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



[[Page 722]]

=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

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

RIN 3038-AD01


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

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

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

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

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's Regulations.\1\
---------------------------------------------------------------------------

    \1\ 17 CFR 145.9.
---------------------------------------------------------------------------

    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

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

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\ 
Title VII of the Dodd-Frank Act \3\ amended the Commodity Exchange Act 
(``CEA'') \4\ to establish a comprehensive new regulatory framework for 
swaps and certain security-based swaps. The legislation was enacted to 
reduce risk, increase transparency, and promote market integrity within 
the financial system by, among other things: (i) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; \5\ (ii) imposing mandatory clearing and trade 
execution requirements on clearable swap contracts; (iii) creating 
robust recordkeeping and real-time reporting regimes; and (iv) 
enhancing the rulemaking and enforcement authorities of the Commission 
with respect to, among others, all registered entities and 
intermediaries subject to the oversight of the Commission.
---------------------------------------------------------------------------

    \2\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq.
    \5\ In this release, the terms ``swap dealer'' and ``major swap 
participant'' shall have the meanings set forth in Section 721(a) of 
the Dodd-Frank Act, which added Sections 1a(49) and (33) of the CEA. 
However, Section 721(c) of the Dodd-Frank Act directs the Commission 
to promulgate rules to further define, among other terms, ``swap 
dealer'' and ``major swap participant.'' The Commission is in the 
process of this rulemaking. See, e.g., http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_2_Definitions.html. The Commission 
anticipates that such rulemaking will be completed by the statutory 
deadline of July 15, 2011.
---------------------------------------------------------------------------

    In order to ensure the proper implementation of the comprehensive 
new regulatory framework, the Dodd-Frank Act requires the Commission to 
promulgate regulations regarding the mitigation of conflicts of 
interest in the operation of certain DCOs, DCMs, and SEFs. On October 
1, 2010, the Commission identified possible conflicts. Section II below 
briefly summarizes these conflicts. To address these conflicts, the 
Commission proposed \6\ both (i) structural governance requirements \7\ 
and (ii) limits on ownership of voting equity and exercise of voting 
power \8\ (the ``Conflicts of Interest NPRM'').
---------------------------------------------------------------------------

    \6\ 75 FR 63732 (Oct. 18, 2010).
    \7\ According to the Conflicts of Interest NPRM: (i) Each DCO, 
DCM, or SEF must have a Board of Directors with at least 35 percent, 
but no less than two, public directors; (ii) each DCO, DCM, or SEF 
must have a nominating committee with at least 51 percent public 
directors; (iii) each DCO, DCM, or SEF must have one or more 
disciplinary panels, with a public participant as chair; (iv) each 
DCM or SEF must have (A) a regulatory oversight committee (``ROC''), 
with all public directors, and (B) a membership or participation 
committee, with 35 percent public directors; and each DCO must have 
a risk management committee (``RMC''), with at least (A) 35 percent 
public directors and (B) 10 percent customer representatives. See 
generally 75 FR 63732 (Oct. 18, 2010).
    \8\ According to the Conflicts of Interest NPRM, no DCM or SEF 
member (and related persons) may (i) beneficially own more than 20 
percent of any class of voting equity or (ii) directly or indirectly 
vote an interest exceeding 20 percent of the voting power of any 
class of equity.
    A DCO may choose one of the following alternatives. Under the 
first alternative, no individual member may beneficially own more 
than 20 percent of any class of voting equity or directly or 
indirectly vote an interest exceeding 20 percent of the voting power 
of any class of equity. In addition, the enumerated entities, 
whether or not they are DCO members, may not collectively own on a 
beneficial basis more than 40 percent of any class of voting equity, 
or directly or indirectly vote an interest exceeding 40 percent of 
the voting power of any class of equity.
    Under the second alternative, no DCO member or enumerated 
entity, regardless of whether it is a DCO member, may own more than 
five (5) percent of any class of voting equity or directly or 
indirectly vote an interest exceeding five (5) percent of the voting 
power of any class of equity. Notwithstanding the foregoing, the 
Conflicts of Interest NPRM provides a procedure for the DCO to apply 
for, and the Commission to grant, a waiver of the abovementioned 
limits. See generally 75 FR 63732 (Oct. 18, 2010).
    ``Enumerated entities'' are those entities listed in Section 
726(a) of the Dodd-Frank Act and include: (i) Bank holding companies 
with over $50,000,000,000 in total consolidated assets; (ii) a 
nonbank financial company supervised by the Board of Governors of 
the Federal Reserve System; (iii) an affiliate of (i) or (ii); (iv) 
a swap dealer; (v) a major swap participant; or (vi) an associated 
person of (iv) or (v).

---------------------------------------------------------------------------

[[Page 723]]

    The Conflicts of Interest NPRM primarily aims to implement Sections 
726 and 725(d) of the Dodd-Frank Act.\9\ However, the Commission drew 
additional authority to propose the abovementioned requirements from 
Sections 725(c),\10\ 735(b),\11\ and 733 \12\ of the Dodd-Frank Act. 
Together, such sections contain DCO, DCM, or SEF core principles that 
require each such entity to (i) establish and enforce rules to minimize 
conflicts of interest in its decision-making process and (ii) establish 
a process for resolving such conflicts.\13\ This proposed rulemaking 
(the ``Governance NPRM'') aims to more fully implement such core 
principles. Therefore, the Governance NPRM proposes the following 
requirements, which complement those in the Conflicts of Interest NPRM:
---------------------------------------------------------------------------

    \9\ First, Section 726(a) of the Dodd-Frank Act specifically 
empowers the Commission to adopt ``numerical limits * * * on 
control'' or ``voting rights'' that enumerated entities may hold 
with respect to such DCOs, DCMs, and SEFs. Second, Section 726(b) of 
the Dodd-Frank Act directs the Commission to determine the manner in 
which its rules may be deemed necessary or appropriate to improve 
the governance of certain DCOs, DCMs, or SEFs or to mitigate 
systemic risk, promote competition, or mitigate conflicts of 
interest in connection with the interaction between swap dealers and 
major swap participants, on the one hand, and such DCOs, DCMs, and 
SEFs. Finally, Section 726(c) of the Dodd-Frank Act directs the 
Commission to consider the manner in which its rules address 
conflicts of interest in the abovementioned interaction arising from 
equity ownership, voting structure, or other governance arrangements 
of the relevant DCOs, DCMs, and SEFs.
    Section 725(d) of the Dodd-Frank Act states: ``[t]he Commodity 
Futures Trading Commission shall adopt rules mitigating conflicts of 
interest in connection with the conduct of business by a swap dealer 
or a major swap participant with a derivatives clearing 
organization, board of trade, or a swap execution facility that 
clears or trades swaps in which the swap dealer or major swap 
participant has a material debt or material equity investment.''
    \10\ Section 725(c) of the Dodd-Frank Act amends Section 5b(c) 
of the CEA to include new DCO Core Principle O (Governance Fitness 
Standards), P (Conflicts of Interest), and Q (Composition of 
Governing Boards). Together, such core principles empower the 
Commission to develop performance standards for determining whether 
a DCO has: (i) Governance arrangements that are transparent to 
fulfill public interest requirements and to permit consideration of 
the views of owners and participants; (ii) appropriate fitness 
standards for directors, members, and others; (iii) rules to 
minimize and resolve conflicts of interest in DCO decision-making; 
and (iv) governing boards or committees that include market 
participants.
    \11\ Section 735(b) of the Dodd-Frank Act retains the existing 
DCM core principle on conflicts of interest and governance fitness 
standards, but (i) amends the existing DCM core principle on 
composition of governing boards of contract markets to state: 
``[t]he governance arrangements of the board of trade shall be 
designed to permit consideration of the views of market 
participants,'' and (ii) adds a new DCM core principle on diversity 
of the Board of Directors. Together, such core principles empower 
the Commission to develop performance standards for determining 
whether a DCM has: (i) Appropriate fitness standards for directors, 
members, and others; (ii) rules to minimize conflicts of interest in 
DCM decision-making; (iii) appropriate governance arrangements to 
permit the Board of Directors to consider the views of market 
participants; and (iv) rules, if the DCM is a publicly-traded 
company, regarding the cultural diversity of the Board of Directors.
    \12\ Section 733 of the Dodd-Frank Act includes SEF Core 
Principle 12 (Conflicts of Interest) in new Section 5h of the CEA. 
Such core principle empowers the Commission to establish performance 
standards for determining whether a SEF has rules to minimize and 
resolve conflicts of interest in SEF decision-making.
    \13\ The conflicts of interest core principles are DCO Core 
Principle P, DCM Core Principle 16, and SEF Core Principle 12. Such 
core principles shall hereinafter be referred to as ``Conflicts of 
Interest Core Principles.''
---------------------------------------------------------------------------

     Each DCO must report to the Commission when its Board of 
Directors rejects a recommendation from or supersedes an action of the 
RMC; \14\
---------------------------------------------------------------------------

    \14\ In addition, a DCO would be required to report to the 
Commission when its RMC rejects a recommendation from or supersedes 
an action of a subcommittee of the RMC.
---------------------------------------------------------------------------

     Each DCM or SEF must report to the Commission when its 
Board of Directors rejects a recommendation from or supersedes an 
action of the ROC or the Membership or Participation Committee; \15\
---------------------------------------------------------------------------

    \15\ The proposed regulations would also require the ROC of a 
DCM or SEF to prepare an annual report to the Board of Directors 
assessing various components of the regulatory program of such DCM 
or SEF.
---------------------------------------------------------------------------

     Each DCO, DCM, or SEF must:
    [cir] Implement a regulatory program to identify, on an ongoing 
basis, existing and potential conflicts of interest, as well as a 
method for making fair and non-biased decisions in the event of such a 
conflict;
    [cir] Prescribe limits on the use or disclosure of non-public 
information by owners, members of the Board of Directors, members of 
any committee, officers or other employees; and
    [cir] Make certain information on governance arrangements available 
to the public and relevant authorities, including summaries of 
significant decisions.
    In addition to containing the Conflicts of Interest Core 
Principles, Sections 725(c), 735(b), and 733 of the Dodd-Frank Act add 
or amend DCO or DCM core principles on (i) governance fitness standards 
and (ii) composition of the Board of Directors or other governing 
bodies. Section 735(b) of the Dodd-Frank Act also adds a DCM core 
principle on diversity of certain Boards of Directors. To implement 
such core principles, the Governance NPRM proposes the following 
requirements:
     Each DCO or DCM must specify and enforce fitness standards 
for its members, directors, members of any Disciplinary Panel or 
Disciplinary Committee, persons with direct access, and certain 
affiliates;
     Each publicly-traded DCM must evaluate the breadth and 
cultural diversity of its Board of Directors;
     Each DCM must design and institute a process for 
considering the range of opinions that market participants \16\ hold 
with respect to (i) the functioning of an existing market and (ii) new 
rules or rule amendments; and
---------------------------------------------------------------------------

    \16\ In general, the Commission interprets the term ``market 
participants'' to be more expansive than the term ``member'' (as 
defined in Section 1a(34) of the CEA). Therefore, with respect to 
DCMs, DCOs, and SEFs, the Commission construes the term ``market 
participants'' to encompass customers of members (to the extent that 
such customers do not fall within Section 1a(34) of the CEA).
---------------------------------------------------------------------------

     Each DCO must have 10 percent customer representation on 
its Board of Directors, in lieu of having such representation on the 
RMC (or the RMC Subcommittee). Alternatively, each DCO must have 10 
percent customer representation on the RMC (or the RMC Subcommittee), 
in lieu of having such representation on the DCO Board of 
Directors.\17\
---------------------------------------------------------------------------

    \17\ As Section IV(c)(ii) below describes further, the 
Commission is reconsidering that portion of the Conflicts of 
Interest NPRM that requires 10 percent customer representation on 
the RMC. The Commission notes that it has authority under both 
Section 726 of the Dodd-Frank Act, as well as under DCO Core 
Principles P (Conflicts of Interest) and Q (Composition of Governing 
Boards) to adopt either a Board or RMC composition requirement.

---------------------------------------------------------------------------

[[Page 724]]

    Sections 725(c), 735(b), and 733 explicitly authorize the 
Commission to promulgate regulations implementing DCO, DCM, and SEF 
core principles under Section 8a(5) of the CEA. Section 8a(5) of the 
CEA states that ``[t]he Commission is authorized * * * to make or 
promulgate such rules and regulations as, in the judgment of the 
Commission, are reasonably necessary to effectuate any of the 
provisions or to accomplish any of the purposes of [the CEA].'' The 
requirements that the Governance NPRM proposes apply to all DCOs and 
DCMs, regardless of whether they clear or list swap contracts or only 
commodity futures or options.\18\
---------------------------------------------------------------------------

    \18\ As the Conflicts of Interest NPRM states:
    In applying such requirements and limits, the Commission does 
not propose to distinguish between DCMs and SEFs listing swap 
contracts. As mentioned above, such DCMs and SEFs may experience 
sustained competition with respect to the same swap contract, and 
therefore would face the same pressures on self-regulation. 
Additionally, the Commission does not propose to distinguish between 
(i) DCMs listing swap contracts and (ii) DCMs listing only commodity 
futures and options. As mentioned above, clearable swap contracts 
may share sufficiently similar characteristics with certain 
commodity futures and options as to compete with respect to 
execution. Therefore, a DCM listing only commodity futures and 
options may face competition from a SEF with fewer self-regulatory 
requirements, in the same manner as a DCM listing swap contracts. 
Given that the same conflicts of interest may concern both types of 
DCM, it would appear that the same (i) structural governance 
requirements and (ii) limits on the ownership of voting equity and 
the exercise of voting power should apply.
    In addition, the Commission does not propose to distinguish 
between (i) DCOs clearing swap contracts and (ii) DCOs clearing only 
commodity futures and options. Certain standardized swap contracts 
have sufficiently similar risk profiles to commodity futures and 
options that the Commission has, on occasion, permitted such 
products to be commingled and margined within the segregated 
customer account under Section 4d of the CEA. If the Commission 
applied differential (i) structural governance requirements and (ii) 
limits on the ownership of voting equity and the exercise of voting 
power, the Commission risks creating an incentive for regulatory 
arbitrage between the two types of DCO.
    75 FR at 63737. The Commission has requested comment in the 
Conflicts of Interest NPRM regarding this approach. The Commission 
reiterates its request for comment in the context of the Governance 
NPRM.
---------------------------------------------------------------------------

    The Governance NPRM reflects consultation with staff of the 
following agencies: (i) The Securities and Exchange Commission (the 
``SEC''); \19\ (ii) the Board of Governors of the Federal Reserve; 
(iii) the Office of the Comptroller of the Currency; (iv) the Federal 
Deposit Insurance Corporation; and (v) the Treasury Department. The 
Governance NPRM has been further informed by (i) the joint roundtable 
that Commission and SEC staff conducted on August 20, 2010 (the 
``Roundtable'') \20\ and (ii) public comments posted to the Web site of 
the Commission.\21\ Finally, mindful of the importance of international 
harmonization,\22\ the Governance NPRM incorporates certain elements 
of: (i) The Proposal for a Regulation of the European Parliament and of 
the Council on OTC Derivatives, Central Counterparties, and Trade 
Depositories (the ``European Commission Proposal''); \23\ and (ii) the 
Recommendations for Central Counterparties, drafted by the Committee on 
Payment and Settlement Systems of the Bank for International 
Settlements and the Technical Committee of the International 
Organization of Securities Commissions, dated November 2004 (the ``CCP 
Recommendations'').\24\
---------------------------------------------------------------------------

    \19\ Section 765 of the Dodd-Frank Act requires the SEC to 
promulgate rules to mitigate conflicts of interest in the operation 
of (i) a clearing agency that clears security-based swaps, (ii) a 
security-based swap execution facility, or (iii) a national 
securities exchange that posts or makes available for trading 
security-based swaps. Core Principles for security-based swap 
execution facilities are set forth in Section 763 of the Dodd-Frank 
Act.
    \20\ The transcript from the roundtable (the ``Roundtable Tr.'') 
is available at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/derivative9sub082010.pdf.
    \21\ Such comments are available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_9_DCOGovernance.html.
    \22\ Currently, the Commission regulates certain entities based 
outside of the United States (e.g., LCH.Clearnet Limited and ICE 
Clear Europe Limited, each of which is based in the United Kingdom).
    \23\ COM(2010) 484/5.
    \24\ The CCP Recommendations are available at: http://www.bis.org/publ/cpss61.pdf.
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of the Governance 
NPRM.

II. Conflicts of Interest

    As mentioned above, Title VII of the Dodd-Frank Act amended the CEA 
to establish a comprehensive new framework for swaps and certain 
security-based swaps. This framework imposes mandatory clearing and 
trade execution requirements with respect to clearable swap contracts. 
Some market participants, investor advocates, and academics have 
expressed a concern that the enumerated entities have economic 
incentives to minimize the number of swaps subject to mandatory 
clearing and trading. They contend that control of a DCO by the 
enumerated entities, whether through ownership or otherwise, 
constitutes the primary means for keeping swap contracts out of the 
mandatory clearing requirement, and therefore also out of the trading 
requirement. A further contention is that sustained competition between 
DCMs or SEFs may exacerbate certain structural conflicts of 
interest.\25\
---------------------------------------------------------------------------

    \25\ This term is defined in 72 FR 6936 (Feb. 14, 2007), which 
includes acceptable practices that the Commission previously adopted 
for the DCM core principle on conflicts of interest.
---------------------------------------------------------------------------

    As the Conflicts of Interest NPRM further describes, the potential 
conflicts of interest that the Commission has identified are: Conflicts 
of interest that a DCO may confront when determining (i) whether a 
product is capable of being cleared, (ii) the minimum criteria that an 
entity must meet in order to become and remain a clearing member, and 
(iii) whether a particular entity satisfies such criteria; and 
conflicts of interest that a DCM or SEF may confront in balancing 
advancement of commercial interests and fulfillment of self-regulatory 
responsibilities.
    In addition, the Commission has identified misuse or disclosure of 
non-public information as a conflict of interest that a DCO, DCM, or 
SEF may confront. Certain individuals (e.g., owners, members of the 
Board of Directors, officers, or other employees) will be privy to non-
public information. Such non-public information could be used or 
disclosed improperly (e.g., to the detriment of competitors), whether 
advertently or inadvertently.

III. Mitigation of Conflicts of Interest

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

A. Reporting Requirements

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

[[Page 725]]

committee that has the authority to amend or constrain the action of 
the Board of Directors,
---------------------------------------------------------------------------

    \26\ The Conflicts of Interest NPRM defines ``Executive 
Committee'' as a committee of the Board of Directors that may 
exercise the authority delegated to it by the Board of Directors 
with respect to the management of the company or organization. See 
proposed Sec.  1.3(ccc). 75 FR at 63747.
---------------------------------------------------------------------------

     A description of the relationship, if any, between such 
directors and the registered entity or the members of the registered 
entity (and, in each case, any affiliates thereof),
     The basis for any determination that a director qualifies 
as a Public Director, and \27\
---------------------------------------------------------------------------

    \27\ With respect to DCOs, the Commission also requires the 
basis for any determination that a director qualifies as a customer 
representative.
---------------------------------------------------------------------------

     A description of how the composition of the Board of 
Directors and each of the abovementioned committees allows the 
registered entity to comply with applicable core principles, 
regulations, as well as to the rules of the registered entity.
2. DCOs
    As the Conflict of Interest NPRM states:

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

    \28\ 75 FR at 63740.

    The Conflicts of Interest NPRM proposes to require each DCO to have 
an RMC, with at least (i) 35 percent public directors and (ii) 10 
percent customer representatives.\29\ If a DCO would like to have 
greater clearing member participation in risk management, then it may 
cause its RMC to delegate to a subcommittee (the ``RMC Subcommittee'') 
decisions implicating whether (i) a product is capable of being cleared 
and (ii) particular entities or categories of entities are capable of 
performing such clearing. After such delegation the RMC would be free 
of any composition requirements.
---------------------------------------------------------------------------

    \29\ See Section IV(c)(ii) below on Commission reconsideration 
of requiring customer representation on the RMC, rather than on the 
DCO Board of Directors.
---------------------------------------------------------------------------

    In the abovementioned structure, the RMC Subcommittee reports to 
the RMC, whereas the RMC reports to the DCO Board of Directors. 
Therefore, a DCO governing body that is not subject to the same 
compositional requirements as the RMC or the RMC Subcommittee may 
reject a recommendation or supersede an action thereof.\30\ To enable 
the Commission to determine whether such a rejection or supersession 
originates from a conflict of interest, the Governance NPRM proposes to 
require a DCO to submit a written report to the Commission, whenever 
such a rejection or supersession occurs.\31\ Such report would detail, 
among other things, the rationale for such rejection or supersession. 
This requirement parallels the requirements for central counterparties 
(``CCPs'') in the European Commission Proposal.\32\ The Commission 
anticipates that such a reporting requirement may serve to deter 
conflicts from arising in the first place.
---------------------------------------------------------------------------

    \30\ This observation would be true regardless of whether the 
Commission ultimately requires customer representation on the RMC or 
the DCO Board of Directors. However, the Commission requests comment 
on whether the reporting requirement described herein should apply 
to a DCO if the Commission requires the latter and not the former.
    \31\ If, after examination, the Commission determines that such 
rejection or supersession originates from a conflict of interest, 
the Commission may find that the DCO regulatory program (as 
referenced in Section III(b) herein) is non-compliant with DCO Core 
Principle P. Upon making such a finding, the Commission may resort 
to certain administrative remedies (e.g., pursuant to Section 5c(d) 
of the CEA).
    \32\ See Article 26(5) of the European Commission Proposal.
---------------------------------------------------------------------------

3. DCMs or SEFs
    The Conflicts of Interest NPRM emphasizes the importance of the ROC 
and Membership or Participation Committees in ensuring that the DCM or 
SEF does not prioritize commercial interests over self-regulatory 
responsibilities, including restricting access or imposing burdens on 
access in a discriminatory manner.\33\ As mentioned above, the 
Conflicts of Interest NPRM proposes to require each DCM or SEF to have 
(i) a ROC with all public directors and (ii) a Membership or 
Participation Committee with 35 percent public directors. However, the 
Conflicts of Interest NPRM contemplates that such ROC or Membership or 
Participation Committee would report to the DCM or SEF Board of 
Directors. As such DCM or SEF Board of Directors may not be subject to 
the same composition requirements (or may not have the same members) as 
the ROC or Membership or Participation Committee, the Governance NPRM 
proposes to require a DCM or SEF to submit a written report to the 
Commission whenever such Board of Directors rejects a recommendation of 
the ROC or the Membership or Participation Committee or supersedes an 
action. Such report would detail among other things, the rationale for 
such action. The Commission believes that such a reporting requirement 
would alert it to potential conflicts of interests, as well as deter 
such conflicts from arising in the first place.
---------------------------------------------------------------------------

    \33\ 75 FR 63741.
---------------------------------------------------------------------------

    In addition to the above, the Governance NPRM proposes to require 
the ROC to prepare an annual report to the Board of Directors assessing 
various components of the DCM or SEF regulatory program. Such a 
requirement generally parallels current acceptable practices under DCM 
Core Principle 15.\34\
---------------------------------------------------------------------------

    \34\ Such regulatory program is described further in section 
III(b) herein. The Dodd-Frank Act has redesignated DCM Core 
Principle 15 as DCM Core Principle 16, but has left the actual 
language of the core principle substantively unchanged. See section 
3(ii)(E) under Acceptable Practices for Core Principle 15 in 
Appendix B to Part 38 of the Commission's regulations.
---------------------------------------------------------------------------

4. Questions \35\
---------------------------------------------------------------------------

    \35\ See note 30 supra.
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of the reporting 
requirements. The Commission further requests comment on the questions 
set forth below.
     Pursuant to Article 31(2) of the European Commission 
Proposal, if a CCP cannot manage, through structural or substantive 
governance arrangements, conflicts of interest that may disadvantage a 
specific member or customer, then that CCP must disclose to that member 
(or customer, if known) the general nature or sources of such 
conflicts. The CCP must make such disclosure before accepting new 
transactions from the affected member, presumably so that such member 
(or customer thereof) may choose to discontinue clearing with the CCP. 
Should the Commission consider imposing a similar requirement on DCOs? 
Why or why not?
     If the Commission decides to impose a similar requirement 
on DCOs, should the Commission extend such a requirement to cover DCMs 
and SEFs? Why or why not?

B. Regulatory Program

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

[[Page 726]]

     Make fair and non-biased decisions in the event of a 
conflict of interest. Such procedures would include rules regarding the 
recusal, when appropriate, of parties involved in the making of 
decisions. The Chief Compliance Officer (for DCOs and SEFs), or the 
Chief Regulatory Officer (for DCMs), shall, in consultation with the 
Board of Directors of the entity or a senior officer of the entity, 
resolve any conflicts of interest.
    The Commission anticipates that the potential conflicts of interest 
that each DCO, DCM, or SEF confronts may change as the swaps market 
evolves under regulation. Consequently, the Commission believes that it 
is appropriate to require a DCO, DCM, or SEF to have a regulatory 
program to monitor existing and potential conflicts of interest on an 
ongoing basis. The Commission intends to permit a DCO, DCM, or SEF to 
contract with a third-party regulatory service provider to fulfill such 
requirement, subject to Commission guidance generally applicable to 
such contractual relationships.\36\
---------------------------------------------------------------------------

    \36\ See ``Trading Facilities, Intermediaries, and Clearing 
Organizations; New Regulatory Framework; Final Rule,'' 66 FR 42256, 
42266 (August 10, 2001). Although the relevant discussion focuses on 
DCMs, a similar logic would apply to DCOs. Further, pursuant to the 
Dodd-Frank Act, the Commission is contemplating proposing 
regulations regarding such contractual relationships.
---------------------------------------------------------------------------

    To protect the integrity of trade execution and clearing, the 
Commission believes that it is appropriate to require each DCO, DCM, or 
SEF to have procedures, including recusal procedures, to make fair and 
non-biased decisions in the event of a conflict of interest. Article 
26(4) of the European Commission Proposal includes a similar recusal 
requirement for CCP risk committees. Specifically, if the chairman of a 
CCP risk committee determines that a member has an actual or potential 
conflict of interest on a particular matter, that member would not be 
allowed to vote on that matter.
1. Questions
    The Commission requests comment on all aspects of the regulatory 
program. The Commission further requests comment on the questions set 
forth below:
     As mentioned above, the Commission intends to permit a 
DCO, DCM, or SEF to contract with a third-party regulatory service 
provider (e.g., the National Futures Association) to implement the 
abovementioned regulatory program. Would a third-party regulatory 
service provider itself ever experience a conflict of interest from the 
performance of its obligations under such a contract? If so, under what 
circumstances?
     Should the Commission propose any other substantive 
requirements with respect to the decision-making process of a DCO, DCM, 
or SEF?

C. Transparency Requirements

    At the Roundtable, certain market participants emphasized that DCO 
governance arrangements must be transparent to permit the Commission, 
as well as the public, to (i) learn of decisions that have systemic 
importance (e.g., whether a product is capable of being cleared), and 
(ii) identify the governing bodies (e.g., the RMC) responsible for 
making such decisions.\37\ Previously, when the Commission proposed 
acceptable practices for current DCM Core Principle 15 (Conflicts of 
Interest), the Commission recognized the value of transparency in 
``maintaining market integrity and public trust.'' \38\ Such a 
rationale would appear to also apply to DCOs and SEFs.\39\
---------------------------------------------------------------------------

    \37\ See, e.g., Comments from Jason Kastner, Vice Chairman, 
Swaps and Derivatives Markets Association (``I think that the issue 
is making sure that the risk committees of these DCOs are 
transparent, that you know who the membership is, that the decisions 
that are taken about whether to permit new clearing members and 
whether to permit new products to be listed are transparent and 
readily appraisable, and so that everyone knows, you know, what's 
going on. * * * So this is an open hearing, right? There's a public 
record. There's cameras. There's recordings. The same type of 
transparency should apply to DCO governance so that everyone is 
clear about how decisions are taken and how they're made and who's 
making them.''), Roundtable Tr. at 74-75; and Comments from Randy 
Kroszner, Professor of Economics, Booth School of Business, 
University of Chicago (``I think this gets back to the transparency 
point, but I do think it's extremely important to have people with 
the knowledge, the wherewithal, and with their money on the line 
having input into these risk-management decisions, and I think the 
best way to ensure that is to ensure a very, very transparent 
process so that outsiders can evaluate and provide the commentary 
and the independent directors will have enough wherewithal, enough 
knowledge to know what is going on.''), Roundtable Tr. 78-79.
    \38\ 71 FR 38741 (July 7, 2006) (which proposed the acceptable 
practices for current DCM core principle 15) (``* * * the current 
market environment mandates enhanced and transparent governance as 
an essential business practice for maintaining market integrity and 
public trust.'').
    \39\ According to Section 4.13.3 of the CCP Recommendations, 
``[g]overnance arrangements should be clearly specified and publicly 
available.''
---------------------------------------------------------------------------

    In light of the above, the Governance NPRM proposes to establish 
minimum standards for the transparency of the governance arrangements 
of each DCO, DCM, or SEF to relevant authorities (including the 
Commission) as well as the public.\40\ These minimum standards \41\ 
require each DCO, DCM, or SEF to:
---------------------------------------------------------------------------

    \40\ The Commission intends to promulgate the transparency 
requirements for DCMs and SEFs pursuant to its authority under DCM 
Core Principle P, SEF Core Principle 12 (in each case, Conflicts of 
Interest), and Section 8a(5) of the CEA. The Commission intends to 
promulgate the transparency requirements for DCOs pursuant to its 
authority under DCO Core Principle O (Governance Fitness Standards), 
and Section 8a(5) of the CEA. This core principle requires that a 
DCO establish governance arrangements that are transparent to, among 
other things, fulfill public interest requirements. This core 
principle is interrelated to DCO Core Principle P (Conflicts of 
Interest), since transparency requirements enhance the ability of 
the Commission to detect conflicts of interest, and may serve to 
deter such conflicts. The Commission believes that it has the 
authority to promulgate transparency requirements under either DCO 
Core Principle O or P.
    \41\ As Section III discusses in greater detail, the Commission 
proposes to require DCOs and DCMs to meet additional standards 
regarding the manner in which the Board of Directors considers the 
opinions of market participants, among others.
---------------------------------------------------------------------------

     Make available certain information to the public and 
relevant authorities; \42\
---------------------------------------------------------------------------

    \42\ Such information includes (i) the charter (or mission 
statement) of the registered entity; (ii) the charter (or mission 
statement) of the Board of Directors and certain committees; (iii) 
the Board of Directors nominations process for the registered 
entity, as well as the process for assigning members of the Board of 
Directors or other persons to certain committees; (iv) names of all 
members of (a) the Board of Directors and (b) certain committees; 
(v) the identities of all Public Directors (and with respect to a 
DCO, all customer representatives); (vi) the lines of responsibility 
and accountability for each operational unit of the registered 
entity; and (vii) summaries of significant decisions implicating the 
public interest.
---------------------------------------------------------------------------

     Ensure that the information made available is current, 
accurate, clear and readily accessible; and
     Disclose summaries of certain significant decisions.
    DCM, SEF, and DCO significant decisions involve those areas in 
which conflicts of interest identified in Section II above may be most 
manifest. With respect to a DCM or a SEF, significant decisions would 
relate to access, membership, and disciplinary procedures. With respect 
to a DCO, significant decisions would relate to open access, 
membership, and the finding of products acceptable (or not acceptable) 
for clearing. The Commission proposes to require that the DCO 
specifically disclose whether (i) its Board of Directors has rejected a 
recommendation or superseded an action of the RMC, or (ii) the RMC has 
rejected a recommendation or superseded an action of the RMC 
Subcommittee. The Commission does not intend the foregoing to require a 
DCM, SEF, or DCO to disclose any ``non-public information'' (as 
proposed Sec.  1.3(ggg) defines such term), including, without 
limitation, minutes from meetings of its Board of Directors or 
committees or information that it may have received on a confidential 
basis from an applicant for membership.

[[Page 727]]

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

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

1. Requirements
    The Governance NPRM proposes to require each DCO, DCM, or SEF to 
establish and maintain written policies and procedures on safeguarding 
non-public information. These policies and procedures must, at a 
minimum, preclude a DCO, DCM, or SEF owner, director, officer, or 
employee from using or disclosing any non-public information gained 
through their interest or position, absent prior written consent from 
the DCO, DCM, or SEF, as applicable.\43\ The Commission intends for 
such requirements to prohibit those in a position of power, either by 
holding a certain position in the organization or through an ownership 
interest, from leveraging such power to benefit, commercially or 
otherwise, from non-public information.\44\ The Commission believes 
that such leveraging would constitute a clear conflict of interest. The 
Commission notes that such requirements comport with certain aspects of 
the European Commission Proposal.\45\
---------------------------------------------------------------------------

    \43\ The Commission recognizes that the disclosure of non-public 
information may be necessary in certain instances, even without the 
written consent of the DCO, DCM, or SEF. Such instances include if 
disclosure is compelled by valid legal process (provided that the 
individual or entity notifies the registered SDR) or required by a 
regulatory authority.
    \44\ For example, a DCO, DCM, or SEF member may use or disclose 
non-public information (e.g., the possibility of disciplinary 
action) to the detriment of its competitor.
    \45\ See Article 26(4) of the European Commission Proposal 
(stating that ``[w]ithout prejudice to the right of competent 
authorities to be duly informed, the members of the risk committee 
shall be bound by confidentiality.'').
---------------------------------------------------------------------------

    The Governance NPRM proposes to define ``non-public information'' 
as any information that the DCO, DCM, or SEF owns or any information 
that such entity otherwise deems confidential, such as intellectual 
property belonging to (A) such registered entity or (B) a third party, 
which property such registered entity receives on a confidential basis. 
The Commission will not preclude a DCO, DCM, or SEF from adopting a 
more expansive definition of ``non-public information.''
2. Questions
    The Commission requests comment on all aspects of the limitation on 
use of non-public information. The Commission further requests comment 
on the questions set forth below.
     Are the abovementioned proposals necessary or appropriate 
to mitigate DCO, DCM, and SEF conflicts of interests? If not, why not? 
What would be a better alternative?
     Has the Commission proposed an appropriate definition for 
``non-public information''? If not, why not? What would be a better 
alternative?
     Should the Commission consider any other concerns 
regarding the use of ``non-public information''?

IV. Regulations Implementing Governance Core Principles

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

A. Governance Fitness Standards

    DCO Core Principle O,\46\ as added by Section 725(c) of the Dodd-
Frank Act, provides that each DCO shall (i) establish governance 
arrangements that are transparent to fulfill public interest 
requirements and to permit the consideration of the views of owners and 
participants and (ii) establish and enforce appropriate fitness 
standards for (A) directors, (B) members of any disciplinary committee, 
(C) members of the DCO, (D) any other individual or entity with direct 
access to the settlement or clearing activities of the DCO, and (E) any 
party affiliated with any entity mentioned above. DCM Core Principle 
15, as retained by Section 735(b) of the Dodd-Frank Act, provides that 
a DCM shall establish and enforce appropriate fitness standards for (i) 
directors, (ii) members of any disciplinary committee, (iii) members of 
the DCM, (iv) any other person with direct access to the facility, and 
(v) any person affiliated with any entity mentioned above.
---------------------------------------------------------------------------

    \46\ 7 U.S.C. 5b(c)(2)(O).
---------------------------------------------------------------------------

1. Fitness Requirements
    To implement DCM Core Principle 15 and partially implement DCO Core 
Principle O, the Governance NPRM proposes to require each DCM and DCO 
to specify and enforce fitness standards for (i) directors, (ii) 
members of any Disciplinary Panel,\47\ and (iii) members of the 
Disciplinary Committee.\48\ These standards shall include, at a 
minimum, (i) those bases for refusal to register a person under Section 
8a(2) of the CEA,\49\ and (2) the absence of a significant history of 
serious disciplinary offenses, such as those that would be 
disqualifying under Sec.  1.63 of the Commission's regulations.\50\
---------------------------------------------------------------------------

    \47\ The Conflicts of Interest NPRM defines ``Disciplinary 
Panel'' as a panel that shall be responsible for conducting 
hearings, rendering decisions, and imposing sanctions with respect 
to disciplinary matters. See proposed Sec.  40.9(c)(3)(i). 75 FR at 
63752.
    \48\ Section 1.63 of the Commission's regulations defines 
``Disciplinary Committee'' as a person or committee of persons, or 
any subcommittee thereof, that is authorized by a self-regulatory 
organization to issue disciplinary charges, to conduct disciplinary 
proceedings, to settle disciplinary charges, to impose disciplinary 
sanctions or to hear appeals thereof. See 17 CFR 1.63.
    \49\ 7 U.S.C. 12(a)(2). Bases for refusal to register a person 
under Section 8a(2) of the CEA include, among other things, 
suspension or revocation of registration, certain court orders 
prohibiting action in the capacity of a registrant under the CEA, 
certain felony convictions, or findings of violation of the CEA or 
certain other Federal statutes.
    \50\ 17 CFR 1.63. Such offenses include violations of certain 
self-regulatory organization rules and violations of the CEA or the 
Commission's regulations thereunder.
---------------------------------------------------------------------------

    Also, the Governance NPRM proposes to require each DCM and DCO to 
specify and enforce fitness standards for (i) its members and 
affiliates \51\ thereof, (ii) persons with direct access to the DCM or, 
in the case of a DCO, to its settlement and clearing activities, (iii) 
natural persons who, directly or indirectly, own greater than ten 
percent of any one class

[[Page 728]]

of equity interest in a DCM or DCO,\52\ and (v) parties affiliated with 
(A) directors, (B) members of any Disciplinary Panel, and (C) members 
of the Disciplinary Committee.\53\ At a minimum, such standards shall 
include those bases for refusal to register a person under Section 
8a(2) of the CEA.\54\
---------------------------------------------------------------------------

    \51\ The Governance NPRM proposes to define ``affiliate'' as a 
person that directly, or indirectly through one or more 
intermediaries, controls, is controlled by, or is under common 
control with, a registered entity.
    \52\ This provision is a clarification of acceptable practices 
under current DCM Core Principle 14.
    \53\ Currently, the Governance NPRM does not propose to impose 
any requirement on each DCM and DCO with respect to fitness 
standards for affiliates of persons with direct access. Therefore, 
under Section 5(d)(1)(B) of the CEA, as added by Section 735 of the 
Dodd-Frank Act, each DCM has reasonable discretion in comporting 
with DCM Core Principle 15 with respect to such affiliates. Also, 
under Section 5b(c)(2)(A)(ii) of the CEA, as added by Section 725 of 
the Dodd-Frank Act, each DCO retains similar discretion.
    \54\ See note 49 supra.
---------------------------------------------------------------------------

    Further, the Governance NPRM proposes to require each DCM and DCO 
to collect and verify information that supports compliance with the 
standards articulated above and provide that information to the 
Commission annually.
    The abovementioned proposals codify the acceptable practices under 
current DCM Core Principle 14 (Governance Fitness Standards) and extend 
such practices to DCOs.\55\ The Commission believes that such proposals 
are appropriate to ensure the integrity of individuals and entities 
specified above. Such integrity, in turn, allows DCMs and DCOs to 
operate in the best interests of the public.\56\
---------------------------------------------------------------------------

    \55\ DCM Core Principle 14 is redesignated as DCM Core Principle 
15 under the Dodd-Frank Act.
    \56\ DCMs facilitate the execution of, and DCOs provide clearing 
for, ``* * * transactions * * * affected with a national public 
interest.'' See Section 3(a) of the CEA, 7 U.S.C. 5.
---------------------------------------------------------------------------

    In addition to the above, the Governance NPRM proposes to mandate 
that members and certain other persons must agree to become subject to 
the jurisdiction of the DCM or the DCO, as a condition of access. Such 
a proposal ensures that a DCM or DCO, each of which has self-regulatory 
responsibilities, would be able to appropriately discipline a member or 
such other person for violation of DCM or DCO rules. The Commission 
believes that a DCM or DCO must have the ability to exert such 
discipline in order to ensure the fitness of members or such other 
persons.
2. Questions
    The Commission requests comment on all aspects of the governance 
fitness standards. Specifically, the Commission requests comment on the 
questions set forth below.
     Are the abovementioned proposals necessary or appropriate 
to implement DCM Core Principle 15 and DCO Core Principle O? If not, 
why not? What would be a better alternative?
     Should the Commission propose any minimum fitness 
standards other than those specified above?
     Is the Commission's proposed definition of affiliate 
appropriate? If not, why?

B. Transparency Requirements

    As mentioned above, DCO Core Principle O \57\ provides that each 
DCO shall establish governance arrangements that are transparent to 
fulfill public interest requirements.\58\ Section III(C) of the 
Governance NPRM discusses proposals to implement such portion of the 
core principle. However, DCO Core Principle O also provides that each 
DCO shall establish governance arrangements that are transparent to 
permit the consideration of the views of owners and participants. Such 
language appears unique to DCOs. Hence, the Governance NPRM sets forth 
the following additional proposals for DCOs:
---------------------------------------------------------------------------

    \57\ 7 U.S.C. 5b(c)(2)(O).
    \58\ To comport with the European Commission Proposal, the 
Commission has additionally interpreted DCO Core Principle O to 
require governance arrangements that are well-defined and that 
include a clear organizational structure with consistent lines of 
responsibility and effective internal controls.
---------------------------------------------------------------------------

     Each DCO shall make available to the public, as well as 
relevant authorities (including the Commission), a description of the 
manner in which its governance arrangements permit the consideration of 
the views of owners (whether voting or non-voting) and its 
participants, including, without limitation, clearing members and 
customers;
     Such description shall include, at a minimum:
    [cir] The general method by which the DCO learns of the views of 
owners (other than through the exercise of voting power) and 
participants (other than through representation on the DCO Board of 
Directors or any DCO committee); and
    [cir] The manner in which the DCO considers such views.
1. Questions
    The Commission requests comment on all aspects of the additional 
proposals. Specifically, the Commission requests comment on the 
questions set forth below.
     Are such additional proposals necessary or appropriate to 
implement DCO Core Principle O? If not, why not? What would be a better 
alternative?
     Should the Commission propose to require that each DCO 
make available to the public, as well as relevant authorities, 
information other than that identified above?

C. Composition of the Board of Directors

1. DCMs
    DCM Core Principle 17,\59\ as amended by Section 735(b) of the 
Dodd-Frank Act,\60\ provides that the governance arrangements of a DCM 
shall be designed to permit consideration of the views of market 
participants. To implement this provision, the Governance NPRM proposes 
to require each DCM to design and institute a process for considering 
the range of opinions that market participants hold with respect to (i) 
the functioning of an existing market (including governance 
arrangements) and (ii) new rules or rule amendments. The Commission 
intends to permit each DCM to have the flexibility to determine the 
process that is most appropriate for its market participants. The 
Commission notes that one process by which a DCM may fulfill DCM Core 
Principle 17 is to have market participants on its Board of Directors 
(or other governing bodies). Regardless of the process that a DCM 
chooses, the Governance NPRM requires the DCM to make a description of 
such process available to the public and to relevant authorities 
(including the Commission) as part of its compliance with the 
transparency requirements described in Section III(C) above.\61\
---------------------------------------------------------------------------

    \59\ 7 U.S.C. 7(d)(17).
    \60\ The Dodd-Frank Act redesignated DCM Core Principle 16 
(Composition of Boards of Mutually Owned Contract Markets) as DCM 
Core Principle 17 (Composition of Governing Boards of Contract 
Markets), and amended the language of the core principle. Former DCM 
Core Principle 16 stated: ``In the case of a mutually owned contract 
market, the board of trade shall ensure that the composition of the 
governing board reflects market participants.'' DCM Core Principle 
17, as amended by the Dodd-Frank Act states that ``[t]he governance 
arrangements of the board of trade shall be designed to permit 
consideration of the views of market participants.''
---------------------------------------------------------------------------

    a. Questions.
    The Commission requests comment on this proposal. Specifically, the 
Commission requests comment on the questions set forth below.
     Is the abovementioned proposal appropriate to implement 
DCM Core Principle 17? What would be a better alternative? What are the 
costs and benefits of the abovementioned proposals? What are the costs 
and benefits of any alternative?
     Does the Commission need to consider proposing any 
additional requirements in order to implement DCM Core Principle 17? 
What would be the costs and benefits of any such requirement?

[[Page 729]]

2. DCOs
    DCO Core Principle Q, as added by Section 725(c) of the Dodd-Frank 
Act, provides that each DCO shall ensure that the composition of the 
governing board or committee of the DCO includes market participants. 
In partial reliance on this core principle, the Conflicts of Interest 
NPRM proposed requiring that the RMC (or the RMC Subcommittee) be 
composed of at least 10 percent customer representatives. However, 
based on comments that the Commission received on the Conflicts of 
Interest NPRM,\62\ certain market participants would prefer that the 
DCO Board of Directors, rather than the RMC, include customer 
representation.\63\ Therefore, the Commission is reconsidering whether 
requiring customer representation on the RMC or the DCO Board of 
Directors would better implement both Section 726 of the Dodd-Frank Act 
and DCO Core Principle Q. Preliminarily, the Commission is not inclined 
to require customer representation on both the RMC and the DCO Board of 
Directors, as the former reports to the latter. As members of the DCO 
Board of Directors, customer representatives would have the opportunity 
to (i) review recommendations and actions of the RMC, (ii) request the 
rationale behind such recommendations and actions, and (iii) vote to 
reject such recommendations and to supersede such actions.
---------------------------------------------------------------------------

    \62\ The comment period for the Conflicts of Interest NPRM 
closed on November 17, 2010. Comments are available at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=861.
    \63\ See, e.g., Comment from the Investment Company Institute, 
dated November 17, 2010 (stating that ``[t]he Commissions' proposals 
include provisions that would allow for industry representation on 
board advisory committees. The CFTC proposal, for example, 
specifically includes a requirement that 10 percent of the Risk 
Management Committee of a swap entity be composed of customers of 
clearing members who also routinely execute swap contracts and who 
have experience in using pricing models for such contracts. We 
strongly support investor representation on board advisory 
committees. These committees are designed to facilitate meaningful 
discussion on important issues before the board. Nevertheless, such 
advisory committee representation should not be a substitute for 
investor representation on the board itself. This is particularly 
true in the developing swap markets where, at this time, investors 
have access to only a handful of swap entities for clearing and 
trading.''). C.f. Comment from BlackRock, dated November 15, 2010 
(stating that '' [t]he essence of BlackRock's comments is that buy-
side participants, like customers of clearing members, need 
meaningful representation on the committees that make the critical 
determinations on the core functions of the organization that impact 
all of its participants. Such representation is more important than 
fair representation on the Board of Directors because the governance 
committees, such as the Risk Management Committee, will have 
significant influence over the day-to-day affairs of DCOs. The 
Proposing Release would charge the Risk Management Committee with 
determining products eligible for clearing, setting standards and 
requirements for initial and continuing clearing membership 
eligibility, and advising the Board of Directors on the DCO's risk 
model and default procedures. See Proposed Rule 39.13(g)(1), 75 FR 
at 63,750. In other words, decisions of the Risk Management 
Committee will have profound and immediate impacts on all DCO 
constituencies, including customers.'').
---------------------------------------------------------------------------

    Based on the above, the Commission is proposing to require that a 
DCO Board of Directors include at least 10 percent customer 
representatives. However, in case the Commission decides to keep such 
requirement at the RMC level, the Commission is alternatively re-
proposing that the RMC (or the RMC Subcommittee) be composed of at 
least 10 percent customer representatives. As mentioned above, the 
Commission is preliminarily anticipating that it would adopt only one 
requirement on customer representation. The Commission is not 
anticipating making a final decision regarding customer representation 
until it finishes reviewing comments on the Governance NPRM.
    a. Questions.
    The Commission requests comment on all aspects of the 
abovementioned proposal. Specifically, the Commission requests comment 
on the questions set forth below.
     Should the Commission require customer representation on 
the DCO Board of Directors instead of the RMC (or RMC Subcommittee)? 
Why or why not? What are the benefits and costs of such requirement?
     Alternatively, should the Commission require customer 
representation on the RMC (or the RMC Subcommittee) instead of the DCO 
Board of Directors? Why or why not? What are the benefits and costs of 
such requirement?
     Should the Commission consider requiring customer 
representation on both the DCO Board of Directors and the RMC? Why or 
why not?
     Alternatively, should the Commission consider requiring 
customer representation on another committee, but neither the DCO Board 
of Directors nor the RMC? Why or why not? Which committee would be most 
appropriate? For example, the Nominating Committee?
     What percentage or number of customer representatives 
should the Commission require on the DCO Board of Directors? Should 
such percentage be higher or lower than 10 percent? What should such 
number be? What are the benefits and costs of each percentage or 
number?
     Alternatively, what percentage or number of customer 
representatives should the Commission require on the RMC? Should such 
percentage be higher or lower than 10 percent? What should such number 
be? What are the benefits and costs of each percentage or number?
     To the extent that the Commission requires customer 
representatives on either the DCO Board of Directors or the RMC, should 
the Commission consider imposing any additional requirement to ensure 
that these representatives appropriately weigh the interests of all 
customers, rather than just advocate on behalf of the entity to which 
such representative belongs?

D. Diversity of DCM Board of Directors

    DCM Core Principle 22, as added by Section 735(b) of the Dodd-Frank 
Act, provides that a DCM, if a publicly-traded company, shall endeavor 
to recruit individuals to serve on its Board of Directors and its other 
decision-making bodies (as determined by the Commission) from among, 
and to have the composition of the bodies reflect, a broad and 
culturally diverse pool of qualified candidates.
    To implement DCM Core Principle 22, the Governance NPRM proposes to 
permit each publicly-traded DCM the flexibility to determine (i) the 
standards by which a Board of Directors could be deemed broad and 
culturally diverse, and (ii) the manner in which the DCM Board of 
Directors meets that standard. The Governance NPRM proposes that each 
such DCM make available its diversity standards to the public and 
relevant authorities (including the Commission) as part of its 
compliance with the transparency requirements described in Section 
III(C) above. Further, the Governance NPRM proposes that each such DCM 
provide the Commission with an annual certification of the manner in 
which its Board of Directors meets its diversity standards. If such a 
DCM concludes that its Board of Directors does not yet meet such 
standards, then the Governance NPRM proposes that the DCM describe the 
manner in which its Nominating Committee is structuring recruiting 
efforts to meet such standards. The Commission is not currently 
proposing diversity requirements for any other DCM decision-making 
bodies. The Commission interprets DCM Core Principle 22 to apply only 
to DCMs that are publicly-traded. This does not include DCMs that are 
not publicly-traded but have one or more affiliates that are.

[[Page 730]]

1. Questions
    The Commission requests comment on all aspects of the diversity 
requirement. Specifically, should the Commission extend such 
requirement to other DCM decision-making bodies? Why or why not? If the 
Commission proposes to extend such requirement, which decision-making 
bodies should it consider?

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \64\ requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the impact.\65\ 
The proposed rules detailed in the Governance NPRM would only affect 
DCOs, DCMs, and SEFs. The Commission has previously determined that 
DCOs \66\ and DCMs \67\ are not ``small entities'' for purposes of the 
RFA. In contrast, SEFs are a new category of registrant that the Dodd-
Frank Act created. Accordingly, the Commission has not addressed the 
question of whether SEFs are, in fact, ``small entities'' for purposes 
of the RFA.
---------------------------------------------------------------------------

    \64\ 5 U.S.C. 601 et seq.
    \65\ Id.
    \66\ 66 FR 45604, 45609 (August 29, 2001).
    \67\ 47 FR 18618, 18619 (April 30, 1982).
---------------------------------------------------------------------------

    The Dodd-Frank Act defines a SEF to mean ``a trading system or 
platform in which multiple participants have the ability to execute or 
trade swaps by accepting bids and offers made by multiple participants 
in the facility or system, through any means of interstate commerce, 
including any trading facility that (A) facilitates the execution of 
swaps between persons and (B) is not a designated contract market.'' 
\68\ The Commission hereby determines that SEFs not be considered 
``small entities'' for essentially the same reasons that DCMs and DCOs 
have previously been determined not to be small entities. These reasons 
include the fact that the Commission designates a contract market or 
registers a derivatives clearing organization only when it meets 
specific criteria including expenditure of sufficient resources to 
establish and maintain adequate self-regulatory programs. Likewise, the 
Commission will register an entity as a SEF only after it has met 
specific criteria including the expenditure of sufficient resources to 
establish and maintain an adequate self-regulatory program.\69\ 
Accordingly, the Commission does not expect the rules, as proposed 
herein, to have a significant impact on a substantial number of small 
entities. Therefore, the Chairman, on behalf of the Commission, hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the proposed amendments 
will not have a significant economic impact on a substantial number of 
small entities. The Commission invites the public to comment on whether 
SEFs covered by these rules should be considered small entities for 
purposes of the RFA.
---------------------------------------------------------------------------

    \68\ See Section 721 of the Dodd-Frank Act. The Commission is 
contemplating proposing regulations that would further specify those 
entities that must register as a SEF. The Commission does not 
believe that such proposals would alter its determination that a SEF 
is not a ``small entity'' for purposes of the RFA.
    \69\ See Core Principle 2 applicable to SEFs under Section 733 
of the Dodd-Frank Act.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Governance NPRM contains information collection requirements. 
The Paperwork Reduction Act of 1995 (``PRA'') \70\ imposes certain 
requirements on Federal agencies (including the Commission) in 
conducting or sponsoring any ``collection of information'' (as the PRA 
defines such term). Pursuant to the PRA, the Commission has submitted 
to the Director of the Office of Management and Budget (``OMB''), an 
explanation, as well as details, of the information collection and 
recordkeeping requirements which would be necessary to implement the 
Governance NPRM.
---------------------------------------------------------------------------

    \70\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Information Provided by Reporting Entities/Persons
    If the Governance NPRM is promulgated in final form, they would 
require DCOs, DCMs, and new SEF registrants to collect and submit, 
pursuant to parts 37 to 40 of the Commission's regulations, certain 
information to the Commission, which such regulations have never 
previously required. For each such proposed requirement, set forth 
below are estimates of: (i) The number of respondents; (ii) the number 
of annual responses by each respondent; (iii) the average hours per 
response; and (iv) the aggregate annual reporting burden (in hours as 
well as dollars). New OMB control numbers will be assigned to these 
proposed information collection requirements.

New Collection 3038-NEW

    Sections 37.1201(b)(5) and 38.851(b)(5) of the Commission's 
regulations require each SEF and DCM, respectively, to provide to the 
Commission on an annual basis a report assessing the regulatory program 
of the SEF or DCM, including (i) the description of such program, (ii) 
expenses, (iii) staffing and structure, (iv) certain disciplinary 
matters, and (v) with respect to a SEF only, the performance of the 
chief compliance officer (as referenced in Section 5(f)(15) of the 
Act).
    OMB Control Number 3038-NEW.
    Estimated number of respondents: 51.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 20.
    Aggregate annual reporting burden in hours: 1,020.
    Aggregate annual reporting burden in dollars: $121,125.00.

New Collection 3038-NEW

    Sections 37.1201(d) and 38.851(d) of the Commission's regulations 
require a SEF and DCM, respectively, to submit a report to the 
Commission detailing five items of information in the event that the 
SEF or DCM Board of Directors rejects a recommendation or supersedes an 
action of the Regulatory Oversight Committee or the Membership or 
Participation Committee (or entity performing the functions of such 
committee). Similarly, Sec.  39.25(b) of the Commission's regulations 
requires a DCO to submit a report to the Commission detailing five 
items of information in the event that (i) the DCO Board of Directors 
rejects a recommendation or supersedes an action of the RMC or (ii) the 
RMC rejects a recommendation or supersedes an action of the RMC 
Subcommittee.

OMB Control Number 3038-NEW

    Estimated number of respondents: 70.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 15.
    Aggregate annual reporting burden in hours: 1,050.
    Aggregate annual reporting burden in dollars: $124,688.

New Collection 3038-NEW

    Sections 38.801(d) and 39.24(b)(4) of the Commission's regulations 
require each DCM and DCO, respectively, to provide to the Commission 
information on an annual basis that supports compliance with certain 
governance fitness standards.
    OMB Control Number 3038-NEW
    Estimated number of respondents: 35.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 8.
    Aggregate annual reporting burden in hours: 280.
    Aggregate annual reporting burden in dollars: $33,250.00.

[[Page 731]]

New Collection 3038-NEW

    Section 38.901(c) of the Commission's regulations requires each DCM 
to make available to the public and the Commission a description of its 
process for considering the range of opinions that market participants 
hold with respect to (i) the functioning of an existing market 
(including governance arrangements) and (ii) new rules or rule 
amendments. Section 39.24(a) of the Commission's regulations requires 
each DCO to make available to the public and to the relevant 
authorities, including the Commission, a description of the manner in 
which its governance arrangements permit the consideration of the views 
of its owners, whether voting or non-voting, and its participants, 
including, without limitation, clearing members and customers.

OMB Control Number 3038-NEW

    Estimated number of respondents: 35.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 15.
    Aggregate annual reporting burden in hours: 525.
    Aggregate annual reporting burden in dollars: $62,344.00.

New Collection 3038-NEW

    Section 38.1151(d) of the Commission's regulations requires each 
DCM that is publicly listed on a domestic exchange to (i) make 
available to the public and the Commission the standards by which its 
Board of Directors shall be deemed broadly and culturally diverse, and 
(ii) certify to the Commission on an annual basis whether and how its 
Board of Directors has met certain diversity standards.

OMB Control Number 3038-NEW

    Estimated number of respondents: 16.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 15.
    Aggregate annual reporting burden in hours: 240.
    Aggregate annual reporting burden in dollars: $28,500.00.

New Collection 3038-NEW

    Section 40.9(b) of the Commission's regulations requires each DCO, 
DCM, or SEF to submit to the Commission, within 30 days after the 
election of the Board of Directors, (i) a list of all members of the 
Board of Directors, each committee with a composition requirement 
(including any Executive Committee), and each other committee with the 
authority to amend or constrain the action of the Board of Directors, 
(ii) a description of the relationship, if any, between such directors 
and the registered entity or the members of the registered entity (and, 
in each case, any affiliates thereof), (iii) the basis for any 
determination that a director qualifies as a Public Director (and with 
respect to DCOs only, as a customer representative), and (iv) a 
description of how the composition of the Board of Directors and each 
of the abovementioned committees allows the DCO, DCM, or SEF to comply 
with applicable core principles, regulations, as well as to its rules.

OMB Control Number 3038-NEW

    Estimated number of respondents: 70.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 2.
    Aggregate annual reporting burden in hours: 140.
    Aggregate annual reporting burden in dollars: $16,625.00.

New Collection 3038-NEW

    Section 40.9(d) of the Commission's regulations requires each DCO, 
DCM or SEF to make certain information regarding its governance 
arrangements available to the public and the Commission on a current 
basis.\71\
---------------------------------------------------------------------------

    \71\ See note 42 supra.
---------------------------------------------------------------------------

OMB Control Number 3038-NEW

    Estimated number of respondents: 70.
    Annual responses by each respondent: 4.
    Estimated average hours per response: 10.
    Aggregate annual reporting burden in hours: 2,800.
    Aggregate annual reporting burden in dollars: $332,500.
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission will consider public comments on such proposed requirements 
in:
     Evaluating whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
     Evaluating the accuracy of the estimated burden of the 
proposed information collection requirements, including the degree to 
which the methodology and the assumptions that the Commission employed 
were valid;
     Enhancing the quality, utility, and clarity of the 
information proposed to be collected; and
     Minimizing the burden of the proposed information 
collection requirements on DCOs, DCMs, and SEFs, including through the 
use of appropriate automated, electronic, mechanical, or other 
technological information collection techniques, e.g., permitting 
electronic submission of responses.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street, NW., Washington, DC 
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the proposed information 
collection requirements should send those comments to the OMB Office of 
Information and Regulatory Affairs at:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (e-mail).
2. Information Collection Comments
    Please provide the Commission with a copy of submitted comments so 
that all comments can be summarized and addressed in the final rule 
preamble. Please refer to the ADDRESSES section of the Governance NPRM 
for instructions on submitting comments to the Commission.
    OMB is required to make a decision concerning the proposed 
information collection requirements between thirty (30) and sixty (60) 
days after publication of the Governance NPRM in the Federal Register. 
Therefore, a comment to OMB is best assured of receiving full 
consideration if OMB (as well as the Commission) receives it within 
thirty (30) days of publication of the Governance NPRM.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA \72\ requires that the Commission, before 
promulgating a regulation or issuing an order, consider the costs and 
benefits of its action. By its terms, section 15(a) of the CEA does not 
require the Commission to quantify the costs and benefits of a new 
regulation or to determine whether the benefits of the regulation 
outweigh its costs. Rather, section 15(a) of the CEA simply requires

[[Page 732]]

the Commission to ``consider the costs and benefits'' of its action. 
Section 15(a) of the CEA further specifies that costs and benefits 
shall be evaluated in light of the following considerations: (1) 
Protection of market participants and the public; (2) efficiency and 
competition; (3) financial integrity of the futures markets and price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. Accordingly, the Commission could in its 
discretion, give greater weight to any one of the five considerations 
and could determine that, notwithstanding its costs, a particular 
regulation was necessary or appropriate to protect the public interest 
or to effectuate any of the provisions or to accomplish any of the 
purposes of the Act.
---------------------------------------------------------------------------

    \72\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

1. The Conflicts of Interest Core Principles: Proposed Regulations
    a. Reporting.
    As mentioned above, Sec. Sec.  37.1201(b)(5) and 38.851(b)(5) of 
the Commission's proposed regulations require each SEF and DCM, 
respectively, to provide to the Commission an annual assessment report.
    In addition, as mentioned above, Sec. Sec.  37.1201(d) and 
38.851(d) of the Commission's proposed regulations require a DCO, DCM, 
or SEF, as appropriate, to submit a report to the Commission whenever 
certain committees are overruled and Sec.  40.9(b) of the Commission's 
proposed regulations requires each DCO, DCM, or SEF to submit to the 
Commission post-Board election information.
    b. Transparency of Governance Arrangements.
    As mentioned above, Sec.  40.9(d) of the Commission's proposed 
regulations requires each DCO, DCM or SEF to make certain information 
regarding its governance arrangements available to the public and the 
Commission on a current basis.
    c. Identification and Mitigation of Conflicts of Interest.
    Section 40.9(e) of the Commission's proposed regulations require 
each DCO, DCM, or SEF to establish, maintain, and enforce written 
procedures to identify existing and potential conflicts of interest, 
and to make decisions in the event of a conflict of interest. The 
Commission recognizes that such requirements impose costs. Such costs 
may be ameliorated to the extent that certain DCOs or DCMs may modify 
existing practices to accommodate proposed Sec.  40.9(e).\73\
---------------------------------------------------------------------------

    \73\ See, e.g., Rule 234 of the Chicago Mercantile Exchange 
(``CME'') (Avoiding Conflicts of Interest in ``Significant 
Actions''), available at: http://www.cmegroup.com/rulebook/CME/I/2/34.html.
---------------------------------------------------------------------------

    d. Limitations on Use or Disclosure of Non-Public Information.
    As more fully described above, Sec.  40.9(f) of the Commission's 
proposed regulations requires each DCO, DCM, or SEF to establish and 
maintain written policies and procedures on safeguarding non-public 
information. The Commission recognizes that such requirements impose 
costs. Such costs may be ameliorated to the extent that certain DCOs or 
DCMs may modify existing practices to accommodate proposed Sec.  
40.9(f).\74\
---------------------------------------------------------------------------

    \74\ See, e.g., CME Confidentiality Policy for Market Regulation 
and Audit Departments, available at: http://www.cmegroup.com/market-regulation/overview/files/confidentialitypolicy.pdf.
---------------------------------------------------------------------------

2. The Costs and Benefits of Regulations Implementing the Conflicts of 
Interest Core Principles
    As Section II herein mentions, a DCO may face conflicts of interest 
resulting from control by enumerated entities. Such conflicts may have 
detrimental effects on the public because they may impede the mandatory 
clearing of swaps.\75\ Also, such conflicts may evidence less sound 
risk management practices, as such conflicts may cause a DCO to make 
decisions regarding, e.g., membership, based on the commercial 
interests of certain clearing members, rather than on objective risk 
criteria. Further, such conflicts may also have detrimental effects on 
market participants, as well as on efficiency and competition, because 
such conflicts may result in non-risk-based constraints on the number 
of futures commission merchants available to clear swaps, which may 
increase the price that certain market participants must bear in order 
to obtain clearing. Finally, such conflicts may have detrimental 
effects on price discovery because, by impeding the mandatory clearing 
of swaps, they may also impede the trading of swaps on a SEF or DCM.
---------------------------------------------------------------------------

    \75\ The Conflicts of Interest NPRM states: ``The framers of the 
Dodd-Frank Act observe that the clearing of swap contracts 
constitutes a key means for managing systemic risk, because clearing 
removes the type of interconnectedness between financial 
institutions that contributed to the financial crisis resulting from 
the failure and bankruptcy of firms such as Bear Stearns, Lehman 
Brothers, and AIG.'' 75 FR at 63736.
---------------------------------------------------------------------------

    Section II also states that sustained competition between DCMs or 
SEFs may exacerbate certain structural conflicts of interest. Such 
structural conflicts may lead a DCM or SEF to prioritize commercial 
interests over self-regulatory responsibilities, including restricting 
access or imposing burdens on access in a discriminatory manner. Such 
structural conflicts may have a detrimental effect on price discovery, 
as prices are best discovered in a market with broad participation. 
Broad participation generally results in higher liquidity. Because of 
its effect on price discovery, such structural conflicts may also have 
a detrimental effect on market participants, and ultimately, the 
public. Certain market participants may face higher fees to access a 
DCM or SEF. Others may not be able to access a DCM or SEF at all. To 
the extent that such market participants are executing transactions to 
hedge price risk (whether their own or those of end-users), increased 
costs associated with a hedge (or the inability to execute a hedge) may 
be passed on to consumers. Finally, such structural conflicts may have 
a detrimental effect on efficiency and competition, as certain market 
participants may be precluded from competing to execute at a lower 
price for end-users.
    As mentioned above, the Governance NPRM proposes substantive 
requirements that, together with the proposals in the Conflicts of 
Interest NPRM (i.e., structural governance requirements and limitations 
on ownership of voting equity and the exercise of voting rights), 
mitigate the conflicts of interest described in Section II, and 
therefore, the detrimental effects resulting from such conflicts. The 
Commission believes that the benefits of such mitigation exceed the 
costs for DCOs, DCMs, and SEFs to implement the Governance NPRM. The 
Commission welcomes comment on its determination.
3. Regulations Implementing DCM and DCO Core Principles
    a. Governance Fitness.
    As mentioned above, Sec. Sec.  38.801(d) and 39.24(b)(4) of the 
Commission's proposed regulations require each DCM and DCO, 
respectively, to (i) specify and enforce fitness standards for 
directors, members, and certain other persons, and (ii) provide to the 
Commission information on an annual basis that supports compliance with 
such standards. For DCMs, the proposed regulations are simply 
codifications of current acceptable practices. Therefore, the proposed 
regulations should impose minimal additional costs. For DCOs, 
governance fitness standards are necessary to ensure sound risk 
management practices, and therefore the protection of market 
participants and the public. The proposed regulations should impose 
minimal costs on DCOs.
    Certain DCOs are divisions of DCMs, which means that they may 
already apply current acceptable practices to

[[Page 733]]

their directors, members, and other persons. All DCOs are currently 
subject to DCO Core Principle B,\76\ which requires each to have 
``adequate * * * managerial resources to discharge the responsibilities 
of a DCO.'' Thus, the Commission preliminary believes that the benefits 
of DCM and DCO governance fitness standards exceed the costs of such 
standards. The Commission welcomes comment on its determination.
---------------------------------------------------------------------------

    \76\ 7 U.S.C. 7a-1(c)(B).
---------------------------------------------------------------------------

    b. Composition of Governing Boards.
    As mentioned above, Sec.  38.901(a) of the Commission's proposed 
regulations requires DCM governance arrangements to be designed to 
permit consideration of the views of market participants. 
Preliminarily, the Commission believes that such benefit exceeds any 
costs associated with Sec.  38.901(c), which may be idiosyncratic to 
each DCM. However, the Commission notes that it has specifically 
requested comment on the costs and benefits of Sec.  38.901(c), as well 
as any alternative thereto.
    Core Principle Q requires each DCO to ensure that its governing 
board or committee includes market participants. Section 39.26 of the 
Commission's proposed regulations requires each DCO Board of Directors 
to include 10 percent representatives of customers. Preliminarily, the 
Commission believes that the benefit of such customer representation 
exceeds any cost associated with Sec.  39.26.\77\ However, the 
Commission notes that it has specifically requested comment on the 
costs and benefits of Sec.  39.26, as well as any alternative thereto.
---------------------------------------------------------------------------

    \77\ For example, in addition to implementing DCO Core Principle 
Q, certain comments on the Conflicts of Interest NPRM state that 
customer representation on the DCO Board of Directors would be a 
better method of ameliorating conflicts of interest under Section 
726 of the Dodd-Frank Act. See note 63 supra. See generally, 75 FR 
at 63746 (discussing the costs and benefits of the Conflicts of 
Interest NPRM).
---------------------------------------------------------------------------

    Alternatively, Sec.  39.13(g)(3)(i) of the Commission's proposed 
regulations requires each RMC (or RMC Subcommittee) to include 10 
percent representatives of customers. As mentioned above, the Conflicts 
of Interest NPRM had previously proposed such requirement. Therefore, 
the costs and benefits of Sec.  39.13(g)(3)(i) have been addressed in 
the Conflicts of Interest NPRM.\78\
---------------------------------------------------------------------------

    \78\ See generally, 75 FR at 63746.
---------------------------------------------------------------------------

    c. Regulation Implementing the DCM Core Principle on Diversity of 
Certain Boards of Directors.
    As mentioned above, DCM Core Principle 22, as added by Section 
735(b) of the Dodd-Frank Act, provides that a DCM, if a publicly-traded 
company, shall endeavor to recruit individuals to serve on its Board of 
Directors and its other decision-making bodies (as determined by the 
Commission) from among, and to have the composition of the bodies 
reflect, a broad and culturally diverse pool of qualified candidates.
    Section 38.1151(d) of the Commission's proposed regulations affords 
flexibility to each such DCM \79\ to determine the standards by which a 
Board of Directors may be deemed broadly and culturally diverse. 
Further, such section requires the DCM to (i) make available to the 
public and the Commission such standards, and (ii) certify to the 
Commission on an annual basis whether and how its Board of Directors 
has met certain standards. The benefit of cultural diversity on Boards 
of Directors in enhancing the efficiency of organizations has been 
recognized.\80\ Preliminarily, the Commission believes that the benefit 
of Sec.  38.1151(d) exceeds its costs. The Commission welcomes comment 
on its preliminary determination.
---------------------------------------------------------------------------

    \79\ Currently, no such DCM exists.
    \80\ For example, SEC Commissioner Luis Aguilar made the 
following remarks at an SEC Open Meeting held on July 1, 2009:
    Because of the importance of boards of directors, investors 
increasingly care about how directors are appointed, and what their 
background is. This is especially true as American businesses 
increasingly compete in both a global environment, and in a domestic 
marketplace that is, itself, increasingly diverse. In this ever more 
challenging business environment, the ability to draw on a wide 
range of viewpoints, backgrounds, skills, and experience is critical 
to a company's success.
    It should be no surprise that studies indicate that diversity in 
the boardroom can result in real value for companies--and for 
shareholders. It also should be no surprise that many investors--
from individual investors to sophisticated institutions--have asked 
the Commission to provide for disclosures about the diversity of 
corporate boards and a company's policies related to board 
diversity.
    Also, the SEC issued a rule on Proxy Disclosure Enhancements 
which, among other things, requires public companies to disclose if 
they have a formal policy to consider diversity with respect to 
board nominees. See 74 FR 68334 (Dec. 16, 2009).
---------------------------------------------------------------------------

4. Conclusion
    Accordingly, after considering the five factors specified in 
Section 15(a) of the CEA, the Commission has determined to propose the 
regulations set forth below. The Commission invites public comment on 
its evaluation of the costs and benefits of all aspects of the 
Governance NPRM.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Parts 37, 38 and 40

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 39

    Commodity futures, Consumer protection, Reporting and recordkeeping 
requirements.

    For the reasons stated in this release, the Commission proposes to 
amend 17 CFR parts 1, 37, 38, 39, and 40 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6h, 6i, 
6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 13a, 13a-1, 
16, 16a, 19, 21, 23, and 24 as amended by Pub. L. 222-203, 124 Stat. 
1376.

    2. In Sec.  1.3, as proposed to be amended at 75 FR 63732, October 
18, 2010, 75 FR 65586, October 26, 2010, 75 FR 77576, December 13, 
2010, and 75 FR 80211, December 21, 2010, redesignate paragraphs (zz) 
to (eee) as paragraphs (bbb) to (ggg), redesignate paragraphs (fff) to 
(ggg) as (iii) to (jjj), add and reserve paragraph (zz), and add new 
paragraphs (aaa) and (hhh) to read as follows:
* * * * *
    (zz) [Reserved].
    (aaa) Affiliate. The term ``affiliate'' means a person that 
directly or indirectly through one or more intermediaries, controls, is 
controlled by, or is under common control with, another person.
* * * * *
    (hhh) Non-Public Information.
    (1) This term means any information that a registered derivatives 
clearing organization, a designated contract market, or a registered 
swap execution facility owns or any information that such entity 
otherwise deems confidential, such as intellectual property belonging 
to:
    (i) Such registered entity; or
    (ii) A third party, which property such registered entity receives 
on a confidential basis.
    (2) Nothing in this paragraph shall preclude a registered entity 
from adopting a definition of ``non-public information'' that is more 
expansive than the definition in this paragraph.
* * * * *

PART 37--SWAP EXECUTION FACILITIES

    3. The authority citation for part 37 continues to read as follows:


[[Page 734]]


    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a as 
amended by Titles VII and VIII of Pub. L. 111-203, 124 Stat. 1376.

    4. Section 37.19, as proposed at 75 FR 63747, October 18, 2010, is 
redesignated as Sec.  37.1201 and amended by adding new paragraph 
(b)(5), redesignating paragraph (d) as paragraph (e), adding new 
paragraph (d), and revising newly designated paragraph (e)(1) 
introductory text, to read as follows:


Sec.  37.19  Conflicts of Interest.

* * * * *
    (b) * * *
    (5) Annual Report. The Regulatory Oversight Committee shall prepare 
an annual report assessing, for the Board of Directors and the 
Commission, the regulatory program of the registered swap execution 
facility. Such report shall:
    (i) Describe the self-regulatory program;
    (ii) Set forth the expenses of the regulatory program;
    (iii) Describe the staffing and structure of the same;
    (iv) Catalogue investigations and disciplinary actions taken during 
the year; and
    (v) Review the performance of disciplinary committees and panels, 
as well as the performance of the Chief Compliance Officer (as 
referenced in Section 5(f)(15) of the Act).
* * * * *
    (d) Reporting to the Commission. In the event that the Board of 
Directors of a registered swap execution facility rejects a 
recommendation or supersedes an action of the Regulatory Oversight 
Committee or the Membership or Participation Committee (or entity 
performing the functions of such committee), the registered swap 
execution facility shall submit a written report to the Commission 
detailing:
    (1) The recommendation or action of the Regulatory Oversight 
Committee or the Membership or Participation Committee (or entity 
performing the functions of such committee);
    (2) The rationale for such recommendation or action;
    (3) The rationale of the Board of Directors for rejecting such 
recommendation or superseding such action; and
    (4) The course of action that the Board of Directors decided to 
take contrary to such recommendation or action.
    (e) * * *
    (1) Definitions. For purposes of this Sec.  37.1201(e):
* * * * *

PART 38--DESIGNATED CONTRACT MARKETS

    5. The authority citation for part 38 continues to read as follows:

    Authority: 7 U.S.C. 2, 4c, 6, 6a, 6d, 6e, 6f, 6g, 6i, 6j, 6k, 
6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21 as amended by 
Pub. L. 111-203, 124 Stat. 1376.

    6. Add Sec.  38.801 to subpart P, as proposed at 75 FR 80612, 
December 22, 2010, to read as follows:


Sec.  38.801  Governance Fitness Standards.

    (a) General. The designated contract market shall establish and 
enforce appropriate fitness standards for directors, members of any 
disciplinary committee, members of the contract market, and any other 
person with direct access to the facility (including any party 
affiliated with any person described in this paragraph).
    (b) Fitness Standards for Directors and Members of the Disciplinary 
Panel and Disciplinary Committee. Each designated contract market must 
specify and enforce fitness standards for directors, members of any 
Disciplinary Panel (as defined in Sec.  1.3(bbb) of this chapter), and 
members of the Disciplinary Committee (as defined in Sec.  1.63 of this 
chapter). At a minimum, such standards shall include:
    (1) Those bases for refusal to register a person under Section 
8a(2) of the Act; and
    (2) The absence of a significant history of serious disciplinary 
offenses, such as those that would be disqualifying under Sec.  1.63 of 
this chapter.
    (c) Fitness Standards for Members, Persons with Direct Access, and 
Certain Affiliates. Each designated contract market must specify and 
enforce fitness standards for its members and affiliates thereof; 
persons with direct access to the facility; natural persons who, 
directly or indirectly, own greater than ten percent of any one class 
of equity interest in a designated contract market; and parties 
affiliated with the persons enumerated in paragraph (b) of this 
section. At a minimum, such standards shall include those bases for 
refusal to register a person under Section 8a(2) of the Act.
    (d) Verification. Each designated contract market must collect and 
verify information that supports compliance with the standards in 
paragraphs (b) and (c) of this section and provide that information to 
the Commission on an annual basis. Such information may take the form 
of a certification based on verifiable information, an affidavit from 
the general counsel of the designated contract market, registration 
information, or other substantiating information.
    (e) Jurisdiction. As a condition of access, members and non-member 
market participants must agree to become subject to the jurisdiction of 
the designated contract market.
    7. In Sec.  38.851, as proposed at 75 FR 80612, December 22, 2010, 
add new paragraph (b)(5) redesignate paragraph (d) as paragraph (e), 
add new paragraph (d), and revise newly designated paragraph (e)(1) 
introductory text, to read as follows:


Sec.  38.851  Conflicts of Interest.

* * * * *
    (b) * * *
    (5) Annual Report. The Regulatory Oversight Committee shall prepare 
an annual report assessing, for the Board of Directors and the 
Commission, the regulatory program of the designated contract market. 
Such report shall:
    (i) Describe the self-regulatory program;
    (ii) Set forth the expenses of the regulatory program;
    (iii) Describe the staffing and structure of the same;
    (iv) Catalogue investigations and disciplinary actions taken during 
the year; and
    (v) Review the performance of disciplinary committees and panels.
* * * * *
    (d) Reporting to the Commission. In the event that the Board of 
Directors of a designated contract market rejects a recommendation or 
supersedes an action of the Regulatory Oversight Committee or the 
Membership or Participation Committee (or entity performing the 
functions of such committee), the designated contract market shall 
submit a written report to the Commission detailing:
    (1) The recommendation or action of the Regulatory Oversight 
Committee or the Membership or Participation Committee (or entity 
performing the functions of such committee);
    (2) The rationale for such recommendation or action;
    (3) The rationale of the Board of Directors for rejecting such 
recommendation or superseding such action; and
    (4) The course of action that the Board of Directors decided to 
take contrary to such recommendation or action.
    (e) * * *
    (1) Definitions. For purposes of this Sec.  38.851(e):
* * * * *
    8. Add Sec.  38.901 to subpart R, as proposed at 75 FR 80612, 
December 22, 2010, to read as follows:

[[Page 735]]

Sec.  38.901  Composition of governing boards of contract markets.

    (a) General. The governance arrangements of each designated 
contract market shall be designed to permit consideration of the views 
of market participants.
    (b) Notice. Each designated contract market shall design and 
institute a process for considering the range of opinions that market 
participants hold with respect to:
    (1) The functioning of an existing market (including governance 
arrangements) and
    (2) New rules or rule amendments.
    (c) Transparency. As part of its compliance with Sec.  40.9(d) of 
this chapter, each designated contract market shall make available to 
the public and to the relevant authorities, including the Commission, a 
description of such process.
    (1) Such description shall include, at a minimum:
    (i) The manner in which the designated contract market obtains 
opinions from market participants;
    (ii) The manner in which the designated contract market considers 
such opinions; and
    (iii) A summary of the lines of responsibility and accountability 
for considering such opinions, from the relevant operational unit to 
the Board of Directors (and any committee thereof).
    (2) Nothing in paragraph (c) of this section shall be construed to 
constrain the Commission from requiring the designated contract market 
to describe any other element of its process for obtaining a fair 
understanding of the opinions of market participants.
    9. Add Sec.  38.1151 to subpart W, as proposed at 75 FR 80612, 
December 22, 2010, to read as follows:


Sec.  38.1151  Diversity of Board of Directors.

    (a) General. A designated contract market, if publicly-listed on a 
domestic exchange, shall endeavor to recruit individuals to serve on 
its Board of Directors and its other decision-making bodies (as 
determined by the Commission) from among, and to have the composition 
of the bodies reflect, a broad and culturally diverse pool of qualified 
candidates.
    (b) Standards. Each such designated contract market shall 
formulate, describe, and enforce the standards by which its Board of 
Directors shall be deemed broadly and culturally diverse.
    (c) Transparency. As part of its compliance with Sec.  40.9(d) of 
this chapter, each such designated contract market shall make available 
to the public and to the relevant authorities, including the 
Commission, such standards.
    (d) Annual Certification. (1) On an annual basis, each such 
designated contract market shall certify to the Secretary of Commission 
whether and how its Board of Directors has met such standards. If the 
designated contract market determines that its Board of Directors has 
failed to meet such standards, then the designated contract market must 
describe the manner in which its Nominating Committee is endeavoring to 
structure recruitment to meet such standards.
    (2) Such certification shall be in the form of a letter or an 
affidavit signed by the general counsel of the designated contract 
market.

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    10. Revise the authority citation for part 39 to read as follows:

    Authority: 7 U.S.C. 2, 5, 6, 6d, 7a-1, 7a-2, and 7b as amended 
by Pub. L. 111-123, 124 Stat. 1376.

    11. Amend Sec.  39.13, as proposed at 75 FR 63750, October 18, 
2010, by revising paragraph (g)(3)(i) to read as follows:


Sec.  39.13  Risk management.

* * * * *
    (g) * * *
    (3) * * *
    (i) The Risk Management Committee shall be composed of at least 
thirty-five percent Public Directors of a derivatives clearing 
organization and at least ten percent representatives of customers. In 
this context, a ``customer'' means any customer of a clearing member, 
including, without limitation:
    (A) Any ``customer'' or ``commodity customer'' within the meaning 
of Sec.  1.3(k) of this chapter;
    (B) Any ``foreign futures or foreign options customer'' within the 
meaning of Sec.  30.1(c) of this chapter; and
    (C) Any customer entering into a cleared swap (as defined in 
Section 1a(7) of the Act).
* * * * *
    12. Add Sec.  39.24 to read as follows:


Sec.  39.24  Governance Fitness Standards.

    (a) Governance Arrangements.
    (1) General.
    (i) Each derivatives clearing organization shall establish 
governance arrangements that are transparent:
    (A) To fulfill public interest requirements; and
    (B) To permit the consideration of the views of owners and 
participants.
    (ii) Each derivatives clearing organization shall establish 
governance arrangements that are well-defined and include a clear 
organizational structure with consistent lines of responsibility and 
effective internal controls.
    (2) Transparency. As part of its compliance with Sec.  40.9(d) of 
this chapter, each derivatives clearing organization shall make 
available to the public and to the relevant authorities, including the 
Commission, a description of the manner in which its governance 
arrangements permit the consideration of the views of its owners, 
whether voting or non-voting, and its participants, including, without 
limitation, clearing members and customers. Such description shall 
include, at a minimum:
    (i) The general method by which the derivatives clearing 
organization learns of (A) the views of owners, other than through 
their exercise of voting power, and (B) the views of participants, 
other than through representation on the Board of Directors or any 
committee of the derivatives clearing organization; and
    (ii) The manner in which the derivatives clearing organization 
considers such views.
    (3) Construction. Nothing in paragraph (a)(2) of this section shall 
be construed to constrain the Commission from requiring the derivatives 
clearing organization to describe any other element of the manner in 
which its governance arrangements permit the consideration of the views 
of its owners and participants.
    (b) Fitness Standards. (1) General. Each derivatives clearing 
organization shall establish and enforce appropriate fitness standards 
for directors, members of any disciplinary committee, members of the 
derivatives clearing organization, any other individual or entity with 
direct access to the settlement or clearing activities of the 
derivatives clearing organization, and any party affiliated with any 
individual or entity described in this paragraph.
    (2) Fitness Standards for Directors and Members of the Disciplinary 
Panel and Disciplinary Committee. Each derivatives clearing 
organization must specify and enforce fitness standards for directors, 
members of any Disciplinary Panel (as defined in Sec.  1.3(bbb) of this 
chapter), and members of the Disciplinary Committee (as defined in 
Sec.  1.63 of this chapter). At a minimum, such standards shall include 
(i) those bases for refusal to register a person under Section 8a(2) of 
the Act, and (ii) the absence of a significant history of serious 
disciplinary offenses, such as those that would be disqualifying under 
Sec.  1.63 of this chapter.
    (3) Fitness Standards for Clearing Members, Persons with Direct 
Access, and Certain Affiliates. Each derivatives clearing organization 
must specify and enforce fitness standards for its clearing

[[Page 736]]

members and affiliates thereof; persons with direct access to its 
settlement and clearing activities; natural persons who, directly or 
indirectly, own greater than ten percent of any one class of equity 
interest in the derivatives clearing organization; and parties 
affiliated with the persons enumerated in paragraph (b)(2) of this 
section. At a minimum, such standards shall include those bases for 
refusal to register a person under Section 8a(2) of the Act.
    (4) Verification. Each derivatives clearing organization must 
collect and verify information that supports compliance with the 
standards in paragraphs (b)(2) and (3) of this section, and provide 
that information to the Commission on an annual basis. Such information 
may take the form of a certification based on verifiable information, 
an affidavit from the general counsel of the derivatives clearing 
organization, registration information, or other substantiating 
information.
    (5) Jurisdiction. As a condition of access, clearing members and 
other persons with direct access to the settlement and clearing 
activities of a derivatives clearing organization must agree to become 
subject to the jurisdiction of the derivatives clearing organization.
    13. In Sec.  39.25, as proposed at 75 FR 63750, October 18, 2010, 
redesignate paragraph (b) as paragraph (c), add new paragraph (b), and 
revise newly designated paragraph (c)(1) introductory text to read as 
follows:


Sec.  39.25  Conflicts of interest.

* * * * *
    (b) Reporting to the Commission. In the event that:
    (1) The Board of Directors of a derivatives clearing organization 
rejects a recommendation or supersedes an action of the Risk Management 
Committee, or
    (2) The Risk Management Committee rejects a recommendation or 
supersedes an action of its subcommittee (as described in Sec.  
39.13(g)(5) of this part), the derivatives clearing organization shall 
submit a written report to the Commission detailing:
    (i) The recommendation or action of the Risk Management Committee 
(or subcommittee thereof);
    (ii) The rationale for such recommendation or action;
    (iii) The rationale of the Board of Directors (or the Risk 
Management Committee, if applicable) for rejecting such recommendation 
or superseding such action; and
    (iv) The course of action that the Board of Directors (or the Risk 
Management Committee, if applicable) decided to take contrary to such 
recommendation or action.
    (c) * * *
    (1) Definitions. For purposes of this Sec.  39.25(c):
* * * * *
    14. Add Sec.  39.26 to read as follows:


Sec.  39.26  Composition of Governing Boards.

    (a) General. (1) Each derivatives clearing organization shall 
ensure that the composition of the governing board or committee of the 
derivatives clearing organization includes market participants.
    (2) Nothing in this section shall supersede any other section of 
this part or any requirement applicable to a derivatives clearing 
organization under Sec.  40.9 of this chapter.
    (b) Composition Requirement. The Board of Directors of a 
derivatives clearing organization shall be composed of at least ten 
percent representatives of customers. In this context, a ``customer'' 
means any customer of a clearing member, including, without limitation:
    (1) Any ``customer'' or ``commodity customer'' within the meaning 
of Sec.  1.3(k) of this chapter;
    (2) Any ``foreign futures or foreign options customer'' within the 
meaning of Sec.  30.1(c) of this chapter; or
    (3) Any customer entering into a cleared swap (as defined in 
Section 1a(7) of the Act).

PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

    15. Revise the authority citation for part 40 to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8, and 12a, as amended 
by Pub. L. 111-203, 124 Stat. 1376.

    16. Revise the heading and add new paragraphs (b)(1)(iii), (d), 
(e), and (f) to Sec.  40.9 as proposed at 75 FR 63751, October 18, 
2010, to read as follows:


Sec.  40.9  Governance and conflicts of interest.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Each registered entity referenced in paragraph (b)(1)(i) of 
the section must submit to the Commission, within thirty days after 
each election of its Board of Directors:
    (A) A list of all members of the Board of Directors, each committee 
with a composition requirement (including any Executive Committee), and 
each other committee that has the authority to amend or constrain 
actions of the Board of Directors;
    (B) A description of the relationship, if any, between such 
directors and the registered entity or the members of the registered 
entity (and, in each case, any affiliates thereof, as Sec.  1.3(aaa) of 
defines such term); and
    (C) The basis for any determination that a director qualifies as a 
Public Director, and, for derivatives clearing organizations only, the 
basis for any determination that a director qualifies as a 
representative of customers; and
    (D) A description of how the composition of the Board of Directors 
and each of the committees allows the registered entity to comply with 
applicable core principles, regulations, as well as the rules of the 
registered entity.
* * * * *
    (d) Transparency of Governance Arrangements. (1) Each registered 
derivatives clearing organization, designated contract market, or 
registered swap execution facility shall, at a minimum, make the 
following information available to the public and relevant authorities, 
including the Commission:
    (i) The charter (or mission statement) of the registered entity;
    (ii) The charter (or mission statement) of the registered entity's 
Board of Directors, each committee with a composition requirement 
(including any Executive Committee), as well as each other committee 
that has the authority to amend or constrain actions of the Board of 
Directors;
    (iii) The Board of Directors nomination process for the registered 
entity, as well as the process for assigning members of the Board of 
Directors or other persons to any committee referenced in paragraph 
(d)(1)(ii) of this section;
    (iv) For the Board of Directors and each committee referenced in 
paragraph (d)(1)(ii) of this section, the names of all members;
    (v) The identities of: all Public Directors; and with respect to a 
registered derivatives clearing organization, all representatives of 
customers;
    (vi) The lines of responsibility and accountability for each 
operational unit of the registered entity;
    (vii) Summaries of significant decisions implicating the public 
interest. Such significant decisions shall include:
    (A) With respect to a designated contract market or a registered 
swap execution facility, all decisions relating to access, membership, 
and disciplinary procedures; and
    (B) With respect to a derivatives clearing organization, all 
decisions relating to open access (as described in

[[Page 737]]

Section 2(h)(1)(B) of the Act), membership (as described in Section 
5(b)(c)(2)(C) of the Act), and the finding of products acceptable or 
not acceptable for clearing. In describing such decisions, the 
derivatives clearing organization shall specifically disclose whether:
    (1) Its Board of Directors has rejected a recommendation or 
superseded an action of the Risk Management Committee; or
    (2) The Risk Management Committee has rejected a recommendation or 
superseded an action of its subcommittee (as described in Sec.  
39.13(g)(5) of this part).
    (C) Nothing in the foregoing shall be construed as requiring a 
designated contract market, a registered swap execution facility, or a 
derivatives clearing organization to disclose any ``non-public 
information'' (as Sec.  1.3(ggg) of this chapter defines such term), 
including, without limitation, minutes from meetings of its Board of 
Directors or committees and information that it may have received on a 
confidential basis from an applicant for membership.
    (2) The registered entity must ensure that the information 
specified in paragraphs (d)(1)(i) to (vii) of this section is current, 
accurate, clear, and readily accessible, for example, on its Web site. 
The registered entity shall set forth such information in a language 
commonly used in the commodity futures and swap markets and at least 
one of the domestic language(s) of the jurisdiction in which the 
registered entity is located.
    (e) Regulatory Program. (1) As part of its regulatory program, each 
registered derivatives clearing organization, designated contract 
market, or registered swap execution facility must establish, maintain, 
and enforce written procedures to:
    (i) Identify, on an ongoing basis, existing and potential conflicts 
of interest; and
    (ii) Make fair and non-biased decisions in the event of a conflict 
of interest. Such procedures shall include rules regarding the recusal, 
in applicable circumstances, of parties involved in the making of 
decisions. The Chief Compliance Officer of a registered derivatives 
clearing organization or registered swap execution facility shall, in 
consultation with the Board of Directors of the entity, an equivalent 
body, or a senior officer of the entity, resolve any such conflicts of 
interest.
    (f) Limitations on Use or Disclosure of Non-Public Information. (1) 
Each registered entity must establish and maintain written policies and 
procedures on safeguarding non-public information gained through either 
an ownership interest or through the performance of official duties 
(including duties associated with self-regulatory or regulatory 
purposes) by members of its Board of Directors, members of any 
committee, or officers and other employees.
    (2) Such policies and procedures shall comport, at a minimum, with 
the following principles:
    (i) No individual or entity described in paragraph (f)(1) of this 
section shall use or disclose any non-public information, absent prior 
written consent from the relevant registered entity. A registered 
entity shall establish guidelines that specify the information that 
must be included in the written consent.
    (ii) No individual or entity described in paragraph (f)(1) of this 
section shall, either during or after service with the relevant 
registered entity:
    (A) Use, directly or indirectly, information that the registered 
entity deems to be non-public information; or
    (B) Disclose non-public information to others, except:
    (1) To others within the relevant registered entity or to outside 
advisors thereof, provided that such advisors are subject to 
confidentiality obligations, and that such disclosure is necessary for 
the performance of official duties by the individual or entity;
    (2) If required by regulatory authority; or
    (3) If compelled to so by valid legal process, provided that the 
individual or entity notifies the relevant registered entity.

    Issued in Washington, DC, on December 9, 2010, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

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

Appendices to Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities; Additional Requirements Regarding the Mitigation of 
Conflicts of Interest--Commission Voting Summary and Statements of 
Commissioners

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, 
Sommers, Chilton and O'Malia voted in the affirmative; no 
Commissioners voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule on further governance and conflicts 
of interest requirements for derivatives clearing organizations 
(DCOs), designated contract markets (DCMs) and swap execution 
facilities (SEFs). The proposed rule complements the conflicts of 
interest provisions that the Commission proposed on October 1st by 
keeping regulators up to date about the composition of boards, board 
committees and ownership, promoting transparency in decision-making 
and ensuring limitations on use or disclosure of non-public 
information. The proposed rule also provides guidance to industry 
and the public on appropriate minimum governance fitness standards 
for DCOs and DCMs, as well as the manner in which market 
participants must be heard or included in DCO or DCM governance 
arrangements. The proposed rule would enhance the integrity of 
clearing and trading and would increase public trust in the 
facilities on which such important activities occur.

[FR Doc. 2010-31898 Filed 1-5-11; 8:45 am]
BILLING CODE 6351-01-P