registered
clearing agency or its affiliates, rather than participants? Why or why
not?
15. The Commission is soliciting comment on how to view participant
clearing fees or other payments from participants that generate revenue
for the clearing agency as a potential scenario that precludes director
independence. Is it sufficiently clear in the text of proposed Rule
17Ad-22(f)(4) that revenues from participants are covered under the
scope of this prohibition? Should the Commission treat revenues from
participants differently from other sources of revenues or
expenditures? Should the Commission create a carve out for lower levels
of revenues in order to promote the opportunity for partners or
controlling shareholders of small participants to be able to qualify as
an independent director, such as by creating a minimum threshold of
payments covered by this provision? Why or why not?
16. The Commission is proposing an extensive list of natural
persons who fall within the definition of family member for this
rulemaking, along with legal entities under their control. Has the
Commission chosen an appropriate scope for the definition of family
member, or is the definition unworkable, either because it is
overbroad, or because it misses an important category of persons?
17. Should the Commission define ``family member'' to refer to
``spouse or spousal equivalent''? Why or why not? Is adding ``spousal
equivalent'' unnecessary because such person would be covered as ``any
person (other than a tenant or employee) sharing a household,'' which
is already part of the definition? Please explain.
18. The Commission is not specifying particular roles for several
aspects of this rulemaking, such as who makes the determination that a
director is an independent director. Should the Commission be more
prescriptive and specify whose responsibility it is to make such a
determination? Why or why not?
B. Nominating Committee
1. Proposed Rule 17Ad-25(c)
Proposed Rule 17Ad-25(c)(1) would require each registered clearing
agency to establish a nominating committee and a written evaluation
process whereby such nominating committee shall evaluate individual
nominees to serve as directors. Proposed Rule 17Ad-25(c)(2) would
require that (i) independent directors comprise a majority of the
nominating committee, and (ii) an independent director chair the
nominating committee. Proposed Rule 17Ad-25(c)(3) would require the
nominating committee to specify and document fitness standards approved
by the board. Such fitness standards for serving as a director would
need to be consistent with all the requirements of proposed Rule 17Ad-
25, and also would include that the individual nominee is not subject
to any statutory disqualification as defined under Section 3(a)(39) of
the Exchange Act.\107\ Proposed Rule 17Ad-25(c)(4) would require the
nominating committee to document the outcome of the clearing agency's
written evaluation process in a manner that is consistent with the
nominating committee's written fitness standards required under
proposed Rule 17Ad-25(c)(3). The process would require the nominating
committee to: (i) take into account each nominee's expertise,
availability, and integrity, and demonstrate that the board, taken as a
whole, has a diversity of skills, knowledge, experience, and
perspectives; (ii) demonstrate that the nominating committee has
considered whether a particular nominee would complement the other
board members, such that, if elected, the board of directors, taken as
a whole, would represent the views of the owners and participants,
including a selection of directors that reflects the range of different
business strategies, models, and sizes across participants, as well as
the range of customers and clients the participants serve; (iii)
demonstrate that the nominating committee considered the views of other
stakeholders who may be impacted by the decisions of the registered
clearing agency, including transfer agents, settlement banks, nostro
agents, liquidity providers, technology or other service providers; and
(iv) identify whether each selected nominee would meet the definition
of independent director in proposed Rules 17Ad-25(a) and (f), and
whether each selected nominee has a known material relationship with
the registered clearing agency or any affiliate thereof, an owner, a
participant, or a representative of another type of stakeholder of the
registered clearing agency described in (iii) above.
---------------------------------------------------------------------------
\107\ Section 3(a)(39) of the Exchange Act lists the particular
events that would subject a person to ``statutory disqualification''
with respect to membership or participation in, or association with
a member of, a self-regulatory organization, such as a registered
clearing agency. 15 U.S.C. 78q-1(a)(3)(C).
---------------------------------------------------------------------------
2. Discussion
In Part III.A.2, the Commission discussed the importance of
requiring independent directors on the board of a registered clearing
agency to help manage the dynamics that exist between owners and
participants. To help ensure that the nomination process for the
selection of independent directors is thoughtful and transparent,
promote the integrity of determinations that a nominee is independent
and is qualified to serve, and also promote more effective governance,
the Commission is proposing to require a nominating committee that is
composed of a majority of independent directors and chaired by an
independent director. The Commission is proposing to require that the
nominating committee be composed of a majority of independent directors
in all cases, even where a clearing agency is majority-owned by
participants, to help ensure that the evaluation of director nominees
by the nominating committee reflects independent judgment.\108\
---------------------------------------------------------------------------
\108\ See supra note 106 and accompanying text (explaining that,
despite the composition requirements for certain board committees
under proposed Rule 17Ad-25(e), the lower independence threshold
under proposed Rule 17Ad-25(b)(1) will not apply to the nominating
committee).
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(a) Requirement for Nominating Committee
Many registered clearing agencies already have a designated
nominating committee.\109\ However, these nominating committees may not
serve as the exclusive governing body for evaluating director nominees.
To create a record that would help to ensure the integrity of the
nominating committee's consideration of each potential nominee's
qualifications, including
[[Page 51829]]
whether such nominee would qualify as an independent director under
proposed Rules 17Ad-25(b), (e), and (f), the Commission believes that
requiring the nominating committee to be the exclusive governing body
for evaluating director nominees helps ensure that director selections
are made consistent with the proposed requirements and without
influence from potential conflicts of interest. Some registered
clearing agencies currently allow other governing bodies and/or
constituents of their organizational structure to select certain
directors.\110\ While the proposed rule would not prohibit such
approaches, it would require that any such nominees be submitted first
to the nominating committee for evaluation--before being considered by
the board--pursuant to a written evaluation process established by the
registered clearing agency. This proposed requirement would help ensure
that nominees are evaluated in a manner consistent with the
requirements for independent directors and other qualifications to
serve.
---------------------------------------------------------------------------
\109\ See infra Part IV.B.4.a)(2) (discussing the current
baseline for the proposed rule).
\110\ For example, OCC currently allows certain participant
exchanges to select Exchange Director nominees for election to OCC's
board. See OCC, By-Laws (rev. Apr. 11, 2022), at 39, https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf (``An individual may be nominated by, elected by, and
serve as an Exchange Director for more than one Equity Exchange.'');
see also OCC, Board of Directors Charter and Corporate Governance
Principles (rev. Sept. 22, 2021), at 4, 6, https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf (providing that Public Director and
Member Director nominees are selected by OCC's Governance and
Nominating Committee, but Exchange Director nominees are instead
selected by OCC's Equity Exchanges).
---------------------------------------------------------------------------
(b) Role of Independent Directors
Not all registered clearing agencies require that the nominating
committee be chaired by an independent director or composed of a
majority of independent directors. As discussed above, however,
independent directors are well-suited to help manage the divergent
interests that exist among management, owners, and participants,\111\
and are also best incentivized to help ensure that nominees do not have
conflicts of interest that would preclude independent decision-making
or otherwise undermine the decisions of the board.\112\ Because a
majority of independent directors can help provide perspectives broader
than owners and participants, constituting the nominating committee
with a majority of independent directors would help promote the fair
representation of owners and participants in the selection of
directors. In addition, independent directors would facilitate a fair
evaluation of a nominee's qualifications, including whether such
individual would meet the Commission's proposed criteria for being an
independent director, as such an evaluation would be conducted by a
body that is free from influence in the performance of its duties and
whose majority would itself satisfy the proposed criteria for being
independent directors. By contrast, when evaluating nominees, directors
serving on the nominating committee who are not independent directors
may be more likely to favor board candidates whose views align with
those persons with whom the director has a material relationship,
reducing the likelihood that the nominating committee will consider a
set of director nominees that represent the different stakeholders in a
clearing agency. Thus, having a nominating committee that is composed
of majority independent directors should help to address and facilitate
both the selection of independent directors, as well as the selection
of a broad range of directors that reflect the different stakeholder
groups in a fair and more representative way.
---------------------------------------------------------------------------
\111\ See supra Part III.A.2 (discussing independent directors
as a governance tool to address such divergent interests).
\112\ See supra Part III.A.2 (discussing independent directors
as a governance tool to address such conflicts).
---------------------------------------------------------------------------
(c) Fitness Standards
Fitness standards for directors help ensure that directors have the
necessary qualifications and experience to contribute more effectively
to board governance, and most clearing agencies already have documented
fitness standards for serving as director. The Commission believes that
codifying this practice by requiring documented fitness standards will
help ensure that directors are subject to consistent standards, fairly
applied over time by the nominating committee and the board. Because
the Commission is proposing rules to require independent directors, the
Commission also believes requiring documented fitness standards will
help ensure that a nominee's qualifications and relationships are
reviewed pursuant to a consistent set of standards before the
nomination is voted on by the board. In addition, the Commission is
establishing that the nominating committee is responsible for
maintaining the fitness standards because the composition of the
nominating committee, in which a majority of directors must be
independent directors, helps ensure that the standards are objective
and evenly applied across nominees and over time because they will be
maintained by a majority of directors from among the objective and
disinterested group of independent directors.
Although many registered clearing agencies already have documented
fitness standards for selecting nominees to serve as directors
generally, not all registered clearing agencies have an existing
requirement to forbid directors who have been subject to a statutory
disqualification. Because such individuals have been found in violation
of applicable laws or suspended from membership or participation in an
SRO, the Commission does not believe such an individual should serve in
the capacity of a director, where functionally the individual would be
in a position to advise and direct the decisions of a registered
clearing agency. The Commission believes that adding such a requirement
helps ensure a nominee's fitness to serve on the board.
(d) Selection Criteria for Directors
Based on its supervisory experience, the Commission believes that
enhancements to clearing agency governance practices would facilitate
the ability of clearing agencies to obtain and address input from a
broader array of market participants, especially on risk management
issues, to improve resilience. Additionally, based on its supervisory
experience, the Commission believes that clearing agencies should
consider the views of relevant stakeholders, such as clearing members
and clients, in their decision-making, as these groups will ultimately
bear the majority of any losses incurred as a result of decisions
affecting the clearing agency's risk profile. Further, based on its
supervisory experience, the Commission believes that smaller
participants and clients of participants should be represented on
clearing agency boards and board committees, including the risk
management committee, such that their views and perspectives are
formally considered in board decisions that may impact them. In the
Commission's view, the diverse perspectives and expertise that smaller
participants and clients of participants can provide will help inform a
clearing agency's operations and thereby improve the resilience of the
registered clearing agency. Therefore, the Commission believes that
board governance of the risk management function of the clearing agency
will be enhanced when it has the benefit of more diverse perspectives
on relevant risk management issues from across the range of
stakeholders--owners, direct participants, and indirect participants--
[[Page 51830]]
in a registered clearing agency. Accordingly, proposed Rules 17Ad-
25(c)(4)(i), (ii), and (iii) would require that clearing agencies take
steps to facilitate diverse perspectives and expertise on the board of
directors, as well as greater involvement by these stakeholders.
In the Commission's view, the proposed rules would complement the
Exchange Act requirements for fair representation of owners and
participants in the clearing agency's selection of directors and the
administration of the clearing agency's affairs.\113\ Proposed Rule
17Ad-25(c)(4)(ii) would help ensure that, when evaluating director
nominees, the nominating committee considers nominees that represent
the views of a broad range of participants with different business
strategies, models, and sizes--such as smaller participants and clients
of participants--for director positions. The Commission believes that
it is useful for the nominating committee to also consider nominees who
are representatives from participants and their clients for director
positions because directors representative of a diverse cross-section
of the clearing agency's participants and clients of participants are
more likely to identify and understand the disparate impacts of
different risks and risk management practices across the full set of
participants and their clients.
---------------------------------------------------------------------------
\113\ See 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------
While proposed Rule 17Ad-25(c)(4)(iii) does not require a
registered clearing agency to include other types of stakeholders in
the selection of directors, the Commission understands that other
stakeholders--including transfer agents, settlement banks, nostro
agents, liquidity providers, technology or other service providers--may
be impacted by board decisions concerning risk management and other
significant operational issues. Therefore, the Commission believes that
board governance may benefit in some instances from considering such
stakeholders' perspectives in the evaluation process for director
nominees. Accordingly, proposed Rule 17Ad-25(c)(4)(iii) would help
ensure that the nominating committee considers the views of other
stakeholders who may be impacted by the decisions of the clearing
agency into the evaluation process for director nominees. In this
regard, the Commission believes that proposed Rule 17Ad-25(c)(4)(iii)
would facilitate a process that considers the wide variety of
perspectives that may have an interest in the risk management purpose
of the clearing agency.
Proposed Rule 17Ad-25(c)(4)(iii) would give the nominating
committee discretion to determine how to consider the views of other
stakeholders, in part based on the markets served by the clearing
agency and the relevant interested stakeholders. In the Commission's
view, relevant stakeholders generally would include persons and
entities that access the national system for clearance and settlement
indirectly (e.g., institutional and retail investors), entities that
rely on the national system for clearance and settlement to more
effectively provide services to investors and market participants, and
other market infrastructures.\114\ The Commission believes that
considering the views of such persons and entities in particular would
support the Exchange Act requirements that clearing agencies be able to
facilitate prompt and accurate clearance and settlement, protect
investors and the public interest, and ensure the safeguarding of
securities and funds in the custody or control of the clearing agency
or for which the clearing agency is responsible.\115\ The Commission
understands that the scope of relevant stakeholders who may be impacted
by the decisions of the registered clearing agency will vary for each
registered clearing agency and could include direct participants,
indirect participants, and other stakeholders described in proposed
Rule 17Ad-25(c)(4)(iii).
---------------------------------------------------------------------------
\114\ See CCA Standards Adopting Release, supra note 13, at
70803 (``Other relevant stakeholders currently include, for example,
transfer agents, liquidity providers, and other linked market
infrastructures, including exchanges, matching service providers,
and payment systems.'').
\115\ See supra Part I and Part II.A; see also 15 U.S.C 78q-
1(b)(3)(A).
---------------------------------------------------------------------------
Finally, proposed Rule 17Ad-25(c)(4)(iv) would require the
nominating committee's process to identify whether each selected
nominee would meet the independent director definition in proposed
Rules 17Ad-25(a) and (f), and whether each selected nominee has a known
material relationship with the registered clearing agency or any
affiliate thereof, an owner, a participant, or a representative of
another stakeholder of the registered clearing agency described in
proposed Rule 17Ad-25(c)(4)(iii). Such record would help to ensure and
verify the integrity and consistency of the nominating committee's
process and adherence to the clearing agency's standards for
independent directors, consistent with proposed Rules 17Ad-25(b), (e),
and (f).
3. Request for Comment
The Commission requests comment on all aspects of proposed Rule
17Ad-25(c). In particular, the Commission requests comment on the
following specific topics:
19. Is it appropriate for the Commission to require that the
nominating committee be the exclusive venue for evaluating nominees for
director to the board of directors? What alternative arrangements or
processes might also be appropriate for evaluating director nominees?
Should the rules incorporate such arrangements? Why or why not? Please
explain.
20. Should the Commission be more prescriptive in requiring that
certain types of stakeholders, such as smaller participants and
customers, be afforded a right of participation in the board of a
clearing agency? Why or why not? If so, which types of stakeholders?
Please explain with specific information.
21. Do commenters agree with the Commission's assessment that
requiring a majority of independent directors on the nominating
committee will improve the quality of nominees? Please explain.
22. Do commenters believe that the proposed rule will help ensure
that the nominating committee considers nominees that represent the
views of smaller participants and clients of participants? Please
explain. Should the Commission consider additional specific composition
requirements? Why or why not? If so, what should those requirements be?
23. Has the Commission provided sufficient specificity regarding
the scope and content of the evaluation process for director nominees?
Please identify and explain other types of criteria, if any, that
should be included in the evaluation process for director nominees.
Please identify and explain any proposed criteria that should be
excluded from the evaluation process for director nominees.
C. Risk Management Committee
1. Proposed Rule 17Ad-25(d)
Proposed Rule 17Ad-25(d)(1) would require each registered clearing
agency to establish a risk management committee (or committees) to
assist the board of directors in overseeing the risk management of the
registered clearing agency. Proposed Rule 17Ad-25(d)(1) would also
require each risk management committee to reconstitute its membership
on a regular basis and at all times include representatives from the
owners and participants of the registered clearing agency. Proposed
Rule 17Ad-25(d)(2) would require that a risk management committee, in
the
[[Page 51831]]
performance of its duties, be able to provide a risk-based,
independent, and informed opinion on all matters presented to it for
consideration in a manner that supports the safety and efficiency of
the registered clearing agency.
2. Discussion
(a) Purpose and Experience of the Risk Management Committee
Covered clearing agencies are subject to the requirements of Rule
17Ad-22(e) under the Exchange Act, while all registered clearing
agencies other than covered clearing agencies are subject to the
requirements of Rule 17Ad-22(d) under the Exchange Act.\116\ Currently,
all registered clearing agencies are covered clearing agencies and, as
such, they are required to have risk management committees as a part of
their governance arrangements under Rule 17Ad-22(e)(3)(iv).\117\ While
Rule 17Ad-22(e)(3)(iv) requires covered clearing agencies to have a
risk management committee, no parallel requirement exists for
registered clearing agencies that are subject to Rule 17Ad-22(d). The
Commission recognizes that there may be future registered clearing
agencies that are not covered clearing agencies and, as a result, would
be subject to Rule 17Ad-22(d). The Commission believes that clearing
agencies subject to Rule 17Ad-22(d) will also likely face risk
management issues related to their activities and, therefore, that any
clearing agency subject to Rule 17Ad-22(d) will likely benefit from
having a risk management committee. Accordingly, the Commission is
proposing Rule 17Ad-25(d) so that clearing agencies subject to Rule
17Ad-22(d) will also be required to have risk management committees as
a part of their governance arrangements.\118\ Additionally, because the
general requirement for a risk management committee under Rule 17Ad-
22(e)(3)(iv) does not outline minimum requirements for such committee,
proposed Rule 17Ad-25(d) establishes more defined requirements related
to the purpose and function of risk management committees. The specific
requirements imposed by proposed Rule 17Ad-25(d) will help enhance risk
management governance across all registered clearing agencies.
---------------------------------------------------------------------------
\116\ See supra notes 17-23 and accompanying text (explaining
that there are two categories of clearing agencies: covered clearing
agencies and all registered clearing agencies other than covered
clearing agencies).
\117\ See 17 CFR 240.17Ad-22(e)(3)(iv); see also CCA Standards
Adopting Release, supra note 13, at 70807-09 (discussing that, under
Rule 17Ad-22(e)(3)(iv), a registered clearing agency's risk
management framework must provide risk management personnel with a
direct reporting line to, and oversight by, a risk management
committee of the board of directors).
\118\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)(1), which requires a risk management committee to assist the
board in overseeing the risk management of a registered clearing
agency); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------
As discussed above, each registered clearing agency is also a
covered clearing agency and, therefore, has established some form of
risk management committee to consider risk issues generally.\119\
Critical to the effective functioning of a clearing agency is the
board's ability to understand and engage with the risks that a
registered clearing agency faces and the risk management practices it
employs to mitigate those risks. The Commission recognizes that while
the board has ultimate responsibility over risk management matters, it
may assign certain tasks to a board committee to assist the board in
discharging its ultimate responsibility.\120\ Therefore, the Commission
believes that a risk management committee of the board is a more
effective way to help ensure that the board is engaged with and
informed of the ongoing risk management of the clearing agency, and
that a dedicated committee of the board remains focused exclusively on
matters related to risk management. The Commission believes that
requiring registered clearing agencies to establish a risk management
committee of the board would help ensure that the board can more
effectively oversee management's decisions concerning matters that
implicate the clearing agency's risk management, including its
policies, procedures, and tools for mitigating risk.
---------------------------------------------------------------------------
\119\ See infra Part IV.B.4.a)(3).
\120\ See CCP Resilience Guidance, supra note 77, at 5.
---------------------------------------------------------------------------
In addition, for the risk management committee itself to be
effective, it must have a clearly defined purpose and obligations to
the board. Accordingly, proposed Rule 17Ad-25(d)(2) would require that
a risk management committee, in the performance of its duties, be able
to provide a risk-based, independent, and informed opinion on all
matters presented to it for consideration in a manner that supports the
safety and efficiency of the registered clearing agency. The proposed
rule is intended to specify the role of the risk management committee
by stating the committee's purpose--namely, to provide a risk-based,
independent, and informed opinion on all matters presented to it in a
way that supports the safety and efficiency of the registered clearing
agency. The Commission believes the proposed rule helps ensure that the
committee has a clear scope and sufficient direction to more
effectively address risk management related matters, regardless of the
participants, markets, and products that a clearing agency serves.
First, with respect to its purpose, the risk management committee's
opinions must be risk-based, meaning that its opinions are focused on
both the risks that the clearing agency faces and the tools at its
disposal to mitigate and address such risks. To facilitate such an
approach, the proposed rule provides that the risk management committee
must be able to provide an opinion that supports the safety and
efficiency of the clearing agency itself. As a result, the Commission
believes that when the risk management committee makes recommendations
to the board, its opinions should reflect how the decisions support the
safety and efficiency of the clearing agency. In the Commission's view,
the stated objective of supporting the safety and efficiency of the
clearing agency helps ensure that the risk management committee's
recommendations represent the best interests of the clearing agency.
Second, the risk management committee's opinions must be independent.
That is, when making recommendations to the board, the risk management
committee's decisions or opinions must be its own, mindful of the
objective discussed above, and not merely a rubber stamp for the
recommendations presented to the committee by management. The
Commission believes that, by requiring the risk management committee to
provide an independent opinion, irrespective of its composition, the
proposed rule helps ensure that the committee is free from influence in
the performance of its duties.
Finally, the risk management committee's opinions must be informed.
That is, when making recommendations to the board, the risk management
committee's opinions should demonstrate that the committee was able to
engage thoughtfully and knowledgeably with the matters presented to it.
In this regard, for the risk management committee to provide an
informed opinion, its members should have a clear understanding of the
clearing agency's operations and risk management procedures, including
the risks that it faces and its methods of addressing such risks.
Accordingly, the Commission believes that, in complying with this
proposed requirement, the risk management committee generally should
include directors with specific risk management expertise and
[[Page 51832]]
experience related to the risks that the clearing agency faces.\121\
Because the risks a clearing agency faces will vary depending on the
products it clears and the markets it serves, the Commission believes
that a clearing agency should have discretion to determine the
appropriate qualifications and expertise needed for the risk management
committee to provide an informed opinion. The Commission also believes
that, by requiring the risk management committee to provide an informed
opinion, the proposed rule helps ensure that the committee's
recommendations are more reliable and effective. In the Commission's
view, the risk management committee's ability to provide risk-based,
independent, and informed opinions is critical to the proper
functioning and effectiveness of the committee.
---------------------------------------------------------------------------
\121\ The Commission has previously recognized that, because
clearing and settlement is a highly specialized area, specific risk
management expertise and experience are needed to serve on the risk
management committee and make informed decisions. See Regulation MC
Proposing Release, supra note 1, at 65899, 65921 (discussing the
``highly specialized risk management expertise required of directors
serving on [the risk management] committee'').
---------------------------------------------------------------------------
(b) Representation of Owners and Participants
Commission rules do not currently require a registered clearing
agency to include representatives from the clearing agency's owners and
participants on the risk management committee. Based on its supervisory
experience, the Commission believes that clearing agencies will benefit
from the diverse perspectives and expertise that representatives from
owners and participants can provide, which enhances the effectiveness
of their risk management practices. With this in mind, the Commission
is proposing that the risk management committee at all times include
representatives from the owners and participants of the registered
clearing agency.\122\ In the Commission's view, these representatives
would be persons who have a relationship with the clearing agency's
owners and participants, such as employees of the owners and
participants or those who have an ownership interest in the owners and
participants. Based on its supervisory experience, the Commission
believes that representatives from a clearing agency's owners and
participants will likely have an understanding of the clearing agency's
operations and procedures, as well as the complex risk management
issues that the clearing agency's board must consider. In this regard,
requiring the risk management committee to include representatives from
the clearing agency's owners and participants helps ensure that the
risk management committee's recommendations to the board reflect these
stakeholders' unique perspectives and expertise on risk management
issues.
---------------------------------------------------------------------------
\122\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)(1)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------
Proposed Rule 17Ad-25(d)(1) requires that the risk management
committee at all times include multiple representatives from the owners
and participants of the registered clearing agency. By requiring the
risk management committee to include representatives from the clearing
agency's owners and participants, the Commission believes that the
committee will likely include representation from a broad range of
participants with different business strategies, models, and sizes. The
committee generally should include both small and large participants.
The Commission recognizes that, other than requiring that multiple
representatives from the clearing agency's owners and participants
serve on the committee at all times, the proposed rule does not require
that a certain percentage or number of such representatives serve on
the committee. Accordingly, the Commission believes that the proposed
rule provides a registered clearing agency with some discretion to
determine the appropriate composition for the risk management committee
with respect to representation from its owners and participants. By
requiring that the risk management committee include multiple
representatives from the owners and participants of the clearing
agency, the proposed rule helps ensure a minimum standard for the
inclusion of market participants on risk management committees while
providing sufficient flexibility to registered clearing agencies given
the range of different sizes, business models, and governance
structures across clearing agencies.
(c) Requirement To Reconstitute Membership
Many registered clearing agencies have established policies and
procedures for governance arrangements that help promote participation
from a broader array of owners and participants on the risk management
committee through the use of regular reconstitution.\123\ The
Commission believes that codifying this practice will set a minimum
standard for the reconstitution of the risk management committee's
membership. Therefore, the Commission is proposing that the risk
management committee reconstitute its membership on a regular
basis.\124\ Requiring the risk management committee to regularly
reconstitute its membership helps ensure that a broad range of owners
and participants will be able to provide their risk management
expertise and participate in the decision-making of the risk management
committee over time. In the Commission's view, the proposed
reconstitution requirement achieves the above objective of ensuring a
broad range of participation on the risk management committee without
imposing specific obligations related to owners, participants, or
independent directors that may be suitable in some, but not necessarily
all, cases.
---------------------------------------------------------------------------
\123\ See, e.g., ICC, ICE Clear Credit Regulation and Governance
Fact Sheet, at 3 (April 2022), https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf; OCC,
Risk Committee Charter, at 1 (rev. Sept. 22, 2021), https://www.theocc.com/getmedia/e71a4c1d-52dc-4c95-aeb1-98dab9159f41/risk_committee_charter.pdf.
\124\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)(1)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------
Because the risk management committee is broadly responsible for
providing recommendations to the board on all risk management related
matters, it is important that the committee's membership reflects a
wide range of owners and participants with relevant experience and
expertise on a variety of risk management issues. By requiring the risk
management committee to regularly reconstitute its membership, proposed
Rule 17Ad-25(d)(1) helps ensure ongoing diversity of perspectives
across owners and participants and expertise on the risk management
committee. The Commission believes the proposed reconstitution
requirement helps ensure that the risk management committee is well-
positioned to provide more effective recommendations to the board on
all risk management matters. The Commission also believes the proposed
reconstitution requirement helps ensure that the committee is able to
provide fresh perspectives on risk management matters, which, in turn,
helps promote more effective and reliable risk management practices at
a registered clearing agency.
The Commission acknowledges that proposed Rule 17Ad-25(d)(1) only
requires the risk management committee to reconstitute its membership
``on a regular basis.'' In this regard, the proposed rule provides a
registered clearing agency with discretion to
[[Page 51833]]
determine the appropriate timing for reconstitution. For example, the
charter for a registered clearing agency's risk management committee
could establish that the committee will conduct a review of its members
on an annual basis, or other specified length of time, to assess
whether the committee continues to be an accurate reflection of the
clearing agency's owners and participants. The charter could also
establish that members of the committee serve for a specified term, or
that the committee would rotate or replace directors on the committee
at certain intervals absent a specified turnover threshold among
directors. Additionally, registered clearing agencies could stagger
terms in order to have regular turnover of participants and other
members of the risk management committee.
3. Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-25(d). In addition, the Commission requests comments
on the following specific issues:
24. The Commission is not proposing to carve out the risk
management committee from the director independence requirements under
proposed Rule 17Ad-25(e). Should the Commission include such a carve-
out for the risk management committee so that a registered clearing
agency would not be required to include independent directors on the
committee? Why or why not? If not, should there be separate director
independence requirements applicable only to the risk management
committee that reflect the highly specialized risk management expertise
needed to serve on the committee? Why or why not?
25. Is the proposed requirement that the registered clearing
agency's risk management committee be a committee of the board a more
effective way to structure the risk management committee than requiring
that the risk management committee be an external committee, such as a
management committee or an advisory committee? Why or why not? If not,
should the risk management committee be structured to represent more
participants, regardless of whether those participants are represented
on a clearing agency's board? Why or why not?
26. The Commission is not specifying whose responsibility it is to
determine the matters presented to the risk management committee for
consideration. Should the Commission be more prescriptive and specify
whose responsibility it is to make such determinations? If so, should
the Commission require the risk management committee to designate
thresholds or identify the types of risk management related matters
that warrant consideration by the committee? Why or why not? Please
explain.
27. Is the proposed requirement that the risk management committee
include at all times representatives from the registered clearing
agency's owners and participants sufficient to help ensure that the
directors serving on the committee will have the specific risk
management expertise and relevant experience needed to make effective
risk management decisions? Why or why not? In requiring that the risk
management committee include such representatives at all times, should
the Commission require that a specific percentage or number of
representatives from the clearing agency's owners and participants
serve on the risk management committee? Why or why not? If so, what
percentage or number? Please explain with specific information.
28. Should the Commission require the risk management committee to
include at all times a specific percentage or number of representatives
from small participants of the clearing agency in addition to
representatives from the owners and participants more generally, as
proposed? Why or why not? If so, what percentage or number? Please
explain with specific information.
29. The Commission is not specifying whose responsibility it is to
determine the appropriate qualifications and expertise needed for a
director to serve on the risk management committee. Should the
Commission be more prescriptive and specify whose responsibility it is
to make this determination, such as the nominating committee, or should
this determination remain up to the discretion of the registered
clearing agency? Why or why not? Please explain.
30. The Commission requests comment on whether the requirement that
a risk management committee ``reconstitute'' its membership on a
regular basis is sufficiently clear. Is there additional guidance
needed on what ``reconstitute'' means? Is it sufficiently clear that
the term ``reconstitute'' refers to the membership of the risk
management committee and not to the form of the committee? Why or why
not? Should the Commission instead require that the membership be
``rotated''? \125\ Please explain.
---------------------------------------------------------------------------
\125\ The CFTC's proposal would require a risk management
committee to ``rotate'' its membership on a regular basis. See supra
note 52 and accompanying text.
---------------------------------------------------------------------------
31. Has the Commission provided a sufficient explanation for what
constitutes ``on a regular basis'' with respect to how often a risk
management committee is required to reconstitute its membership? Why or
why not? Would a more specific reconstitution requirement be
appropriate? For example, should this requirement specify a frequency
for the risk management committee's reconstitution (e.g., annually)?
Why or why not? If so, please explain what the appropriate frequency
should be.
D. Conflicts of Interest
1. Proposed Rules 17Ad-25(g) and (h)
Proposed Rule 17Ad-25(g) would require each registered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to identify and document existing or
potential conflicts of interest in the decision-making process of the
clearing agency involving directors or senior managers of the
registered clearing agency; and mitigate or eliminate and document the
mitigation or elimination of such conflicts of interest. Additionally,
proposed Rule 17Ad-25(h) would require registered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to require a director to document and
inform the registered clearing agency promptly of the existence of any
relationship or interest that reasonably could affect the independent
judgment or decision-making of the director.
2. Discussion
At the time of the 2016 CCA Standards Adopting Release, the
Commission declined to incorporate more prescriptive governance
elements into the rule as urged by commenters, including specific
requirements on conflicts of interest,\126\ based on the premise that
the requirements in Section 17A of the Exchange Act relating to fair
representation and the public interest provided sufficient
[[Page 51834]]
grounds to hold covered clearing agencies accountable to these
concerns.\127\ At the time, the Commission also observed that as a
general matter, the market for clearing agency services demonstrates
evidence of a significant volume of activity being concentrated in a
small number of large financial institutions.\128\ The concentration of
clearing and settlement services within a handful of entities
continues, suggesting that additional interventions may be
appropriate.\129\ The Commission is concerned that this characteristic
could impede the continued development of open, transparent, and
competitive markets and, therefore, believes it is appropriate to
propose requirements on registered clearing agencies on mitigating or
eliminating conflicts of interest so that such conflicts do not
undermine the integrity of decisions made in the governance of the
clearing agency. The proposed rules are intended to address concerns
that the institutions that currently dominate the securities markets
would have conflicts of interest that influence their participation in
the development of centralized trading and clearance and settlement
systems for securities. As they relate to clearing agencies that clear
security-based swaps, the proposed rules would also advance the policy
objectives set forth in Section 765 by establishing new requirements
for policies and procedures that require such clearing agencies to
identify, mitigate or eliminate, and document the identification and
mitigation or elimination of conflicts of interest.
---------------------------------------------------------------------------
\126\ See CCA Standards Adopting Release, supra note 13, at
70804 (stating that ``[o]ne commenter stated that proposed Rule
17Ad-22(e)(2) does not require covered clearing agencies to resolve
conflicts of interests among board members and management and urged
the Commission explicitly to require covered clearing agencies to
document and maintain policies and procedures governing the
resolution of conflicts of interests that may impact certain
decisions by the board of directors. The Commission notes . . . that
the commenter's concern is addressed by Section 17A(b)(3)(F) of the
Exchange Act, which requires that the rules of a clearing agency be
designed, in general, to protect investors and the public
interest'').
\127\ See 15 U.S.C. 78q-1(b)(3)(C).
\128\ See CCA Standards Adopting Release, supra note 13, at
70793 (stating that ``the Commission has considered the level of
concentration in the provision of clearing agency services'' and
acknowledging concerns ``that at present the clearance and
settlement industry, like much of the financial sector, can be
described as highly concentrated, and . . . that it is paramount . .
. [to] promote the proliferation of viable new clearing agencies,
given that existing clearing agencies typically serve as
intermediaries for trillions of dollars in trading volumes'').
\129\ See Staff Report on Clearing Agencies, supra note 27, at
21.
---------------------------------------------------------------------------
With the above in mind, requirements on registered clearing
agencies to address conflicts of interest would strengthen the
integrity of a registered clearing agency's governance arrangements,
including those regarding director independence, the fitness standards
applied and nominations made by the nominating committee, and the
independent opinions and recommendations made by the risk management
committee previously discussed. Proposed Rules 17Ad-25(g) and (h) help
promote the integrity of these governance arrangements by helping
ensure that a registered clearing agency is capable of both identifying
potential conflicts when they arise and subjecting conflicts to a
transparent and uniform process of review, mitigation or elimination,
and documentation. Specifically, the proposed rules would help ensure
that potential conflicts of interest are identified and documented,
that policies and procedures for their management have been established
ex ante to help ensure a consistent approach over time, and that cases
are subject to established processes for review and mitigation or
elimination. In some cases, for example, a conflicts of interest policy
may simply require that a director or senior manager recuse herself
from a particular decision to mitigate or eliminate the conflict of
interest. At the same time, the Commission believes that disclosure,
while an effective tool for the clearing agency to identify and
recognize a conflict of interest, is insufficient by itself to reduce
the potential harm a conflict of interest may have on the clearing
agency. Instead, the Commission believes that as the clearing agency is
best positioned to identify and address conflicts of interest that may
arise in its operations and risk management and decision-making, the
clearing agency is best positioned through reasonable policies and
procedures to mitigate--namely, reduce--or eliminate these conflicts of
interest so that such conflicts do not undermine the integrity of
decisions made in the governance of the clearing agency. In addition,
the policies and procedures approach helps ensure the documentation of
conflicts of interest and their mitigation or elimination, helping the
Commission to assess and compare the types of conflicts that arise
across clearing agencies to help promote more effective oversight and
regulation of clearing agencies.
In the absence of policies and procedures to address conflicts of
interest, directors and senior managers of a registered clearing agency
could undermine the purpose of requiring independent directors and
centralizing the nominating process for new directors in a nominating
committee composed of a majority of independent directors. More
broadly, the proposed rules help to ensure that when directors and
senior managers develop relationships that create potential conflicts
of interest, the clearing agency has a process to manage those
relationships to mitigate or eliminate conflicts so that they do not
undermine the integrity of decisions made in the governance of the
clearing agency.
(a) Potential Conflicts
Under proposed Rule 17Ad-25(g), the registered clearing agency must
be able to identify and document both existing and potential conflicts
of interest involving directors or senior managers of the registered
clearing agency. The rule is intended to address the conflicts of
interests of directors and senior managers that could undermine the
decision-making process within a registered clearing agency or
interfere with fair representation and equitable treatment of clearing
members or other market participants by a registered clearing agency.
Being able to identify potential conflicts of interest is critical to
ensuring the effective identification and management of actual
conflicts of interest. In other words, a clearing agency must be able
to spot close cases, where another director, manager, employee, or
observer might perceive a conflict of interest, in order to more
effectively manage actual conflicts and help ensure the integrity of
decisions made in the governance of the clearing agency.
As previously discussed in Part II.A, it is important for the
registered clearing agency to consider the differing incentives and
interests of individual directors, once they are on the board, when
they are governing the registered clearing agency. The board as a whole
is ultimately responsible for overseeing the clearing agency's
compliance with the regulatory obligations under the Dodd-Frank Act and
the Exchange Act, including the open and fair access requirements.\130\
Yet, depending on their affiliation with owners, large participants,
small participants, or indirect participants, individual directors may
be subject to different perspectives and motivations when fulfilling
these duties and roles. Like participants themselves, direct
participant directors may on balance be more likely to favor reducing
or minimizing the risk exposure of the clearing agency, potentially at
the expense of more open access; in contrast, indirect participant
directors may be inclined to favor expanded access to products and
services, which may increase the amount of risk that the clearing
agency must successfully manage.\131\
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\130\ See Regulation MC Proposing Release, supra note 1, at
65888.
\131\ See id.
---------------------------------------------------------------------------
The Commission believes that because interests and incentives may
vary among directors and over time for
[[Page 51835]]
a range of reasons, it is not possible to predict how any individual
director will address particular matters. For this reason, the approach
taken in proposed Rule 17Ad-25(g)--as well as proposed Rule 17Ad-
25(h)--is intended to achieve an appropriate balance among these
various considerations by taking a principles-based approach to
addressing conflicts of interest. While the proposed rule provides the
registered clearing agency with a certain level of discretion to
address specific facts and circumstances it faces in light of its
governance structure, the product it clears, and the market it serves,
it is designed to complement other applicable, more prescriptive
requirements in this proposal, which the registered clearing agency may
also separately apply where relevant. Additionally, the proposed rule
is intended to limit the clearing agency's discretion through more
prescriptive procedural requirements the clearing agency must undertake
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to document the identification,
mitigation or elimination of conflicts of interest under proposed Rule
17Ad-25(g).
(b) Obligation of Directors To Report
Because a registered clearing agency may not have access to
information necessary to identify a potential conflict of interest,
proposed Rule 17Ad-25(h) would also require a registered clearing
agency to have policies and procedures that require a director to
document and inform the registered clearing agency promptly of the
existence of any relationship or interest that reasonably could affect
the independent judgment or decision-making of the director. The
proposed rule takes elements from the ``material relationship''
definition, which was carried forward from the Commission's previous
proposal in Regulation MC,\132\ without incorporating the definition
into the proposed rule itself. Specifically, the Commission is
requiring policies and procedures that focus on any relationship or
interest that reasonably could affect the independent judgment or
decision-making of the director, rather than material relationships or
interests, so that the registered clearing agency--not the party with a
reporting obligation--can determine whether a relationship or interest
is subject to mitigation or elimination under the conflicts of interest
policy. This approach helps ensure that the registered clearing agency
has sufficient information to investigate, identify and address
potential conflicts.
---------------------------------------------------------------------------
\132\ See id. at 65896-97.
---------------------------------------------------------------------------
(c) Policies and Procedures Approach
Because organizational structures vary across clearing agencies, as
do the products, markets, and market participants served by the
clearing agency, the Commission has taken a policies and procedures
approach in the proposed rule to manage conflicts. This provides
registered clearing agencies with discretion to design policies that
fit their particular structure and circumstances, and help ensure that
policies and procedures remain effective over time as circumstances
change. While the Commission has identified some specific circumstances
in proposed Rules 17Ad-25(f) that preclude a director from being an
independent director because they present a clear conflict of interest,
as a general matter the Commission believes that a clearing agency
should have discretion to assess conflicts and determine how to
mitigate or eliminate them.
3. Request for Comment
The Commission generally requests comments on all aspects of
proposed Rules 17Ad-25(g) and (h). In addition, the Commission requests
comments on the following specific issues:
32. Are proposed Rules 17Ad-25(g) and (h) sufficient to have
registered clearing agencies address conflicts of interest within their
governance arrangements? Why or why not? Please provide specific
examples to illustrate your points, if possible.
33. Do commenters agree with the potential conflict concerns that
the Commission has identified? What effect would the identified
conflicts of interest likely have? Should the Commission focus on any
of these conflicts more than others? Are there other existing conflicts
concerns that commenters believe warrant scrutiny? If so, what are they
and how are they likely to affect registered clearing agencies? Which
conflicts of interest could potentially cause the greatest harm to a
registered clearing agency? Please explain.
34. What potential new conflicts of interest could arise that the
Commission should consider? What other parties may have conflicts of
interest that would affect whether they should control or participate
in the governance of a registered clearing agency? In what
circumstances do these conflicts of interest arise?
35. Are there any additional requirements and/or guidance that the
Commission could provide to help registered clearing agencies evaluate
the relationships of their directors and senior managers to identify
potential sources of conflicts? Please explain with specifics in terms
of processes that would help identify both existing and potential
conflicts of interest involving directors or senior managers of the
registered clearing agency.
36. In requiring registered clearing agencies to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to require a director to document and inform the
registered clearing agency promptly of the existence of any
relationship or interest that reasonably could affect the independent
judgment or decision-making of the director, does proposed Rule 17Ad-
25(h) provide sufficient requirements to have directors document and
inform the registered clearing agency promptly of potential conflicts
of interest? Why or why not?
37. Is the ``reasonably could affect'' standard proposed in Rule
17Ad-25(h) sufficient? Why or why not?
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\133\ The proposed rule would not apply to utility companies,
such as a power company providing general power services for the
registered clearing agency, although general power services are
necessary to allow a registered clearing agency to function and
operate, as a general matter. The Commission believes that such
services neither support the core clearance and settlement
functionality of the registered clearing agency nor are material to
the clearing agency's business, in that the power company does not
perform the core clearance and settlement functionality or material
clearing agency business functions itself. At the same time, the
registered clearing agency should be aware of how issues relating to
such services may impact its obligations under the Exchange Act.
This is consistent with Commission staff's views. See, e.g.,
Division of Trading and Markets: Responses to Frequently Asked
Questions Concerning Regulation SCI (rev. Aug. 21, 2019), https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml (stating
that ``an issue at a power utility may interrupt the electric power
supplied to an SCI entity's SCI systems. Even if the outage at the
power utility's system would not itself be an SCI event, there is a
significant likelihood that an SCI entity would nonetheless
experience an SCI event following such an outage'').
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E. Board Obligation To Oversee Service Providers for Critical Services
1. Proposed Rule 17Ad-25(i)
Proposed Rule 17Ad-25(a) would define the term ``service provider
for critical services'' to mean any person that is contractually
obligated to the registered clearing agency for the purpose of
supporting clearance and settlement functionality or any other purposes
material to the business of the registered clearing agency.\133\
Proposed Rule 17Ad-25(i)(1) would require each registered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to enable the board to confirm and
document that risks
[[Page 51836]]
related to critical service provider relationships are managed in a
manner consistent with the registered clearing agency's risk management
framework, and to review senior management's monitoring of
relationships with service providers for critical services. Proposed
Rule 17Ad-25(i)(2) would require each registered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to enable the board to approve policies
and procedures that govern the relationship with service providers for
critical services. Proposed Rule 17Ad-25(i)(3) would require each
registered clearing agency to establish, implement, maintain, and
enforce written policies and procedures reasonably designed to enable
the board to review and approve plans for entering into third-party
relationships where the engagement entails being a service provider for
critical services to the registered clearing agency. Proposed Rule
17Ad-25(i)(4) would require each registered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to enable the board to, through regular
reporting to the board by senior management, confirm that senior
management takes appropriate actions to remedy significant
deterioration in performance or address changing risks or material
issues identified through ongoing monitoring.
2. Discussion
Under existing requirements, the Commission requires registered
clearing agencies to manage operational risk, which can include risks
associated with relationships with service providers for critical
services. Rule 17Ad-22(d)(4) under the Exchange Act requires a
registered clearing agency that is not a covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to identify sources of operational risk
and minimize them through the development of appropriate systems,
controls, and procedures; implement systems that are reliable,
resilient and secure, and have adequate, scalable capacity; and have
business continuity plans that allow for timely recovery of operations
and fulfillment of a clearing agency's obligations.\134\ Rule 17Ad-
22(e)(17) under the Exchange Act requires a covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to manage the covered clearing agency's
operational risks by, among other things, identifying the plausible
sources of operational risk, both internal and external, and mitigating
their impact through the use of appropriate systems, policies,
procedures, and controls.\135\ Additionally, under Regulation SCI, the
Commission requires registered clearing agencies as SCI entities to
conduct risk assessments of SCI systems at least once per year and
report the findings to senior management and the board of
directors.\136\
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\134\ See 17 CFR 240.17Ad-22(d)(4).
\135\ See 17 CFR 240.17Ad-22(e)(17).
\136\ See 17 CFR 242.1000-1007.
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Based on its supervisory experience, the Commission has observed
that clearing agencies have used service providers to help ensure the
prompt and accurate clearance and settlement of securities
transactions, and that in some cases, service providers are affiliates
or a parent company within the same holding company structure as the
registered clearing agency itself. Service providers may also be third
party entities, such as technology providers, data providers, or
providers of other services. Because of the range of relationships and
needs of a registered clearing agency, service providers can perform a
wide variety of functions. For example, a clearing agency may contract
with its parent company to staff the registered clearing agency.\137\ A
clearing agency may contract with one or more investment advisers to
help facilitate the closing out of a defaulting participant's
portfolio.\138\ A clearing agency may use one or more data service
providers to help calculate pricing information for securities.\139\ A
clearing agency may also purchase technology services from service
providers that may help to facilitate clearance and settlement in a
number of ways. In each of the cases described above, failure of the
service provider to perform its obligations would pose significant
operational risks and have critical effects on the ability of the
registered clearing agency to perform its risk management function and
facilitate prompt and accurate clearance and settlement. In this
regard, under existing requirements, including Regulation SCI,
outsourcing a clearance and settlement functionality to a service
provider for critical services does not relieve the registered clearing
agency of its statutory and regulatory obligations, which remain with
the registered clearing agency.\140\
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\137\ See, e.g., DTCC, Businesses and Subsidiaries, https://www.dtcc.com/about/businesses-and-subsidiaries; see also Part IV.B.1
(explaining that DTC, FICC, and NSCC are clearing agency
subsidiaries of DTCC).
\138\ See, e.g., NSCC, Disclosure Framework for Covered Clearing
Agencies and Financial Market Infrastructures (Dec. 2021), at 84,
https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf (``NSCC utilizes the
services of investment advisors and executing brokers to facilitate
such [close-out purchase and sale] transactions [for open Continuous
Net Settlement (CNS) positions] promptly following its determination
to cease to act. NSCC may engage in hedging transactions or
otherwise take action to minimize market disruption as a result of
such purchases and sales.'').
\139\ See, e.g., FICC, Disclosure Framework for Covered Clearing
Agencies and Financial Market Infrastructures (Dec. 2021), at 58,
65, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf (``Collateral securities
are re-priced every night, from pricing sources utilized by FRM's
[Financial Risk Management's] Securities Valuation unit . . . . FICC
utilizes multiple third-party vendors to price its eligible
securities and uses a pricing hierarchy to determine a price for
each security.'').
\140\ See Regulation SCI Adopting Release, supra note 39, at
77276 (expressing that an ``SCI entity should be responsible for
managing its relationship with third parties operating systems on
behalf of the SCI entity through due diligence, contract terms, and
monitoring of third party performance'').
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As firms explore new technologies that can facilitate prompt and
accurate clearance and settlement in new and innovative ways, clearing
agencies may increasingly determine that service providers will offer
the most effective technology to perform key functions.\141\ Reliance
on service providers will require careful oversight of these
relationships because service provider relationships are a key source
of operational risk to a registered clearing agency, risk which can
result in service outages that, due to the centralizing nature of
registered clearing agencies, could have implications for the national
system for clearance and settlement.
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\141\ See id. at 72252-53.
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Ultimately, it is the responsibility of the board to oversee the
relationships that management establishes with service providers to
help ensure that management is performing its function more effectively
and that the clearing agency can facilitate prompt and accurate
clearance and settlement. Accordingly, the Commission believes it is
appropriate to propose certain requirements relating to the board
oversight of service providers for critical services.
(a) Definition of Service Providers for Critical Services
Registered clearing agencies perform some oversight of certain
service provider relationships, pursuant to existing Commission
requirements with respect to these relationships.\142\ Against this
backdrop and as part of the evolution of the registered clearing agency
regulatory framework, the
[[Page 51837]]
Commission proposes a companion governance requirement to these
existing rules that makes explicit the registered clearing agency's
board obligation to oversee the range of its service providers for
critical services. In this regard, proposed Rule 17Ad-25(a) would
define the scope of ``service provider for critical services'' to mean
any person that is contractually obligated to the registered clearing
agency for the purpose of supporting clearance and settlement
functionality or any other purposes material to the business of the
registered clearing agency. Absent regular monitoring and oversight,
these relationships could endanger the operational resilience of a
registered clearing agency and call into question the registered
clearing agency's ability to meet its obligations under the Exchange
Act.
---------------------------------------------------------------------------
\142\ See 17 CFR 240.17Ad-22(d)(4) and (e)(17); 17 CFR 242.1000-
1007.
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(b) Obligations of the Board
In addition, proposed Rule 17Ad-25(i) would explicitly obligate the
registered clearing agency to have policies and procedures that require
its board to oversee a registered clearing agency's relationships with
service providers for critical services. Proposed Rule 17Ad-25(i)
includes a policies and procedures approach because, the Commission
believes that, given the range of potential service provider
relationships, the risks that they pose, and the different ways in
which they might interact with different types of products, markets,
and market participants, a registered clearing agency will need to
exercise its discretion and judgment in managing these risks and
reviewing steps taken by management.
Accordingly, under paragraphs (1) and (2), the board would be
charged with reviewing senior management's monitoring of each
relationship with a service provider for critical services, confirming
and documenting that the risks related to such relationships have been
considered and addressed consistent with the clearing agency's risk
management framework, and, more generally, approving policies and
procedures that govern such relationships. One method of confirming and
documenting the risks posed by a service provider for critical services
to the registered clearing agency would be for the board to complete a
self-assessment based on the format and substance of Annex F in the
PFMI \143\ that highlights oversight expectations applicable to
critical service providers. Annex F, in its form as of the date of this
publication, provides a comprehensive basis for the board of a
registered clearing agency to use to assess a service provider's risk
identification and management, information security management,
reliability and resilience, technology planning, and the strength of
communications with users. Completing such a self-assessment is not
mandatory but may be helpful for the registered clearing agency to
demonstrate compliance with this element of proposed Rule 17Ad-
25(i)(1).
---------------------------------------------------------------------------
\143\ See PFMI, supra note 4, at 170-71.
---------------------------------------------------------------------------
Paragraph (1) would also require review of senior management's
oversight of a service provider relationship. The Commission believes
that the board should be aware of the risks flowing into the registered
clearing agency, including through its relationships with service
providers for critical services, and maintain awareness of those risks
over time by monitoring management's oversight of the relationship. In
its traditional function as a check on management, the board can help
ensure that, for example, management assesses and addresses performance
issues by the provider under any agreement with the provider and helps
to ensure that product or other deliverables are provided timely and
consistent with the terms of the agreement.
Under paragraph (3), the board should review and approve plans for
entering into third-party relationships where the engagement entails
being a service provider for critical services to the registered
clearing agency. The Commission believes the board's participation in
this regard is required as part of sound risk management when the
clearing agency enters into contractual relationships with third
parties. Board involvement would help ensure that the terms of
performance for the service provider are sufficient to support the
needs of the registered clearing agency and any increased level of risk
to the registered clearing agency is evaluated, assessed, and accounted
for. If renewal of third-party contracts or performance issues are
called into question, the Commission believes that the Board should
generally review such matters as part of its oversight responsibilities
in existing governance arrangements and requirements.\144\
---------------------------------------------------------------------------
\144\ See generally 17 CFR 240.17Ad-22(d)(8), (e)(2). Existing
Rules 17Ad-22(d)(8) and (e)(2) impose obligations on a governance
arrangements of the clearing agency to promote the effectiveness of
the clearing agency's risk management procedures. Proposed Rule
17Ad-25(i)(3) would impose obligations on the Board when initiating
a third-party relationship.
---------------------------------------------------------------------------
Finally, under paragraph (4), the board would have responsibility
for overseeing the extent to which senior management remedies
performance issues under a service provider contract. A key source of
risk in any service provider relationship to a registered clearing
agency is the operational risks that may arise if a service provider is
not performing pursuant to the agreed terms of the contractual
relationship. Without the board's effective ongoing monitoring of such
risks and oversight of management's remedial actions to control such
risks, the registered clearing agency may be faced with increasing
levels of risk that undermine sound risk management and operational
resilience. Accordingly, the Commission believes that policies and
procedures should specifically provide for regular reporting to the
board by senior management to ascertain whether senior management is
taking appropriate remedial actions to mitigate or eliminate the risks
of a critical service provider's significant performance deterioration
or other material changes in the relationship that would result in an
unacceptable increase in risk to the registered clearing agency if not
remedied in a timely manner.
3. Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-25(i). In addition, the Commission requests comments
on the following specific issues:
38. Is the definition of ``service provider for critical services''
sufficiently clear and properly scoped? Why or why not? Please explain
and include alternative definitions, if possible.
39. In requiring registered clearing agencies to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to enable the board to oversee relationships with
service providers of critical services, should the Commission provide
specific guidance regarding the means and measures by which the board
performs such oversight responsibilities? Why or why not?
40. In requiring registered clearing agencies to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to confirm and document that risks related to
relationships with service providers for critical services are managed
in a manner consistent with its risk management framework, should the
Commission require--rather than provide as guidance, as currently
formulated--that the board confirm and document the risks through a
self-assessment as discussed above? Why or why not?
[[Page 51838]]
F. Obligation to Formally Consider Stakeholder Viewpoints
1. Proposed Rule 17Ad-25(j)
Proposed Rule 17Ad-25(j) would require each registered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to solicit, consider, and document
its consideration of the views of participants and other relevant
stakeholders of the registered clearing agency regarding material
developments in its governance and operations on a recurring basis.
2. Discussion
Currently, all registered clearing agencies are covered clearing
agencies and, as such, they are subject to requirements for their
governance arrangements to include policies and procedures that support
the public interest and the objectives of owners and participants, as
well as that consider the interests of participants' customers,
securities issuers and holders, and other relevant stakeholders.\145\
However, no parallel requirement exists for registered clearing
agencies that are subject to Rule 17Ad-22(d). Based on its supervisory
experience, the Commission believes that enhancing clearing agency
governance practices will facilitate the ability of clearing agencies
subject to Rule 17Ad-22(d) to obtain and consider the views of a
diverse cross-section of their participants and stakeholders, who will
likely bear any of the losses incurred as a result of the clearing
agency's decisions with respect to its governance and operations.
Accordingly, the proposed rule would supplement existing Commission
requirements by also requiring that a registered clearing agency have
policies and procedures to solicit, consider, and document its
consideration of the views of participants and other relevant
stakeholders regarding material developments in the clearing agency's
governance and operations. The Commission believes that other relevant
stakeholders generally would include investors, customers of
participants, as well as securities issuers.
---------------------------------------------------------------------------
\145\ See 17 CFR 240.17Ad-22(e)(2)(iii) and (vi).
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The Commission understands that many registered clearing agencies
already have established committees, working groups, and other fora of
varying size, scope, and formality to share and solicit information
with participants, the customers of their participants, and other
stakeholders regarding changes to risk management and other services
offered by the clearing agency. These groups and fora are useful tools
for information sharing and gathering, and help promote an open
dialogue between the clearing agency, its participants, and other
relevant stakeholders. Accordingly, the Commission is proposing Rule
17Ad-25(j) to help promote the formalization of these processes and
structures to help ensure their ongoing use, both for the existing set
of registered clearing agencies and for potential future registrants.
The Commission believes that the proposed rule would help ensure that
these types of groups have a clear purpose and scope by requiring that
registered clearing agencies solicit views from relevant stakeholders
in addition to their participants and document their consideration of
views expressed, and that the views solicited concern topics related to
material developments in a clearing agency's governance and operations.
Soliciting and considering viewpoints from participants and other
relevant stakeholders helps ensure that the board of a registered
clearing agency is informed of the full range of views across its
participants and stakeholders while making decisions related to
material developments in the clearing agency's governance and
operations.
In addition, the Commission believes that requiring registered
clearing agencies to document their consideration of such viewpoints
would help ensure that a record exists of the viewpoints provided by
participants and other relevant stakeholders regarding material
developments in a clearing agency's governance and operations, ensuring
that the clearing agency indicated that it had received such viewpoints
and evaluated their merits. Such a requirement also helps promote
confidence in the use of such fora and other structures because records
will help demonstrate the ways in which registered clearing agencies
consider and engage with stakeholder viewpoints. Building a record of
such engagements also would help the Commission itself evaluate the
ways in which clearing agencies consider stakeholder viewpoints and
balance potentially competing viewpoints, facilitating the Commission's
monitoring and oversight of registered clearing agencies and their
impact on the U.S. securities market.
3. Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-25 (j). In addition, the Commission requests
comments on the following specific issues:
41. The Commission understands that some registered clearing
agencies have established multiple groups or fora to target specific
topics or types of participants when sharing and soliciting
information. What should a registered clearing agency consider when
determining to establish one versus multiple fora for soliciting
viewpoints? Why? How should it select the types of stakeholders or
market participants from whom it solicits information? Are there
particular topics for which a group or fora should be required under
the rule? Are there any merits in limiting the number of different
groups or fora to avoid overly fragmenting the discussion of topics and
solicitation of viewpoints? Please explain with specific examples, if
possible.
42. Should the rule include specific requirements applicable to
committees, working groups, or other fora when established by a
clearing agency? Please explain.
43. The proposed rule would require that a registered clearing
agency solicit viewpoints regarding material developments in its
governance and operations. Does limiting the topics for soliciting
viewpoints to ``material'' aspects of a clearing agency's governance
and operations provide for the appropriate scope of topics for which a
clearing agency should solicit viewpoints? Why or why not? Should the
rule limit the topics for soliciting viewpoints only to risk
management? Why or why not? Conversely, should the set of topics be
expanded to include topics such as participation requirements, products
cleared, fees, new technologies, services, or other topics relevant to
participants and other stakeholders? Please explain with specific
examples, if possible.
44. The proposed rule would require that the registered clearing
agency solicit viewpoints on a recurring basis. How frequently should a
registered clearing agency solicit viewpoints? Should the requirement
apply on an annual basis, a quarterly basis, or some other frequency?
How should a clearing agency balance the frequency of its outreach
against the obligation to document its consideration of viewpoints
received?
45. Does the proposed rule interact with the board's fiduciary duty
to the clearing agency? If so, how? Please explain with specific
information.
G. Considerations Related to Implementation and Compliance
The Commission believes it is important to establish governance
requirements for registered clearing agencies given the potentially
[[Page 51839]]
significant risks posed by their size, systemic importance, and/or the
risks inherent in the products they clear, and therefore believes that
implementation of any of the requirements in proposed Rule 17Ad-25, if
adopted, should be prompt. However, the Commission also recognizes that
additional time may be warranted to address any new requirements, if
adopted, by both clearing agencies currently registered with the
Commission and those entities that intend to register as clearing
agencies with the Commission while the rules are being finalized.
The Commission intends to review any application for registration
as a clearing agency pursuant to the requirements of Section 17A of the
Exchange Act and the rules and regulations thereunder, including Rule
17Ad-22 and any amendments thereto, and notes that the compliance date
would apply to all clearing agencies, including an applicant for
registration as a clearing agency whose application is pending upon the
compliance date. In reviewing such an application, Section 17A(b)(3) of
the Exchange Act requires that a clearing agency shall not be
registered unless the Commission determines that an applicant's rules
and operations satisfy each of the requirements set forth in Section
17A(b)(3).\146\ Following registration, any registered clearing agency
would need to address compliance with any of the requirements in
proposed Rule 17Ad-25, if adopted.
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\146\ See 15 U.S.C. 78q-1(b)(3).
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The Commission is also mindful of the time and costs that may be
incurred by registered clearing agencies to implement aspects of
proposed Rule 17Ad-25, if adopted, namely the independence requirements
for the board and board committees. Implementation of these proposed
requirements could require changes to policies and procedures currently
utilized to comply with the Commission's clearing agency rules. These
burdens could be exacerbated if affected clearing agencies must begin
complying with any proposed Rule 17Ad-25, if adopted, in their existing
policies and procedures at or near the same time that they are making
changes to their board and board committee composition by undertaking
the steps to identify and select candidates to accommodate these
proposed requirements. The Commission believes that implementation of
the proposed rules, if adopted, can and should be done in a manner that
carries out the fundamental policy goals of the rules while minimizing
burdens and disruptions as much as practicable, including minimizing
the prospect of current directors having to resign before their terms
expire. The Commission believes that this should be done pursuant to a
phased-in compliance schedule whereby the proposed rules, if adopted,
would have a compliance date that is 180 days from publication of the
final rules in the Federal Register for all the provisions other than
proposed Rule 17Ad-25(b)(1), (c)(2), and (e), and 24 months from
publication of the final rules in the Federal Register for the
independence requirement for the board and board committees under
proposed Rule 17Ad-25(b)(1), (c)(2), and (e).
1. Request for Comment
46. Are the 180-day and 24-month compliance periods appropriate?
Why or why not? Please be specific.
47. Does the phased-in compliance date envisioned by the Commission
adequately address the time and resources needed for clearing agencies
to comply with proposed Rule 17Ad-25 if adopted? Please explain. Should
specific requirements be phased in over time, such as to allow current
directors to serve their complete term rather than needing to resign
early in order to adjust the number of independent directors on a
board? If so, what is the appropriate number of days that would allow
current directors to serve their complete terms?
H. General Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-25.
IV. Economic Analysis
A. Introduction
The Commission is sensitive to the economic consequences and
effects of the proposed rules, including their benefits and costs.\147\
The Commission acknowledges that, since many of these proposals could
require a clearing agency to adopt new policies and procedures, the
economic effects and consequences of these rules include those flowing
from the substantive results of those new policies and procedures.
Further, as stated above, Section 17A of the Exchange Act directs the
Commission to have due regard for the public interest, the protection
of investors, the safeguarding of securities and funds, and maintenance
of fair competition among brokers and dealers, clearing agencies, and
transfer agents when using its authority to facilitate the
establishment of a national system for clearance and settlement of
transactions in securities.\148\
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\147\ Under Section 3(f) of the Exchange Act, whenever the
Commission engages in rulemaking under the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, it must consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f). In addition, Section 23(a)(2) of the Exchange Act prohibits
the Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
\148\ See 15 U.S.C. 78q-1(a)(2)(A).
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This section addresses the likely economic effects of the proposed
rules, including their anticipated and estimated benefits and costs and
their likely effects on efficiency, competition, and capital formation.
Many of the benefits and costs are difficult to quantify. For example,
the issue of misaligned incentives is a core economic matter that is
persistent across many different types of economic interactions among
clearing agency stakeholders. Incentives affect the economic outcome of
a transaction but there is little data about how decision-making
processes directly affect monetary gains and losses. In addition,
quantification of these incentive effects is particularly challenging
due to the number of assumptions that would be needed to forecast how
clearing agencies would respond to the proposed rules, and how those
responses would, in turn, affect the broader market for cleared
securities products. While the Commission has attempted to quantify
economic effects where possible, much of the discussion of economic
effects is qualitative in nature. The Commission also discusses the
potential economic effects of certain alternatives to the approaches
recommended in this proposal.
[[Page 51840]]
B. Economic Baseline
To consider the effect of the proposed rules, the Commission first
explains the current state of affairs in the market (the economic
baseline). All the potential benefits and costs from adopting the
proposed rules are changes relative to the economic baseline. The
economic baseline in this proposal considers (1) the current market for
registered clearing agency activities, including the number of
registered clearing agencies, the distribution of participants across
these clearing agencies, and the volume of transactions these clearing
agencies process, (2) the current regulatory framework for registered
clearing agencies, and (3) the current practices of registered clearing
agencies that relate to the proposed rules.
1. Description of Market
Of the nine registered clearing agencies, there are currently seven
operating businesses.\149\ Six provide CCP services and one provides
CSD services.\150\ NSCC, FICC, and DTC are all registered clearing
agencies that are DTCC subsidiaries. Together they offer clearance and
settlement services for equities, corporate and municipal bonds,
government and mortgage-backed securities, derivatives, money market
instruments, syndicated loans, mutual funds, and alternative investment
products in the United States. ICC and ICEEU are both registered
clearing agencies for credit default swaps (``CDS''), and are both
subsidiaries of Intercontinental Exchange, Inc. (``ICE''). LCH SA, a
France-based subsidiary of LCH Group Holdings Ltd, is a registered
clearing agency that also offers clearing for CDS. The seventh
registered clearing agency, OCC, offers clearing services for exchange-
traded U.S. equity options.
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\149\ There are two registered but inactive clearing agencies:
BSECC and SCCP. Neither has provided clearing services in well over
a decade. See Exchange Act Release No. 63629 (Jan. 3, 2011) (BSECC
``returned all clearing funds to its members by September 30, 2010,
and [] no longer maintains clearing members or has any other
clearing operations as of that date. [] BSECC [] maintain[s] its
registration as a clearing agency with the Commission for possible
active operations in the future.''); Exchange Act Release No. 63268
(Nov. 8, 2010) (``SCCP ``returned all clearing fund deposits by
September 30, 2009; [and] as of that date SCCP no longer maintains
clearing members or has any other clearing operations. [] SCCP []
maintain[s] its registration as a clearing agency for possible
active operations in the future.''). Because they do not provide
clearing services, BSECC and SCCP are not included in the economic
baseline or the consideration of benefits and costs. They are
included in the PRA for purposes of the PRA estimate, see infra at
Section V.
\150\ See supra note 17 (summarizing typical CCP services) and
note 18 (summarizing typical CSD services).
---------------------------------------------------------------------------
Registered clearing agencies broadly operate under one of two
models. Specifically, the clearing agency may be organized so that the
participants are owners of the clearing agency,\151\ or so that
participants are not owners of the clearing agency.\152\
---------------------------------------------------------------------------
\151\ See supra note 32 (explaining the ownership structure of
DTCC and its subsidiary clearing agencies).
\152\ OCC is owned by certain options exchanges. ICC and ICEEU
are both subsidiaries of ICE, which is listed on the New York Stock
Exchange. LCH SA is a subsidiary of LCH Group Holdings, Ltd., which
is majority-owned by London Stock Exchange Group plc (a publicly
traded company).
---------------------------------------------------------------------------
Registered clearing agencies currently feature specialization and
limited competition. For example, there is only one registered clearing
agency serving as a central counterparty for each of the following
asset classes: Exchange-traded equity options (OCC), government
securities (FICC), mortgage-backed securities (FICC), and equity
securities (NSCC). There is also only one registered clearing agency
providing central securities depository services (DTC). Registered
clearing agency activities exhibit high barriers to entry and economies
of scale. These features of the existing market, and the resulting
concentration of clearing and settlement services within a handful of
entities, informs the Commission's examination of the effects of the
proposed rules on competition, efficiency, and capital formation, as
discussed below. Table 1 summarizes the most recent data on the number
of participants at each registered clearing agency.\153\
---------------------------------------------------------------------------
\153\ Participant statistics are taken from the websites of each
of the listed clearing agencies as of August 2021, September 2021,
or October 2021. See DTCC, NSCC Member Directories, https://www.dtcc.com/client-center/nscc-directories; DTCC, DTC Member
Directories, https://www.dtcc.com/client-center/dtc-directories;
DTCC, FICC-GOV Member Directories, https://www.dtcc.com/client-center/ficc-gov-directories; DTCC, FICC-MBS Member Directories,
https://www.dtcc.com/client-center/ficc-mbs-directories; ICE, ICE
Clear Credit Participants, https://www.theice.com/clear-credit/participants; ICE, ICE Clear Europe Membership, https://www.theice.com/clear-europe/membership; LCH, LCH SA Membership,
https://www.lch.com/membership/member-search; OCC, Member Directory,
https://www.theocc.com/Company-Information/Member-Directory.
Table 1--Number of Participants at Registered Clearing Agencies
------------------------------------------------------------------------
Number of
Registered clearing agency participants
------------------------------------------------------------------------
Subsidiaries of The Depository Trust & Clearing
Corporation
National Securities Clearing Corporation.............. 3,532
The Depository Trust Company.......................... 841
Fixed Income Clearing Corporation (Government 204
Securities Division).................................
Fixed Income Clearing Corporation (Mortgage Backed 140
Securities Division).................................
Subsidiaries of Intercontinental Exchange
ICE Clear Credit...................................... 29
ICE Clear Europe (CDS Participants Only).............. 30
Subsidiaries of LCH
LCH SA (CDSClear Participants Only)................... 25
The Options Clearing Corporation........................ 184
------------------------------------------------------------------------
[[Page 51841]]
Registered clearing agencies have become an essential part of the
infrastructure of the U.S. securities markets due to their role as
intermediaries.\154\ Many securities transactions are centrally cleared
by clearing agencies. For example, in 2021 approximately $1.1 trillion
(65%) of the notional amount of all single-name CDS transactions in the
United States were centrally cleared.\155\ In addition, in 2021 DTCC
processed $2.4 quadrillion in securities transactions, and OCC cleared
9.9 billion individual options contracts.\156\
---------------------------------------------------------------------------
\154\ See supra Part I.
\155\ Data from DTCC's Trade Information Warehouse, compiled by
Commission staff.
\156\ See OCC, Annual Report (2021), https://annualreport.theocc.com; DTCC, Annual Report (2021), https://
www.dtcc.com/~/media/files/downloads/about/annual-reports/DTCC-2021-
Annual-Report. Within DTCC, NSCC cleared $2.0 trillion of equity
trades every day on average, FICC cleared a total of $1.4
quadrillion of government securities transactions and $69 trillion
of agency mortgage-backed securities transactions, and DTC settled a
total of $152 trillion of securities.
---------------------------------------------------------------------------
Central clearing generally benefits the markets in which it is
available through significantly reducing participants' counterparty
risk and through more efficient netting of margin. Consequently,
central clearing also benefits the financial system as a whole by
increasing financial resilience and the ability to monitor and manage
risk.\157\ Notwithstanding the benefits, central clearing concentrates
risk in the clearing agency.\158\ Disruption to a clearing agency's
operations, or failure on the part of a clearing agency to meet its
obligations, could serve as a source of contagion, resulting in
significant costs not only to the clearing agency itself or its
participants but also to other market participants and the broader U.S.
financial system.\159\ As a result, proper management of the risks
associated with central clearing helps ensure the stability of the U.S.
securities markets and the broader U.S. financial system.\160\
---------------------------------------------------------------------------
\157\ See Darrell Duffie, Still the World's Safe Haven?
Redesigning the U.S. Treasury Market After the COVID-19 Crisis,
Hutchins Center Working Paper No. 62 (June 2020), at 15, https://www.brookings.edu/wp-content/uploads/2020/05/wp62_duffie_v2.pdf
(``Central clearing increases the transparency of settlement risk to
regulators and market participants, and in particular allows the CCP
to identify concentrated positions and crowded trades, adjusting
margin requirements accordingly. Central clearing also improves
market safety by lowering exposure to settlement failures. . . . As
depicted, settlement failures rose less in March [2020] for [U.S.
Treasury] trades that were centrally cleared by FICC than for all
trades involving primary dealers. A possible explanation is that
central clearing reduces `daisy-chain' failures, which occur when
firm A fails to deliver a security to firm B, causing firm B to fail
to firm C, and so on.'').
\158\ See generally Albert J. Menkveld & Guillaume Vuillemey,
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153
(2021).
\159\ See generally Dietrich Domanski, Leonardo Gambacorta &
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS
Q. Rev. (Dec. 2015), https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf
(describing links between CCP financial risk management and systemic
risk); Darrell Duffie, Ada Li & Theo Lubke, Policy Perspectives on
OTC Derivatives Market Infrastructure, Fed. Res. Bank N.Y. Staff
Rep. No. 424, at 9 (Mar. 2010), https://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is successful in clearing a
large quantity of derivatives trades, the CCP is itself a
systemically important financial institution. The failure of a CCP
could suddenly expose many major market participants to losses. Any
such failure, moreover, is likely to have been triggered by the
failure of one or more large clearing agency participants, and
therefore to occur during a period of extreme market fragility.'');
Craig Pirrong, The Inefficiency of Clearing Mandates, Policy
Analysis No. 655, at 11-14, 16-17, 24-26 (July 2010), https://www.cato.org/pubs/pas/PA665.pdf (stating, among other things, that
``CCPs are concentrated points of potential failure that can create
their own systemic risks,'' that ``[a]t most, creation of CCPs
changes the topology of the network of connections among firms, but
it does not eliminate these connections,'' that clearing may lead
speculators and hedgers to take larger positions, that a CCP's
failure to effectively price counterparty risks may lead to moral
hazard and adverse selection problems, that the main effect of
clearing would be to ``redistribute losses consequent to a
bankruptcy or run,'' and that clearing entities have failed or come
under stress in the past, including in connection with the 1987
market break); Hubbard supra note 57, at 96 (``In short, the
systemic consequences from a failure of a major CCP, or worse,
multiple CCPs, would be severe. Pervasive reforms of derivatives
markets following 2008 are, in effect, unfinished business; the
systemic risk of CCPs has been exacerbated and left unaddressed.'');
Froukelien Wendt, Central Counterparties: Addressing their Too
Important to Fail Nature, IMF Working Paper No. 15/21 (Jan. 2015),
https://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf (assessing the
potential channels for contagion arising from CCP
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A
Fresh Look, IMF Working Paper No. 11/66 (Mar. 2011), at 5-11, https://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing factors
that could lead central counterparties to be ``risk nodes'' that may
threaten systemic disruption).
\160\ See Paolo Saguato, Financial Regulation, Corporate
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J.
1071, 1074-75 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3269060 (``[T]he decision to centralize risk
in clearinghouses made them critical for the stability of the
financial system, to the point that they are considered not only
too-big-to-fail, but also too-important-to-fail institutions.'').
---------------------------------------------------------------------------
2. Overview of the Existing Regulatory Framework
The existing regulatory framework for clearing agencies registered
with the Commission includes Section 17A of the Exchange Act and the
Dodd-Frank Act, and the related rules adopted by the Commission. The
current regulatory system is discussed in Parts I, II and III of this
proposal.
The Commission is aware that clearing agencies registered in the
U.S. may also be subject to other domestic or foreign regulators.
Specifically, clearing agencies operating in the U.S. may also be
subject to regulation by the CFTC (as clearing agencies for futures or
swaps) and the Board of Governors of the Federal Reserve System (as
systemically important financial market utilities or state member
banks).\161\ In addition, clearing agencies operating in the U.S. may
be subject to foreign clearing agency regulators. For example, LCH SA
is regulated by l'Autorit[eacute] des march[eacute]s financiers,
l'Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution,
and the Banque de France, and is subject to EMIR.\162\ ICEEU is
regulated by the Bank of England and is subject to EMIR.\163\
---------------------------------------------------------------------------
\161\ Currently, ICC, ICEEU, LCH SA, and OCC are regulated by
the CFTC. DTC, FICC, NSCC, ICC, and OCC have been designated
systemically important financial market utilities. DTC is also a
state member bank of the Federal Reserve System.
\162\ See LCH, Company Structure, https://www.lch.com/about-us/structure-and-governance/company-structure.
\163\ See ICE, ICEEU Regulation, https://www.theice.com/clear-europe/regulation.
---------------------------------------------------------------------------
The Commission also considers relevant international standards when
engaged in rulemaking for clearing agencies. For example, in 2012, the
Committee on Payments and Market Infrastructure (CPMI) and the
International Organization of Securities Commissions (IOSCO) issued the
PFMI, a set of international standards for financial market
infrastructures.\164\ In connection with rulemaking required by Section
805(a)(2)(A) of the Clearing Supervision Act, 12 U.S.C. 5464(a)(2)(A),
the Commission considered the principles and responsibilities in the
PFMI when adopting Rule 17Ad-22(e).\165\
---------------------------------------------------------------------------
\164\ See PFMI, supra note 4.
\165\ CCA Standards Adopting Release, supra note 13, at 70789,
70796-97. A CPMI-IOSCO assessment report also has assessed that the
Commission's rules are consistent with the PFMI principles. See
CPMI-IOSCO, Implementation monitoring of PFMI: Assessment report for
the United States--Payment systems, central securities depositories
and securities settlement systems (May 31, 2019), at 2, https://www.bis.org/cpmi/publ/d184.pdf (presenting the conclusions drawn by
the CPMI and IOSCO from a Level 2 assessment).
---------------------------------------------------------------------------
Table 2 summarizes the board composition and independent director
requirements of the CFTC, the Board of Governors of the Federal Reserve
System, and EMIR, as well as the related principle in the PFMI.
[[Page 51842]]
Table 2--Board Composition and Independent Director Requirements of
CFTC, Board of Governors, EMIR, and CPMI-IOSCO (PFMI)
------------------------------------------------------------------------
Board composition and independence
Organization requirements
------------------------------------------------------------------------
CFTC......................... ``A derivatives clearing organization
shall ensure that the composition of the
governing board or board-level committee
of the derivatives clearing organization
includes market participants and
individuals who are not executives,
officers, or employees of the
derivatives clearing organization or an
affiliate thereof.'' (17 CFR 39.26).
Board of Governors of the `` . . . the designated financial market
Federal Reserve System. utility has governance arrangements that
are designed to ensure . . . [t]he board
of directors includes a majority of
individuals who are not executives,
officers, or employees of the designated
financial market utility or an affiliate
of the designated financial market
utility'' (12 CFR 234.3(a)(2)(iv)(D)).
European Market ``A CCP shall have a board. At least one
Infrastructure Regulation third, but no less than two, of the
(EMIR). members of that board shall be
independent. Representatives of the
clients of clearing members shall be
invited to board meetings for matters
relevant to Articles 38 and 39. The
compensation of the independent and
other non-executive members of the board
shall not be linked to the business
performance of the CCP'' (Regulation
(EU) No 648/2012 of the European
Parliament and of the Council of 4 July
2012, Title IV, Article 27).
`` `independent member' of the board
means a member of the board who has no
business, family or other relationship
that raises a conflict of interests
regarding the CCP concerned or its
controlling shareholders, its management
or its clearing members, and who has had
no such relationship during the five
years preceding his membership of the
board'' (Regulation (EU) No 648/2012 of
the European Parliament and of the
Council of 4 July 2012, Title I, Article
2(28)).
CPMI-IOSCO................... ``[Board] members should be able to
exercise objective and independent
judgment. Independence from the views of
management typically requires the
inclusion of non-executive board
members, including independent board
members, as appropriate. Definitions of
an independent board member vary and
often are determined by local laws and
regulations, but the key characteristic
of independence is the ability to
exercise objective, independent judgment
after fair consideration of all relevant
information and views and without undue
influence from executives or from
inappropriate external parties or
interests. The precise definition of
independence used by an F[inancial]
M[arket] I[nfrastructure (FMI)] should
be specified and publicly disclosed, and
should exclude parties with significant
business relationships with the FMI,
cross-directorships, or controlling
shareholdings, as well as employees of
the organization'' (PFMI, Sec. 3.2.10,
footnotes omitted).
------------------------------------------------------------------------
In addition to Federal regulation, as noted earlier, clearing
agencies must also follow state laws applicable to their choice of
organization, such as limited liability companies, corporations, or
trusts.\166\
---------------------------------------------------------------------------
\166\ For example, ``The New York State Department of Financial
Services supervises DTC as a New York State-chartered trust
company.'' See Board of Governors of the Federal Reserve System,
Designated Financial Market Utilities. https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm. The
OCC is a Delaware corporation. See OCC, Certificate of
Incorporation, https://www.theocc.com/Company-Information/Documents-and-Archives/OCC-Certificate-of-Incorporation.
---------------------------------------------------------------------------
3. Divergent Incentives of Clearing Agency Stakeholders
Several researchers have commented that the misalignment of
interests between clearing agency stakeholders (owners and non-owner
participants, for example) weakens the effectiveness of clearing
agencies' risk management under the existing regulatory framework.\167\
Less effective risk management, in turn, impedes the resilience of
individual clearing agencies, the clearing services market, and the
broader financial markets, as well as competition among participants.
However, academic literature has not coalesced around a standard model
describing clearing agency governance, leaving some uncertainty about
the theoretically best way to mitigate divergent incentives.\168\
---------------------------------------------------------------------------
\167\ See Saguato, supra note 160, at 5, 13 (stating that
``effective risk management in financial institutions can be
achieved only if the final risk bearers have a voice in the
governance of the firm'' and that ``the existing regulatory
framework underestimates and does not address the misaligned
incentives that spill from the agency costs of the separation of
risk and control and from the member-shareholder divide . . .'');
Hester Peirce, Derivatives Clearinghouses: Clearing the Way to
Failure, 64 Clev. St. L. Rev. 589 (2016), https://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=3915&context=clevstlrev (arguing that
clearing members must play a central role in risk management); Craig
Pirrong, The Economics of Central Clearing: Theory and Practice,
ISDA Discussion Papers Series No. 1 (May 2011), at 3, https://www.isda.org/a/yiEDE/isdadiscussion-ccp-pirrong.pdf (``CCPs should
be organized so as to align the control of risks with those who bear
the consequences of risk management decisions.'').
\168\ See Menkveld & Vuillemey, supra note 158, at 21 (``While
the literature on central clearing has made significant progress
over the past ten years, a number of important questions remain
open. On the theoretical front, there is still no standard model of
. . . [CCP] governance.'').
---------------------------------------------------------------------------
As discussed more fully below, the Commission is aware of divergent
incentives at some clearing agencies between clearing agency owners and
non-owner participants, and the importance of actively addressing these
divergent incentives through proactive measures to achieve sound
governance and resilience. In the 2020 Staff Report on the Regulation
of Clearing Agencies, Commission staff emphasized that ``robust written
rules, policies, and procedures are important to clearing agency
functioning, but represent only the first step in achieving resilience
and compliance. To achieve real-life outcomes that help promote
resilience and compliance, rules, policies, and procedures must be . .
. subject to sound governance that ensures they will be executed
promptly and effectively.'' \169\
---------------------------------------------------------------------------
\169\ Staff Report on Clearing Agencies, supra note 27, at 25.
---------------------------------------------------------------------------
(a) Divergent Incentives of Owners vs. Non-Owner Participants
Because clearing agencies mutualize risk among participants but not
all participants necessarily hold an equity interest in the clearing
agencies,\170\ the incentives of clearing agency owners can differ from
the incentives of clearing agency participants.\171\ For example,
owners have an incentive to transfer as much risk of loss as possible
to non-owner participants or to lower risk management standards.\172\
In such
[[Page 51843]]
cases, the owners benefit by receiving higher profits or tying up less
capital in their investment while participants are left with greater
potential losses in the event of a counterparty default or non-default
loss and potentially higher margin and default fund requirements.
---------------------------------------------------------------------------
\170\ For example, OCC, ICC, ICEEU, and LCH SA are not owned by
participants.
\171\ See Saguato, supra note 160, at 1099 (``This new agency
conflict that stems from the separation of risk and control and from
the `member-shareholder divide' misaligns the incentives of the
clearinghouse from those of its members . . .''). This specific
agency conflict is less of a concern in cases where clearing agency
participants own shares of the clearing agency, because there is
less separation of risk and control. For example, DTC, NSCC, and
FICC operate under a utility model, where the participants own
shares of the parent company, DTCC.
\172\ See Menkveld & Vuillemey, supra note 158, at 20 (noting
that because participants are a ``captive clientele,'' clearing
agencies could be incentivized to relax risk management standards);
Saguato, supra note 160, at 1099, 1102. However, it is possible that
a captive clientele could also incentivize a clearing agency to
increase its risk management standards if there is participant
representation in the governance structure.
---------------------------------------------------------------------------
(b) Divergent Incentives Among Participants
In addition, different types of participants (direct vs indirect
participants or large vs small participants, for example) have
divergent incentives. For example, large direct participants have
incentives to influence the clearing agency to adopt policies that
would exclude smaller dealers from participating directly in the
clearing agency.\173\ Because there is only one registered clearing
agency serving as a central counterparty for some asset classes, such
policies could negatively affect competition among clearing agency
participants. The diverging incentives of large direct participants
compared to smaller indirect participants are mitigated by Rule 17Ad-
22, which in part generally requires a clearing agency to admit
participants who meet minimum standards.\174\
---------------------------------------------------------------------------
\173\ See Kristin N. Johnson, Commentary on the Abraham L.
Pomerantz Lecture: Clearinghouse Governance: Moving Beyond Cosmetic
Reform, 77 Brook. L. Rev. 2, 698 (2012), https://brooklynworks.brooklaw.edu/blr/vol77/iss2/5 (``Large dealers have
incentives to limit smaller dealers' access to clearinghouse
membership. When large dealers act as brokers for the smaller
nonmember dealers, the larger dealers earn revenues for executing
transactions for dealers who are nonmembers and ineligible for
membership. If eligibility standards preclude smaller dealers from
gaining the full benefits of membership, then small dealers who
desire to execute transactions must seek the assistance of the
larger dealers who are members. Thus, large dealers have commercial
incentives to ensure that smaller dealers remain ineligible for
membership.''); Sean Griffith, Governing Systemic Risk: Towards a
Governance Structure for Derivatives Clearinghouses, 61 Emory L. J.
1153, 1197 (2012), https://scholarlycommons.law.emory.edu/elj/vol61/iss5/3 (``The major dealers may also use their influence over
clearinghouses to protect [their] trading profits, using the
clearinghouse as a means of increasing their market share and
excluding competitors.'').
\174\ See 17 CFR 240.17Ad-22(b)(5)-(b)(7) and (e)(18).
---------------------------------------------------------------------------
Large participants also have incentives to influence the clearing
agency to adopt policies that could allocate a disproportionately large
risk of loss to smaller participants by allowing the large participant
to contribute lower quality collateral to satisfy margin or default
fund requirements or by promoting margin requirements that are not
commensurate with the risks and particular attributes of each
participant's specific products, portfolio, and market. The diverging
incentives of large participants compared to smaller direct
participants are also mitigated by Rule 17Ad-22, which in part
generally requires a clearing agency to establish minimum margin and
liquidity requirements.\175\ By establishing minimum margin and
liquidity requirements, Rule 17Ad-22 reduces a large participant's
ability to obtain or maintain a competitive advantage through
activities such as providing lower quality collateral or promoting
margin requirements that are not commensurate with the risks and
particular attributes of each participant's specific products,
portfolio, and market.
---------------------------------------------------------------------------
\175\ See 17 CFR 240.17Ad-22(e)(5)-(e)(6).
---------------------------------------------------------------------------
(c) Incentives of Clearing Agency Stakeholders Could Diverge From the
Interest of the Broader Financial Markets
Clearing agency stakeholders, such as owners and direct and
indirect participants, also have incentives that may not be in
alignment with the interests of the broader financial markets.\176\ Any
such misalignment, if left unmitigated, could limit the benefits of
central clearing and hinder the resilience of other financial market
intermediaries and the broader financial market.\177\ For example, in
securities markets where all or part of a transaction may not be
subject to a central clearing requirement, a single participant or a
small group of participants may have a profit incentive to select bi-
lateral clearing over central clearing \178\ or seek to influence a
clearing agency to not clear a security that would profit the
participants more if the security were cleared bi-laterally. Not only
could such incentives limit the benefits of central clearing, but they
could also impede resilience in the broader financial market by
increasing systemic risk.\179\ In addition, indirect participants that
are not permitted to directly access clearing services have incentives
to ``avoid clearing and seek higher-margin trading activity through
faux customization.'' \180\ This, too, could hinder resilience in the
broader financial market by increasing systemic risk. Lastly, as
pointed out in a BIS and IOSCO report, ``. . . an FMI and its
participants may generate significant negative externalities for the
entire financial system and real economy if they do not adequately
manage their risks.'' \181\ To the extent these negative externalities
are not adequately internalized by the clearing agency or otherwise
mitigated, they could present systemic risks to the broader financial
markets.\182\
---------------------------------------------------------------------------
\176\ Cf. Bank of England, The Bank of England's supervision of
financial market infrastructures--Annual Report (Mar. 2015), at
Chapter 2.1.4 (``Strong user and independent representation in [UK
CCPs] governance structures should help ensure that UK CCPs focus
not only on the management of microprudential risks to themselves
but also on systemic risks.'').
\177\ See Griffith, supra note 173, at 1210 (``[T]he containment
of systemic risk [is] a public good. . . . Because no private party
can enjoy the full benefit of eliminating systemic risk, no private
party has an incentive to fully internalize the cost of doing so. As
a result, no private party can simply be entrusted with the means of
doing so because it is more likely to use those means to some other
ends. . . . In other words, none of the commercial parties has the
right incentives.'').
\178\ Cf. Treasury Market Practices Group (TMPG), Best Practice
Guidance on Clearing and Settlement, at 3 (July 2019), https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_BestPractices_071119.pdf (in commenting on the ``potential role
for expanded central clearing'' in the secondary U.S. Treasuries
market, the TMPG noted that ``changes to market structure that have
occurred have also resulted in a substantial increase, in both
absolute and percentage terms, in the number of trades that clear
bilaterally rather than through a central counterparty. This
principally stems from the increased prevalence of P[rincipal]
T[rading] F[irm] activity on I[nter]D[ealer ]B[roker] platforms.'').
\179\ See Griffith, supra note 173, at 1197 (``[D]ealers have a
clear incentive to protect the profits they receive from the
bilateral market . . . by keeping trades off of clearinghouses.
Keeping trades off of clearinghouses has obvious systemic risk
implications: a clearinghouse cannot contain the risk of trades that
it does not clear.''). Though bi-lateral clearing serves a well-
defined function in eliminating basis risk and allowing for more
precise hedging, its benefits in terms of systemic risk mitigation
are more limited relative to centralized clearing.
\180\ See Griffith, supra note 173, at 1200.
\181\ See PFMI, supra note 4, at 11.
\182\ Cf. id. at 128 (Noting that regulators have a role in
addressing negative externalities. ``[R]egulation, supervision, and
oversight of an FMI are needed to . . . address negative
externalities that can be associated with the FMI, and to foster
financial stability generally.''); Menkveld & Vuillemey, supra note
158, at 22 (``Network externalities create a role for regulators to
coordinate investors on a socially desirable equilibrium.'').
---------------------------------------------------------------------------
4. Current Governance Practices
Registered clearing agencies must operate in compliance with Rule
17Ad-22, though they may vary in the particular ways they achieve such
compliance. Some variation in practices across registered clearing
agencies derives from the products they clear and the markets they
serve.
An overview of current practices at the seven operating clearing
agencies is set forth below and includes discussion of clearing agency
boards' policies and procedures related to the composition of the board
and board committees,
[[Page 51844]]
conflicts of interests involving directors and senior managers, the
obligations of the board regarding overseeing relationships with
service providers for critical services, and consideration of
stakeholders' views. This discussion is based on the Commission's
general understanding of current practices as of the date of this
proposal and reflects the Commission's experience supervising
registered clearing agencies.
(a) Current Practices Regarding Board Composition
Each registered clearing agency has a board that governs its
operations and supervises senior management. Section 17A(b)(3)(C) of
the Exchange Act prohibits a clearing agency from registering unless
the Commission finds that ``the rules of the clearing agency assure a
fair representation of its shareholders (or members) and participants
in the selection of its directors and administration of its affairs.
(The Commission may determine that the representation of participants
is fair if they are afforded a reasonable opportunity to acquire voting
stock of the clearing agency, directly or indirectly, in reasonable
proportion to their use of such clearing agency.).'' \183\ In addition,
Rule 17Ad-22(e)(2) requires governance arrangements that support the
objectives of owners and participants and consider the interests of
other relevant stakeholders.
---------------------------------------------------------------------------
\183\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------
(1) Independent Directors
Clearing agencies currently use various definitions of independence
and independent director. In addition, current practices vary widely
regarding the board and board committee requirements for independent
directors (as the term is currently used by clearing agencies). For
example, clearing agencies' existing requirements for the minimum
percentage of independent directors on the board ranges from 0% to 55%.
Table 3 summarizes the general board composition and independent
director requirements of each operating clearing agency.
Table 3--Board Composition and Independent Director Requirements of Operating Clearing Agencies
----------------------------------------------------------------------------------------------------------------
Clearing agency Board composition requirements Definition of independent director
----------------------------------------------------------------------------------------------------------------
DTC, FICC, and NSCC (all use the 22 directors: 1 non-executive Chair, Independent director is not defined.
same board as DTCC). 1 DTCC executive (DTCC's Pres. & Independence is listed as one of a
CEO), 14 participant-owner number of ``characteristics
directors, 4 non-participant essential for effectiveness as a
directors, 1 director designated by Board member.'' (See DTCC Board
DTCC preferred stock shareholder Election Procedures.\a\)
ICE, 1 director designated by DTCC
preferred stock shareholder FINRA.
(See https://www.dtcc.com/about/leadership leadership.).
OCC................................ 20 directors: 1 management director A public director ``lacks material
(Chair), 5 public directors, 9 relationships to OCC, OCC's senior
participant directors, 5 exchange management, and other directors''
directors. (See https:// and is ``not affiliated with any
www.theocc.com/Company-Information/ national securities exchange or
Board-of-Directors; OCC Board national securities association or
Charter.\b\). with any broker or dealer in
securities.'' (OCC Board Charter at
4, 6).
..................................... ``A substantial portion of directors
shall be `independent' of OCC and
OCC's management as defined by
applicable regulatory requirements
and the judgment of the Board.''
(OCC Board Charter at 4-5).
ICE Clear Credit................... 9 directors (a/k/a Board of An independent director must satisfy
Managers): at least 5 independent the independence requirements in
directors and 2 management directors. the NYSE Listed Company Manual.\d\
An independent director also may
not (among other things):
5 directors elected by ICE US Holding ``have any material
Company L.P. (3 of 5 are independent relationships with the Company and
and the remaining 2 are from ICE its subsidiaries.''
management). The Risk Committee
designates four nominees (two must
be independent and two may be non-
independent). (See ICC Regulation
and Governance Fact Sheet \c\ at 2.).
..................................... be affiliated with a Member
Organization or, within the last
year, (a) be employed by a Member
Organization, (b) have an immediate
family member who was an executive
officer of a Member Organization,
or (c) have received from any
Member Organization more than
$100,000 per year in direct
compensation. (See ICC Independence
Policy.\e\)
ICE Clear Europe................... 6 to 12 directors (currently 10): at Independent director ``means a
least \1/3\ independent directors person who meets the independence
(excluding the Chair), 1 director criteria for a director, as defined
approved by the Bank of England, and under relevant applicable
the president of ICEEU. (See ICEEU legislation and who is appointed as
Organizational Structure Disclosure a non-executive director'' (ICEEU
\f\ at 1; ICEEU Articles of Articles of Association at
Association \g\ at paragraph 26.). paragraph 3).
LCH SA............................. 3 to 18 directors (currently 11 with Independent director ``means an
5 independent): ``the board shall be independent director, who satisfies
composed of the following categories applicable Regulatory Requirements
of Directors:'' an independent regarding independent directors and
Chair, independent directors, who is appointed in accordance with
executive directors, a director the Nomination Committee terms of
proposed by Euronext, user reference'' (LCH SA Terms of
directors, and a director Reference of the Board at 2).
representing London Stock Exchange
Group plc. (See https://www.lch.com/about-us/structure-and-governance/board-directors-0; LCH SA Terms of
Reference of the Board \h\ at 4-5.).
----------------------------------------------------------------------------------------------------------------
a. DTCC, Procedure for the Annual Nomination and Election of the Board of Directors (Feb. 11, 2021), (``DTCC
Nomination and Election Procedure''), https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Election-Procedure.pdf.
[[Page 51845]]
b. OCC, Board of Directors Charter and Corporate Governance Principles (Sept. 22, 2021), https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf.
c. ICE, ICC Regulation and Governance Fact Sheet, https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.
d. See Section 303.A.02 of the NYSE Listed Company Manual, https://nyseguide.srorules.com/listed-company-manual
(``No director qualifies as `independent' unless the board of directors affirmatively determines that the
director has no material relationship with the listed company (either directly or as a partner, shareholder or
officer of an organization that has a relationship with the company).'' The independence requirements also
list five situations that would preclude a director from being considered independent).
e. ICE, Independence Policy of the Board of Directors of Intercontinental Exchange, Inc., https://s2.q4cdn.com/154085107/files/doc_downloads/governance_docs/ICE-Independence-Policy.pdf.
f. ICE, ICEEU Organizational Structure, Objectives and Strategy, https://www.theice.com/publicdocs/clear_europe/Organisational_Structure_Objectives_Strategy.pdf.
g. ICE, Articles of Association of ICEEU (Jan. 29, 2021), https://www.theice.com/publicdocs/regulatory_filings/ICEEU-2021-013.pdf.
h. LCH SA, Terms of Reference of the Board (Aug. 18, 2020), https://www.lch.com/system/files/media_root/LCHSA_Governance%20Arrangements_CFTC%20Self-Certif_18%20Aug%202020.pdf.
(2) Nominating Committee
Six of the seven operating clearing agency boards have a nominating
committee or a committee that serves a similar function. Current
practices regarding the minimum level of independent directors on the
nominating committee vary widely. For example, DTC, NSCC, and FICC
require that the nominating committee be composed entirely of ``non-
management'' directors; ICEEU requires that a majority of the
nominating committee be independent directors (as defined by ICEEU);
LCH SA requires that its nomination committee include an independent
chair, at least two independent directors (as defined by LCH SA), and
one user director; and OCC requires only that the chairman of the
nominating committee be a ``public director.'' \184\ As stated
previously, the definition of independent director varies across
clearing agencies.\185\
---------------------------------------------------------------------------
\184\ See DTCC Governance Committee Charter 1 (Feb. 2020),
https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Governance-Committee-Charter.pdf (``All members
of the Committee shall be members of the Board who are not employed
by DTCC (`non-management' directors).''); ICEEU Compliance with PFMI
17 (Jan. 31, 2021), https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Disclosure_Framework.pdf (``[T]he Nominations and
Compensation Committee may consist of up to five Committee Members
the majority of which must be [Independent Non-Executive
Directors].''); LCH SA Terms of Reference of the Nomination
Committee of the Board of Directors (Sept. 9, 2020), https://www.lch.com/system/files/media_root/LCH%20SA%20-%20NomCom%20ToRs.pdf
(``[The] membership shall comprise the Chairman, at least two
Independent Directors, one User Director and the LSEG Director. The
size of the Committee . . . for the current time, will comprise four
to six directors.''); OCC Governance and Nominating Committee
Charter 1 (Sept. 22, 2021), https://www.theocc.com/getmedia/483ac739-0d43-46d2-a1ca-7ed38094975c/governance_nominating_charter.pdf (``The Committee will be composed
of at least one Public Director, one Exchange Director, and one
Member Director. No Management Director will be a member of the
Committee . . . . The Committee Chair will be designated by the
Board from among the Public Director Committee members.'').
\185\ See supra Table 3 and accompanying text.
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All seven boards have fitness standards for directors and processes
for identifying and selecting directors. The fitness standards and
processes for identifying and selecting directors vary across clearing
agencies. For example, OCC's nominating committee is required to
``identify, screen and review individuals qualified to be elected or
appointed [to the Board] after consultation with the Chairman,'' \186\
whereas DTCC's governance committee, which serves as the nominating
committee for DTC, NSCC, and FICC, is not required to consult with the
chairman. Instead, DTCC's governance committee ``considers possible
nominations on its own initiative and invites suggestions from all
participants of each of DTCC's clearing and depository subsidiaries . .
. . The Governance Committee may also use a professional director
search consultant to assist in identifying candidates for the non-
participant Board positions.'' \187\
---------------------------------------------------------------------------
\186\ OCC Governance and Nominating Committee Charter, supra
note 184, at 3.
\187\ DTCC, Procedure for the Annual Nomination and Election of
the Board of Directors (Feb. 11, 2021), at 2, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Election-Procedure.pdf.
---------------------------------------------------------------------------
(3) Risk Management Committee
The Commission already requires that all seven operating clearing
agencies have risk management committees, because they are covered
clearing agencies.\188\ All seven clearing agencies include
representatives from participants on the risk management committee,
though only four clearing agencies require it.\189\ Six of the seven
operating clearing agencies identify the risk management committee as a
board committee.\190\ Three of the seven operating clearing agencies
require the risk management committee to be reconstituted on a regular
basis.\191\
---------------------------------------------------------------------------
\188\ Covered clearing agencies are required to have risk
management committees to comply with 17 CFR 240.17Ad-22(e)(3)(iv).
\189\ OCC, ICC, ICEEU, and LCH SA each require that the risk
committee include representatives from participants. Article 28 of
EMIR requires that a clearing agency have a risk committee that
includes representatives of its clearing members. See EMIR, supra
note 105, at art. 28(1).
\190\ DTC, NSC, FICC, OCC, ICEEU, and LCH SA.
\191\ OCC, ICC, and LCH SA require that the committee be
reconstituted annually.
---------------------------------------------------------------------------
(b) Current Practices Regarding Conflicts of Interest Involving
Directors or Senior Managers
The boards of all seven operating clearing agencies have policies
and procedures in place to identify and mitigate conflicts of interests
involving directors or senior managers. All seven boards also require
directors to notify the clearing agency if a conflict of interest
arises.
(c) Current Practices Regarding Board Oversight of Relationships With
Service Providers for Critical Services
The Commission already requires registered clearing agencies to
manage risks from operations,\192\ which can include risks associated
with relationships with service providers.\193\ The Commission is aware
that at least some clearing agencies periodically inform their boards
regarding risk management associated with service providers for
critical services.
---------------------------------------------------------------------------
\192\ See 17 CFR 240.17Ad-22(d)(4), (e)(17).
\193\ In addition, DTC, as a state member bank of the Federal
Reserve System, has received guidance from the Board of Governors of
the Federal Reserve System regarding managing service provider
risks. See SR Letter 13-19/CA Letter 13-21, Guidance on Managing
Outsourcing Risk (Dec. 5, 2013, rev. Feb. 26, 2021). The Board of
Governors of the Federal Reserve System, jointly with the Federal
Deposit Insurance Corporation and the Office of the Comptroller of
the Currency, proposed updated guidance for banking organizations in
2021 regarding the management of risks arising from third-party
relationships. See Board of Governors of the Federal Reserve System,
Federal Deposit Insurance Corporation, Office of the Comptroller of
the Currency, Proposed Interagency Guidance on Third-Party
Relationships: Risk Management, 86 FR 38182, 38193 (July 19, 2021).
The proposed guidance is not yet final.
---------------------------------------------------------------------------
The Commission also requires that SCI entities--including
registered clearing agencies--conduct risk assessments of ``SCI
systems'' at least once per year in accordance with Regulation SCI and
report the findings to senior management and the board of
[[Page 51846]]
directors.\194\ Insofar as service providers for critical services are
the providers of SCI systems, each registered clearing agency board
likely already has written policies and procedures reasonably designed
to enable the board of directors to oversee service providers for
critical services, including confirming that the risks related to
service provider relationships are managed in a manner consistent with
its risk management framework, reviewing senior management's monitoring
of relationships with service providers for critical services, and
confirming that senior management takes appropriate actions to remedy
significant deterioration in performance or address changing risks or
material issues identified through ongoing monitoring of service
providers for critical services.\195\
---------------------------------------------------------------------------
\194\ See 17 CFR 242.1000-1007.
\195\ See Regulation SCI Adopting Release, supra note 39, at
77276 (noting that ``The Commission agrees with the comment that an
SCI entity should be responsible for managing its relationship with
third parties operating systems on behalf of the SCI entity through
due diligence, contract terms, and monitoring of third party
performance. [. . .] The Commission believes that it would be
appropriate for an SCI entity to evaluate the challenges associated
with oversight of third-party vendors that provide or support its
applicable systems subject to Regulation SCI. If an SCI entity is
uncertain of its ability to manage a third-party relationship
(whether through due diligence, contract terms, monitoring, or other
methods) to satisfy the requirements of Regulation SCI, then it
would need to reassess its decision to outsource the applicable
system to such third party.'').
---------------------------------------------------------------------------
(d) Current Practices Regarding Board Consideration of Stakeholder
Viewpoints
Currently, each covered clearing agency is required to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide governance arrangements that consider
the interests of participants' customers, securities issuers and
holders, and other relevant stakeholders of the covered clearing
agency.\196\ The Commission understands that clearing agency boards
currently use both formal and informal channels to solicit, receive,
and consider the viewpoints of participants and other relevant
stakeholders.\197\ Clearing agency participants acknowledge that their
ability to offer viewpoints has yielded positive but mixed
results.\198\
---------------------------------------------------------------------------
\196\ See 17 CFR 240.17Ad-22(e)(2)(vi).
\197\ See, e.g., OCC, Order Approving Proposed Rule Change,
Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR 5500, 5508
(Jan. 30, 2020) (``OCC also describes the formal and informal
mechanisms that OCC employs to solicit feedback from Clearing
Members and other interested stakeholders, including its Financial
Risk Advisory Committee, Operations Roundtable, multiple letters and
open calls with Clearing Members and other interested stakeholders,
and routine in-person meetings with trade groups and individual
firms.''); Cf. J.P. Morgan et al., A Path Forward for CCP
Resilience, Recovery and Resolution (Mar. 10, 2020), https://www.jpmorgan.com/content/dam/jpm/cib/complex/content/news/a-path-forward-for-ccp-resilience-recovery-and-resolution/pdf-0.pdf
(``[C]learing participants have provided diverse perspectives and
detailed feedback to CCPs and regulators through individual firm and
industry association position papers, targeted comment letters, and
participation in regulatory and industry-sponsored forums on a
global scale.'').
\198\ See, e.g., J.P. Morgan et al., supra note 197, at 1
(explaining that ``[w]hile CCPs and the regulatory community have
taken significant steps to address the feedback received, there
remain outstanding issues that require additional attention'' and
recommending ``[e]nhancing governance practices to obtain and
address input from a broader array of market participants on
relevant risk issues'' to enhance CCP resilience).
---------------------------------------------------------------------------
C. Consideration of Benefits and Costs
The discussion below sets forth the potential economic effects
stemming from adopting the proposed rules, including the effects on
efficiency, competition, and capital formation.
The benefits and costs discussed in this section are relative to
the economic baseline discussed earlier, which includes clearing
agencies' current practices. In some instances, the proposed rules
reflect what we believe to be current practices at many registered
clearing agencies. To the extent that a clearing agency's current
practices could reasonably be considered to be in compliance with a
proposed rule, the clearing agency and broader market would have
already absorbed the benefits of the proposed rule and so might not
experience any direct benefits if the Commission adopts the rule.\199\
In these cases, the Commission believes that imposing these
requirements on all registered clearing agencies would have the effect
of imposing consistent governance standards across all registered
clearing agencies.
---------------------------------------------------------------------------
\199\ However, a clearing agency whose current practices could
reasonably be considered to be in compliance with the proposed rules
might still be required to expend resources if the Commission
adopted the rule, because the clearing agency would likely need to
review its policies and procedures in response to the adoption.
---------------------------------------------------------------------------
If adopted, many of the proposed rules could result in a clearing
agency needing to amend its bylaws, rulebook, or other governance
documents. Because clearing agencies are SROs, any such amendments that
constitute rule changes would be subject to Commission review pursuant
to Rule 19b-4. Adopting the proposed rules could also cause a clearing
agency to make different business decisions, such as capital
expenditure decisions, which would not be subject to the same
Commission review process.
It is uncertain to what extent the costs discussed in this section
would be borne by clearing agencies, as opposed to participants. For
clearing agencies owned by participants, all of the costs will
ultimately be passed on to participants because they are residual
beneficiaries of the clearing agency. For clearing agencies not owned
by participants, the level of pass through would depend upon a number
of factors, including the lack of competition among clearing agencies.
1. Economic Considerations for Rule Proposals Regarding Board
Composition
As discussed in more detail above, proposed Rules 17Ad-25(b), (e),
and (f) would (1) require that a majority of the board (or 34 percent,
if a majority of the voting rights are directly or indirectly held by
participants) be independent directors (as determined by the clearing
agency and precluding certain circumstances that impact independence),
(2) establish minimum independent director requirements for the
composition of certain board committees, and (3) identify circumstances
that would exclude a director from being an independent director.\200\
---------------------------------------------------------------------------
\200\ See supra Part III.A.1 (discussing proposed Rules 17Ad-
25(b), (e), and (f)).
---------------------------------------------------------------------------
To the extent an operating clearing agency could determine that its
current board meets the proposed minimum requirements for independent
directors on the board and board committees, adopting the proposed rule
will not directly affect the effectiveness of the clearing agency's
governance or directly affect the management of divergent interests
between owners and participants, among various types of participants,
and between clearing agency stakeholders and the broader financial
markets.
To the extent operating clearing agencies would need to change the
composition of their boards or board committees to meet the proposed
minimum requirements, the proposed rule could help promote more
effective governance by providing impartial perspectives and helping
mitigate the impact of the divergent interests between owners and
participants, among various types of participants, and between clearing
agency stakeholders and the broader financial markets. The Commission
believes that more effective governance will improve the effectiveness
of a clearing agency's risk management practices, which will promote
resilience at individual clearing agencies and in the broader
[[Page 51847]]
financial markets.\201\ For example, more effectively managing
divergent interests could help the clearing agency better internalize
the costs of participant defaults and non-default losses, which could
mitigate a clearing agency's incentive to underinvest in risk
management services such as liquidity arrangements and risk modelling.
The proposed rules could also help clearing agencies ensure that an
appropriate risk-based margin system is in place.
---------------------------------------------------------------------------
\201\ See Paolo Saguato, The Unfinished Business of Regulating
Clearinghouses, 2020 Colum. Bus. L. Rev. 449, 488 (2020), https://journals.library.columbia.edu/index.php/CBLR/article/view/7219/3838
(``The agency costs between clearinghouses' shareholders and members
(the former participating in the profits of the business, and the
latter bearing its final costs) increase the moral hazard of these
institutions and threaten clearinghouses' systemic resilience.'');
Saguato, supra note 160.
---------------------------------------------------------------------------
The Commission also believes that better managing the divergent
interests could improve the ability of indirect participants to compete
with direct participants of the clearing agency. Given that the cleared
derivatives market is an imperfect substitute for uncleared
derivatives, some commentators argue that large dealers may have an
incentive to protect economic rents and therefore may urge boards to
adopt policies that restrict the classes or volume of transactions that
may use clearinghouse platforms.\202\
---------------------------------------------------------------------------
\202\ See Johnson, supra note 173, at 698-700.
---------------------------------------------------------------------------
Some academic literature on corporate governance could be
interpreted to suggest that, under the proposed definition of
independent director and the proposed minimum requirements for
independent directors on the board and board committees, divergent
interests between owners and participants, among various types of
participants, and between clearing agency stakeholders and the broader
financial markets may continue to adversely impact governance because
independent directors in closely held companies will cede to the
interests of controlling shareholders unless they are affirmatively
incentivized to protect the interests of one or more stakeholder
groups.\203\ One author suggests that independent directors will be
more effective if (1) their explicit purpose is to ``prevent minority
expropriation at the hands of the block-holders,'' (2) there is a
strong regulation and enforcement regime, and (3) the nomination
procedure and the design of incentives guarantee the independent
director is accountable to a specific constituency other than
controlling shareholders.\204\ Another author argues that including
independent directors in the governance process provides a roadmap, but
does not guarantee results in terms of favoritism and objectivity.\205\
While studies on the benefits of independent directors offer mixed
results and while independence alone is unlikely to be sufficient to
motivate a director to act in the public interest,\206\ director
independence, particularly when complemented with other governance
requirements, may help mitigate divergent incentives.
---------------------------------------------------------------------------
\203\ See, e.g., Clarke, supra note 94, at 85 (``The dominant
view has been that directors who are responsible to many
constituencies are in effect responsible to none . . . ''); Lucian
A. Bebchuk & Assaf Hamdani, Independent Directors and Controlling
Shareholders, 165 Univ. Pa. L. Rev. 1271, 1274 (2017), https://scholarship.law.upenn.edu/penn_law_review/vol165/iss6/1/ (taking the
position that the best way to help ensure an independent director
does not capitulate to controlling shareholders' or management's
interests is to help ensure the independent director is accountable
to (i.e., nominated by) another group of stakeholders).
\204\ See Maria Gutierrez & Maribel Saez, Deconstructing
Independent Directors, 13 J. Corp. L. Stud. 63, 90 (2013).
\205\ See Dravis, supra note 80.
\206\ See Clarke, supra note 94, at 82-83 (``If one is to rely
on NMDs [Non-Management Director's] to exercise their voting power
in favor of compliance with external standards, then there needs to
be some reason for believing that NMDs will be more likely to do so
than non-NMDs. Both kinds of directors can be subject to sanctions
for voting to violate clear legal obligations. If the purpose is to
encourage corporations to act in accordance with principles that do
not constitute legal obligations (for example, ``maximize local
employment''), then it is unlikely that NMDs elected by, and
accountable to, profit-maximizing shareholders will produce this
result. A director serving the ``public interest'' should arguably
be independent of everyone--dominant shareholders, management, and
indeed all those who have an interest in the company--and follow
only the dictates of her conscience. Assuming accountability to be a
good thing, however, it is hard to see how such a director could
properly be made accountable. In the real world, of course, any
director without security of tenure will, in the absence of
counterincentives and assuming that the position is desirable, tend
to be accountable to whoever was responsible for appointing her.'').
---------------------------------------------------------------------------
The Commission believes that the proposed independence rules will
work in conjunction with (1) existing governance rules that emphasize
the clearing agency's responsibility to owners, participants and other
stakeholders,\207\ (2) Commission enforcement of securities
regulations, and (3) the adoption of other rules in this proposal (such
as the proposed nominating committee requirements) to help independent
directors mitigate the effects of divergent interests between owners
and participants, among various types of participants, and between
clearing agency stakeholders and the broader financial markets.
---------------------------------------------------------------------------
\207\ See, e.g., Rule 17Ad-22(e)(2).
---------------------------------------------------------------------------
In addition, the Commission believes that standardizing the
definition of independent director could improve efficiency by reducing
economic frictions and search costs related to monitoring by
stakeholders.
The Commission is aware of three primary costs associated with
adopting the proposed rules regarding the composition of the board.
First, adopting the proposed rules would cause clearing agency boards
to immediately expend resources memorializing information that has been
gathered for consideration in determining each director's independence,
and then preserving the records of the determination. The Commission
estimates that each registered, operating clearing agency would incur a
one-time burden of approximately $20,353 \208\ to comply with proposed
Rules 17Ad-25(b), (e), and (f) if the rules were adopted. Clearing
agencies would also expend future resources to repeat the above process
of memorializing information and documenting a determination, likely
twice a year. The Commission estimates that each registered, operating
clearing agency would incur an annual, recurring burden of
approximately $40,706 \209\ to comply with proposed Rules 17Ad-25(b),
(e), and (f) if the rules were adopted.
---------------------------------------------------------------------------
\208\ This figure is calculated as follows: Chief Compliance
Officer for 5 hours at $577 per hour + Compliance Attorney for 44
hours at $397 per hour = $2,885 + $17,468 = $20,353. No hours are
allocated to proposed Rules 17Ad-25(e) or (f). See infra notes 236
and 237. The per-hour costs ($577 for a Chief Compliance Officer and
$397 for a Compliance Attorney) are from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, modified by
Commission staff to account for an 1800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. See SIFMA, Management and
Professional Earnings in the Securities Industry--2013 (Oct. 7,
2013), https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/.
\209\ This figure is calculated as follows: Chief Compliance
Officer for 10 hours at $577 per hour + Compliance Attorney for 88
hours at $397 per hour = $5,770 + $34,936 = $40,706. No hours are
allocated to proposed Rules 17Ad-25(e) or (f). See infra note 239.
The per-hour costs ($577 for a Chief Compliance Officer and $397 for
a Compliance Attorney) are from SIFMA's Management and Professional
Earnings in the Securities Industry--2013, supra note 208.
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Second, clearing agencies may need to add independent directors to
the board, either by replacing directors or increasing the board
size.\210\ As mentioned earlier, approaches to defining independence
for directors vary across clearing agencies. Thus, if proposed Rules
17Ad-25(b), (e), and (f) were adopted, to the extent that a clearing
agency's definition of an
[[Page 51848]]
``independent director'' conflicts with the proposed rules, including
the prohibitions in proposed Rule 17Ad-25(f), a clearing agency
currently reporting a majority of its directors as independent (or 34
percent, if a majority of the voting rights are directly or indirectly
held by participants) on its board may need to replace directors to
comply with the rule requirements.\211\
---------------------------------------------------------------------------
\210\ Alternatively, clearing agencies might achieve compliance
by reducing the board size and eliminating a sufficient number of
non-independent directors.
\211\ On the other hand, a clearing agency that does not require
a minimum percentage of independent directors could determine that
its current slate of directors already satisfies the independence
requirements in the proposed rules.
---------------------------------------------------------------------------
Adding independent directors would require a clearing agency to
expend resources conducting a search for new directors. The costs
incurred by the clearing agency may vary based on whether it conducts
its own search or retains an outside consultant. The Commission
estimates that retaining a recruitment specialist to secure an
independent director could cost approximately $90,000 per
director.\212\
---------------------------------------------------------------------------
\212\ The Commission is basing this estimate on a report by The
Good Search noting that the retainer fee for outside directors is on
average $90,000. See The Good Search, Retained Search Fees, https://tgsus.com/executive-search-blog/retained-search-fees/. The
Commission believes that this amount could serve as a proxy for the
amount of any fee to be charged by a recruitment firm that would
conduct a national search for an independent director.
---------------------------------------------------------------------------
Third, to the extent that non-independent directors tend to have
more relevant knowledge and experience than independent directors do,
requiring that a majority of directors (or 34 percent, if a majority of
the voting rights are directly or indirectly held by participants) be
independent could reduce the depth or breadth of relevant expertise
that can be brought to clearing agency boards. A reduced level of
combined experience on a clearing agency board might impair clearing
agency efficiency in the near term. However, the Commission believes
that any such effect would be short-lived, as new independent directors
gain more experience and prospective director nominees to the board
that may not meet existing experience criteria would qualify under the
proposed new independence requirements and fitness standards.
The Commission believes that the expected costs to implement
proposed Rules 17Ad-25(b), (e), and (f) are sufficiently small that
they would not have a material effect on (1) competition among the
existing clearing agencies or on a new entrant's ability to enter the
market; (2) capital formation, including clearing agencies' ability to
raise capital; and (3) the efficiency of clearing agencies or their
participants. For example, the Commission estimates that a clearing
agency would spend approximately $20,353 plus whatever director search
costs were necessary in the first year if the rules were adopted (which
the Commission estimates to be up to $90,000 per director), and $40,706
in each year thereafter.
2. Economic Considerations for Rule Proposals Regarding the Nominating
Committee
As discussed in more detail above, proposed Rule 17Ad-25(c) would
establish minimum requirements for nominating committees, including a
minimum composition requirement, fitness standards for serving on the
board, and a documented process for evaluating board nominees,
including those who would meet the Commission's proposed independence
criteria.\213\
---------------------------------------------------------------------------
\213\ See supra Part III.B (discussing proposed Rule 17Ad-
25(c)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------
Given that six of the seven operating clearing agencies already
have nominating committees (or a committee that serves a similar
function), the primary benefit of adopting proposed Rule 17Ad-25(c)
would be to increase the number of independent directors on existing
nominating committees. Insofar as a lack of independent directors on a
clearing agency's nominating committee has prevented the clearing
agency from having a fairer representation of their shareholders and
participants in the selection of their directors and the administration
of their affairs, proposed Rule 17Ad-25(c) would help the clearing
agency better meet Section 17A's fair representation requirements.
Adopting proposed Rule 17Ad-25(c) would cause clearing agency
boards to immediately expend resources reviewing, revising, and
possibly creating governance documents and related policies and
procedures. The Commission estimates that each registered, operating
clearing agency would incur a one-time burden of approximately $35,060
\214\ to comply with proposed Rule 17Ad-25(c) if the rule was adopted.
Clearing agencies would also need to expend future resources for
monitoring, compliance, and documentation activities related to the new
or revised policies and procedures. The Commission estimates that each
registered, operating clearing agency would incur an annual, recurring
burden of approximately $11,910 \215\ to comply with proposed Rule
17Ad-25(c) if the rule were adopted.
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\214\ This figure is calculated as follows: Assistant General
Counsel for 30 hours at $507 per hour + Compliance Attorney for 50
hours at $397 per hour = $15,210 + $19,850 = $35,060. See infra note
242. The per-hour costs ($507 for an Assistant General Counsel, and
$397 for a Compliance Attorney) are from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, supra note
208.
\215\ This figure is calculated as follows: Compliance Attorney
for 30 hours at $397 per hour = $11,910. See infra note 244. The
$577 per hour cost for a Chief Compliance Officer is from SIFMA's
Management and Professional Earnings in the Securities Industry--
2013, supra note 208.
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The Commission believes that the expected costs to implement
proposed Rule 17Ad-25(c) are sufficiently small that they would not
have a material effect on (1) competition among the existing clearing
agencies or on a new entrant's ability to enter the market; (2) capital
formation, including clearing agencies' ability to raise capital; and
(3) the efficiency of clearing agencies or their participants.
3. Economic Considerations for Rule Proposals Regarding the Risk
Management Committee
As discussed in more detail above, proposed Rule 17Ad-25(d) would
require each registered clearing agency to establish a risk management
committee (or committees) and establish minimum requirements for the
composition, reconstitution, and function of such risk management
committees. Based on the Commission staff's review of relevant
governance documents, the Commission understands that many registered
clearing agencies currently have written governance arrangements that
largely conform to the requirements for risk management committees in
proposed Rule 17Ad-25(d). The Commission believes that each clearing
agency's governance documents and related policies and procedures would
need minimal modifications if proposed Rule 17Ad-25(d) were adopted. To
the extent that a clearing agency's existing governance documents and
related policies and procedures could reasonably be considered to be in
compliance with the proposed rules, the benefits of the proposed rule
would already be incorporated by market participants.
Adopting proposed Rule 17Ad-25(d) would cause clearing agency
boards to immediately expend resources reviewing, revising, and
possibly creating governance documents and related policies and
procedures. The Commission estimates that each registered, operating
clearing agency would incur a one-time burden of approximately $3,506
\216\ to comply
[[Page 51849]]
with proposed Rule 17Ad-25(d) if the rule was adopted. Clearing
agencies would also need to expend future resources for monitoring,
compliance, and documentation activities related to the new or revised
governance documents and related policies and procedures. The
Commission estimates that each registered, operating clearing agency
would incur an annual, recurring burden of approximately $1,191 \217\
to comply with proposed Rule 17Ad-25(d) if the rule was adopted.
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\216\ This figure is calculated as follows: Assistant General
Counsel for 3 hours at $507 per hour + Compliance Attorney for 5
hours at $397 per hour = $1,521 + $1,985 = $3,506. See infra note
248. The per-hour costs ($507 for an Assistant General Counsel, and
$397 for a Compliance Attorney) are from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, supra note
208.
\217\ This figure is calculated as follows: Compliance Attorney
for 3 hours at $397 per hour = $1,191. See infra note 250. The per-
hour cost is from SIFMA's Management and Professional Earnings in
the Securities Industry--2013, supra note 208.
---------------------------------------------------------------------------
The Commission believes that the expected costs to implement
proposed Rule 17Ad-25(d) are sufficiently small that they would not
have a material effect on (1) competition among the existing clearing
agencies or on a new entrant's ability to enter the market; (2) capital
formation, including clearing agencies' ability to raise capital; and
(3) the efficiency of clearing agencies or their participants.
4. Economic Considerations for Rule Proposals Regarding Conflicts of
Interest Involving Directors or Senior Managers
As discussed in more detail above, proposed Rules 17Ad-25(g) and
(h) would (1) require policies and procedures that identify and
document existing or potential conflicts of interest, mitigate or
eliminate the conflicts of interest and document the actions
taken,\218\ and (2) require policies and procedures that obligate
directors to report potential conflicts.\219\
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\218\ See supra Part III.D.1 (discussing proposed Rule 17Ad-
25(g)).
\219\ See supra Part III.D.1 (discussing proposed Rule 17Ad-
25(h)).
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The Commission believes that each clearing agency's existing
policies and procedures for identifying, reporting, and mitigating
conflicts of interest by directors or senior managers would need
minimal modifications if the proposed rules were adopted. To the extent
a clearing agency's existing policies and procedures could reasonably
be considered to be in compliance with the proposed rules, the benefits
discussed below would already be incorporated by market participants.
The Commission believes that adopting the proposed rules regarding
conflicts of interest would help clearing agencies continue to identify
and mitigate conflicts of interest by directors and senior managers as
circumstances change. For example, by codifying current best practices,
the proposed rules would reduce the future ability of clearing agencies
to change a clearing agency's conflict of interest disclosure
requirements to the detriment of participants and the economic
efficiency of the clearing market.
In addition, to the extent that adopting the proposed rule would
require clearing agencies to strengthen policies and procedures that
deal with identifying, reporting, mitigating or eliminating, and
documenting conflicts of interest, strengthening those policies and
procedures could reduce the monitoring costs borne by clearing agency
stakeholders.
Finally, to the extent a previously undisclosed conflict of
interest resulted in less favorable outcomes for the clearing agency--
such as higher expenses with service providers or the loss of business
from smaller participants--adopting the proposed rule would improve the
clearing agency's profitability (operating efficiency) and the economic
efficiency of the clearing market.
Adopting the proposed rules regarding conflicts of interest would
cause clearing agency boards to immediately expend resources reviewing,
revising, and possibly creating governance documents and related
policies and procedures. The Commission estimates that each registered,
operating clearing agency would incur a one-time burden of
approximately $6,945 \220\ to comply with proposed Rules 17Ad-25(g) and
(h) if the rules were adopted. Clearing agencies would also need to
expend future resources for monitoring, compliance, and documentation
activities related to the new or revised policies and procedures. The
Commission estimates that each registered, operating clearing agency
would incur an annual, recurring burden of approximately $2,382 \221\
to comply with proposed Rules 17Ad-25(g) and (h) if the rules were
adopted.
---------------------------------------------------------------------------
\220\ This figure is calculated as follows: Assistant General
Counsel for 9 hours at $507 per hour + Compliance Attorney for 6
hours at $397 per hour = $4,563 + $2,382 = $6,945. The Assistant
General Counsel's 9 hours are allocated among the proposed rules: 8
hours for proposed Rule 17Ad-25(g) and 1 hour for proposed Rule
17Ad-25(h). The Compliance Attorney's 6 hours are allocated among
the proposed rules: 5 hours for proposed Rule 17Ad-25(g) and 1 hour
for proposed Rule 17Ad-25(h). See infra notes 251, 253, and 255. The
per-hour costs ($507 for an Assistant General Counsel and $397 for a
Compliance Attorney) are from SIFMA's Management and Professional
Earnings in the Securities Industry--2013, supra note 208.
\221\ This figure is calculated as follows: Compliance Attorney
for 6 hours at $397 per hour = $2,382. The Compliance Attorney's 6
hours are allocated among the proposed rules: 5 hours for proposed
Rule 17Ad-25(g) and 1 hour for proposed Rule 17Ad-25(h). See infra
notes 252, 254, and 256. The per-hour cost is from SIFMA's
Management and Professional Earnings in the Securities Industry--
2013, supra note 208.
---------------------------------------------------------------------------
The Commission believes that the expected costs to implement
proposed Rules 17Ad-25(g) and (h) are sufficiently small that they
would not have a material effect on (1) competition among the existing
clearing agencies or on a new entrant's ability to enter the market;
(2) capital formation, including clearing agencies' ability to raise
capital; and (3) the efficiency of clearing agencies or their
participants.
5. Economic Considerations for Rule Proposals Regarding Oversight of
Service Providers for Critical Services
As discussed in more detail above, proposed Rule 17Ad-25(i) would
require policies and procedures enabling the board to oversee
relationships with service providers for critical services.
The Commission believes that, to the extent a clearing agency's
risk management framework does not already consider how reliance on an
affiliated or third-party service provider might affect clearing
agency's risks, adopting the proposed rule would enhance the
effectiveness of a clearing agency's risk management framework. A more
effective risk management framework would reduce the probability of
clearing agency failure or financial distress. The reduced probability
of these outcomes directly and positively affects the stability of the
broader financial system.
Adopting the proposed rules regarding the board's ultimate
responsibility for the oversight of relationships with service
providers for critical services would cause clearing agency boards to
immediately expend resources reviewing, revising, and possibly creating
governance documents and related policies and procedures. For example,
boards might need to create or revise policies for overseeing
relationships with service providers for critical services. The
Commission estimates that each registered, operating clearing agency
would incur a one-time burden of approximately $35,060 \222\ to
[[Page 51850]]
comply with proposed Rule 17Ad-25(i) if the rule was adopted. Clearing
agency boards would also need to expend future resources for
monitoring, compliance, and documentation activities related to the new
or revised policies and procedures. The Commission estimates that each
registered, operating clearing agency would incur an annual, recurring
burden of approximately $11,910 \223\ to comply with proposed Rule
17Ad-25(i) if the rule was adopted.
---------------------------------------------------------------------------
\222\ This figure is calculated as follows: Assistant General
Counsel for 30 hours at $507 per hour + Compliance Attorney for 50
hours at $397 per hour = $15,210 + $19,850 = $35,060. See infra note
261. The per-hour costs ($507 for an Assistant General Counsel and
$397 for a Compliance Attorney) are from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, supra note
208.
\223\ This figure is calculated as follows: Compliance Attorney
for 30 hour at $397 per hour = $11,910. See infra note 263. The per-
hour cost is from SIFMA's Management and Professional Earnings in
the Securities Industry--2013, supra note 208.
---------------------------------------------------------------------------
The Commission believes that the expected costs to implement
proposed Rule 17Ad-25(i) are sufficiently small that they would not
have a material effect on (1) competition among the existing clearing
agencies or on a new entrant's ability to enter the market; (2) capital
formation, including clearing agencies' ability to raise capital; and
(3) the efficiency of clearing agencies or their participants.
6. Economic Considerations for Rule Proposals Regarding Formalized
Solicitation, Consideration, and Documentation of Stakeholders'
Viewpoints
As discussed in more detail above, proposed Rule 17Ad-25(j) would
require policies and procedures to solicit, consider, and document the
registered clearing agency's consideration of the views of its
participants and other relevant stakeholders regarding material
developments in its governance and operations.
The Commission believes that, to the extent clearing agency boards'
inadequate solicitation of stakeholder viewpoints has caused some
stakeholder views not to be considered, adopting the proposed rules
regarding the solicitation, consideration, and documentation of
stakeholders' views would improve boards' consideration of different
stakeholder views. The Commission believes the improved consideration
of different views would help persuade stakeholders with divergent
interests to assert their needs more vigorously, which would encourage
debate amongst actors with different goals. More informed debates
would, in turn, help to foster consensus agreements with mandates and
other decisions that are supported by a broader spectrum of
stakeholders. Consequently, clearing agencies would identify and
develop rule proposals that (to the extent the Commission considers
them) would be more likely to meet the public interest requirements
under Section 17A of the Exchange Act.\224\
---------------------------------------------------------------------------
\224\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Adopting the proposed rules regarding obligations of the board
would cause clearing agency boards to immediately expend resources
reviewing, revising, and possibly creating governance documents and
related policies and procedures. For example, boards might need to
create policies for soliciting, considering, and documenting the
consideration of stakeholders' views. The Commission estimates that
each registered, operating clearing agency would incur a one-time
burden of approximately $6,438 \225\ to comply with proposed Rule 17Ad-
25(j) if the rule was adopted. Clearing agency boards would also need
to expend future resources for monitoring, compliance, and
documentation activities related to the new or revised policies and
procedures. The Commission estimates that each registered, operating
clearing agency would incur an annual, recurring burden of
approximately $1,588 \226\ to comply with proposed Rule 17Ad-25(j) if
the rule was adopted.
---------------------------------------------------------------------------
\225\ This figure is calculated as follows: Assistant General
Counsel for 8 hours at $507 per hour + Compliance Attorney for 6
hours at $397 per hour = $4,056 + $2,382 = $6,438. See infra note
267. The per-hour costs ($507 for an Assistant General Counsel and
$397 for a Compliance Attorney) are from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, supra note
208.
\226\ This figure is calculated as follows: Compliance Attorney
for 4 hours at $397 per hour = $1,588. See infra note 269. The per-
hour cost is from SIFMA's Management and Professional Earnings in
the Securities Industry--2013, supra note 208.
---------------------------------------------------------------------------
The Commission believes that the expected costs to implement
proposed Rule 17Ad-25(j) are sufficiently small that they would not
have a material effect on (1) competition among the existing clearing
agencies or on a new entrant's ability to enter the market; (2) capital
formation, including clearing agencies' ability to raise capital; and
(3) the efficiency of clearing agencies or their participants.
D. Reasonable Alternatives to the Proposed Rule
1. More Flexibility in Governance, Operations, and Risk Management
The Commission believes that when determining the content of its
policies and procedures, each clearing agency must have the ability to
consider the effects of its unique characteristics and circumstances,
including ownership and governance structures, on direct and indirect
participants, markets served, and the risks inherent in products
cleared.\227\
---------------------------------------------------------------------------
\227\ See CCA Standards Adopting Release, supra note 13, at
70806 (``The Commission believes it is appropriate to provide
covered clearing agencies with flexibility, subject to their
obligations and responsibilities as SROs under the Exchange Act, to
structure their default management processes to take into account
the particulars of their financial resources, ownership structures,
and risk management frameworks.'').
---------------------------------------------------------------------------
It has been the Commission's experience that particular securities
markets (e.g., equities, fixed income, and options) have unique
conventions, characteristics, and structures that are best addressed on
a market-by-market basis. The Commission recognizes that a less
prescriptive approach can help promote efficient and effective
practices and encourage regulated entities to consider how to manage
their regulatory obligations and risk management practices in a way
that complies with Commission rules, while considering the particular
characteristics of their business.\228\
---------------------------------------------------------------------------
\228\ See CCA Standards Adopting Release, supra note 13, at
70801; see also Randall S. Kroszner, Central Counterparty Clearing:
History, Innovation, and Regulation, 30 Econ. Persp. 37, 39 (2006)
(``[37, 39 (2006) (``[M]ore intense government regulation of CCPs
may prove counterproductive if it creates moral hazard or impedes
the ability of CCPs to develop new approaches to risk
management.'').
---------------------------------------------------------------------------
Even where current practices at clearing agencies do not
significantly differ from the proposed rules, clearing agencies could
still potentially face costs associated with the limitations on
discretion that would result from the rules, including costs related to
limiting a clearing agency's flexibility to respond to changing
economic environments. For example, to the extent that clearing
agencies having boards with a majority of independent directors value
the ability to sometimes have less than a majority of independent
directors on the board of directors, they may incur additional costs
because, if proposed rules were adopted, they would lose the option to
do so.
Although there may be costs to limiting the degree of discretion
clearing agencies have over governance, operations, and risk
management, the Commission believes there are also potential benefits.
For example, clearing agencies may not fully internalize the social
costs of differing incentives between owners and participants, among
various types of participants, and between clearing agency stakeholders
and the broader financial markets and thus, without more granular
regulations,
[[Page 51851]]
may not appropriately address the needs and incentives of the direct or
indirect participants or the broader financial market.
2. Ownership Limits
In 2010, the Commission proposed Regulation MC, which was
``designed to mitigate potential conflicts of interest . . . through
conditions and structures related to ownership, voting, and
governance.'' \229\ Regulation MC proposed mitigating divergent
incentives, especially between larger and smaller owners, by imposing
maximum ownership limits. Specifically, Regulation MC proposed that
security-based swap clearing agencies be required to choose one of two
governance alternatives. The Voting Interest Alternative in part
prevented any single participant from having more than 20 percent
ownership or voting interest in a clearing agency, and limited total
participant ownership or voting rights to no more than 40 percent. The
Voting Interest Alternative also required that at least 35 percent of
the board be independent directors.
---------------------------------------------------------------------------
\229\ See Regulation MC Proposing Release, supra note 1, at
65882.
---------------------------------------------------------------------------
The Governance Interest Alternative in part limited any participant
to no more than 5 percent ownership or voting rights in the clearing
agency, and required that at least 51 percent of the board be
independent directors.
The Commission has not proposed ownership limits in the current
proposal because (1) rules during the intervening time have
significantly altered how clearing agencies must treat smaller
participants \230\ and (2) bright-line ownership limits are easy to
manipulate, for example by obfuscating beneficial ownership or by
getting extremely close to the limit.
---------------------------------------------------------------------------
\230\ See supra Part II.B. (discussing, in part, how the
Commission has adopted rules to promote access to registered
clearing agencies, including access for smaller participants).
---------------------------------------------------------------------------
3. Increase Shareholders' At-Risk Capital (``Skin in the Game'')
The proposed rules are intended, in part, to better manage
divergent incentives of clearing agency owners and non-owner
participants. One suggested cause of the incentive misalignment is
owners' lack of at-risk capital (``skin in the game'').\231\ Under the
existing regulatory structure, for-profit clearing agencies can
bifurcate risk from reward, sending the reward (e.g., profits) to
owners and requiring participants to hold disproportionate risks (e.g.,
responsibility for non-default losses or participants' defaulted
positions). Thus, it is reasonable to consider using skin in the game
to correct the incentive alignment.\232\
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\231\ See, e.g., Saguato, supra note 201, at 488 (``[There is]
significant imbalance of the economic exposure of clearing members
vis-[agrave]-vis clearinghouses and their holding groups. This
imbalance . . . results in the misaligned incentives of members and
share-holders, which creates agency costs between the firms' primary
stakeholders that threaten clearinghouses' systemic resilience.'').
\232\ See OCC, Order Approving Proposed Rule Change to Establish
OCC's Persistent Minimum Skin-In-The-Game, Exchange Act Release No.
92038 (May 27, 2021), 86 FR 29861, 29863 (June 3, 2021) (``The
Commission continues to regard skin-in-the-game as a potential tool
to align the various incentives of a covered clearing agency's
stakeholders, including management and clearing members.'').
---------------------------------------------------------------------------
The Commission is not currently proposing skin-in-the-game
requirements. Instead, the Commission is proposing using governance
requirements to help manage the divergent incentives of clearing agency
shareholders and participants. The Commission believes that the
improved management of misaligned incentives will help facilitate
clearing agencies' ability to adopt policies, such as skin-in-the-game
requirements, that can further ameliorate the divergent incentives of
shareholders and participants.
4. Increase Public Disclosure
One of the purposes of the proposed rules is to increase
transparency into board governance. Increased transparency could also
be achieved by requiring clearing agencies to enhance their governance
disclosures. For example, the Commission could require clearing
agencies to publicly disclose, for each director, the existence of any
relationship or interest that reasonably could affect the independent
judgment or decision-making of the director. This requirement could
include each director's affiliation with clearing agency participants.
The Commission could require these disclosures to be submitted in a
structured (i.e., machine-readable) data language, which could augment
any transparency benefits resulting from the disclosures by increasing
the efficiency with which they are processed.
E. Request for Comment
The Commission requests comment on all aspects of this initial
economic analysis, including the potential benefits and costs, all
effects on efficiency, competition (including any effects on barriers
to entry), and capital formation, and reasonable alternatives to the
proposed rules. We request and encourage any interested person to
submit comments regarding the proposed rules, our analysis of the
potential effects of the proposed rules, and other matters that may
have an effect on the proposed rules. We request that commenters
identify sources of data and information as well as provide data and
information to assist us in analyzing the economic consequences of the
proposed rules and each reasonable alternative. We also are interested
in comments on the qualitative benefits and costs we have identified
and any benefits and costs we may have overlooked, including those
associated with each reasonable alternative. In addition, we are
interested in comments on any other reasonable alternative, including
any alternative that would distinguish registered clearing agencies
based on certain factors, such as organizational structure or products
cleared.
V. Paperwork Reduction Act
Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\233\ We are submitting the proposed
collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA.\234\ The title for the
collection of information is: ``Clearing Agency Standards for Operation
and Governance'' (OMB Control No. 3235-0695).\235\ An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid OMB
control number.
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\233\ 44 U.S.C. 3502.
\234\ 44 U.S.C. 3507.
\235\ Id.
---------------------------------------------------------------------------
As discussed further below, proposed Rules 17Ad-25(b) through (d)
and ((g) through (j) each contain collections of information. The
collections in proposed Rules 17Ad-25(b) through (d) and (g) through
(j) are mandatory. Respondents under these rules are registered
clearing agencies, of which there are currently nine. The Commission
estimates for purposes of the PRA that one additional entity may seek
to register as a clearing agency in the next three years, and so for
purposes of this proposal the Commission has assumed ten respondents.
A. Rule 17Ad-25(b)
The elements of proposed Rule 17Ad-25(b) are discussed in Part
III.A.1. The purpose of the rule is to require either a majority or 34
percent of independent directors, depending on the circumstances set
forth in the rule. Proposed Rule 17Ad-25(b)(2) would
[[Page 51852]]
impose a collection of information requirement.
The Commission estimates that proposed Rule 17Ad-25(b)(2) would
require respondent clearing agencies to incur a one-time burden of 44
hours \236\ to memorialize information that has been gathered for the
person(s) making the determination to consider prior to making it, as
well as 5 hours \237\ to document and preserve the records of the
determination. The Commission estimates that the initial activities
required by Rule 17Ad-25(b)(2) would impose an aggregate initial burden
on respondent clearing agencies of 490 hours.\238\ Due to the fact that
board composition changes on occasion after elections or due to
unexpected events such as restructuring, resignations, or deaths, the
Commission estimates that respondent clearing agencies would incur an
ongoing annual burden of 98 hours to repeat the above process of
memorializing information and documenting a determination twice a
year.\239\ The Commission estimates that the ongoing activities
required by Rule 17Ad-25(b)(2) would impose an aggregate ongoing burden
on respondent clearing agencies of 980 hours.\240\
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\236\ This figure is calculated as follows: ((Chief Compliance
Officer for 4 hours) + (Compliance Attorney for 40 hours)) = 44
hours.
\237\ This figure is calculated as follows: ((Chief Compliance
Officer for 1 hours) + (Compliance Attorney for 4 hours)) = 5 hours.
\238\ This figure is calculated as follows: 49 hours x 10
respondent clearing agencies = 490 hours.
\239\ This figure is calculated as follows: ((Chief Compliance
Officer for 10 hours) + (Compliance Attorney for 88 hours)) = 98
hours.
\240\ This figure is calculated as follows: 98 hours x 10
respondent clearing agencies = 980 hours.
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B. Rule 17Ad-25(c)
As discussed in Part III.B above, the Commission is proposing
certain composition and process requirements for nominating committees
of registered clearing agencies. As proposed, Rule 17Ad-25(c)(1)
through (4) would add governance requirements regarding the nominating
committee of the Board that do not appear in the existing requirements
for governance arrangements in Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2).\241\ Based on the Commission staff's review of relevant
governance documents, the Commission understands that many registered
clearing agencies currently have written governance arrangements
broadly similar to the requirements for nominating committees in
proposed Rule 17Ad-25(c)(1) through (4). Therefore, the Commission
would expect that the PRA burden for a respondent clearing agency
includes the incremental burdens of reviewing and revising existing
governance documents and related policies and procedures, and creating
new governance documents and related policies and procedures, as
necessary, pursuant to the proposed rule. Accordingly, the Commission
estimates that respondent clearing agencies would incur an aggregate
one-time burden of approximately 800 hours to review and revise
existing governance documents and related policies and procedures and
to create new governance documents and related policies and procedures,
as necessary.\242\
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\241\ 17 CFR 240.17Ad-22(d)(8), (e)(2).
\242\ This figure is calculated as follows: ((Assistant General
Counsel for 30 hours) + (Compliance Attorney for 50 hours)) = 80
hours x 10 respondent clearing agencies = 800 hours.
---------------------------------------------------------------------------
Proposed Rule 17Ad-25(c)(1) through (4) would also impose ongoing
burdens on a respondent clearing agency. The proposed rule would
require ongoing monitoring and compliance activities with respect to
governance documents and related policies and procedures created in
response to the proposed rule. The proposed rule would also require
ongoing documentation activities with respect to the implementation of
a written process for a nominating committee to evaluate board
nominees, including those who would meet the definition of an
independent director, pursuant to the proposed rule. Based on the
Commission's previous estimates for ongoing monitoring and compliance
burdens with respect to Rule 17Ad-22,\243\ the Commission estimates
that the ongoing activities required by proposed Rule 17Ad-25(c)(1)
through (4) would impose an aggregate annual burden on respondent
clearing agencies of 300 hours.\244\
---------------------------------------------------------------------------
\243\ See Clearing Agency Standards Adopting Release, supra note
8, at 66260-63; CCA Standards Adopting Release, supra note 13, at
70891-99.
\244\ This figure is calculated as follows: (Compliance Attorney
for 30 hours) x 10 respondent clearing agencies = 300 hours.
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C. Rule 17Ad-25(d)
Proposed Rule 17Ad-25(d)(1) would require a registered clearing
agency to establish a risk management committee (or committees) to
assist the board of directors in overseeing the risk management of the
registered clearing agency. Under proposed Rule 17Ad-25(d)(1), each
risk management committee would be required to reconstitute its
membership on a regular basis and at all times include representatives
from shareholders (or members) and participants of the registered
clearing agency. Proposed Rule 17Ad-25(d)(2) would require each risk
management committee, in the performance of its duties, to be able to
provide a risk-based, independent, and informed opinion on all matters
presented to it for consideration in a manner that supports the safety
and efficiency of the registered clearing agency.\245\
---------------------------------------------------------------------------
\245\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------
The purpose of this collection of information is to promote sound
risk management and governance arrangements at registered clearing
agencies, to help ensure diversity of perspective across shareholders
(or members) and participants in the oversight of registered clearing
agencies' risk management practices, and to mitigate potential or
existing conflicts of interest that could undermine the recommendations
of risk management committees.
Proposed Rule 17Ad-25(d)(1) through (2) would add governance
requirements regarding the risk management committee (or committees) of
a registered clearing agency's board of directors that do not appear in
the existing requirements for governance arrangements in Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2).\246\ Based on the Commission staff's review
of relevant governance documents, the Commission understands that many
registered clearing agencies currently have written governance
arrangements that largely conform to the requirements for risk
management committees in proposed Rule 17Ad-25(d)(1) through (2).
Therefore, the Commission would expect that the PRA burden for a
respondent clearing agency includes the incremental burdens of
reviewing and revising its existing governance documents and related
policies and procedures and creating new governance documents and
related policies and procedures, as necessary, pursuant to the proposed
rule.\247\ Accordingly, the Commission estimates that respondent
clearing agencies would incur an aggregate one-time burden of
approximately 80 hours to review and revise existing governance
documents and related policies and procedures and to create new
governance documents
[[Page 51853]]
and related policies and procedures, as necessary.\248\
---------------------------------------------------------------------------
\246\ See 17 CFR 240.17Ad-22(d)(8), (e)(2).
\247\ Because the written governance arrangements at many
registered clearing agencies already largely conform to the proposed
requirements for risk management committees, the Commission believes
that registered clearing agencies may need to make only limited
changes to update their governing documents and related policies and
procedures to help ensure compliance with proposed Rule 17Ad-
25(d)(1) through (2).
\248\ This figure is calculated as follows: ((Assistant General
Counsel for 3 hours) + (Compliance Attorney for 5 hours)) = 8 hours
x 10 respondent clearing agencies = 80 hours.
---------------------------------------------------------------------------
Proposed Rule 17Ad-25(d)(1) through (2) would also impose ongoing
burdens on a respondent clearing agency. The proposed rule would
require ongoing monitoring and compliance activities with respect to
the governance documents and related policies and procedures created in
response to the proposed rule. The proposed rule would also require
ongoing documentation activities with respect to the establishment of a
risk management committee (or committees) pursuant to the proposed
rule. Based on the Commission's previous estimates for ongoing
monitoring and compliance burdens with respect to Rule 17Ad-22,\249\
the Commission estimates that the ongoing activities required by
proposed Rule 17Ad-25(d)(1) through (2) would impose an aggregate
annual burden on respondent clearing agencies of 30 hours.\250\
---------------------------------------------------------------------------
\249\ See Clearing Agency Standards Adopting Release, supra note
8, at 66260-63; CCA Standards Adopting Release, supra note 13, at
70891-99.
\250\ This figure is calculated as follows: (Compliance Attorney
for 3 hours) x 10 respondent clearing agencies = 30 hours.
---------------------------------------------------------------------------
D. Rule 17Ad-25(g)
Proposed Rule 17Ad-25(g)(1) would contain similar provisions to
Rules 17Ad-22(d)(8) and 17Ad-22(e)(2) in that they reference clear and
transparent governance arrangements, but also adds additional
requirements that do not appear in those rules. The Commission
therefore would expect that a respondent clearing agency may have
written rules, policies, and procedures similar to the requirements in
the rule, and the PRA burden includes the incremental burdens of
reviewing and revising current policies and procedures and creating new
policies and procedures, as necessary, pursuant to the rule.
Accordingly, based on the similar provisions and the corresponding
burden estimates previously made by the Commission for Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2), the Commission estimates that respondent
clearing agencies would incur an aggregate one-time burden of
approximately 80 hours to review and revise existing policies and
procedures and to create new policies and procedures as necessary to
help ensure compliance with proposed Rule 17Ad-25(g)(1).\251\
---------------------------------------------------------------------------
\251\ This figure is calculated as follows: ((Assistant General
Counsel for 5 hours) + (Compliance Attorney for 3 hours)) = 8 hours
x 10 respondent clearing agencies = 80 hours.
---------------------------------------------------------------------------
Rule 17Ad-25(g)(1) also imposes ongoing burdens on a respondent
clearing agency. The rule requires ongoing monitoring and compliance
activities with respect to its policies and procedures under the rule.
Based on the Commission's previous estimates for ongoing monitoring and
compliance burdens with respect to Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2) and because the modifications to Rule 17Ad-25(g)(1) will
require updating current policies and procedures or establishing new
policies and procedures to help ensure compliance, the Commission
estimates that the ongoing activities required by Rule 17Ad-25(g)(1)
would impose an aggregate annual burden on respondent clearing agencies
of 30 hours.\252\
---------------------------------------------------------------------------
\252\ This figure is calculated as follows: (Compliance Attorney
for 3 hours) x 10 respondent clearing agencies = 30 hours.
---------------------------------------------------------------------------
Proposed Rule 17Ad-25(g)(2) would contain similar provisions to
Rules 17Ad-22(d)(8) and 17Ad-22(e)(2) in that they reference clear and
transparent governance arrangements, but also adds additional
requirements that do not appear in those rules. The Commission
therefore would expect that a respondent clearing agency may have
written rules, policies, and procedures similar to the requirements in
the rule and that the PRA burden includes the incremental burdens of
reviewing and revising current policies and procedures and creating new
policies and procedures, as necessary, pursuant to the rule. The
Commission recognizes that while registered clearing agencies may have
existing policies and procedures to comply with proposed Rule 17Ad-
25(g)(1), they may not have current policies and procedures designed
specifically to mitigate and document the how the conflict of interest
was mitigated, as required by Rule 17Ad-25(g)(2). Accordingly, based on
the similar provisions and the corresponding burden estimates
previously made by the Commission for Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2), the Commission estimates that respondent clearing agencies
would incur an aggregate one-time burden of approximately 50 hours to
review and revise existing policies and procedures and to create new
policies and procedures as necessary to help ensure compliance with
proposed Rule 17Ad-25(g)(2).\253\
---------------------------------------------------------------------------
\253\ This figure is calculated as follows: ((Assistant General
Counsel for 3 hours) + (Compliance Attorney for 2 hours)) = 5 hours
x 10 respondent clearing agencies = 50 hours.
---------------------------------------------------------------------------
Rule 17Ad-25(g)(2) also imposes ongoing burdens on a respondent
clearing agency. The rule requires ongoing monitoring and compliance
activities with respect to its policies and procedures under the rule.
Based on the Commission's previous estimates for ongoing monitoring and
compliance burdens with respect to Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2) and because the modifications to Rule 17Ad-25(g)(2) will
require updating current policies and procedures or establishing new
policies and procedures to help ensure compliance, the Commission
estimates that the ongoing activities required by Rule 17Ad-25(g)(2)
would impose an aggregate annual burden on respondent clearing agencies
of 20 hours.\254\
---------------------------------------------------------------------------
\254\ This figure is calculated as follows: (Compliance Attorney
for 2 hours) x 10 respondent clearing agencies = 20 hours.
---------------------------------------------------------------------------
E. Rule 17Ad-25(h)
Proposed Rule 17Ad-25(h) would contain similar provisions to Rules
17Ad-22(d)(8) and 17Ad-22(e)(2) in that they reference clear and
transparent governance arrangements, but also adds additional
requirements that do not appear in those rules. The Commission
therefore would expect that a respondent clearing agency may have
written rules, policies, and procedures similar to the requirements in
the rule and that the PRA burden includes the incremental burdens of
reviewing and revising current policies and procedures and creating new
policies and procedures, as necessary, pursuant to the rule.
Accordingly, based on the similar provisions and the corresponding
burden estimates previously made by the Commission for Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2), the Commission estimates that respondent
clearing agencies would incur an aggregate one-time burden of
approximately 20 hours to review and revise existing policies and
procedures and to create new policies and procedures as necessary to
help ensure compliance with proposed Rule 17Ad-25(h).\255\
---------------------------------------------------------------------------
\255\ This figure is calculated as follows: ((Assistant General
Counsel for 1 hours) + (Compliance Attorney for 1 hours)) = 2 hours
x 10 respondent clearing agencies = 20 hours.
---------------------------------------------------------------------------
Rule 17Ad-25(h) also imposes ongoing burdens on a respondent
clearing agency. The rule requires ongoing monitoring and compliance
activities with respect to its policies and procedures under the rule.
Based on the Commission's previous estimates for ongoing monitoring and
compliance burdens with respect to Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2) and because the modifications to Rule 17Ad-25(h) will require
updating current policies and procedures or establishing new
[[Page 51854]]
policies and procedures to help ensure compliance, the Commission
estimates that the ongoing activities required by Rule 17Ad-25(h) would
impose an aggregate annual burden on respondent clearing agencies of 10
hours.\256\
---------------------------------------------------------------------------
\256\ This figure is calculated as follows: (Compliance Attorney
for 1 hours) x 10 respondent clearing agencies = 10 hours.
---------------------------------------------------------------------------
F. Rule 17Ad-25(i)
As discussed in Section III.F above, the Commission is proposing
certain obligations of the board to oversee service providers for
critical services to a registered clearing agency under proposed Rule
17Ad-25(i). Such obligation does not appear in the existing
requirements for governance arrangements in Rules 17Ad-22(d)(8) and
17Ad-22(e)(2),\257\ but certain aspects of the proposed rule may be
addressed in existing requirements. For example, proposed rule 17Ad-
25(i)(1) references the existence of a risk management framework but
does not itself require the creation of such framework. Instead,
maintenance of a risk management framework is already required for all
currently registered clearing agencies under Rule 17Ad-
22(e)(3)(i).\258\ Additionally, as discussed above, there are existing
requirements for managing operational risk under Rule 17Ad-22(d)(4)
\259\ and Rule 17Ad-22(e)(17).\260\ Therefore, the Commission would
expect that the PRA burden for a respondent clearing agency includes
the incremental burdens of reviewing and revising its existing
governance documents and related policies and procedures and creating
new governance documents and related policies and procedures, as
necessary, pursuant to the proposed rule. Accordingly, the Commission
estimates that respondent clearing agencies would incur an aggregate
one-time burden of approximately 800 hours to review and revise
existing governance documents and related policies and procedures and
to create new governance documents and related policies and procedures,
as necessary.\261\
---------------------------------------------------------------------------
\257\ 17 CFR 240.17Ad-22(d)(8), (e)(2).
\258\ 17 CFR 240.17Ad-22(e)(3)(i).
\259\ 17 CFR 240.17Ad-22(d)(4).
\260\ 17 CFR 240.17Ad-22(e)(17).
\261\ This figure is calculated as follows: ((Assistant General
Counsel for 30 hours) + (Compliance Attorney for 50 hours)) = 80
hours x 10 respondent clearing agencies = 800 hours.
---------------------------------------------------------------------------
Proposed Rule 17Ad-25(i) would also impose ongoing burdens on a
respondent clearing agency. The proposed rule would require ongoing
documentation, monitoring, and compliance activities with respect to
the governance documents and related policies and procedures created in
response to the proposed rule. Based on the Commission's previous
estimates for ongoing monitoring and compliance burdens with respect to
Rule 17Ad-22,\262\ the Commission estimates that the ongoing activities
required by Rule 17Ad-25(i) would impose an aggregate annual burden on
respondent clearing agencies of 300 hours.\263\
---------------------------------------------------------------------------
\262\ See Clearing Agency Standards Adopting Release, supra note
38, at 66260-63; CCA Standards Adopting Release, supra note 38, at
70891-99.
\263\ This figure is calculated as follows: (Compliance Attorney
for 30 hours) x 10 respondent clearing agencies = 300 hours.
---------------------------------------------------------------------------
G. Rule 17Ad-25(j)
Proposed Rule 17Ad-25(j) would require a registered clearing agency
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to solicit, consider, and document its
consideration of the views of participants and other relevant
stakeholders of the registered clearing agency regarding material
developments in the clearing agency's governance and operations on a
recurring basis.\264\
---------------------------------------------------------------------------
\264\ See supra Part III.F.2 (discussing proposed Rule 17Ad-
25(j)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------
Proposed Rule 17Ad-25(j) contains similar provisions to Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2) but would also impose additional governance
obligations that do not appear in the existing requirements for
governance arrangements in Rule 17Ad-22.\265\ Therefore, the Commission
would expect that a respondent clearing agency may have written rules,
policies, and procedures similar to some of the requirements in the
proposed rule and that the PRA burden includes the incremental burdens
of reviewing and revising existing policies and procedures and creating
new policies and procedures, as necessary, pursuant to the proposed
rule. Accordingly, based on the similar policies and procedures
requirements and the corresponding burden estimates previously made by
the Commission for Rules 17Ad-22(d)(8) and 17Ad-22(e)(2),\266\ the
Commission estimates that respondent clearing agencies would incur an
aggregate one-time burden of approximately 140 hours to review and
revise existing policies and procedures and to create new policies and
procedures, as necessary.\267\
---------------------------------------------------------------------------
\265\ See 17 CFR 240.17Ad-22(d)(8), (e)(2).
\266\ See Clearing Agency Standards Adopting Release, supra note
8, at 66260; CCA Standards Adopting Release, supra note 13, at
70891-92.
\267\ This figure was calculated as follows: ((Assistant General
Counsel for 8 hours) + (Compliance Attorney for 6 hours)) = 14 hours
x 10 respondent clearing agencies = 140 hours.
---------------------------------------------------------------------------
Rule 17Ad-25(j) also imposes ongoing burdens on a respondent
clearing agency. The proposed rule would require ongoing monitoring and
compliance activities with respect to the written policies and
procedures created in response to the proposed rule. The proposed rule
would also require ongoing documentation activities with respect to the
board's consideration of participants' and relevant stakeholders' views
pursuant to the proposed rule. Based on the Commission's previous
estimates for ongoing monitoring and compliance burdens with respect to
Rule 17Ad-22,\268\ the Commission estimates that the ongoing activities
required by proposed Rule 17Ad-25(j) would impose an aggregate annual
burden on respondent clearing agencies of 40 hours.\269\
---------------------------------------------------------------------------
\268\ See Clearing Agency Standards Adopting Release, supra note
8, at 66260-63; CCA Standards Adopting Release, supra note 13, at
70891-99.
\269\ This figure was calculated as follows: (Compliance
Attorney for 4 hours) x 10 respondent clearing agencies = 40 hours.
---------------------------------------------------------------------------
H. Chart of Total PRA Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial burden Ongoing burden Total annual
Name of information collection Type of burden Number of per entity per entity burden per Total industry
respondents (hours) (hours) entity (hours) burden (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
17Ad-25(b)................................ Recordkeeping............... 10 49 98 147 1,470
17Ad-25(c)................................ Recordkeeping............... 10 80 30 110 1,100
17Ad-25(d)................................ Recordkeeping............... 10 8 3 11 110
17Ad-25(g)................................ Recordkeeping............... 10 13 5 18 180
17Ad-25(h)................................ Recordkeeping............... 10 2 1 3 30
17Ad-25(i)................................ Recordkeeping............... 10 80 30 110 1,100
17Ad-25(j)................................ Recordkeeping............... 10 14 4 18 180
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 51855]]
I. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
1. Evaluate whether the proposed collection of information is
necessary for the proper performance of the Commission's functions,
including whether the information shall have practical utility;
2. Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collection of information;
3. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
4. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
5. Evaluate whether the proposed rules would have any effects on
any other collection of information not previously identified in this
section.
Persons wishing to submit comments on the collection of information
requirements should direct them to the OMB Desk Officer for the
Securities and Exchange Commission,
[email protected], and should also send a copy
of their comments to Secretary, Securities and Exchange Commission, 100
F Street NE, Washington, DC 20549-1090, with reference to File Number
S7-21-22. Requests for materials submitted to OMB by the Commission
with regard to this collection of information should be in writing,
with reference to File Number S7-21-22 and be submitted to the
Securities and Exchange Commission, Office of FOIA/PA Services, 100 F
Street NE, Washington, DC 20549-2736. As OMB is required to make a
decision concerning the collection of information between 30 and 60
days after publication, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of publication.
VI. Small Business Regulatory Enforcement Fairness Act
Under the Small Business Regulatory Enforcement Fairness Act of
1996, a rule is considered ``major'' where, if adopted, it results or
is likely to result in (i) an annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (ii)
a major increase in costs or prices for consumers or individual
industries; or (iii) significant adverse effect on competition,
investment, or innovation.\270\ The Commission requests comment on the
potential impact of proposed Rule 17Ad-25 on the economy on an annual
basis, any potential increase in costs or prices for consumers or
individual industries, and any potential effect on competition,
investment, or innovation. Commenters are requested to provide
empirical data and other factual support for their views to the extent
possible.
---------------------------------------------------------------------------
\270\ Public Law 104-121, 110 Stat. 857 (1996) (codified in
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C.
601).
---------------------------------------------------------------------------
VII. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\271\ Section 603(a) of the Administrative Procedure Act,\272\
as amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules to determine the
impact of such rulemaking on ``small entities.'' \273\ Section 605(b)
of the RFA states that this requirement shall not apply to any proposed
rule which, if adopted, would not have a significant impact on a
substantial number of small entities.\274\
---------------------------------------------------------------------------
\271\ See 5 U.S.C. 601 et seq.
\272\ 5 U.S.C. 603(a).
\273\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this proposed rulemaking, are set forth
in Rule 0-10, 17 CFR 240.0-10.
\274\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------
A. Registered Clearing Agencies
Proposed Rule 17Ad-25 would apply to all registered clearing
agencies. For the purposes of Commission rulemaking and as applicable
to proposed Rule 17Ad-25, a small entity includes, when used with
reference to a clearing agency, a clearing agency that (i) compared,
cleared, and settled less than $500 million in securities transactions
during the preceding fiscal year, (ii) had less than $200 million of
funds and securities in its custody or control at all times during the
preceding fiscal year (or at any time that it has been in business, if
shorter), and (iii) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\275\
---------------------------------------------------------------------------
\275\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------
Based on the Commission's existing information about the clearing
agencies currently registered with the Commission,\276\ the Commission
believes that all such registered clearing agencies exceed the
thresholds defining ``small entities'' set out above. While other
clearing agencies may emerge and seek to register as clearing agencies
with the Commission, the Commission believes that no such entities
would be ``small entities'' as defined in Exchange Act Rule 0-10.\277\
---------------------------------------------------------------------------
\276\ In 2021, DTCC processed $2.37 quadrillion in financial
transactions. Within DTCC, DTC settled $152 trillion of securities
and held securities valued at $87.1 trillion, NSCC processed an
average daily value of $2.029 trillion in equity securities, and
FICC cleared $1.4 quadrillion of transactions in government
securities and $69 trillion of transactions in agency mortgage-
backed securities. See DTCC, 2021 Annual Report, https://www.dtcc.com/annuals/2021/. ICE averaged daily trade volume of 5.97
million contracts and total revenues of $7.1 billion in 2021. See
ICE, 2021 Annual Report, https://s2.q4cdn.com/154085107/files/doc_financials/2021/ar/250217_009_Web_BMK-(1).pdf. In addition, OCC
cleared more than 7.5 billion contracts and held margin of $180
billion at the end of 2020. See OCC, 2020 Annual Report, https://annualreport.theocc.com/. These trade volumes exceed the $500
million threshold for small entities.
\277\ See 17 CFR 240.0-10(d). The Commission based this
determination on its review of public sources of financial
information about registered clearing agencies.
---------------------------------------------------------------------------
B. Certification
For the reasons described above, the Commission certifies that
proposed Rule 17Ad-25 would not have a significant economic impact on a
substantial number of small entities for purposes of the RFA. The
Commission requests comment regarding this certification. The
Commission requests that commenters describe the nature of any impact
on small entities and provide empirical data to support the extent of
the impact. Persons wishing to submit written comments should refer to
the instructions for submitting comments in the front of this release.
VIII. Statutory Authority and Text of Proposed Rule
The Commission is proposing Rule 17Ad-25 under the Commission's
rulemaking authority in the Exchange Act, particularly Section 17(a),
15 U.S.C. 78q(a), Section 17A, 15 U.S.C. 78q-1, Section 23(a), 15
U.S.C. 78w(a), Section 765 of the Dodd-Frank Act, and 805 of the
Clearing Supervision Act, 15 U.S.C. 8343 and 15 U.S.C. 5464
respectively.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Amendment
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
[[Page 51856]]
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Section 240.17Ad-25 is added to read as follows:
Sec. 240.17Ad-25 Clearing agency boards of directors and conflicts of
interest.
(a) Definitions. All terms used in this section have the same
meaning as in the Securities Exchange Act of 1934, and unless the
context otherwise requires, the following definitions apply for
purposes of this section:
Affiliate means a person that directly or indirectly controls, is
controlled by, or is under common control with the registered clearing
agency.
Board of directors means the board of directors or equivalent
governing body of the registered clearing agency.
Director means a member of the board of directors or equivalent
governing body of the registered clearing agency.
Family member means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law, including adoptive relationships, any person (other than a
tenant or employee) sharing a household with the director or a nominee
for director, a trust in which these persons (or the director or a
nominee for director) have more than fifty percent of the beneficial
interest, a foundation in which these persons (or the director or a
nominee for director) control the management of assets, and any other
entity in which these persons (or the director or a nominee for
director) own more than fifty percent of the voting interests.
Independent director means a director of the registered clearing
agency who has no material relationship with the registered clearing
agency or any affiliate thereof.
Material relationship means a relationship, whether compensatory or
otherwise, that reasonably could affect the independent judgment or
decision-making of the director. A material relationship also includes
a relationship that existed during a lookback period of one year
counting back from making the initial determination in paragraph (b)(2)
of this section.
Service provider for critical services means any person that is
contractually obligated to the registered clearing agency for the
purpose of supporting clearance and settlement functionality or any
other purposes material to the business of the registered clearing
agency.
(b) Composition of the board of directors. (1) A majority of the
members of the board of directors of a registered clearing agency must
be independent directors, unless a majority of the voting rights issued
as of the immediately prior record date are directly or indirectly held
by participants, in which case at least 34 percent of the members of
the board of directors must be independent directors.
(2) Each registered clearing agency shall broadly consider all the
relevant facts and circumstances, including under paragraph (g) of this
section, on an ongoing basis, to affirmatively determine that a
director does not have a material relationship with the registered
clearing agency or an affiliate of the registered clearing agency, and
is not precluded from being an independent director under paragraph (f)
of this section, in order to qualify as an independent director. In
making such determination, a registered clearing agency must:
(i) Identify the relationships between a director, the registered
clearing agency, and any affiliate thereof and any circumstances under
paragraph (f) of this section;
(ii) Evaluate whether any relationship is likely to impair the
independence of the director in performing the duties of director; and
(iii) Document this determination in writing.
(c) Nominating committee. (1) Each registered clearing agency must
establish a nominating committee and a written evaluation process
whereby such nominating committee shall evaluate nominees for serving
as directors.
(2) A majority of the directors serving on the nominating committee
must be independent directors, and the chair of the nominating
committee must be an independent director.
(3) The fitness standards for serving as a director shall be
specified by the nominating committee, documented in writing, and
approved by the board of directors. Such fitness standards must be
consistent with the requirements of this section and include that the
individual is not subject to any statutory disqualification as defined
under Section 3(a)(39) of the Act.
(4) The nominating committee must document the outcome of the
written evaluation process consistent with the fitness standards
required under paragraph (c)(3) of this section. Such process shall:
(i) Take into account each nominee's expertise, availability, and
integrity, and demonstrate that the board of directors, taken as a
whole, has a diversity of skills, knowledge, experience, and
perspectives;
(ii) Demonstrate that the nominating committee has considered
whether a particular nominee would complement the other board members,
such that, if elected, the board of directors, taken as a whole, would
represent the views of the owners and participants, including a
selection of directors that reflects the range of different business
strategies, models, and sizes across participants, as well as the range
of customers and clients the participants serve;
(iii) Demonstrate that the nominating committee considered the
views of other stakeholders who may be impacted by the decisions of the
registered clearing agency, including transfer agents, settlement
banks, nostro agents, liquidity providers, technology or other service
providers; and
(iv) Identify whether each selected nominee would meet the
definition of independent director in paragraphs (a) and (f) of this
section, and whether each selected nominee has a known material
relationship with the registered clearing agency or any affiliate
thereof, an owner, a participant, or a representative of another
stakeholder of the registered clearing agency described in paragraph
(c)(4)(iii) of this section.
(d) Risk management committee. (1) Each registered clearing agency
must establish a risk management committee (or committees) to assist
the board of directors in overseeing the risk management of the
registered clearing agency. The membership of each risk management
committee must be reconstituted on a regular basis and at all times
include representatives from the owners and participants of the
registered clearing agency.
(2) In the performance of its duties, the risk management committee
must be able to provide a risk-based, independent, and informed opinion
on all matters presented to the committee for consideration in a manner
that supports the safety and efficiency of the registered clearing
agency.
(e) Committees generally. If any committee has the authority to act
on
[[Page 51857]]
behalf of the board of directors, the composition of that committee
must have at least the same percentage of independent directors as is
required for the board of directors, as set forth in paragraph (b)(1)
of this section.
(f) Circumstances that preclude directors from being independent
directors. In addition to how the definition of independent director
set forth in this section is applied by a registered clearing agency,
the following circumstances preclude a director from being an
independent director, subject to a lookback period of one year
(counting back from making the initial determination in paragraph
(b)(2) of this section) applying to paragraphs (f)(2) through (6) of
this section:
(1) The director is subject to rules, policies, or procedures by
the registered clearing agency that may undermine the director's
ability to operate unimpeded, such as removal by less than a majority
vote of shares that are entitled to vote in such director's election;
(2) The director, or a family member, has an employment
relationship with or otherwise receives compensation other than as a
director from the registered clearing agency or any affiliate thereof,
or the holder of a controlling voting interest of the registered
clearing agency;
(3) The director, or a family member, is receiving payments from
the registered clearing agency, or any affiliate thereof, or the holder
of a controlling voting interest of the registered clearing agency,
that reasonably could affect the independent judgment or decision-
making of the director, other than the following:
(i) Compensation for services as a director on the board of
directors or a committee thereof; or
(ii) Pension and other forms of deferred compensation for prior
services not contingent on continued service;
(4) The director, or a family member, is a partner in, or
controlling shareholder of, any organization to or from which the
registered clearing agency, or any affiliate thereof, or the holder of
a controlling voting interest of the registered clearing agency, is
making or receiving payments for property or services, other than the
following:
(i) Payments arising solely from investments in the securities of
the registered clearing agency, or affiliate thereof; or
(ii) Payments under non-discretionary charitable contribution
matching programs;
(5) The director, or a family member, is employed as an executive
officer of another entity where any executive officers of the
registered clearing agency serve on that entity's compensation
committee; or
(6) The director, or a family member, is a partner of the outside
auditor of the registered clearing agency, or any affiliate thereof, or
an employee of the outside auditor who is working on the audit of the
registered clearing agency, or any affiliate thereof.
(g) Conflicts of interest. Each registered clearing agency must
establish, implement, maintain and enforce written policies and
procedures reasonably designed to:
(1) Identify and document existing or potential conflicts of
interest in the decision-making process of the clearing agency
involving directors or senior managers of the registered clearing
agency; and
(2) Mitigate or eliminate and document the mitigation or
elimination of such conflicts of interest.
(h) Obligation of directors to report conflicts. Each registered
clearing agency must establish, implement, maintain, and enforce
written policies and procedures reasonably designed to require a
director to document and inform the registered clearing agency promptly
of the existence of any relationship or interest that reasonably could
affect the independent judgment or decision-making of the director.
(i) Obligation of board of directors to oversee relationships with
service providers for critical services. Each registered clearing
agency must establish, implement, maintain, and enforce written
policies and procedures reasonably designed to enable the board of
directors to:
(1) Confirm and document that risks related to relationships with
service providers for critical services are managed in a manner
consistent with its risk management framework, and review senior
management's monitoring of relationships with service providers for
critical services;
(2) Approve policies and procedures that govern the relationship
with service providers for critical services;
(3) Review and approve plans for entering into third-party
relationships where the engagement entails being a service provider for
critical services to the registered clearing agency; and
(4) Through regular reporting to the board of directors by senior
management, confirm that senior management takes appropriate actions to
remedy significant deterioration in performance or address changing
risks or material issues identified through ongoing monitoring.
(j) Obligation of board of directors to solicit and consider
viewpoints of participants and other relevant stakeholders. Each
registered clearing agency must establish, implement, maintain, and
enforce written policies and procedures reasonably designed to solicit,
consider, and document its consideration of the views of participants
and other relevant stakeholders of the registered clearing agency
regarding material developments in its governance and operations on a
recurring basis.
By the Commission.
Dated: August 8, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-17316 Filed 8-22-22; 8:45 am]
BILLING CODE 8011-01-P
