[Federal Register Volume 87, Number 162 (Tuesday, August 23, 2022)]
[Proposed Rules]
[Pages 51812-51857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17316]



[[Page 51811]]

Vol. 87

Tuesday,

No. 162

August 23, 2022

Part III





Securities and Exchange Commission





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17 CFR Part 240





Clearing Agency Governance and Conflicts of Interest; Proposed Rule

  Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / 
Proposed Rules  

[[Page 51812]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-95431; File No. S7-21-22]
RIN 3235-0695


Clearing Agency Governance and Conflicts of Interest

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; partial withdrawal of proposed rule; withdrawal 
of applicability of proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing rules under the Securities Exchange Act of 1934 (``Exchange 
Act'') to help improve the governance of clearing agencies registered 
with the Commission (``registered clearing agencies'') by reducing the 
likelihood that conflicts of interest may influence the board of 
directors or equivalent governing body (``board'') of a registered 
clearing agency. The proposed rules would identify certain 
responsibilities of the board, increase transparency into board 
governance, and, more generally, improve the alignment of incentives 
among owners and participants of a registered clearing agency. In 
support of these objectives, the proposed rules would establish new 
requirements for board and committee composition, independent 
directors, management of conflicts of interest, and board oversight.

DATES: As of August 23, 2022, SEC withdraws amendatory instructions # 7 
and 8 (Sec. Sec.  240.17Ad-25 and 240.17Ad-26 in Release No. 34-64017), 
published at 76 FR 14472 on March 16, 2011. Also as of August 23, 2022, 
SEC withdraws the applicability of the proposed rule published at 75 FR 
65881 on October 26, 2010 (Release No. 34-63107) as it pertained to 
clearing agencies.
    Comments on this proposal should be received on or before October 
7, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-21-22 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.
    All submissions should refer to File Number S7-21-22. This file 
number should be included on the subject line if email is used. To help 
us process and review your comments more efficiently, please use only 
one method. The Commission will post all comments on the Commission's 
website (https://www.sec.gov/rules/proposed.shtml). Comments are also 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Operating 
conditions may limit access to the Commission's public reference room. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director, 
Stephanie Park, Senior Special Counsel, Claire Noakes, Special Counsel, 
or Tanin Kazemi, Attorney-Adviser, Office of Clearance and Settlement 
at (202) 551-5710, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is withdrawing the following 
proposed rules under the Exchange Act: Regulation MC as proposed for 
security-based swap clearing agencies,\1\ and rules proposed for 
clearing agencies at 17 CFR 240.17Ad-25 (``Rule 17Ad-25'') and 
240.17Ad-26 (``Rule 17Ad-26'').\2\ In their place, the Commission is 
proposing a new Rule 17Ad-25 to mitigate conflicts of interest, promote 
the fair representation of owners and participants in the governance of 
a clearing agency, identify responsibilities of the board, and increase 
transparency into clearing agency governance.
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    \1\ Exchange Act Release No. 63107 (Oct. 14, 2010), 75 FR 65882 
(Oct. 26, 2010) (``Regulation MC Proposing Release'').
    \2\ Exchange Act Release No. 64017 (Mar. 3, 2011), 76 FR 14471 
(Mar. 16, 2011) (``Clearing Agency Standards Proposing Release'') 
(proposing Rules 17Ad-25 and 17Ad-26).
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    The Commission is also mindful of the differing perspectives that 
exist at registered clearing agencies among stakeholders, including 
owners and participants (some of whom also are clearing agency owners), 
small and large participants, and direct participants (who are clearing 
members) and indirect participants.\3\ Proposed Rule 17Ad-25 would 
establish new requirements for clearing agency boards to address and 
mitigate conflicts of interest and to help ensure more effective 
oversight of the clearing agency by the board. The Commission believes 
these requirements would help ensure that a clearing agency's 
governance arrangements can more effectively manage these different 
perspectives so that the clearing agency can, among other things, help 
ensure that the design and implementation of risk management decisions 
are effective. Specifically, the proposed rule would: (i) define 
independence in the context of a director serving on the board of a 
registered clearing agency and require that a majority of directors on 
the board be independent, unless a majority of the voting rights 
distributed to shareholders of record are directly or indirectly held 
by participants of the registered clearing agency, in which case at 
least 34 percent of the board must be independent directors; (ii) 
establish requirements for a nominating committee, including with 
respect to the composition of the nominating committee, fitness 
standards for serving on the board, and documenting the process for 
evaluating board nominees; (iii) establish requirements for the 
function, composition, and reconstitution of the risk management 
committee; (iv) require policies and procedures that identify, mitigate 
or eliminate, and document the identification and mitigation or 
elimination of conflicts of interest; (v) require policies and 
procedures that obligate directors to report potential conflicts 
promptly; (vi) require policies and procedures for the board to oversee 
relationships with service providers for critical services; and (vii) 
require policies and procedures to solicit, consider, and document the 
registered clearing agency's consideration of the views of its 
participants and other

[[Page 51813]]

relevant stakeholders regarding its governance and operations.
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    \3\ Examples of indirect participants might be entities such as 
customers or clients of direct participants or clearing members 
since they rely on services provided by a direct participant to 
access the services of the clearing agency.
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Table of Contents

I. Introduction
II. Background
    A. Differing Perspectives at Registered Clearing Agencies
    B. Regulatory Framework for Registered Clearing Agencies
    C. Risks Associated with Clearance and Settlement
III. Proposed Rules
    A. Board Composition and Requirements for Independent Directors
    B. Nominating Committee
    C. Risk Management Committee
    D. Conflicts of Interest
    E. Board Obligation to Oversee Service Providers for Critical 
Services
    F. Obligation to Formally Consider Stakeholder Viewpoints
    G. Considerations Related to Implementation and Compliance
    H. General Request for Comment
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    C. Consideration of Benefits and Costs
    D. Reasonable Alternatives to the Proposed Rule
    E. Request for Comment
V. Paperwork Reduction Act
    A. Rule 17Ad-25(b)
    B. Rule 17Ad-25(c)
    C. Rule 17Ad-25(d)
    D. Rule 17Ad-25(g)
    E. Rule 17Ad-25(h)
    F. Rule 17Ad-25(i)
    G. Rule 17Ad-25(j)
    H. Chart of Total PRA Burdens
    I. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
    A. Registered Clearing Agencies
    B. Certification
VIII. Statutory Authority and Text of Proposed Rule

I. Introduction

    Clearing agencies registered with the Commission play an important 
role in the securities markets. They help ensure the prompt and 
accurate clearance and settlement of securities transactions, including 
the transfer of record ownership and the safeguarding of securities and 
related funds, which has the effect of protecting investors and persons 
facilitating transactions by and acting on behalf of investors.\4\ As 
such, Section 17A of the Exchange Act requires that, before an entity 
provides clearing agency services, it must register with the 
Commission.\5\ Under the Commission's supervision, registered clearing 
agencies, as self-regulatory organizations (``SROs'') under Section 19 
of the Exchange Act,\6\ must submit to the Commission changes to their 
rules for review and approval or to be deemed immediately effective 
upon filing.\7\
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    \4\ See 15 U.S.C. 78q-1(a)(1)(A); see, e.g., Committee on 
Payment and Settlement Systems and Technical Committee of the 
International Organization of Securities Commissions, Principles for 
financial market infrastructures (Apr. 16, 2012), at 5 (``PFMI''), 
http://www.bis.org/publ/cpss101a.pdf (stating that financial market 
infrastructures (``FMIs''), which include clearing agencies like 
central counterparties (``CCPs'') and central securities 
depositories (``CSDs''), ``[w]hile safe and efficient . . . 
contribute to maintaining and promoting financial stability and 
economic growth, FMIs also concentrate risk. If not property 
managed, FMIs can be sources of financial shocks, such as liquidity 
dislocations and credit losses, or a major channel through which 
these shocks are transmitted across domestic and international 
financial markets'').
    \5\ See 15 U.S.C. 78q-1(a)(2); see also 17 CFR 240.17Ab2-1.
    \6\ Upon registration, registered clearing agencies are SROs 
under Section 3(a)(26) of the Exchange Act. See 15 U.S.C. 
78c(a)(26).
    \7\ Except for certain rule changes that do not need approval, 
set forth in 17 CFR 240.19b-4(f), an SRO must submit proposed rule 
changes to the Commission for review and approval pursuant to Rule 
19b-4 under the Exchange Act. A stated policy, practice, or 
interpretation of an SRO, such as its written policies and 
procedures, would generally be deemed to be a proposed rule change. 
See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
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    Given the important role of clearing agencies in the U.S. financial 
system, the governance framework of each clearing agency is an integral 
part in helping to ensure that the clearing agency is resilient and 
strong. A transparent and reliable governance framework has a positive 
and lasting cascading effect: Through the decision-making of the 
clearing agency and to its effective and efficient supervision. From 
the outset, an ideal governance framework that establishes a clear and 
deliberative process would have the clearing agency consider a range of 
stakeholder views as part of its rules and risk management practices, 
resulting in more thorough and robust SRO rule proposals for the 
Commission to consider in supervising the clearing agency. In essence, 
improved governance would help promote optimum practices for all 
registered clearing agencies to follow to help ensure that their 
processes and decisions are clear, transparent, and reliable, that 
risks are appropriately monitored, addressed, and managed, and that 
their leadership is competent and accountable. When these fundamental 
guiding principles on governance influence and permeate a clearing 
agency's culture and operations, the clearing agency will instill 
confidence in its participants, the markets, and the investing public, 
thereby meeting and promoting the policy objectives in Section 17A of 
the Exchange Act regarding the prompt and accurate clearance and 
settlement of securities transactions, among other objectives.\8\
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    \8\ See 15 U.S.C. 78q-1(a)(1)(A)-(D); see also Exchange Act 
Release No. 68080 (Oct. 22, 2012), 77 FR 66219, 66252 (Nov. 2, 2012) 
(``Clearing Agency Standards Adopting Release'') (noting that 
``[g]overnance arrangements have the potential to play an important 
role in making sure that clearing agencies fulfill the Exchange Act 
requirements that the rules of a clearing agency be designed to 
protect investors and the public interest and to support the 
objectives of owners and participants. Similarly, governance 
arrangements may promote the effectiveness of a clearing agency's 
risk management procedures by creating an oversight framework that 
fosters a focus on the critical role that risk management plays in 
promoting prompt and accurate clearance and settlement'').
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    The Commission has previously stated that clear and transparent 
governance arrangements help promote accountability and reliability in 
the decisions, rules and procedures of the clearing agency because they 
provide interested parties (such as owners, direct and indirect 
participants, and general members of the public) with information about 
how such decisions are made and what the rules and procedures are 
designed to accomplish.\9\ In turn, clear and transparent governance 
arrangements help optimize the clearing agency's decisions, rules and 
procedures that the Commission considers in the SRO rule filing process 
because clearing agency transparency improves the quality of the 
information shared with stakeholders, which in turn improves the public 
comments submitted in response to rule filings. While the business 
models of clearing agencies vary and include entities that are 
affiliates of publicly traded companies and entities that function as 
participant-owned utilities, the key components of a clearing agency's 
governance arrangements include the

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clearing agency's ownership structure, the composition and role of its 
board, the structure and role of board committees, reporting lines 
between management and the board, and the processes that help ensure 
management is held accountable for the clearing agency's 
performance.\10\ Regardless of the business model, the clearing agency 
is more effective when it has governance arrangements that accomplish 
the following: (1) help ensure that the clearing agency satisfies the 
Exchange Act requirements and Commission rules that are designed to 
protect investors and the public interest; and (2) support the 
objectives of the clearing agency's owners, direct participants, and 
indirect participants.\11\
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    \9\ See Clearing Agency Standards Proposing Release, supra note 
2, at 14488 (``Clear and transparent governance arrangements promote 
accountability and reliability in the decisions, rules and 
procedures of the clearing agency because they provide interested 
parties (such as owners, participants, and general members of the 
public) with information about how such decisions are made and what 
the rules and procedures are designed to accomplish. The key 
components of a clearing agency's governance arrangements include 
the clearing agency's ownership structure, the composition and role 
of its board, the structure and role of board committees, reporting 
lines between management and the board, and the processes that 
ensure management is held accountable for the clearing agency's 
performance. Governance arrangements have the potential to play an 
important role in making sure that clearing agencies fulfill the 
Exchange Act requirements that the rules of a clearing agency be 
designed to protect investors and the public interest and to support 
the objectives of owners and participants. Similarly, governance 
arrangements may promote the effectiveness of a clearing agency's 
risk management procedures by creating an oversight framework that 
fosters a focus on the critical role that risk management plays in 
promoting prompt and accurate clearance and settlement.'').
    \10\ See id. at 66269.
    \11\ See id. at 66252.
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    In recognizing the implications that a robust governance framework 
has on the operations of clearing agencies, the Commission adopted a 
series of clearing agency governance requirements. In 2012, the 
Commission adopted a general governance rule for all registered 
clearing agencies (that are not covered clearing agencies) under Rule 
17Ad-22(d).\12\ In 2016, the Commission adopted a governance rule under 
Rule 17Ad-22(e) as part of its heightened standards for covered 
clearing agencies, defined as a registered clearing agency that 
provides the services of a central counterparty or central securities 
depository.\13\ The Commission took a broad, principles-based approach 
in the design of both rules, and emphasized that governance remains an 
area of continued consideration and interest, with the goal of 
establishing an evolving regulatory framework for clearing 
agencies.\14\
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    \12\ See 17 CFR 240.17Ad-22(d)(8) (requiring that all registered 
clearing agencies aside from covered clearing agencies establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear 
and transparent to fulfill the public interest requirements in 
Section 17A of the Exchange Act, to support the objectives of owners 
and participants, and to promote the effectiveness of the clearing 
agency's risk management procedures).
    \13\ See 17 CFR 240.17Ad-22(e)(2) (requiring a covered clearing 
agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for 
governance arrangements that are clear and transparent, clearly 
prioritize the safety and efficiency of the covered clearing agency, 
support the public interest requirements in Section 17A of the 
Exchange Act and the objectives of owners and participants, 
establish that the board of directors and senior management have 
appropriate experience and skills to discharge their duties and 
responsibilities, specify clear and direct lines of responsibility, 
and consider the interests of participants' customers, securities 
issuers and holders, and other relevant stakeholders of the covered 
clearing agency); see also Exchange Act Release No. 78961 (Sept. 28, 
2016), 81 FR 70786 (Oct. 13, 2016) (``CCA Standards Adopting 
Release'').
    \14\ See Clearing Agency Standards Adopting Release, supra note 
8, at 66252 (stating that ``[w]e continue to perform a careful 
review and evaluation of the comments that the Commission received 
on proposed Rules 17Ad-25, 17Ad-26 and Regulation MC, which 
commenters rightly observed represent separate, and in some cases 
more prescriptive, proposed requirements related to clearing agency 
governance and mitigation of conflicts of interest . . . .We believe 
it is more appropriate to consider those issues in connection with 
the Commission's ongoing consideration of those rules'').
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    During the ensuing years since the adoption of the 2016 covered 
clearing agency governance rule, the Commission has observed and 
learned from recurring tensions among incentive structures in the area 
of clearing agency governance. The Commission understands that 
differing views among clearing agency stakeholders can have a ripple 
effect on the decisions that clearing agencies make, including risk 
management decisions that, in turn, affect clearing members and the 
larger financial community. Accordingly and for the reasons described 
throughout this release, the Commission is proposing rules that would 
build upon and strengthen the existing governance requirements adopted 
by the Commission in the Clearing Agency Standards Adopting Release in 
2012 and the CCA Standards Adopting Release in 2016.\15\ Specifically, 
the Commission believes that the existing clearing agency governance 
rules should be enhanced to help balance the differing incentives of 
the registered clearing agencies, clearing members, and other key 
stakeholders. While the governance requirements adopted by the 
Commission at that time are broad and principles-based, the rules 
proposed today would set more specific and defined parameters and 
requirements for governance for all registered clearing agencies--both 
covered clearing agencies under Rule 17Ad-22(e) under the Exchange Act 
and all registered clearing agencies other than covered clearing 
agencies that are subject to Rule 17Ad-22(d) under the Exchange Act. 
Because all clearing agencies would face these tensions, the Commission 
believes it is appropriate to have this governance proposal apply to 
all registered clearing agencies. In this regard, the rules would 
establish new governance requirements on board composition for 
independent directors, nominating committees, risk management 
committees, conflicts of interest, board obligations to oversee service 
providers for critical services, and an obligation to formally consider 
stakeholder viewpoints. The proposed rules are designed to address 
governance issues specific to registered clearing agencies, due to 
their distinct ownership structures and organizational forms. Moreover, 
the rules are designed to take a multi-layered approach to governance 
in that one rule alone would not necessarily capture and address an 
issue relating to governance; each of the different rules proposed 
today would provide one additional mitigation layer to help ensure that 
registered clearing agencies are designed, managed, and operated under 
a robust governance framework to protect investors and the public 
interest and help promote the prompt and accurate clearance and 
settlement of securities transactions. Each mitigation layer improves 
the robustness of the governance framework by itself, with each 
additional mitigation layer having a cumulative effect on robustness.
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    \15\ See 17 CFR 240.17Ad-22; see also Clearing Agency Standards 
Adopting Release, supra note 8; CCA Standards Adopting Release, 
supra note 13.
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    In Part II below, the Commission provides context for the rule 
proposal by (i) discussing the different perspectives that exist among 
various stakeholders at registered clearing agencies, (ii) briefly 
summarizing changes to the regulatory framework for registered clearing 
agencies following passage of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (``Dodd-Frank Act''),\16\ and (iii) 
describing recent events that have increased focus among market 
participants on the governance arrangements that direct risk management 
policies and procedures at registered clearing agencies.
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    \16\ Public Law 111-203, 124 Stat. 1376 (2010).
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II. Background

    Rule 17Ad-22 under the Exchange Act provides for two categories of 
registered clearing agencies and contains a set of rules that apply to 
each category. The first category is covered clearing agencies, which 
are registered clearing agencies that provide CCP \17\ or

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CSD \18\ services.\19\ Rule 17Ad-22(e) applies to covered clearing 
agencies and includes requirements intended to address the activity and 
risks that their size, operation, and importance pose to the U.S. 
securities markets, the risks inherent in the products they clear, and 
the goals of both the Exchange Act and the Dodd-Frank Act.\20\ The 
second category includes registered clearing agencies other than 
covered clearing agencies; such clearing agencies must comply with Rule 
17Ad-22(d).\21\ Rule 17Ad-22(d) establishes a regulatory regime to 
govern registered clearing agencies that do not provide CCP or CSD 
services.\22\ Currently, all clearing agencies registered with the 
Commission that are actively providing clearance and settlement 
services are covered clearing agencies.\23\ Although all currently 
registered and active clearing agencies meet the definition of a 
covered clearing agency, thereby making Rule 17Ad-22(d) not applicable 
to any registered and active clearing agencies at present, clearing 
agencies that are not covered clearing agencies may register with the 
Commission in the future and would be subject to Rule 17Ad-22(d).\24\
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    \17\ A CCP is a type of registered clearing agency that acts as 
the buyer to every seller and the seller to every buyer, providing a 
trade guaranty with respect to transactions submitted for clearing 
by the CCP's participants. See 17 CFR 240.17Ad-22(a)(2); Exchange 
Act Release No. 88616 (Apr. 9, 2020), 85 FR 28853, 28855 (May 14, 
2020) (``CCA Definition Adopting Release''). A CCP may perform a 
variety of risk management functions to manage the market, credit, 
and liquidity risks associated with transactions submitted for 
clearing. For example, CCPs help manage the effects of a participant 
default by closing out the defaulting participant's open positions 
and using financial resources available to the CCP to absorb any 
losses. In this way, the CCP can prevent the onward transmission of 
financial risk. See, e.g., Exchange Act Release No. 94196 (Feb. 9, 
2022), 87 FR 10436, 10448 (Feb. 24, 2022) (``T+1 Proposing 
Release''). If a CCP is unable to perform its risk management 
functions effectively, however, it can transmit risk throughout the 
financial system.
    \18\ A CSD is a type of registered clearing agency that acts as 
a depository for handling securities, whereby all securities of a 
particular class or series of any issuer deposited within the system 
are treated as fungible. Through use of a CSD, securities may be 
transferred, loaned, or pledged by bookkeeping entry without the 
physical delivery of certificates. A CSD also may permit or 
facilitate the settlement of securities transactions more generally. 
See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad-22(a)(3); CCA 
Definition Adopting Release, supra note 17, at 28856. If a CSD is 
unable to perform these functions, market participants may be unable 
to settle their transactions, transmitting risk through the 
financial system.
    \19\ See 17 CFR 240.17Ad-22(a)(5).
    \20\ See CCA Standards Adopting Release, supra note 13, at 
70793. The Financial Stability Oversight Council (``FSOC'') has 
designated certain financial market utilities (``FMUs'')--which 
include clearing agencies that manage or operate a multilateral 
system for the purpose of transferring, clearing, or settling 
payments, securities, or other financial transactions among 
financial institutions or between financial institutions and the 
FMU--as systemically important or likely to become systemically 
important (``SIFMUs''). See 12 U.S.C. 5463. An FMU is systemically 
important if the failure of or a disruption to the functioning of 
such FMU could create or increase the risk of significant liquidity 
or credit problems spreading among financial institutions or markets 
and thereby threaten the stability of the U.S. financial system. See 
12 U.S.C. 5462(9).
    \21\ See 17 CFR 240.17Ad-22(d).
    \22\ See CCA Standards Adopting Release, supra note 13, at 
70793.
    \23\ They are The Depository Trust Company (``DTC''), FICC, 
NSCC, ICE Clear Credit (``ICC''), ICE Clear Europe (``ICEEU''), The 
Options Clearing Corporation (``OCC''), and LCH SA.
    \24\ The Boston Stock Exchange Clearing Corporation (``BSECC'') 
and Stock Clearing Corporation of Philadelphia (``SCCP'') are 
currently registered with the Commission as clearing agencies but 
conduct no clearance or settlement operations; both inactive 
clearing agencies are subject to Rule 17Ad-22(d). See Exchange Act 
Release No. 63629 (Jan. 3, 2011), 76 FR 1473, 1474 (Jan. 10, 2011) 
(``BSECC Notice''); Exchange Act Release No. 63268 (Nov. 8, 2010), 
75 FR 69730, 69731 (Nov. 15, 2010) (``SCCP Notice'').
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    In establishing these regimes under Rule 17Ad-22 under the Exchange 
Act, the Commission stated that the approach under Rules 17Ad-22(d) and 
(e) takes into account clearing agency activities and the risks they 
pose, while promoting robust risk management practices and the general 
safety and soundness of registered clearing agencies and addressing 
concerns relating to the level of concentration in the provision of 
clearing agency services.\25\ The Commission recognized that Rule 17Ad-
22(d) would allow new entrants to more firmly establish themselves as 
clearing agencies, which is important for the deconsolidation and 
diffusion of risk across the market.\26\ Notwithstanding their 
different risk profiles, all registered clearing agencies--whether 
covered clearing agencies under Rule 17Ad-22(e) or registered clearing 
agencies under Rule 17Ad-22(d)--are important to the U.S. financial 
system, as evident in their obligations under Section 17A of the 
Exchange Act. Effective governance--the primary way by which a clearing 
agency develops and oversees the provision of its clearance and 
settlement services--is the lynchpin to ensuring a well-functioning and 
resilient clearing agency that can withstand periods of market 
stress.\27\ In this regard, the Commission believes that the governance 
requirements in proposed Rule 17Ad-25 should apply to all registered 
clearing agencies. The Commission's intent with respect to proposed 
Rule 17Ad-25 is, in part, to take another incremental step to help 
ensure that risks posed by registered clearing agencies are 
appropriately managed consistent with the purposes of the Exchange Act.
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    \25\ See CCA Standards Adopting Release, supra note 13, at 
70793.
    \26\ See id.
    \27\ See SEC Division of Trading and Markets and Office of 
Compliance Inspections and Examinations, Staff Report on the 
Regulation of Clearing Agencies (Oct. 1, 2020) (``Staff Report on 
Clearing Agencies''), https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf.
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A. Differing Perspectives at Registered Clearing Agencies

    The Exchange Act requires each registered clearing agency to be so 
organized and have the capacity to facilitate prompt and accurate 
clearance and settlement.\28\ It also requires each registered clearing 
agency to have rules that assure the fair representation of 
shareholders and participants in the selection of directors and the 
administration of its affairs.\29\ These requirements highlight the 
importance of a clearing agency's organization in facilitating prompt 
and accurate clearance and settlement, and of the need for a clearing 
agency to have rules that help ensure that both owners and participants 
participate in the selection of directors and the administration of its 
affairs, including board governance. Moreover, the Commission's recent 
experience has revealed that differing perspectives among other 
categories of stakeholders may influence the ways risk management 
decisions and practices develop and are implemented by the registered 
clearing agency. These differing views--whether between small and large 
clearing members or between direct and indirect participants of the 
clearing agency--warrant attention as they may manifest themselves in a 
clearing agency's decision-making to benefit one category of 
stakeholders at the expense of another category of stakeholders.
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    \28\ 15 U.S.C. 78q-1(b)(3)(A).
    \29\ 15 U.S.C. 78q-1(b)(3)(C). The Exchange Act specifically 
states the ``fair representation of . . . shareholders (or members) 
and participants'' in the selection of directors and the 
administration of affairs, reflecting the fact that a clearing 
agency could be either a for-profit or not-for-profit entity. See 
Regulation of Clearing Agencies, Exchange Act Release No. 16900, 20 
SEC Docket 415, 420 n.15 (June 17, 1980) (explaining that ``[t]he 
fair representation requirement was adopted verbatim from S. 249, 
the Senate bill that preceded the Securities Acts Amendments of 
1975. The report of the Senate Committee on Banking, Housing and 
Urban Affairs to accompany S. 249 states: `The rules of the clearing 
agency must assure fair representation of its shareholders (or 
members) and participants in the decision making process of the 
clearing agency . . . . The reference to shareholders of [sic] 
members makes it clear that the bill establishes no norm as to 
whether clearing agencies should or should not be operated for 
profit. The bill makes no attempt to set up particular standards of 
representation or participation. Rather, it provides that the 
Commission must assure itself that the rules of the clearing agency 
regarding the manner in which decisions are made give fair voice to 
participants as well as to shareholders or members. Fair 
representation of participants may be found if they are afforded an 
opportunity to acquire voting stock of the clearing agency in 
proportion to their use of its facilities''). ``Members,'' however, 
is a term often used to describe the participants of a clearing 
agency. This release refers to ``shareholders (or members)'' 
collectively as ``owners'' of the registered clearing agency. In 
some instances, owners and shareholders may differ in certain 
respects, such as the nature and extent of their voting rights on 
the board. To avoid confusion, in this release the Commission uses 
only ``participants'' to refer to the direct users of a clearing 
agency, which have met the standards for participation and have 
executed a participation agreement.

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[[Page 51816]]

    First, based on its supervisory experiences, the Commission has 
observed that owners and participants may have structural incentives 
that differ from one another, leading to differing views as to the 
efficacy of certain risk management tools and the potential for 
divergent interests in the risk management of the clearing agency. For 
example, owners and participants may have differing views as to the 
scope of products cleared by the clearing agency, the minimum standards 
required for participation in the clearing agency, and the size, 
timing, and nature of financial resource requirements applied as part 
of the risk management framework.
    Fundamentally, an owner's interest in protecting the equity and 
continued operation of the clearing agency diverges from a 
participant's interest in avoiding the allocation of losses from a 
defaulting participant. Diverging interests and incentives among owners 
and participants with respect to loss allocation or scope of products--
such as in the event that some participants may want to limit access to 
a market by limiting access to clearing, while owners would like to 
expand the scope of products to collect fees-could limit the benefits 
of a clearing agency, and even potentially cause harm to the market it 
serves as well as the broader financial system to the extent that they 
might undermine the risk mitigating purpose of the clearing agency by 
failing to achieve the right balance among competing interests.\30\
---------------------------------------------------------------------------

    \30\ For a discussion of the importance of aligning clearing 
agency governance with the interests of those who bear the financial 
risk, see infra note 167 and accompanying text.
---------------------------------------------------------------------------

    When a clearing agency chooses to mutualize the risk it faces among 
its owners and participants, it may find a closer alignment of 
incentives among owners and participants because both owners and 
participants would bear losses associated with a failure of the 
clearing agency.\31\ In considering how to mutualize the risk it faces, 
a clearing agency may choose from a number of different approaches. For 
example, a clearing agency may be organized so that the participants 
are owners of the clearing agency,\32\ which may eliminate diverging 
incentives between owners and participants. Regardless of the approach, 
as stated above, the Exchange Act requires that a clearing agency be so 
organized and have the capacity to facilitate prompt and accurate 
clearance and settlement. In addition, the Exchange Act requires that 
the rules of the clearing agency assure a fair representation of its 
shareholders (or members) and participants in the selection of its 
directors and administration of its affairs.\33\
---------------------------------------------------------------------------

    \31\ See Jorge Cruz Lopez & Mark Manning, Who Pays? CCP Resource 
Provision in the Post-Pittsburgh World (Dec. 2017), https://www.bankofcanada.ca/wp-content/uploads/2017/12/sdp2017-17.pdf.
    \32\ See, e.g., Exchange Act Release No. 52922 (Dec. 7, 2005), 
70 FR 74070 (Dec. 14, 2005) (explaining that participants of DTC, 
FICC, and NSCC that make full use of the services of one or more of 
these clearing agency subsidiaries of DTCC are required to purchase 
DTCC common shares).
    \33\ See 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

    Second, the Commission has observed differing views between large 
and small participants in a registered clearing agency about risk 
management practices. Consolidation among market participants in recent 
years has resulted in the increased concentration of clearance and 
settlement activity among a smaller set of firms. For example, over 90 
percent of the total notional amount of the U.S. market in credit 
derivatives is concentrated in four U.S. commercial banks.\34\ Large 
clearing agency participants, especially participant-owners, often have 
different incentives from smaller participants. When a small number of 
dominant participants exercise control or influence over a registered 
clearing agency with respect to the services provided by the registered 
clearing agency or the rules applicable to its participants, these 
participants may promote margin requirements that are not commensurate 
with the risks and particular attributes of each participant's specific 
products, portfolio, and market, thereby indirectly limiting 
competition and increasing their ability to maintain higher profit 
margins. Given such incentives, a registered clearing agency that is 
dominated by a small number of large participants might make decisions 
that are designed to provide them with a competitive advantage.
---------------------------------------------------------------------------

    \34\ See Staff Report on Clearing Agencies, supra note 27, at 21 
(citing the Office of the Comptroller of the Currency, Quarterly 
Report on Bank Trading and Derivatives Activities, Third Quarter 
2019, graph 4 (Dec. 2019), https://www.occ.gov/publications-andresources/publications/quarterly-report-on-bank-trading-and-derivatives-activities/files/pub-derivativesquarterly-qtr3-2019.pdf).
---------------------------------------------------------------------------

    Third, the Commission's proposal is informed, in part, by its 
experience overseeing registered clearing agencies with regard to the 
concerns raised by certain participants that access criteria and risk 
management standards may impose disproportionate costs relative to the 
value of access to clearing agencies. In addition, when the Commission 
proposed Regulation MC, the Commission identified a potential area 
where a conflict of interest of participants that exercise undue 
control or influence over a security-based swap clearing agency could 
adversely affect the central clearing of security-based swaps by 
limiting access to the security-based swap clearing agency, either by 
restricting direct participation in the security-based swap clearing 
agency or restricting indirect access by controlling the ability of 
non-participants to enter into correspondent clearing arrangements.\35\ 
The resulting conflicts of interest could limit the benefits of a 
registered security-based swap clearing agency in the securities market 
to indirect participants. As a result, the Commission believes it 
should continue to implement measures that help ensure the decisions of 
a registered clearing agency reflect the interests and perspectives of 
the broadest cross-section of stakeholders as possible.
---------------------------------------------------------------------------

    \35\ See Regulation MC Proposing Release, supra note 1, at 
65885.
---------------------------------------------------------------------------

    This proposal is intended to help ensure that a registered clearing 
agency's governance arrangements can manage these differing 
perspectives and interests more effectively. As discussed in detail 
below, the Commission believes that the proposed rules would help 
ensure that a registered clearing agency's governance arrangements can 
more effectively manage the divergent interests between and among 
clearing agency owners and participants, small and large participants, 
and direct and indirect participants of a clearing agency, which, in 
turn, would improve a clearing agency's risk management practices to be 
fair and more effective. Imposing these requirements on all registered 
clearing agencies would have the effect of building upon existing 
governance requirements with consistent, more defined and robust 
governance standards across all registered clearing agencies.

B. Regulatory Framework for Registered Clearing Agencies

    The regulatory framework for registered clearing agencies has 
evolved over the last decade. Existing elements of the regulatory 
framework establish policies and procedures requirements for minimum 
standards to help promote participation in registered clearing 
agencies.\36\ Other rules require that certain clearing agencies have 
policies and procedures for governance arrangements that support the 
objectives of owners and participants and consider the interests of 
participants' customers, securities issuers and holders, and other 
relevant stakeholders.\37\
---------------------------------------------------------------------------

    \36\ See, e.g., 17 CFR 240.17Ad-22(b)(5)-(7).
    \37\ See, e.g., 17 CFR 240.17Ad-22(e)(2)(iii), (vi).

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[[Page 51817]]

    Following the enactment of the Dodd-Frank Act, the Commission has 
taken multiple steps to strengthen its regulatory framework for 
clearing agencies by: (i) establishing minimum requirements for 
governance, operations, and risk management practices of registered 
clearing agencies; \38\ (ii) enhancing the Commission's oversight and 
enforcement of the technology and systems infrastructure that supports 
clearing agencies; \39\ (iii) establishing an enhanced regulatory 
framework for systemically important clearing agencies and clearing 
agencies for security-based swaps; \40\ and (iv) expanding the enhanced 
regulatory framework from systemically important clearing agencies to 
all registered clearing agencies that provide CCP or CSD services so 
that the set of covered clearing agencies includes the seven active 
clearing agencies registered with the Commission.\41\ In addition, the 
Commission has adopted rules to help promote access to registered 
clearing agencies, including rules that require a registered clearing 
agency that performs CCP services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to: (i) 
provide the opportunity for a person that does not perform any dealer 
or security-based swap dealer services to obtain membership on fair and 
reasonable terms at the clearing agency to clear securities for itself 
or on behalf of other persons; (ii) have membership standards that do 
not require that participants maintain a minimum portfolio size or 
minimum transaction volume; and (iii) provide that a person maintaining 
net capital equal to or greater than $50 million may obtain membership 
at the clearing agency, provided that such person is able to comply 
with other reasonable membership standards.\42\
---------------------------------------------------------------------------

    \38\ See 17 CFR 240.17Ad-22; see also Clearing Agency Standards 
Adopting Release, supra note 8; CCA Standards Adopting Release, 
supra note 13; CCA Definition Adopting Release, supra note 17.
    \39\ See 17 CFR 242.1000 et seq.; see also Exchange Act Release 
No. 73639 (Nov. 19, 2014), 79 FR 72251 (Dec. 5, 2014) (``Regulation 
SCI Adopting Release'').
    \40\ See 17 CFR 240.17Ad-22(e); CCA Standards Adopting Release, 
supra note 13.
    \41\ See CCA Definition Adopting Release, supra note 17.
    \42\ 17 CFR 240.17Ad-22(b)(5)-(7).
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1. Current Requirements and Past Proposals on Clearing Agency 
Governance
    In the recent past, the Commission addressed clearing agency 
governance with the adoption of two rules. In 2016, the Commission 
adopted a rule that requires a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent, clearly prioritize the safety and efficiency of 
the covered clearing agency, support the public interest requirements 
in Section 17A of the Exchange Act, and the objectives of owners and 
participants, establish that the board of directors and senior 
management have appropriate experience and skills to discharge their 
duties and responsibilities, specify clear and direct lines of 
responsibility, and consider the interests of participants' customers, 
securities issuers and holders, and other relevant stakeholders of the 
covered clearing agency.\43\ In 2012, the Commission adopted a rule 
that requires all registered clearing agencies aside from covered 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to have governance 
arrangements that are clear and transparent to fulfill the public 
interest requirements in Section 17A of the Exchange Act, to support 
the objectives of owners and participants, and to help promote the 
effectiveness of the clearing agency's risk management procedures.\44\ 
The Commission took a broad, principles-based approach to these 
governance rules to give a clearing agency the discretion to consider 
its unique characteristics and circumstances, including ownership and 
governance structures, effect on direct and indirect participants, 
membership base, markets served, and the risks inherent in products 
cleared, while at the same time, largely being subject to the 
requirements of the SRO rule filing process, which requires public 
notice and comment and consideration by the Commission.\45\
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    \43\ See 17 CFR 240.17Ad-22(e)(2); see also CCA Standards 
Adopting Release, supra note 13, at 70802. The Commission also 
issued guidance on Rule 17Ad-22(e)(2) ``because . . . [as] there may 
be a number of ways to address compliance with Rule 17Ad-22(e)(2), 
the Commission . . . provid[ed] the following guidance that a 
covered clearing agency generally should consider in establishing 
and maintaining its policies and procedures: . . . whether the roles 
and responsibilities of its board of directors are clearly 
specified, and whether there are documented procedures for the 
functioning of the board of directors, such as procedures for 
identifying, addressing, and managing member conflicts of interest, 
and for reviewing the board's overall performance and the 
performance of its individual members regularly.'' CCA Standards 
Adopting Release, supra note 13, at 70806-07.
    \44\ See 17 CFR 240.17Ad-22(d)(8); see also Clearing Agency 
Standards Adopting Release, supra note 8, at 66251-52.
    \45\ See generally CCA Standards Adopting Release, supra note 
13, at 70800 (``With a number of exceptions, Rule 17Ad-22(e) does 
not prescribe a specific tool or arrangement to achieve its 
requirements. The Commission believes that when determining the 
content of its policies and procedures, each covered clearing agency 
must have the ability to consider its unique characteristics and 
circumstances, including ownership and governance structures, effect 
on direct and indirect participants, membership base, markets 
served, and the risks inherent in products cleared. This ability, 
however, is subject to the requirements of the SRO rule filing and 
advance notice processes, which provide some opportunities for the 
public and participants to comment on the covered clearing agency's 
rules, policies, and procedures. The Commission does not believe 
that a granular or prescriptive approach to its regulation of 
covered clearing agencies would be appropriate, nor would such an 
approach ensure that a covered clearing agency does not become a 
transmission mechanism for systemic risk. Moreover, the Commission 
believes that the primarily principles-based approach reflected in 
Rule 17Ad-22(e) will help a covered clearing agency continue to 
develop policies and procedures that can effectively meet the 
evolving risks and challenges in the markets that the covered 
clearing agency serves.''); Clearing Agency Standards Adopting 
Release, supra note 8, at 66252 (``We appreciate the perspective of 
commenters who prefer the more general policies and procedures 
design of Rule 17Ad-22(d)(8) to any more prescriptive rulemaking by 
the Commission in the area of clearing agency governance.'').
---------------------------------------------------------------------------

    The Commission also proposed, but did not adopt, other rules 
directed to clearing agency governance: proposed Regulation MC, which 
contemplated limitations on ownership and minimum requirements for 
independent directors intended to satisfy a requirement for Commission 
rulemaking set forth in Section 765 of the Dodd-Frank Act (``Section 
765''); \46\ proposed Rule 17Ad-25, which included additional 
requirements for a clearing agency to mitigate conflicts of interest; 
\47\ and proposed Rule 17Ad-26, which included requirements for a 
clearing agency to establish standards for directors on the board and 
committees thereof.\48\ The Commission did not adopt those proposals, 
which were issued in 2010 and 2011, and is now withdrawing them because 
of the multiple changes that the Commission has made to its regulatory 
framework for clearing agencies as stated above.
---------------------------------------------------------------------------

    \46\ See Regulation MC Proposing Release, supra note 1, at 
65893-904.
    \47\ See Clearing Agency Standards Proposing Release, supra note 
2, at 14497-98.
    \48\ See id. at 14498-99.
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    As part of the incremental evolution of the Commission's clearing 
agency regulatory framework that has occurred over the past decade, the 
Commission now believes that updated rules are warranted to build upon 
and strengthen the existing clearing agency governance framework, given 
the trends the Commission has observed in the securities markets and 
during its supervisory processes.\49\ Specifically,

[[Page 51818]]

the Commission believes that addressing the composition of a board and 
its committees will help ensure effective governance, help promote 
transparency into decision-making processes, facilitate fair 
representation of owners and participants, and mitigate the potential 
effects of conflicts of interest between owners and participants, large 
and small participants, and direct and indirect participants. For these 
reasons, proposed Rule 17Ad-25 includes provisions directed to all 
registered clearing agencies.
---------------------------------------------------------------------------

    \49\ As discussed further below, the Commission believes that 
the targeted set of proposed rules for governance included in this 
release can help ensure that the framework effectively addresses the 
considerations set forth in Section 765 with respect to clearing of 
security-based swaps. Although Section 765 directed the Commission 
to focus on conflicts of interest specifically with respect to 
security-based swap clearing agencies, the Commission believes that 
conflicts of interest concerns can arise across all registered 
clearing agencies regardless of the asset classes served.
---------------------------------------------------------------------------

2. Commodity Futures Trading Commission's Governance Framework for 
Derivatives Clearing Organizations
    Three clearing agencies registered with the Commission are also 
registered as derivatives clearing organizations (``DCOs'') with the 
Commodity Futures Trading Commission (``CFTC''). The Commission 
acknowledges that, while other agency rules and regulations on 
governance may apply to a clearing agency registered with the 
Commission that are similar in scope or purpose to proposed Rule 17Ad-
25, the Commission remains obligated to ensure that risk in the U.S. 
securities markets is appropriately managed--including through 
promulgation of its own rules and regulations--consistent with the 
purposes of the Exchange Act. Additionally, because Rule 17Ad-22(e) 
under the Exchange Act and other comparable regulations--including DCO 
governance rules adopted by the CFTC in January 2020 \50\--are based on 
the same international standards, namely the PFMI, the potential for 
inconsistent regulation is low. In this regard, the Commission believes 
its existing governance rules for covered clearing agencies and 
registered clearing agencies other than covered clearing agencies are 
consistent with the CFTC's governance rule for DCOs.\51\ Certain 
proposed requirements in this rulemaking are also consistent with the 
requirements in the CFTC's DCO regime, which provides conflicts of 
interest and board composition rules.\52\ Further, in developing these 
rules, Commission staff has consulted with the CFTC and the Board of 
Governors of the Federal Reserve System (``FRB'').
---------------------------------------------------------------------------

    \50\ See DCO General Provisions and Core Principles, 85 FR 4800 
(Jan. 27, 2020), https://www.cftc.gov/sites/default/files/2020/01/2020-01065a.pdf.
    \51\ See 17 CFR 39.24 (requiring DCOs to, among other things, 
have governance arrangements that are written, clear and 
transparent, place a high priority on the safety and efficiency of 
the derivatives clearing organization, and explicitly support the 
stability of the broader financial system and other relevant public 
interest considerations of clearing members, customers of clearing 
members, and other relevant stakeholders; the board of directors 
shall make certain that the DCO's design, rules, overall strategy, 
and major decisions appropriately reflect the legitimate interests 
of clearing members, customers of clearing members, and other 
relevant stakeholders).
    \52\ See 17 CFR 39.25 (requiring DCOs to establish and enforce 
rules to minimize conflicts of interest in the decision-making 
process of the derivatives clearing organization, establish a 
process for resolving such conflicts of interest, and describe 
procedures for identifying, addressing, and managing conflicts of 
interest involving members of the board of directors); 17 CFR 39.26 
(requiring DCOs to ensure that the composition of the governing 
board or board-level committee of the DCO includes market 
participants and individuals who are not executives, officers, or 
employees of the derivatives clearing organization or an affiliate 
thereof). We note that the CFTC recently proposed amendments to its 
DCO governance framework relating to risk management committee 
requirements. See Governance Requirements for Derivatives Clearing 
Organizations, Release Number 8565-22 (July 27, 2022), https://www.cftc.gov/PressRoom/PressReleases/8565-22.
---------------------------------------------------------------------------

C. Risks Associated With Clearance and Settlement

    The Commission also believes that the proposed governance rules 
would help ensure that registered clearing agencies make more effective 
risk management decisions that take into account relevant stakeholder 
perspectives and concerns. Recent episodes of increased market 
volatility--in March 2020 following the outbreak of the COVID-19 
pandemic, and in January 2021 following heightened interest in certain 
``meme'' stocks--have revealed potential vulnerabilities in the U.S. 
securities market and highlight the essential role of registered 
clearing agencies in managing the risk that securities transactions may 
fail to clear or settle.\53\ These events underscore the importance of 
a strong regulatory framework to oversee registered clearing agencies 
that clear or settle securities transactions and provide transparency 
to the markets.
---------------------------------------------------------------------------

    \53\ See, e.g., SEC, Staff Report on Equity and Options Market 
Structure Conditions in Early 2021 (Oct. 14, 2021) (``2021 Staff 
Report''), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf. Staff reports, Investor 
Bulletins, and other staff documents (including those cited herein) 
represent the views of Commission staff and are not a rule, 
regulation, or statement of the Commission. The Commission has 
neither approved nor disapproved the content of these staff 
documents and, like all staff statements, they have no legal force 
or effect, do not alter or amend applicable law, and create no new 
or additional obligations for any person.
---------------------------------------------------------------------------

    Among other things, the rules of a registered clearing agency 
generally require its participants to transfer collateral to the 
clearing agency, which may include different types of collateral, such 
as margin payments, funds, or other assets, and the requirements 
associated with these rules may change in response to changes in market 
volatility. The terms of these rules, and the related policies and 
procedures of the registered clearing agency that implement them, are 
generally approved by the board as part of the clearing agency's 
governance arrangements. These rules, policies, and procedures are also 
subject to Commission review as proposed rule changes under Section 19 
of the Exchange Act and Rule 19b-4 thereunder.\54\ The potential for 
sudden and large increases in the margin required by a registered 
clearing agency of its participants, as evidenced in the March 2020 and 
January 2021 events stated above, have increased scrutiny by a wide 
variety of market participants into the way a registered clearing 
agency establishes, implements, maintains, and enforces its rules that 
impose margin requirements.\55\ Some market participants have suggested 
that such margin requirements are too conservative; \56\ others have 
suggested that margin requirements do not sufficiently consider the 
range of participants in a clearing agency and the downstream effect 
such requirements may have on other types of investors.\57\ In response 
to this increased attention, the Basel Committee on Banking Supervision 
(``BCBS''), the Committee on Payments and Market Infrastructure 
(``CPMI''), and the International Organization of Securities 
Commissions (``IOSCO'') jointly released a consultative paper on CCP 
margin practices, focused on, among other things, recent market 
volatility and the apparent drivers of the size and composition of 
margin calls.\58\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78s; 17 CFR 240.19b-4.
    \55\ See, e.g., Fitch Ratings, Margin Call Disparity, Breaches 
Could Drive Clearinghouse Scrutiny (July 20, 2020), https://www.fitchratings.com/research/non-bank-financial-institutions/margin-call-disparity-breaches-could-drive-clearinghouse-scrutiny-20-07-2020.
    \56\ See Alexander Campbell, CCP Margin Buffers Too Big, 
Research Suggests (July 9, 2019), https://www.risk.net/risk-management/6783941/ccp-margin-buffers-too-big-research-suggests.
    \57\ See Glenn Hubbard et al., Report of the Task Force on 
Financial Stability, Brookings Institution (June 2021), https://www.brookings.edu/wp-content/uploads/2021/06/financial-stability_report.pdf.
    \58\ See BCBS-CPMI-IOSCO, Consultative Report, Review of 
Margining Practices (Oct. 2021), https://www.bis.org/bcbs/publ/d526.pdf.
---------------------------------------------------------------------------

    Concerns about the size and timing of margin requirements are only 
one example of an area in which direct and indirect participants that 
rely on the clearance and settlement process have expressed concerns 
about clearing

[[Page 51819]]

agency governance and, in particular, the way that such governance 
would oversee or employ risk management tools under stressed market 
conditions. Two other areas of heightened attention concern a clearing 
agency's process for loss allocation in the event of a participant 
default and an event other than a participant default (hereinafter a 
``non-default loss''), such as an operational failure, cyber-attack, or 
theft. For example, participants and others have expressed concerns 
about the extent to which existing governance structures at registered 
clearing agencies would function during a potential recovery or 
resolution scenario, which would occur in the event that a clearing 
agency's prefunded financial resources available to absorb any loss--
sometimes referred to as the ``clearing fund'' or ``guaranty fund''--
are insufficient to close out a defaulting participant's portfolio 
without allocating losses among the non-defaulting participants of the 
clearing agency.\59\ Based on its supervisory experience, the 
Commission believes that this loss allocation process could thus have 
significant implications for the risk management of its non-defaulting 
participants.
---------------------------------------------------------------------------

    \59\ In 2018, a default at a European CCP increased scrutiny of 
the auction process through which a CCP may choose to close out a 
defaulted portfolio. CPMI-IOSCO issued a report on issues for 
consideration in 2020. See Bank for International Settlements, 
Central Counterparty Default Management Auctions--Issues for 
Consideration (June 2020), https://www.bis.org/cpmi/publ/d192.pdf.
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    Further, although concerns about the size and timing of margin 
requirements are, at one level, concerns about the risk management 
practices of a clearing agency, they also implicate clearing agency 
governance because the governance arrangements of a registered clearing 
agency will determine the process for developing and approving policies 
and procedures for imposing margin requirements, and the governance and 
management of the registered clearing agency will also implement these 
policies and procedures, whether during normal market conditions or 
periods of increased market volatility.
    In this regard, proposed Rule 17Ad-25 is intended to help ensure 
that in periods of market stress or stress on the registered clearing 
agency, the governance process of all registered clearing agencies is 
transparent, objective, and addresses conflicts of interest. Trust 
among market participants in the national system for clearance and 
settlement, particularly in times of market stress, necessarily depends 
on trust in the ability of registered clearing agencies to more 
effectively manage the risk flowing from that market stress and, when 
necessary, transparently and objectively impose increased margin 
requirements or employ loss allocation mechanisms.

III. Proposed Rules

    The Commission is proposing rules under the Exchange Act and to 
address the considerations set forth in Section 765 of the Dodd-Frank 
Act. Section 17(a) of the Exchange Act directs registered clearing 
agencies to make and keep for prescribed periods such records, furnish 
such copies, and make and disseminate such reports as the Commission, 
by rule, prescribes as necessary or appropriate in the public interest, 
for the protection of investors, or in furtherance of the Exchange 
Act.\60\ Section 17A of the Exchange Act directs the Commission to 
facilitate the establishment of a national system for the prompt and 
accurate clearance and settlement of securities transactions and 
provides the Commission with the authority to regulate those entities 
critical to the clearance and settlement process.\61\ Section 23(a) of 
the Exchange Act authorizes the Commission to make rules and 
regulations as necessary or appropriate to implement the provisions of 
the Exchange Act.\62\ The enactment of the Payment, Clearing, and 
Settlement Supervision Act (``Clearing Supervision Act'') in 2010 
(Title VIII of the Dodd-Frank Act) reaffirmed the importance of the 
national system for clearance and settlement.\63\ Specifically, 
Congress found that the ``proper functioning of the financial markets 
is dependent upon safe and efficient arrangements for the clearing and 
settlement of payments, securities, and other financial transactions.'' 
\64\ In addition, Section 765 of the Dodd-Frank Act specifically 
directs the Commission to adopt rules to mitigate conflicts of interest 
for security-based swap clearing agencies.\65\ Accordingly, the 
Commission is proposing these rules pursuant to overlapping statutory 
authorities, because although the Commission is able to propose these 
rules pursuant to Section 17A of the Exchange Act, the Commission is 
also meeting the mandatory rulemaking requirements of Section 765. The 
Commission preliminarily has determined that these proposed rules are 
necessary and appropriate to improve the governance of a clearing 
agency that clears security-based swaps and in which a major security-
based swap participant has a material debt or equity investment.
---------------------------------------------------------------------------

    \60\ See 15 U.S.C. 78q(a).
    \61\ See 15 U.S.C. 78q-1(a)(2)(A).
    \62\ See 15 U.S.C. 78w(a).
    \63\ See 12 U.S.C. 5461-5472.
    \64\ 12 U.S.C. 5461(a)(1).
    \65\ See 15 U.S.C. 8343.
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    The Commission had previously reviewed the potential for conflicts 
of interest at security-based swap clearing agencies in accordance with 
Section 765 of the Dodd-Frank Act when it proposed Regulation MC, and 
had identified those conflicts that could affect access to clearing 
agency services, products eligible for clearing, and risk management 
practices of the clearing agencies.\66\ The Commission had identified 
three key areas where it believed a conflict of interest of 
participants who exercise undue control or influence over a security-
based swap clearing agency could adversely affect the central clearing 
of security-based swaps.\67\ First, participants could limit access to 
the security-based swap clearing agency, either by restricting direct 
participation in the security-based swap clearing agency or restricting 
indirect access by controlling the ability of non-participants to enter 
into correspondent clearing arrangements. Second, participants could 
limit the scope of products eligible for clearing at the security-based 
swap clearing agency, particularly if there is a strong economic 
incentive to keep a product traded in the over-the-counter (``OTC'') 
market for security-based swaps. Third, participants could use their 
influence to reduce the amount of collateral they would be required to 
contribute and liquidity resources they would have to expend as margin 
or guaranty fund to the security-based swap clearing agency. Although 
the Commission does not believe that the participants of security-based 
swap clearing agencies are engaged in these types of activities, the 
Commission recognizes that these three potential conflicts of interest 
could limit the benefits of a security-based swap clearing agency in 
the security-based swaps market, and even potentially cause substantial 
harm to that market and the broader financial markets.
---------------------------------------------------------------------------

    \66\ See Regulation MC Proposing Release, supra note 1, at 
65885.
    \67\ See id.
---------------------------------------------------------------------------

    Nevertheless, there are benefits to having participant incentives 
known and reflected in the decision making activity of a board of 
directors. Employees of participants--in particular, chief risk 
officers or their equivalent--are likely to bring technical expertise 
to a board of directors. Participants are often exposed to enormous 
financial liability in the event of a default, and so they have strong

[[Page 51820]]

incentives to have sound risk management at the clearing agencies. In 
order to promote the utility of having directors who are familiar with 
participant operations, the proposed rule does not prohibit directors 
who, among other things, receive compensation from participants from 
meeting the definition of independent director (provided all other 
requirements of the proposed rules are met).\68\
---------------------------------------------------------------------------

    \68\ Other jurisdictions have chosen a different approach, as 
discussed below. See infra Part IV.B.2.
---------------------------------------------------------------------------

    For the reasons discussed throughout this release, the Commission 
is proposing rules for all registered clearing agencies to establish 
requirements for governance, including requirements for the composition 
of the board of directors, to mitigate conflicts of interest, to 
establish certain obligations of the board to oversee service provider 
relationships, and to establish an obligation of the board to consider 
the views of participants and other relevant stakeholders. Each of 
these proposed rules are discussed further below.

A. Board Composition and Requirements for Independent Directors

1. Proposed Rules 17Ad-25(b), (e) and (f)
    Proposed Rules 17Ad-25(b), (e), and (f) would establish 
requirements related to independent directors. First, proposed Rule 
17Ad-25(b)(1) would require that a majority of the directors of a 
registered clearing agency must be independent directors, as defined in 
proposed Rule 17Ad-25(a). The proposed rule would also provide that, if 
a majority of the voting interests issued as of the immediately prior 
record date are directly or indirectly held by participants, then at 
least 34 percent of the members of the board of directors must be 
independent directors. Proposed Rule 17Ad-25(a) would define an 
``independent director'' to mean a director that has no material 
relationship with the registered clearing agency, or any affiliate 
thereof. Proposed Rule 17Ad-25(a) also would define ``material 
relationship'' to mean a relationship, whether compensatory or 
otherwise, that reasonably could affect the independent judgment or 
decision-making of the director, and includes relationships during a 
lookback period of one year counting back from making the initial 
determination in proposed Rule 17Ad-25(b)(2). In addition, proposed 
Rule 17Ad-25(a) would define ``affiliate'' to mean a person that 
directly or indirectly controls, is controlled by, or is under common 
control with the registered clearing agency. Proposed Rule 17Ad-
25(b)(2) would require each registered clearing agency to broadly 
consider all the relevant facts and circumstances, including under 
proposed Rule 17Ad-25(g), on an ongoing basis, to affirmatively 
determine that a director does not have a material relationship with 
the registered clearing agency or an affiliate of the registered 
clearing agency to qualify as an independent director. In making such 
determination, a registered clearing agency must (i) identify the 
relationships between a director, the registered clearing agency, any 
affiliate thereof, along with the circumstances set forth in proposed 
Rule 17Ad-25(f); (ii) evaluate whether any relationship is likely to 
impair the independence of the director in performing the duties of 
director; and (iii) document this determination in writing. Such 
documentation requirements would be subject to the recordkeeping and 
retention requirements that apply to all SROs under Section 17(a)(2) of 
the Exchange Act.\69\
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    \69\ See 15 U.S.C. 78q(a)(2).
---------------------------------------------------------------------------

    The Commission believes that proposed Rules 17Ad-25(a) and 17Ad-
25(b)(2) could provide registered clearing agencies with a broad pool 
of potential candidates to serve as independent directors. For example, 
an employee of a participant of the registered clearing agency, a 
professional in the securities or financial services industries, an 
academic, and other such qualified persons would be eligible for 
consideration as an independent director as long as the candidate meets 
the other criteria under the definition of material relationship and 
proposed Rule 17Ad-25(f).
    Proposed Rule 17Ad-25(e) would require that, if any committee has 
the authority to act on behalf of the board of directors, the 
composition of that committee must have at least the same percentage of 
independent directors as is required under these rules for the board of 
directors, as set forth in proposed paragraph (b)(1).
    Proposed Rule 17Ad-25(f) would describe certain circumstances that 
would always exclude a director from being an independent director. 
These circumstances would include: (1) the director is subject to 
rules, policies, and procedures by the registered clearing agency that 
may undermine the director's ability to operate unimpeded, such as 
removal by less than a majority vote of shares that are entitled to 
vote in such director's election; (2) the director, or a family member, 
has an employment relationship with or otherwise receives compensation, 
other than as a director, from the registered clearing agency or any 
affiliate thereof, or the holder of a controlling voting interest of 
the registered clearing agency; (3) the director, or a family member, 
is receiving payments from the registered clearing agency, or any 
affiliate thereof, or the holder of a controlling voting interest of 
the registered clearing agency that reasonably could affect the 
independent judgment or decision-making of the director, other than the 
following: (i) compensation for services as a director to the board of 
directors or a committee thereof; or (ii) pension and other forms of 
deferred compensation for prior services not contingent on continued 
service; (4) the director, or a family member, is a partner in, or 
controlling shareholder of, any organization to or from which the 
registered clearing agency, or any affiliate thereof, or the holder of 
a controlling voting interest of the registered clearing agency, is 
making or receiving payments for property or service, other than the 
following: (i) payments arising solely from investments in the 
securities of the registered clearing agency, or affiliate thereof; or 
(ii) payments under non-discretionary charitable contribution matching 
programs; (5) the director, or a family member is employed as an 
executive officer of another entity where any executive officers of the 
registered clearing agency serve on that entity's compensation 
committee; or (6) the director, or a family member, is a partner of the 
outside auditor of the registered clearing agency, or an employee of 
the outside auditor who is working on the audit of the registered 
clearing agency, or any affiliate thereof. Proposed Rules 17Ad-
25(f)(2)-(6) would be subject to a lookback period of one year 
(counting back from making the initial determination in proposed Rule 
17Ad-25(b)(2)). Family member would be defined to include any child, 
stepchild, grandchild, parent, stepparent, grandparent, spouse, 
sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, 
daughter-in-law, brother-in-law, or sister-in-law, including adoptive 
relationships, any person (other than a tenant or employee) sharing a 
household with the director or a nominee for director, a trust in which 
these persons (or the director or a nominee for director) have more 
than fifty percent of the beneficial interest, a foundation in which 
these persons (or the director or a nominee for director) control the 
management of assets, and

[[Page 51821]]

any other entity in which these persons (or the director or a nominee 
for director) own more than fifty percent of the voting interests.
    At the time of the 2016 CCA Standards Adopting Release, the 
Commission declined to incorporate more prescriptive governance 
elements into the rule as urged by commenters, including specific 
requirements on independent representation on the board or risk 
committee or governance relating to business relationships and 
affiliates,\70\ based on the premise that the requirements in Section 
17A of the Exchange Act relating to fair representation and the public 
interest provided sufficient grounds to hold covered clearing agencies 
accountable to these concerns.\71\ Similarly, with regard to the 2012 
governance rule for all registered clearing agencies that are not 
covered clearing agencies, the Commission declined to adopt more 
prescriptive elements to its approach on governance with regard to 
board composition.\72\ However, given the growing concentration of 
clearing and settlement participants among a small number of firms \73\ 
and the concentration of differing perspectives into distinct groups of 
clearing agency stakeholders, the Commission believes it is appropriate 
to propose requirements on independent representation to facilitate the 
consideration and management of diverse stakeholder interests in the 
decision-making of the clearing agency.
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    \70\ See CCA Standards Adopting Release, supra note 13, at 70804 
(stating that ``[a]fter careful consideration of the comments, the 
Commission has determined not to modify Rule 17Ad-22(e)(2) to 
include specific requirements related to public or independent 
representation on the covered clearing agency's board or risk 
committee . . . . The Commission is declining to modify Rule 17Ad-
22(e)(2) to further specify that a particular director represent the 
interests of buy-side or sell-side market participants . . . . In 
addition, and for the same reasons, the Commission is declining to 
modify Rule 17Ad-22(e)(2) to provide further specification regarding 
business relationships and affiliates because these topics, like the 
above, are already addressed by the fair representation requirement 
in Section 17A(b)(3)(C) and the public interest requirements of 
Section 17A of the Exchange Act'').
    \71\ See 15 U.S.C. 78q-1(b)(3)(C).
    \72\ See Clearing Agency Standards Adopting Release, supra note 
8, at 66251 (adopting the rule largely as proposed and declining to 
incorporate prescriptive requirements as suggested by commenters, 
including ``[o]ne commenter [who] urged the Commission to ensure 
that Rule 17Ad-22(d)(8) as well as any requirements adopted from the 
Commission's proposed Regulation MC pertaining to the mitigation of 
conflicts of interest are designed to ensure that buy-side market 
participants have a meaningful voice in the operating committees of 
clearing agencies because that representation is critical to 
promoting robust governance arrangements at clearing agencies and 
serving the best interests of the U.S. financial system. Another 
commenter stated that proposed Rules 17Ad-22(d)(8), 17Ad-25, and 
17Ad-26 reflect a better approach to governance, conflicts of 
interest, and board and committee composition than the Commission's 
proposed requirements for clearing agencies under Regulation MC. One 
commenter urged the Commission to consider complementing proposed 
Rule 17Ad-22(d)(8) with a minimum board independence requirement so 
that at least two-thirds of all board directors would be required to 
be independent'').
    \73\ See Staff Report on Clearing Agencies, supra note 27, at 
21.
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2. Discussion
(a) Board of Director Oversight of Management
    Several current requirements under the Exchange Act and regulations 
are applicable to a clearing agency's board of directors. Section 17A 
of the Exchange Act requires that the rules of a clearing agency assure 
the fair representation of owners and participants in the selection of 
directors and the administration of the clearing agency's affairs.\74\ 
Rule 17Ad-22(e)(2) \75\ under the Exchange Act requires a covered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements that, in relevant part, (i) support the public interest 
requirements in Section 17A of the Exchange Act applicable to clearing 
agencies, and the objectives of owners and participants; (ii) establish 
that the board of directors and senior management have appropriate 
experience and skills to discharge their duties and responsibilities; 
and (iii) consider the interests of participants' customers, securities 
issuers and holders, and other relevant stakeholders of the covered 
clearing agency.
---------------------------------------------------------------------------

    \74\ See 15 U.S.C. 78q-1(b)(3)(C).
    \75\ See 17 CFR 240.17Ad-22(e)(2)(iii)-(iv), (vi).
---------------------------------------------------------------------------

    Given the importance of the board oversight function,\76\ CPMI-
IOSCO has issued guidance regarding the board's obligations with 
respect to oversight of management.\77\ This guidance provides several 
examples of effective oversight of management by clearing agency 
boards. For example, the guidance highlights the board's responsibility 
for: (i) carefully overseeing, monitoring and evaluating management's 
implementation of the risk-management framework; (ii) taking 
appropriate steps to help ensure that management is performing risk-
management tasks properly and effectively; (iii) ensuring that 
processes are in place for effective and timely communication, 
reporting and information flow between management and the board; (iv) 
communicating with management about risk management processes; and (v) 
when assessing the risk-management framework, appropriately challenging 
management to demonstrate the effectiveness of risk-management 
processes.\78\ Likewise, the report stated that while a board may not 
delegate its ultimate responsibilities regarding risk management, it 
may assign certain tasks, so long as the board clearly defines the 
assigned tasks and retains ultimate responsibility over such tasks.\79\
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    \76\ As a foundational principle of U.S. state corporate law, a 
board of directors of a corporation has ultimate responsibility for 
the oversight of management, consistent with a director's fiduciary 
duties of loyalty and care to a company. See, e.g., Del. Code tit. 
8, sec. 141 (2022) (establishing that the board is ultimately 
responsible for the corporation's management). In the context of a 
registered clearing agency incorporated under such principles, this 
means that the board has ultimate responsibility for ensuring an 
effective framework for the management of risk by the registered 
clearing agency, so that the clearing agency can facilitate the 
prompt and accurate clearance and settlement of securities 
transactions. To discharge this duty effectively, the board must 
necessarily work closely with management, but also effectively 
oversee it.
    \77\ See CPMI-IOSCO, Final Report, Resilience of central 
counterparties (CCPs): Further guidance on the PFMI (July 2017) 
(``CCP Resilience Guidance''), https://www.bis.org/cpmi/publ/d163.pdf.
    \78\ See id. at 5.
    \79\ See id.
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(b) Requirement for Independent Directors
    Corporate governance tools exist to help ensure that the board 
performs more effective oversight of the management of the company. One 
such tool is the independent director, which could bolster the board's 
ability to perform effectively by reducing the potential for financial 
or other relationships between directors and those persons who are 
overseen by directors, such as management.\80\ The Commission is 
proposing a definition of ``independent director'' that retains 
elements of the definition used in Regulation MC, but with 
modifications.\81\ The Commission continues to believe that as part of 
the definition, the key operating elements are the concepts of material 
relationships and affiliates, so those elements would be retained. 
However, at the same time, the Commission proposes using a modified 
definition of

[[Page 51822]]

``independent directors'' because of changes in scope of this proposed 
rulemaking. Regulation MC resulted from a public roundtable discussion 
and meetings held with interested persons, in part, to gain further 
insight into the sources of conflicts of interest at security-based 
swap clearing agencies.\82\ Regulation MC had proposed a narrower 
definition of independent director, which would have excluded directors 
who had material relationships with participants and their affiliates 
as well,\83\ and the proposal would have covered only one class of 
registered clearing agencies: security-based swap clearing agencies. 
Pursuant to Section 765, Regulation MC was designed to address 
anticipated governance concerns relating to participant activity \84\ 
that existed in the OTC derivatives market. At the time of the 
proposal, the Commission also proposed Rules 17Ad-25 and 17Ad-26 for 
registered clearing agencies that took a broad, principles-based 
approach to clearing agency governance. Because some registered 
clearing agencies that would be subject to this proposal have 
participants who are also owners, the Commission's current proposal, 
under proposed Rule 17Ad-25(b)(1), creates a carve-out from the 
majority independence requirement when a majority of voting interests 
are owned by participant-owners, as set forth below.
---------------------------------------------------------------------------

    \80\ See, e.g., Bruce Dravis, Director Independence and the 
Governance Process (Aug. 14, 2018), https://www.americanbar.org/groups/business_law/publications/blt/2018/08/05_dravis/. In the 
United States, independent directors traditionally are not selected 
from among management and are not intended to serve as 
representatives of management, and therefore they do not carry the 
same financial or other relationships that might create a conflict 
of interest between the director's interests and the director's 
duties to the company.
    \81\ See Regulation MC Proposing Release, supra note 1, at 
65897.
    \82\ See id. at 65885.
    \83\ See id. at 65928 (defining independent director as ``(1) A 
director who has no material relationship with: (i) The security-
based swap execution facility or national securities exchange or 
facility thereof that posts or makes available for trading security-
based swaps, or security-based swap clearing agency, as applicable; 
(ii) Any affiliate of the security-based swap execution facility or 
national securities exchange or facility thereof that posts or makes 
available for trading security-based swaps, or security-based swap 
clearing agency, as applicable; (iii) A security-based swap 
execution facility participant, a member of a national securities 
exchange that posts or makes available for trading security-based 
swaps, or a participant in the security-based swap clearing agency, 
as applicable; or (iv) Any affiliate of a security-based swap 
execution facility participant, a member of a national securities 
exchange that posts or makes available for trading security-based 
swaps, or a participant in the security-based swap clearing agency, 
as applicable.'').
    \84\ See id. at 65885 (``These [security-based swap] entities 
are not wholly-owned by participants or exchanges and may have 
different governance related issues than the securities clearing 
agencies currently registered with the Commission.'').
---------------------------------------------------------------------------

    The Commission believes that requiring a registered clearing agency 
to include independent directors on the board can improve the board's 
ability to conduct more effective oversight of management, which is a 
critical component of the effectiveness of a registered clearing 
agency. Independent directors constitute a set of directors that do not 
have potential conflicts of interest resulting from their relationships 
with management. This helps the board manage conflicts of interest 
among directors because independent directors do not have the existing 
relationships or accompanying incentives that might, for example, 
discourage or dis-incentivize the board to review management's 
decisions in a thorough, transparent, and consistent way. The 
appearance of conflicts of interest can reduce confidence among direct 
and indirect participants, other stakeholders, and the public in the 
functioning of the clearing agency, particularly during periods of 
market stress when general confidence in market resilience may be low.
    The practice of employing independent directors is common across 
the financial industry and across public companies more generally.\85\ 
Although Commission rules do not currently require the boards of 
registered clearing agencies to include independent directors, each of 
the registered clearing agencies already require directors with some 
independence characteristics (such as ``nonexecutive,'' or ``public'' 
directors).\86\
---------------------------------------------------------------------------

    \85\ See, e.g., Quoc Trung Tran, Independent Directors and 
Corporate Investment: Evidence from an Emerging Market, 21 J. Econ. 
& Dev. 30 (2019), https://www.emerald.com/insight/content/doi/10.1108/JED-06-2019-0008/full/html (noting that ``independent 
directors have become a common approach of corporate governance'' in 
recent years). For example, the NYSE listing standards require that 
a majority of the board of directors of a listed company be 
independent, and they preclude managers or employees of the company 
from meeting the independence standard, among other criteria. See, 
e.g., Weil, Gotshal & Manges LLP, Requirements for Public Company 
Boards (Jan. 3, 2022), https://www.weil.com/-/media/files/pdfs/2022/january/requirements_for_public_company_boards_including_ipo_transition_rules.pdf.
    \86\ See DTCC, Board Mission Statement and Charter (Oct. 2021), 
at 5, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Mission-and-Charter.pdf; ICC, Regulation and 
Governance Fact Sheet (Sept. 2021), at 2, https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf; ICEEU, Disclosure 
Framework (Jan. 31, 2021), at 20, https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Disclosure_Framework.pdf; OCC, Board 
of Directors Charter and Corporate Governance Principles (Sept. 22, 
2021), at 4-5, https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf; LCH SA, Board of 
Directors (2022), https://www.lch.com/about-us/structure-and-governance/board-directors-0.
---------------------------------------------------------------------------

    In that vein, in addition to the above dynamic that exists between 
the board and management, registered clearing agencies must also manage 
the competing and sometimes divergent interests of owners and 
participants, as previously discussed in Part II.A.\87\ The structure 
of a registered clearing agency, and the risk management tools that it 
employs, affect how the interests of owners, participants, and other 
types of stakeholders align. For example, the risk mutualizing and 
trade guaranty features provided by covered clearing agencies provide 
for the shift of the consequences of one party's actions to another, 
binding disparate interests together in certain circumstances, such as 
a participant default. These features both affect how different 
stakeholders maximize their own self-interest and also distinguish the 
governance of a clearing agency from other corporate structures, such 
as those of other financial services companies or, more generally, 
publicly traded companies, who are unable to legally bind their 
customers with financial obligations that are theoretically uncapped. 
In particular, the owners of a clearing agency may seek to shift risks 
to the participants of the clearing agency to decrease the level of 
exposure that the owners face by capitalizing the clearing agency. 
Meanwhile, participants in the registered clearing agency may seek to 
raise the cost of participation to exclude competitors from the 
benefits of the clearing agency's risk mutualizing and mitigating 
tools, or they may seek to reduce their exposure to the clearing agency 
by not making certain assets available for use by the clearing agency 
during loss allocation. As described below, there can be countervailing 
benefits to having the interests of a director and the interests of an 
owner aligned, so as to increase the likelihood that decisions made 
will benefit shareholders. Likewise, there are benefits to having the 
interests of a director and the interests of a participant aligned, in 
order to increase the likelihood that decisions will take into account 
the long-term needs of participants. The requirement in Section 17A for 
fair representation recognizes that clearing agencies may serve 
competing stakeholders, such as owners and participants, both in the 
selection of directors and administration of their affairs.\88\ 
Directors may carry these perspectives when they serve on the board, 
and these perspectives may influence the ultimate decision-making of 
the board. For example, one set of

[[Page 51823]]

stakeholders could use the board to shift costs and risk exposure to 
others (e.g., owners shifting them to participants), in ways that could 
undermine the risk mutualizing and mitigating purpose of the clearing 
agency.\89\ The Commission is also mindful that ultimately, owners (as 
holders of voting interests) are generally in the position of electing 
directors (subject to any restrictions on ownership, classes of shares, 
etc.), meaning that any director who has a material relationship with a 
participant and who has been nominated as a potential independent 
director must nonetheless be voted onto the board of directors by the 
owners; so ultimate approval of a director would remain in the hands of 
owners, creating an incentive for even a director who is employed by a 
participant to take into account the views of owners. Nonetheless, the 
criteria for independent directors under the proposed rules would help 
ensure that independent directors retain those features that 
distinguish their interests from those of other directors because, for 
example, an independent director cannot have an employment relationship 
with or otherwise receive compensation (other than as a director) from 
the registered clearing agency or any affiliate thereof, or the holder 
of a controlling voting interest of the registered clearing agency. In 
addition, although independent directors may be elected, in part, by 
owners, the views of owners would not be the only stakeholders' views 
that independent directors would consider.
---------------------------------------------------------------------------

    \87\ See, e.g., Securities Industry Study, Report of the 
Subcommittee on Commerce and Finance, H.R. Rep. No. 92-1519, at 84 
(1972) (``1972 House Report'') (stating generally about SROs such as 
clearing agencies, ``[s]elf-regulators may be parochial in 
adjustment and accommodating competing aims and policies. 
Furthermore, since self-regulatory bodies are composed of disparate 
subsidiary groups, the legitimate interests of a particular group 
may be overridden, or the tugging and pulling may result in inaction 
or impasse'').
    \88\ See 15 U.S.C. 78q-1(b)(3)(C).
    \89\ See, e.g., PFMI, supra note 4, at 11 (``FMIs and their 
participants do not necessarily bear all the risks and costs 
associated with their payment, clearing, settlement, and recording 
activities. Moreover, the institutional structure of an FMI may not 
provide strong incentives or mechanisms for safe and efficient 
design and operation, fair and open access, or the protection of 
participant and customer assets. In addition, participants may not 
consider the full impact of their actions on other participants, 
such as the potential costs of delaying payments or settlements.'').
---------------------------------------------------------------------------

    Given the above dynamics between owners and participants, the 
Commission believes that registered clearing agency processes involving 
risk management or director nominations are also implicated in managing 
the dynamics between owners and participants. Therefore, the 
relationships affecting the independence of a director in the context 
of a registered clearing agency also include those between the director 
and the registered clearing agency itself or its affiliates.\90\ The 
ability of a registered clearing agency to help ensure effective risk 
management and loss allocation in the event of a default or non-default 
loss is linked to the interests of the owners of the clearing agency, 
who may also have financial relationships with the participants (or be 
the participants) of such registered clearing agency.\91\ For example, 
The Options Clearing Corporation (``OCC'') is owned by certain options 
exchanges, whose customers may also be participants of OCC.\92\ 
Similarly, participants in the registered clearing agencies that are 
subsidiaries of The Depository Trust & Clearing Corporation (``DTCC'') 
are required to purchase common shares of DTCC as part of periodic 
efforts to keep ownership proportionate to such owners' use of clearing 
agency services.\93\ Such provisions that require common shares to be 
periodically re-allocated to reflect levels of use of the clearing 
agency services create financial and other relationships between a 
registered clearing agency, its participants, its affiliates, and its 
owners. In this sense, registered clearing agencies are not organized 
in a way that reflects the corporate ownership of the typical publicly 
traded company, where the shareholder base is a dispersed population 
that may have coordination problems, and therefore the scope of inquiry 
cannot end simply at whether a director is independent from management 
alone.\94\ Rather, the owners of a registered clearing agency reflect a 
few key groups, who may be owners or participants of the clearing 
agency, and board composition will thus necessarily reflect these 
different stakeholder groups and their views on risk management.
---------------------------------------------------------------------------

    \90\ Affiliate is proposed to mean a person that directly or 
indirectly controls, is controlled by, or is under common control 
with the registered clearing agency. A director would, of course, 
have a relationship with the clearing agency that arises from 
service as a director, and the accompanying duties to the company 
such as the fiduciary duties of the duty of care or the duty of 
loyalty. These relationships and duties, however, do not create a 
potential conflict of interest that might impair the independent 
judgment of the director.
    \91\ In Part III.A.2.f) below, the Commission discusses how 
participant-owners may have interests that are well-aligned with the 
risk management function of the clearing agency, supporting a lower 
threshold of independent directors when a majority of owners are 
participant-owners.
    \92\ See OCC, Annual Report (2019), https://annualreport.theocc.com/About-OCC.
    \93\ See DTCC, NSCC Important Notice No. A8986 (Apr. 5, 2021) 
(regarding the period common stock reallocation process), https://www.dtcc.com/-/media/Files/pdf/2021/4/5/A8986.pdf.
    \94\ See, e.g., Donald C. Clarke, Three Concepts of the 
Independent Director, 32 Del. J. Corp. L. 73 (2007), https://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=1045&context=faculty_publications.
---------------------------------------------------------------------------

    In the context of a registered clearing agency, the Commission 
believes that requiring independent directors helps promote the ability 
of the board to perform its oversight of management function and to 
support a plurality of viewpoints voiced at the board level. 
Independent directors would help ensure that, when the interests 
between owners and participants diverge, the impact of such divergence 
is more manageable because the board would not be composed entirely of 
directors who have material relationships either to management (such as 
under a situation where managers approve compensation or other payments 
from the registered clearing agency to such director), owners, or 
participants. Balance between stakeholders with divergent views could 
help the board to adequately consider the respective needs of all 
stakeholders, and help promote the integrity of the clearing agency's 
risk management function. With respect to independent directors serving 
on the boards of public companies, some studies have questioned whether 
independent directors succeed in improving shareholder value.\95\ For 
registered clearing agencies, the Commission is proposing a requirement 
for independent directors for reasons unrelated to improving 
shareholder value. Rather, registered clearing agencies are subject to 
an expansive regulatory framework in which they operate as critical and 
often systemically important financial market utilities.\96\ They are 
subject to requirements under the Exchange Act to facilitate prompt and 
accurate clearance and settlement, promote the public interest,\97\ and 
help ensure the fair representation of owners and participants 
(regardless of whether these owners and participants are the 
controlling owner or the clearing agency's largest participant). As 
long as a majority of directors are not solely motivated by the needs 
of one category of stakeholders, this structure can help ensure that 
the board addresses the full

[[Page 51824]]

set of owners and participants, even smaller participants,\98\ in 
fulfilling these statutory objectives. In this way, a requirement for 
independent directors is well-suited to help promote more effective 
governance of a registered clearing agency and meet the purposes of the 
Exchange Act.\99\
---------------------------------------------------------------------------

    \95\ See, e.g., id. at 75-77.
    \96\ See, e.g., 12 U.S.C. 5461; see also Board of Governors of 
the Federal Reserve System, Designated Financial Market Utilities, 
https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm (providing the list of designated financial 
market utilities, including five SEC-regulated registered clearing 
agencies).
    \97\ See 15 U.S.C. 78q-1(b)(3)(C). See also Clarke, supra note 
94, at 82-83 (noting that although there are situations where an 
independent director may not make an appreciable difference in 
outcomes, that provided there is a mechanism for accountability, 
``[a] director serving the `public interest' should arguably be 
independent of everyone [such that a director is able to] . . . 
follow only the dictates of her conscience'').
    \98\ See id. at 80 (stating that non-management directors are 
viewed as potentially protecting small shareholders from big 
shareholders).
    \99\ See infra Part IV.C.1 (discussing proposed Rules 17Ad-
25(b), (e), and (f)).
---------------------------------------------------------------------------

(c) Definition of ``Material Relationship''
    To be an independent director consistent with the proposed rules, a 
director must have no material relationships with a registered clearing 
agency or its affiliate. As defined in proposed Rule 17Ad-25(a), which 
was carried forward from the Commission's previous proposal in 
Regulation MC,\100\ a ``material relationship'' means a relationship, 
whether compensatory or otherwise, that reasonably could affect the 
independent judgment or decision-making of the director. The scope 
covers relationships during a lookback period of one year counting back 
from making the initial determination in proposed Rule 17Ad-25(b)(2). 
The proposed definition is identical to the definition proposed in 
Regulation MC, except for the addition of a one-year look back period, 
which is intended to address recently terminated business or personal 
relationships to prevent evasion of the purposes of this provision, as 
discussed further below. The Commission is retaining its prior proposed 
definition of material relationship because the definition of material 
relationship is not impacted by the type of security cleared (i.e., 
expanding this proposal to cover all registered clearing agencies 
rather than security-based swap clearing agencies does not alter the 
rationale provided under the Regulation MC). Establishing a materiality 
and reasonableness threshold for such relationships provides a 
registered clearing agency with discretion to apply this requirement 
across a range of fact patterns while ensuring that they ultimately 
facilitate the fair representation of owners and participants.
---------------------------------------------------------------------------

    \100\ See Regulation MC Proposing Release, supra note 1, at 
65897.
---------------------------------------------------------------------------

    The proposed rule includes relationships both compensatory and 
otherwise to help ensure that the evaluation of a director's 
independence is thorough. Such scope of relationships would include not 
only pecuniary transactions but other types of quid pro quo 
arrangements, biases, or obligations between persons. Under the 
Commission's proposed rule, however, such non-compensatory 
relationships must reach the level of materiality to affect a 
director's status as an independent director. In addition, the proposed 
rule would carve out any past relationships that have terminated at 
least one year prior because the Commission believes such past 
relationships are unlikely to have a material effect on a director's 
future decision-making. The proposed definition includes a lookback 
period, which is meant to cover recently terminated relationships as a 
method to avoid circumvention of the proposed independent director 
requirements. As discussed below, the Commission has experience with a 
one-year lookback period applied to employment relationships between 
auditors and former audit clients, and the Commission believes that the 
same objectives underpinning that lookback period would apply 
here.\101\
---------------------------------------------------------------------------

    \101\ See generally Sarbanes-Oxley Act of 2002, Public Law 107-
204, sec. 206, 116 Stat. 745, 774 (2002) (``SOX'').
---------------------------------------------------------------------------

    Finally, the definition would require consideration of material 
relationships between a director and any affiliate that directly or 
indirectly controls, is controlled by, or is under common control with 
the registered clearing agency. The purpose of this provision is to 
address potential conflicts of interest that would arise when a 
director is serving in a management or director role for an affiliate, 
such as a parent company, of the registered clearing agency,\102\ or 
when a director has a material level of investment in a registered 
clearing agency or its affiliate. The Commission is not including a 
bright-line test as to what is a material level of investment because 
such an investment could be either material to the director, such as a 
financial investment that is a material percentage of an individual's 
wealth, or material to the registered clearing agency or its affiliate, 
such as a material percentage of ownership of a company. For example, 
if a director held ownership in an affiliated company of a registered 
clearing agency, this investor relationship should be evaluated for 
materiality and whether it could affect the independent judgment or 
decision-making of the director, even if such investment did not amount 
to such director being a controlling shareholder of such affiliate 
(which is specifically prohibited for independent directors under 
proposed rule 17Ad-25(f)(4), as discussed further below). If such 
relationships were not considered, then a director who serves on the 
management of the parent company and therefore indirectly manages the 
registered clearing agency itself through the holding structure could 
nonetheless be considered independent. The proposed definition would 
help mitigate evasion of the spirit of the independent director 
requirement through the use of multi-tier holding company structures 
that place management responsibility at multiple levels of the 
organizational structure. If the functional role of managing a clearing 
agency was housed in a parent company, thereby allowing a manager to 
claim to be an independent director by virtue of not being an employee 
of the registered clearing agency itself but instead of the parent 
company, then the Commission's intent in this proposed rule could be 
easily circumvented.
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    \102\ The potential implications of a director of a registered 
clearing agency having a material relationship with an affiliated 
company have been discussed in the context of European Union-based 
CCPs under the 2012 Regulatory Technical Standards (``RTS''), 
adopted by the European Commission as part of the European Market 
Infrastructure Regulation (``EMIR''). Chapter III, Article 3 of the 
RTS states, ``[a] CCP that is part of a group shall take into 
account any implications of the group for its own governance 
arrangements including whether it has the necessary level of 
independence to meet its regulatory obligations as a distinct legal 
person and whether its independence could be compromised by the 
group structure or by any board member also being a member of the 
board of other entities of the same group. In particular, such a CCP 
shall consider specific procedures for preventing and managing 
conflicts of interest including with respect to outsourcing 
arrangements.'' See Commission Delegated Regulation (EU) No 153/2013 
of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the 
European Parliament and of the Council with regard to regulatory 
technical standards on requirements for central counterparties, 2013 
O.J. (L 52), at art. 3(4), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0153&from=EN.
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(d) Process for Assessing Relationships
    Proposed Rule 17Ad-25(b)(2) establishes a process by which a 
registered clearing agency must identify, evaluate, and document its 
determinations regarding director independence. These requirements have 
been included in the rule because achieving director independence 
necessarily requires an assessment of a director's relationships. The 
provisions of Rule 17Ad-25(b)(2) include requirements to establish a 
process to identify and evaluate any such relationships and to document 
that process to help ensure that a registered clearing agency has 
considered a wide range of potential relationships, and applied its 
analysis transparently and consistently over time.
    The proposed rule also requires a registered clearing agency to 
affirmatively determine that no material relationships exist, broadly 
considering

[[Page 51825]]

all the relevant facts and circumstances. The Commission believes that 
establishing a process helps ensure more effective identification and 
evaluation of any material relationships. The Commission also believes 
that affirmatively determining that a director is independent helps 
promote a thorough review of the director's relationships and helps 
promote confidence in the governance arrangements of the clearing 
agency because each such director's independence status will have been 
evaluated by the registered clearing agency. The Commission has not 
specified in the rule the particular sources of information to be 
reviewed or the particular approach to inquiring about relationships 
because the facts and circumstances of each director or candidate's 
relationships are likely to differ. The Commission is not specifying a 
checklist of sources to consult and searches to perform, in order to 
avoid inadvertently leaving off such checklist a source that cannot be 
foreseen.
(e) Excluded Relationships
    The process set forth under Rule 17Ad-25(b)(2) would also require 
analysis of certain circumstances pursuant to which a director would be 
precluded from being an independent director, regardless of any 
determinations otherwise made pursuant to Rule 17Ad-25(b)(2). These 
scenarios are intended to address cases where, in the Commission's 
view, the circumstances clearly prevent a director from exercising 
independent judgment or decision-making.
    Currently, owners of registered clearing agencies are predominantly 
non-natural persons such as participants, exchanges, or a parent 
company. The Commission does not expect that a natural person serving 
as a director would typically be a controlling shareholder of such 
registered clearing agency, although there may be future registered 
clearing agencies with this organizational structure. However, due to 
the fact that directors are natural persons, but owners of registered 
clearing agencies currently tend to be non-natural persons, many of the 
circumstances described below seek to address the connection between 
the natural person director and the non-natural person owner.
    Proposed Rule 17Ad-25(f)(1) limits the ability for a registered 
clearing agency to undercut the authority of independent directors, 
such as through provisions established by a registered clearing agency 
in the bylaws or other organizational documents. For example, if one 
director who happened to be associated with management was authorized 
to remove independent directors him or herself, rather than through the 
normal channels of removing a director via a majority vote of the 
shareholders, then any independent directors might be beholden to such 
director. Likewise, if some directors--such as those with relationships 
to management--could conduct closed meetings that exclude independent 
directors to discuss matters before the board, the ability of 
independent directors to perform their duties could be undercut. This 
provision would not limit the ability of a registered clearing agency 
to manage or mitigate conflicts of interests among its directors, such 
as by implementing through policies and procedures a requirement that 
conflicted directors recuse themselves from a matter pursuant to a 
conflicts of interest policy, if such recusal would be necessary for 
that director to operate more effectively. Rather, the provision 
addresses whether independent directors would be limited, restricted, 
or chilled in expressing their views because they were subject to 
removal by a management director or denied information relevant to the 
decision-making process.
    Proposed Rules 17Ad-25(f)(2) through (5) identify circumstances 
where a director is precluded from being an independent director 
because the director has an employment relationship or has received a 
payment from the clearing agency, its affiliates, or its holders of 
controlling voting interests, either directly or through indirect 
channels. Several of the provisions reference a family member, which 
the Commission is proposing to define broadly, to include natural 
persons who are related by blood, marriage, or household, including 
living antecedents and descendants, as well an non-natural persons 
(trusts and other legal entities) that are controlled by such natural 
persons. The Commission is intending for the prohibition to be 
comprehensive as to the relationship in order to cover potentially 
meaningful relationships. Although the list includes non-natural 
persons controlled by an extensive list of natural persons, a director 
would not necessarily need to compile a list of trusts or companies 
controlled by various in-laws and relatives. Instead, if the director 
compiled the list of natural persons referenced in the definition, a 
registered clearing agency could determine whether those persons (or 
legal entities under their control) were doing business with the 
registered clearing agency, any of its affiliates, the holder of a 
controlling voting interest of the registered clearing agency, the 
outside auditor, or an entity where an executive officer of the 
registered clearing agency serves on such entity's compensation 
committee, in a manner that would exclude a person from being 
considered an independent director under proposed Rule 17Ad-25(f), as 
described below. A registered clearing agency is likely already 
determining who it is conducting business with as part of evaluating 
whether to enter into contracts with those companies.
    Proposed Rule 17Ad-25(f)(2) precludes a director from being an 
independent director when the director is also an employee of the 
registered clearing agency or its affiliates, a requirement intended to 
reflect the traditional concept of director independence from 
management, discussed above. Proposed Rule 17Ad-25(f)(3) and (4) 
preclude a director from being an independent director when receiving 
certain types of payments, such as in a scenario where the director is 
a partner or a controlling shareholder of a consulting firm that 
contracts with the registered clearing agency, or where the director's 
spouse is a partner or controlling shareholder of a service provider 
that is hired by the registered clearing agency. These proposed rules 
address circumstances where payments would create a conflict of 
interest and undermine the ability of the director to maintain 
independent judgment. The proposed rules would carve out certain types 
of payments, such as payments from pensions or deferred compensation 
for prior services. The Commission believes that such payments are 
generally made in response to past, rather than future, activity and 
therefore do not have the potential to create conflicts of interest by 
affecting future decision-making by the director.
    The list of payments for property or services in proposed Rule 
17Ad-25(f)(4) scopes in participant clearing fees as well. The 
Commission is restricting the ability of a director to be independent 
if he or she is a partner or controlling shareholder of a participant 
because he or she could directly profit from reducing the size of the 
clearing fees even if that impairs the quality of the risk management 
of the clearing agency.
    Proposed Rule 17Ad-25(f)(5) would preclude independence if a 
director, or a family member, is employed the as an executive officer 
of another entity where any executive officers of the registered 
clearing agency serve on that entity's compensation committee. The 
intent of this provision would prevent circular arrangements whereby 
compensation

[[Page 51826]]

could be elevated among a chain of interested persons.
    Proposed Rule 17Ad-25(f)(6) would preclude a director from being an 
independent director when the director is a partner of an outside 
auditor or is an employee working on an audit of the registered 
clearing agency. As above, these limitations are designed to reduce the 
potential for conflicts of interest that would impair an independent 
director's independent judgment.
    Finally, proposed Rule 17Ad-25(f) would subject paragraphs (f)(2)-
(6) to a one-year lookback period, which is intended to capture 
conflicts of interest that may arise from relationships that have 
recently terminated (such as departure from a job). As with the 
lookback period in the ``material relationship'' definition, the 
purpose of this lookback period is the same for all provisions, as well 
as in the material relationship definition, which is to cover 
relationships that have recently terminated, while not reaching back so 
far in time as to impede the registered clearing agency's ability to 
select from a large pool of skilled and experienced candidates for 
independent director. The Commission believes that a one-year lookback 
period is consistent with similar requirements in other statutes and 
Commission rules.\103\
---------------------------------------------------------------------------

    \103\ See SOX, supra note 101.
---------------------------------------------------------------------------

(f) Majority of Independent Directors
    In assessing the appropriate quantum of independent directors to be 
required under the proposed rule, the Commission has considered the 
potential impact of divergent interests between owners and 
participants, or the potential in which the interests of owners and 
participants might diverge. The Commission believes that requiring a 
majority of independent directors is most likely to result in the board 
acting from a position where the interests of all the stakeholders of 
the clearing agency are considered, rather than the interests of a 
particular subset of owners or participants. Having a majority of 
independent directors reduces the potential misalignment of interests 
among directors and management, and among owners and participants, 
helping to ensure that a majority of directors are unattached to these 
dynamics. In other words, an unattached or ``disinterested'' majority 
helps promote consideration of the risk management purposes of the 
clearing agency, and helps decrease the likelihood that other interests 
that may arise from a potential conflict of interest are the 
determinative factor in board decisions. If a majority of directors are 
non-independent directors, then a majority of directors influenced by 
potential or perceived conflicts of interest could sway the outcome of 
board decisions.
    The Commission recognizes, however, that the interests of an owner 
and a participant can overlap in some cases, such as when a participant 
also owns a portion of its equity. For example, the Exchange Act 
provides that the Commission may determine that the representation of 
participants is fair if they are afforded a reasonable opportunity to 
acquire voting stock of the clearing agency, directly or indirectly, in 
reasonable proportion to their use of such clearing agency.\104\ The 
opportunity for a participant to become such an owner of a clearing 
agency is one method to mitigate the potential for conflicts of 
interest among these two groups, by more closely aligning the interests 
of a participant with those of a voting interest holder (i.e., owner).
---------------------------------------------------------------------------

    \104\ See 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

    In this structure, owners and participants would be one and the 
same, and the dynamic where diverging interests between owners and 
participants undermine the risk management function of the clearing 
agency is less likely because participant-owners would necessarily 
internalize and synthesize the divergent interests resulting from 
ownership and participation. In other words, participant-owners are 
less likely to use their equity share to shift the burdens of risk 
management to the participants of the clearing agency because they are 
themselves participants. When a majority of voting shares are held by 
participant-owners, the Commission believes that the interests of the 
board will be more closely aligned with ensuring more effective risk 
management. In this circumstance, the Commission believes it is 
appropriate to reduce the number of independent directors required 
under the rule to promote the selection of directors by participant-
owners because directors voted by a majority of persons intended to 
represent the clearing agency's participant-owners would mitigate 
against the possibility of a divergence of interests. Accordingly, the 
Commission is proposing a lower requirement for independent directors 
of at least 34 percent of directors when the registered clearing agency 
has a majority of its voting interests directly or indirectly held by 
participants; indirectly held by participants refers to participant 
ownership of a parent company. For example, if a registered clearing 
agency is wholly-owned by a holding company, and the holding company is 
majority owned by the participants of the registered clearing agency, 
then a 34 percent threshold would apply. Alternatively, if a registered 
clearing agency was 51 percent owned by a holding company, and that 
holding company was 100 percent owned by the participants of the 
registered clearing agency, then that would also amount to a majority 
ownerships of participants, which would cause the 34 percent 
independent director provision to apply. The Commission proposes to 
require 34 percent, or greater than one-third of directors, to 
encourage a significant portion of directors to meet the independence 
requirement but to provide a comparatively higher level of discretion 
to the clearing agency to select non-independent directors. A 
requirement for greater than one-third independent directors would 
align with the requirement for independence in other jurisdictions for 
clearing agencies.\105\ In addition, if 34 percent of directors are 
independent directors, and participants and owners of the registered 
clearing agency are predominantly the same entity (i.e., participant-
owners), then it remains less likely that any one of the three distinct 
groups seeking to influence the registered clearing agency--owners, 
management, and participants--will establish an outsized influence over 
the remaining non-independent directors.
---------------------------------------------------------------------------

    \105\ See EMIR at art. 27(2), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32012R0648&from=EN (stating that ``[a] 
CCP shall have a board. At least one third, but no less than two, of 
the members of that board shall be independent''); see also id. at 
art. 2(28) (defining independent member of the board to mean a 
member of the board who has no business, family or other 
relationship that raises a conflict of interests regarding the CCP 
concerned or its controlling shareholders, its management or its 
clearing members, and who has had no such relationship during the 
five years preceding his membership of the board).
---------------------------------------------------------------------------

    Finally, the proposed rule defines the 34 percent requirement using 
the term ``holders of voting interests'' rather than simply ``owners'' 
so that the lower threshold only applies when participant-owners are 
entitled to vote to elect a director, irrespective of whether someone 
is otherwise entitled to the financial attributes of such ownership. 
The Commission is not using the term owner as the equivalent concept of 
holder of a voting interest, because the financial attributes of a 
security can be separated from the voting rights of a security. The 
Commission is focused on who has the ability to influence who is voted 
onto the board--which accompanies voting rights, not financial 
attributes--as the relevant factor in deciding whether

[[Page 51827]]

participants can enjoy that benefit of ownership as participant-owners.
 (g) Other Committees of the Board Generally
    Proposed Rule 17Ad-25(e) would impose the independent director 
requirement as applied to the full board of directors under Rule 17Ad-
25(b)(1) to any board committee that has the authority to act on behalf 
of the board. For example, if 34 percent of the board must be composed 
of independent directors, any committee that is taking action based on 
a board delegation also should have at least 34 percent of its members 
be independent directors, unless otherwise required to meet a higher 
standard under the rules.\106\ The purpose of the proposed rule is to 
prevent a registered clearing agency from circumventing the proposed 
requirement for independent directors by delegating key decisions of 
the board to a committee with fewer independent directors than those 
required of the full board under Rule 17Ad-25(b)(1).
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    \106\ For example, to help ensure that evaluations of director 
nominees made by the nominating committee reflect independent 
judgment, proposed Rule 17Ad-25(c)(2) would require that the 
nominating committee be composed of a majority of independent 
directors in all cases. See infra Part III.B.1 (discussing the 
proposed rule).
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3. Request for Comment
    The Commission requests comment on all aspects of proposed Rules 
17Ad-25(b), (e), and (f). In particular, the Commission requests 
comment on the following specific topics:
    1. Is requiring that the boards of registered clearing agencies 
have a majority of independent directors an effective tool for ensuring 
a transparent and objective governance process that balances the 
potentially competing or divergent interests of owners and 
participants? Has the Commission accurately described the benefits of 
independent directors, as defined in this release, to the board of a 
registered clearing agency? Why or why not?
    2. Are there other ways to define ``independent director'' or 
``material relationship'' that would achieve the Commission's goals? If 
so, what are they? Should the Commission establish a numerical 
threshold, such as $100,000 annually, for compensatory relationships in 
order for them to be considered material under this rule? If so, what 
should that numerical threshold be? Please be specific. Should the 
Commission create a list of the types of relationships that should be 
considered either material or that could affect the independent 
judgment or decision-making of a director under this rule, and should 
that list distinguish between compensatory and non-compensatory 
relationships? Why or why not?
    3. Should the Commission define the term ``control'' in the 
proposed rules? If so, would it be appropriate to adopt a definition 
similar to the one in 17 CFR 246.2, which states that control means the 
possession, direct or indirect, of the power to direct or cause the 
direction of the management and policies of a person, whether through 
the ownership of voting securities, by contract, or otherwise?
    4. What is the appropriate percentage of independent directors on 
the board of a registered clearing agency? Does the requirement for a 
majority of directors to be independent directors support the goals 
discussed in this proposal? Would another threshold be more effective 
at addressing diverging views among owners, participants, and other 
relevant stakeholders in the registered clearing agency? For example, 
would a requirement that one-third of the directors be independent 
(which has been adopted by European jurisdictions) provide the benefits 
of independent directors without any of the potential drawbacks? Please 
explain.
    5. Is the application of director independence requirements 
appropriate for all registered clearing agencies, or should there be 
distinctions made among registered clearing agencies based on certain 
factors, such as organizational structure or products cleared? If so, 
what factors are relevant and why? Would these proposed rules apply to 
all types of organizational structures in a consistent manner, or would 
they impede a registered clearing agency from changing its 
organizational structure into a more innovative or efficient structure?
    6. Is a one-year lookback period adequate for purposes of the 
``material relationship'' definition and proposed Rules 17Ad-25(f)(2)-
(6)? For example, is a one-year time period for the receipt of certain 
payments by clearing agencies the appropriate length of time to 
determine that a director is precluded from being considered 
independent? How will this impact the ability of clearing agencies to 
recruit experienced persons to serve as directors? More generally, how 
large is the pool of potential directors that could serve as 
independent directors, as defined in this release, on the boards of 
registered clearing agencies? Are there particular elements of the 
independent director definition that limit the pool of potential 
independent directors? Should those elements be modified to expand the 
pool?
    7. Is it appropriate to include affiliates of registered clearing 
agencies as relevant to the consideration of material relationships of 
independent directors, as well as certain scenarios that preclude 
independence?
    8. Is the scope of the scenario in proposed Rule 17Ad-25(f)(4) 
overly broad or overly narrow in covering all partners, regardless of 
relative holdings, and controlling shareholders? Should this provision 
cover all shareholders, or non-managing partners, instead? Why or why 
not?
    9. The Commission is proposing in Rule 17Ad-25(f)(3) to carve out 
directors who are serving as directors on other boards from the list of 
scenarios that explicitly preclude independence. Is this carve-out 
appropriate in order to permit a director of a registered clearing 
agency who also serves as a director of another legal entity to qualify 
as independent (provided all other requirements are met), or should 
there be some restrictions, such as restrictions on serving as a 
director of an affiliate, or participant? Why or why not?
    10. The Commission requests comment on whether the proposal to 
require independent directors raises any potential legal issues for 
those directors or clearing agency governance committee members. 
Specifically, as a matter of corporate law, would independent directors 
or committee members be forced to contend with competing duties or 
obligations to the clearing agency such as under laws of another 
jurisdiction, including any duties or obligations that would foreclose 
participation in the board or the committees? If so, how may the goal 
of receiving independent, diverse opinions be achieved?
    11. The Commission requests comment on whether the proposed 
approach to board composition and board member independence may raise 
compliance issues with respect to being registered with the Commission 
and the CFTC or a non-U.S. regulatory authority. If so, what steps 
should the Commission take to continue to facilitate dually-registered 
clearing agencies?
    12. The Commission requests comment on whether the requirement to 
undergo a broad consideration of facts and circumstances when 
determining whether a board member is independent is sufficiently 
clear. Is there additional guidance needed on what sources could be 
consulted or what types of relationships could be considered?
    13. The Commission is applying the lowered threshold applicable to 
registered clearing agencies whose voting interests are majority-held 
by participants, or whose parent company's

[[Page 51828]]

voting interests are majority-held by the registered clearing agency's 
participants. Does this scope strike the right balance between 
permitting flexibility in ownership structures versus providing the 
lowered threshold of 34 percent independent directors only when 
warranted (i.e., when the interests of participants and owners are less 
likely to diverge when participant-owners are the holders of voting 
interests)? Why or why not?
    14. Should the Commission permit directors who have material 
relationships with participants (such as being an employee of a 
participant), other than those relationships that are explicitly 
precluded in Rule 17Ad-25(f), to meet the definition of independent 
director, or should these relationships be precluded as well? Should 
the Commission be more restrictive, as is proposed in paragraph (f)(2), 
with respect to compensation and payments received from the registered 
clearing agency or its affiliates, rather than participants? Why or why 
not?
    15. The Commission is soliciting comment on how to view participant 
clearing fees or other payments from participants that generate revenue 
for the clearing agency as a potential scenario that precludes director 
independence. Is it sufficiently clear in the text of proposed Rule 
17Ad-22(f)(4) that revenues from participants are covered under the 
scope of this prohibition? Should the Commission treat revenues from 
participants differently from other sources of revenues or 
expenditures? Should the Commission create a carve out for lower levels 
of revenues in order to promote the opportunity for partners or 
controlling shareholders of small participants to be able to qualify as 
an independent director, such as by creating a minimum threshold of 
payments covered by this provision? Why or why not?
    16. The Commission is proposing an extensive list of natural 
persons who fall within the definition of family member for this 
rulemaking, along with legal entities under their control. Has the 
Commission chosen an appropriate scope for the definition of family 
member, or is the definition unworkable, either because it is 
overbroad, or because it misses an important category of persons?
    17. Should the Commission define ``family member'' to refer to 
``spouse or spousal equivalent''? Why or why not? Is adding ``spousal 
equivalent'' unnecessary because such person would be covered as ``any 
person (other than a tenant or employee) sharing a household,'' which 
is already part of the definition? Please explain.
    18. The Commission is not specifying particular roles for several 
aspects of this rulemaking, such as who makes the determination that a 
director is an independent director. Should the Commission be more 
prescriptive and specify whose responsibility it is to make such a 
determination? Why or why not?

B. Nominating Committee

1. Proposed Rule 17Ad-25(c)
    Proposed Rule 17Ad-25(c)(1) would require each registered clearing 
agency to establish a nominating committee and a written evaluation 
process whereby such nominating committee shall evaluate individual 
nominees to serve as directors. Proposed Rule 17Ad-25(c)(2) would 
require that (i) independent directors comprise a majority of the 
nominating committee, and (ii) an independent director chair the 
nominating committee. Proposed Rule 17Ad-25(c)(3) would require the 
nominating committee to specify and document fitness standards approved 
by the board. Such fitness standards for serving as a director would 
need to be consistent with all the requirements of proposed Rule 17Ad-
25, and also would include that the individual nominee is not subject 
to any statutory disqualification as defined under Section 3(a)(39) of 
the Exchange Act.\107\ Proposed Rule 17Ad-25(c)(4) would require the 
nominating committee to document the outcome of the clearing agency's 
written evaluation process in a manner that is consistent with the 
nominating committee's written fitness standards required under 
proposed Rule 17Ad-25(c)(3). The process would require the nominating 
committee to: (i) take into account each nominee's expertise, 
availability, and integrity, and demonstrate that the board, taken as a 
whole, has a diversity of skills, knowledge, experience, and 
perspectives; (ii) demonstrate that the nominating committee has 
considered whether a particular nominee would complement the other 
board members, such that, if elected, the board of directors, taken as 
a whole, would represent the views of the owners and participants, 
including a selection of directors that reflects the range of different 
business strategies, models, and sizes across participants, as well as 
the range of customers and clients the participants serve; (iii) 
demonstrate that the nominating committee considered the views of other 
stakeholders who may be impacted by the decisions of the registered 
clearing agency, including transfer agents, settlement banks, nostro 
agents, liquidity providers, technology or other service providers; and 
(iv) identify whether each selected nominee would meet the definition 
of independent director in proposed Rules 17Ad-25(a) and (f), and 
whether each selected nominee has a known material relationship with 
the registered clearing agency or any affiliate thereof, an owner, a 
participant, or a representative of another type of stakeholder of the 
registered clearing agency described in (iii) above.
---------------------------------------------------------------------------

    \107\ Section 3(a)(39) of the Exchange Act lists the particular 
events that would subject a person to ``statutory disqualification'' 
with respect to membership or participation in, or association with 
a member of, a self-regulatory organization, such as a registered 
clearing agency. 15 U.S.C. 78q-1(a)(3)(C).
---------------------------------------------------------------------------

2. Discussion
    In Part III.A.2, the Commission discussed the importance of 
requiring independent directors on the board of a registered clearing 
agency to help manage the dynamics that exist between owners and 
participants. To help ensure that the nomination process for the 
selection of independent directors is thoughtful and transparent, 
promote the integrity of determinations that a nominee is independent 
and is qualified to serve, and also promote more effective governance, 
the Commission is proposing to require a nominating committee that is 
composed of a majority of independent directors and chaired by an 
independent director. The Commission is proposing to require that the 
nominating committee be composed of a majority of independent directors 
in all cases, even where a clearing agency is majority-owned by 
participants, to help ensure that the evaluation of director nominees 
by the nominating committee reflects independent judgment.\108\
---------------------------------------------------------------------------

    \108\ See supra note 106 and accompanying text (explaining that, 
despite the composition requirements for certain board committees 
under proposed Rule 17Ad-25(e), the lower independence threshold 
under proposed Rule 17Ad-25(b)(1) will not apply to the nominating 
committee).
---------------------------------------------------------------------------

(a) Requirement for Nominating Committee
    Many registered clearing agencies already have a designated 
nominating committee.\109\ However, these nominating committees may not 
serve as the exclusive governing body for evaluating director nominees. 
To create a record that would help to ensure the integrity of the 
nominating committee's consideration of each potential nominee's 
qualifications, including

[[Page 51829]]

whether such nominee would qualify as an independent director under 
proposed Rules 17Ad-25(b), (e), and (f), the Commission believes that 
requiring the nominating committee to be the exclusive governing body 
for evaluating director nominees helps ensure that director selections 
are made consistent with the proposed requirements and without 
influence from potential conflicts of interest. Some registered 
clearing agencies currently allow other governing bodies and/or 
constituents of their organizational structure to select certain 
directors.\110\ While the proposed rule would not prohibit such 
approaches, it would require that any such nominees be submitted first 
to the nominating committee for evaluation--before being considered by 
the board--pursuant to a written evaluation process established by the 
registered clearing agency. This proposed requirement would help ensure 
that nominees are evaluated in a manner consistent with the 
requirements for independent directors and other qualifications to 
serve.
---------------------------------------------------------------------------

    \109\ See infra Part IV.B.4.a)(2) (discussing the current 
baseline for the proposed rule).
    \110\ For example, OCC currently allows certain participant 
exchanges to select Exchange Director nominees for election to OCC's 
board. See OCC, By-Laws (rev. Apr. 11, 2022), at 39, https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf (``An individual may be nominated by, elected by, and 
serve as an Exchange Director for more than one Equity Exchange.''); 
see also OCC, Board of Directors Charter and Corporate Governance 
Principles (rev. Sept. 22, 2021), at 4, 6, https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf (providing that Public Director and 
Member Director nominees are selected by OCC's Governance and 
Nominating Committee, but Exchange Director nominees are instead 
selected by OCC's Equity Exchanges).
---------------------------------------------------------------------------

(b) Role of Independent Directors
    Not all registered clearing agencies require that the nominating 
committee be chaired by an independent director or composed of a 
majority of independent directors. As discussed above, however, 
independent directors are well-suited to help manage the divergent 
interests that exist among management, owners, and participants,\111\ 
and are also best incentivized to help ensure that nominees do not have 
conflicts of interest that would preclude independent decision-making 
or otherwise undermine the decisions of the board.\112\ Because a 
majority of independent directors can help provide perspectives broader 
than owners and participants, constituting the nominating committee 
with a majority of independent directors would help promote the fair 
representation of owners and participants in the selection of 
directors. In addition, independent directors would facilitate a fair 
evaluation of a nominee's qualifications, including whether such 
individual would meet the Commission's proposed criteria for being an 
independent director, as such an evaluation would be conducted by a 
body that is free from influence in the performance of its duties and 
whose majority would itself satisfy the proposed criteria for being 
independent directors. By contrast, when evaluating nominees, directors 
serving on the nominating committee who are not independent directors 
may be more likely to favor board candidates whose views align with 
those persons with whom the director has a material relationship, 
reducing the likelihood that the nominating committee will consider a 
set of director nominees that represent the different stakeholders in a 
clearing agency. Thus, having a nominating committee that is composed 
of majority independent directors should help to address and facilitate 
both the selection of independent directors, as well as the selection 
of a broad range of directors that reflect the different stakeholder 
groups in a fair and more representative way.
---------------------------------------------------------------------------

    \111\ See supra Part III.A.2 (discussing independent directors 
as a governance tool to address such divergent interests).
    \112\ See supra Part III.A.2 (discussing independent directors 
as a governance tool to address such conflicts).
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(c) Fitness Standards
    Fitness standards for directors help ensure that directors have the 
necessary qualifications and experience to contribute more effectively 
to board governance, and most clearing agencies already have documented 
fitness standards for serving as director. The Commission believes that 
codifying this practice by requiring documented fitness standards will 
help ensure that directors are subject to consistent standards, fairly 
applied over time by the nominating committee and the board. Because 
the Commission is proposing rules to require independent directors, the 
Commission also believes requiring documented fitness standards will 
help ensure that a nominee's qualifications and relationships are 
reviewed pursuant to a consistent set of standards before the 
nomination is voted on by the board. In addition, the Commission is 
establishing that the nominating committee is responsible for 
maintaining the fitness standards because the composition of the 
nominating committee, in which a majority of directors must be 
independent directors, helps ensure that the standards are objective 
and evenly applied across nominees and over time because they will be 
maintained by a majority of directors from among the objective and 
disinterested group of independent directors.
    Although many registered clearing agencies already have documented 
fitness standards for selecting nominees to serve as directors 
generally, not all registered clearing agencies have an existing 
requirement to forbid directors who have been subject to a statutory 
disqualification. Because such individuals have been found in violation 
of applicable laws or suspended from membership or participation in an 
SRO, the Commission does not believe such an individual should serve in 
the capacity of a director, where functionally the individual would be 
in a position to advise and direct the decisions of a registered 
clearing agency. The Commission believes that adding such a requirement 
helps ensure a nominee's fitness to serve on the board.
(d) Selection Criteria for Directors
    Based on its supervisory experience, the Commission believes that 
enhancements to clearing agency governance practices would facilitate 
the ability of clearing agencies to obtain and address input from a 
broader array of market participants, especially on risk management 
issues, to improve resilience. Additionally, based on its supervisory 
experience, the Commission believes that clearing agencies should 
consider the views of relevant stakeholders, such as clearing members 
and clients, in their decision-making, as these groups will ultimately 
bear the majority of any losses incurred as a result of decisions 
affecting the clearing agency's risk profile. Further, based on its 
supervisory experience, the Commission believes that smaller 
participants and clients of participants should be represented on 
clearing agency boards and board committees, including the risk 
management committee, such that their views and perspectives are 
formally considered in board decisions that may impact them. In the 
Commission's view, the diverse perspectives and expertise that smaller 
participants and clients of participants can provide will help inform a 
clearing agency's operations and thereby improve the resilience of the 
registered clearing agency. Therefore, the Commission believes that 
board governance of the risk management function of the clearing agency 
will be enhanced when it has the benefit of more diverse perspectives 
on relevant risk management issues from across the range of 
stakeholders--owners, direct participants, and indirect participants--

[[Page 51830]]

in a registered clearing agency. Accordingly, proposed Rules 17Ad-
25(c)(4)(i), (ii), and (iii) would require that clearing agencies take 
steps to facilitate diverse perspectives and expertise on the board of 
directors, as well as greater involvement by these stakeholders.
    In the Commission's view, the proposed rules would complement the 
Exchange Act requirements for fair representation of owners and 
participants in the clearing agency's selection of directors and the 
administration of the clearing agency's affairs.\113\ Proposed Rule 
17Ad-25(c)(4)(ii) would help ensure that, when evaluating director 
nominees, the nominating committee considers nominees that represent 
the views of a broad range of participants with different business 
strategies, models, and sizes--such as smaller participants and clients 
of participants--for director positions. The Commission believes that 
it is useful for the nominating committee to also consider nominees who 
are representatives from participants and their clients for director 
positions because directors representative of a diverse cross-section 
of the clearing agency's participants and clients of participants are 
more likely to identify and understand the disparate impacts of 
different risks and risk management practices across the full set of 
participants and their clients.
---------------------------------------------------------------------------

    \113\ See 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

    While proposed Rule 17Ad-25(c)(4)(iii) does not require a 
registered clearing agency to include other types of stakeholders in 
the selection of directors, the Commission understands that other 
stakeholders--including transfer agents, settlement banks, nostro 
agents, liquidity providers, technology or other service providers--may 
be impacted by board decisions concerning risk management and other 
significant operational issues. Therefore, the Commission believes that 
board governance may benefit in some instances from considering such 
stakeholders' perspectives in the evaluation process for director 
nominees. Accordingly, proposed Rule 17Ad-25(c)(4)(iii) would help 
ensure that the nominating committee considers the views of other 
stakeholders who may be impacted by the decisions of the clearing 
agency into the evaluation process for director nominees. In this 
regard, the Commission believes that proposed Rule 17Ad-25(c)(4)(iii) 
would facilitate a process that considers the wide variety of 
perspectives that may have an interest in the risk management purpose 
of the clearing agency.
    Proposed Rule 17Ad-25(c)(4)(iii) would give the nominating 
committee discretion to determine how to consider the views of other 
stakeholders, in part based on the markets served by the clearing 
agency and the relevant interested stakeholders. In the Commission's 
view, relevant stakeholders generally would include persons and 
entities that access the national system for clearance and settlement 
indirectly (e.g., institutional and retail investors), entities that 
rely on the national system for clearance and settlement to more 
effectively provide services to investors and market participants, and 
other market infrastructures.\114\ The Commission believes that 
considering the views of such persons and entities in particular would 
support the Exchange Act requirements that clearing agencies be able to 
facilitate prompt and accurate clearance and settlement, protect 
investors and the public interest, and ensure the safeguarding of 
securities and funds in the custody or control of the clearing agency 
or for which the clearing agency is responsible.\115\ The Commission 
understands that the scope of relevant stakeholders who may be impacted 
by the decisions of the registered clearing agency will vary for each 
registered clearing agency and could include direct participants, 
indirect participants, and other stakeholders described in proposed 
Rule 17Ad-25(c)(4)(iii).
---------------------------------------------------------------------------

    \114\ See CCA Standards Adopting Release, supra note 13, at 
70803 (``Other relevant stakeholders currently include, for example, 
transfer agents, liquidity providers, and other linked market 
infrastructures, including exchanges, matching service providers, 
and payment systems.'').
    \115\ See supra Part I and Part II.A; see also 15 U.S.C 78q-
1(b)(3)(A).
---------------------------------------------------------------------------

    Finally, proposed Rule 17Ad-25(c)(4)(iv) would require the 
nominating committee's process to identify whether each selected 
nominee would meet the independent director definition in proposed 
Rules 17Ad-25(a) and (f), and whether each selected nominee has a known 
material relationship with the registered clearing agency or any 
affiliate thereof, an owner, a participant, or a representative of 
another stakeholder of the registered clearing agency described in 
proposed Rule 17Ad-25(c)(4)(iii). Such record would help to ensure and 
verify the integrity and consistency of the nominating committee's 
process and adherence to the clearing agency's standards for 
independent directors, consistent with proposed Rules 17Ad-25(b), (e), 
and (f).
3. Request for Comment
    The Commission requests comment on all aspects of proposed Rule 
17Ad-25(c). In particular, the Commission requests comment on the 
following specific topics:
    19. Is it appropriate for the Commission to require that the 
nominating committee be the exclusive venue for evaluating nominees for 
director to the board of directors? What alternative arrangements or 
processes might also be appropriate for evaluating director nominees? 
Should the rules incorporate such arrangements? Why or why not? Please 
explain.
    20. Should the Commission be more prescriptive in requiring that 
certain types of stakeholders, such as smaller participants and 
customers, be afforded a right of participation in the board of a 
clearing agency? Why or why not? If so, which types of stakeholders? 
Please explain with specific information.
    21. Do commenters agree with the Commission's assessment that 
requiring a majority of independent directors on the nominating 
committee will improve the quality of nominees? Please explain.
    22. Do commenters believe that the proposed rule will help ensure 
that the nominating committee considers nominees that represent the 
views of smaller participants and clients of participants? Please 
explain. Should the Commission consider additional specific composition 
requirements? Why or why not? If so, what should those requirements be?
    23. Has the Commission provided sufficient specificity regarding 
the scope and content of the evaluation process for director nominees? 
Please identify and explain other types of criteria, if any, that 
should be included in the evaluation process for director nominees. 
Please identify and explain any proposed criteria that should be 
excluded from the evaluation process for director nominees.

C. Risk Management Committee

1. Proposed Rule 17Ad-25(d)
    Proposed Rule 17Ad-25(d)(1) would require each registered clearing 
agency to establish a risk management committee (or committees) to 
assist the board of directors in overseeing the risk management of the 
registered clearing agency. Proposed Rule 17Ad-25(d)(1) would also 
require each risk management committee to reconstitute its membership 
on a regular basis and at all times include representatives from the 
owners and participants of the registered clearing agency. Proposed 
Rule 17Ad-25(d)(2) would require that a risk management committee, in 
the

[[Page 51831]]

performance of its duties, be able to provide a risk-based, 
independent, and informed opinion on all matters presented to it for 
consideration in a manner that supports the safety and efficiency of 
the registered clearing agency.
2. Discussion
(a) Purpose and Experience of the Risk Management Committee
    Covered clearing agencies are subject to the requirements of Rule 
17Ad-22(e) under the Exchange Act, while all registered clearing 
agencies other than covered clearing agencies are subject to the 
requirements of Rule 17Ad-22(d) under the Exchange Act.\116\ Currently, 
all registered clearing agencies are covered clearing agencies and, as 
such, they are required to have risk management committees as a part of 
their governance arrangements under Rule 17Ad-22(e)(3)(iv).\117\ While 
Rule 17Ad-22(e)(3)(iv) requires covered clearing agencies to have a 
risk management committee, no parallel requirement exists for 
registered clearing agencies that are subject to Rule 17Ad-22(d). The 
Commission recognizes that there may be future registered clearing 
agencies that are not covered clearing agencies and, as a result, would 
be subject to Rule 17Ad-22(d). The Commission believes that clearing 
agencies subject to Rule 17Ad-22(d) will also likely face risk 
management issues related to their activities and, therefore, that any 
clearing agency subject to Rule 17Ad-22(d) will likely benefit from 
having a risk management committee. Accordingly, the Commission is 
proposing Rule 17Ad-25(d) so that clearing agencies subject to Rule 
17Ad-22(d) will also be required to have risk management committees as 
a part of their governance arrangements.\118\ Additionally, because the 
general requirement for a risk management committee under Rule 17Ad-
22(e)(3)(iv) does not outline minimum requirements for such committee, 
proposed Rule 17Ad-25(d) establishes more defined requirements related 
to the purpose and function of risk management committees. The specific 
requirements imposed by proposed Rule 17Ad-25(d) will help enhance risk 
management governance across all registered clearing agencies.
---------------------------------------------------------------------------

    \116\ See supra notes 17-23 and accompanying text (explaining 
that there are two categories of clearing agencies: covered clearing 
agencies and all registered clearing agencies other than covered 
clearing agencies).
    \117\ See 17 CFR 240.17Ad-22(e)(3)(iv); see also CCA Standards 
Adopting Release, supra note 13, at 70807-09 (discussing that, under 
Rule 17Ad-22(e)(3)(iv), a registered clearing agency's risk 
management framework must provide risk management personnel with a 
direct reporting line to, and oversight by, a risk management 
committee of the board of directors).
    \118\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)(1), which requires a risk management committee to assist the 
board in overseeing the risk management of a registered clearing 
agency); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------

    As discussed above, each registered clearing agency is also a 
covered clearing agency and, therefore, has established some form of 
risk management committee to consider risk issues generally.\119\ 
Critical to the effective functioning of a clearing agency is the 
board's ability to understand and engage with the risks that a 
registered clearing agency faces and the risk management practices it 
employs to mitigate those risks. The Commission recognizes that while 
the board has ultimate responsibility over risk management matters, it 
may assign certain tasks to a board committee to assist the board in 
discharging its ultimate responsibility.\120\ Therefore, the Commission 
believes that a risk management committee of the board is a more 
effective way to help ensure that the board is engaged with and 
informed of the ongoing risk management of the clearing agency, and 
that a dedicated committee of the board remains focused exclusively on 
matters related to risk management. The Commission believes that 
requiring registered clearing agencies to establish a risk management 
committee of the board would help ensure that the board can more 
effectively oversee management's decisions concerning matters that 
implicate the clearing agency's risk management, including its 
policies, procedures, and tools for mitigating risk.
---------------------------------------------------------------------------

    \119\ See infra Part IV.B.4.a)(3).
    \120\ See CCP Resilience Guidance, supra note 77, at 5.
---------------------------------------------------------------------------

    In addition, for the risk management committee itself to be 
effective, it must have a clearly defined purpose and obligations to 
the board. Accordingly, proposed Rule 17Ad-25(d)(2) would require that 
a risk management committee, in the performance of its duties, be able 
to provide a risk-based, independent, and informed opinion on all 
matters presented to it for consideration in a manner that supports the 
safety and efficiency of the registered clearing agency. The proposed 
rule is intended to specify the role of the risk management committee 
by stating the committee's purpose--namely, to provide a risk-based, 
independent, and informed opinion on all matters presented to it in a 
way that supports the safety and efficiency of the registered clearing 
agency. The Commission believes the proposed rule helps ensure that the 
committee has a clear scope and sufficient direction to more 
effectively address risk management related matters, regardless of the 
participants, markets, and products that a clearing agency serves.
    First, with respect to its purpose, the risk management committee's 
opinions must be risk-based, meaning that its opinions are focused on 
both the risks that the clearing agency faces and the tools at its 
disposal to mitigate and address such risks. To facilitate such an 
approach, the proposed rule provides that the risk management committee 
must be able to provide an opinion that supports the safety and 
efficiency of the clearing agency itself. As a result, the Commission 
believes that when the risk management committee makes recommendations 
to the board, its opinions should reflect how the decisions support the 
safety and efficiency of the clearing agency. In the Commission's view, 
the stated objective of supporting the safety and efficiency of the 
clearing agency helps ensure that the risk management committee's 
recommendations represent the best interests of the clearing agency. 
Second, the risk management committee's opinions must be independent. 
That is, when making recommendations to the board, the risk management 
committee's decisions or opinions must be its own, mindful of the 
objective discussed above, and not merely a rubber stamp for the 
recommendations presented to the committee by management. The 
Commission believes that, by requiring the risk management committee to 
provide an independent opinion, irrespective of its composition, the 
proposed rule helps ensure that the committee is free from influence in 
the performance of its duties.
    Finally, the risk management committee's opinions must be informed. 
That is, when making recommendations to the board, the risk management 
committee's opinions should demonstrate that the committee was able to 
engage thoughtfully and knowledgeably with the matters presented to it. 
In this regard, for the risk management committee to provide an 
informed opinion, its members should have a clear understanding of the 
clearing agency's operations and risk management procedures, including 
the risks that it faces and its methods of addressing such risks. 
Accordingly, the Commission believes that, in complying with this 
proposed requirement, the risk management committee generally should 
include directors with specific risk management expertise and

[[Page 51832]]

experience related to the risks that the clearing agency faces.\121\ 
Because the risks a clearing agency faces will vary depending on the 
products it clears and the markets it serves, the Commission believes 
that a clearing agency should have discretion to determine the 
appropriate qualifications and expertise needed for the risk management 
committee to provide an informed opinion. The Commission also believes 
that, by requiring the risk management committee to provide an informed 
opinion, the proposed rule helps ensure that the committee's 
recommendations are more reliable and effective. In the Commission's 
view, the risk management committee's ability to provide risk-based, 
independent, and informed opinions is critical to the proper 
functioning and effectiveness of the committee.
---------------------------------------------------------------------------

    \121\ The Commission has previously recognized that, because 
clearing and settlement is a highly specialized area, specific risk 
management expertise and experience are needed to serve on the risk 
management committee and make informed decisions. See Regulation MC 
Proposing Release, supra note 1, at 65899, 65921 (discussing the 
``highly specialized risk management expertise required of directors 
serving on [the risk management] committee'').
---------------------------------------------------------------------------

(b) Representation of Owners and Participants
    Commission rules do not currently require a registered clearing 
agency to include representatives from the clearing agency's owners and 
participants on the risk management committee. Based on its supervisory 
experience, the Commission believes that clearing agencies will benefit 
from the diverse perspectives and expertise that representatives from 
owners and participants can provide, which enhances the effectiveness 
of their risk management practices. With this in mind, the Commission 
is proposing that the risk management committee at all times include 
representatives from the owners and participants of the registered 
clearing agency.\122\ In the Commission's view, these representatives 
would be persons who have a relationship with the clearing agency's 
owners and participants, such as employees of the owners and 
participants or those who have an ownership interest in the owners and 
participants. Based on its supervisory experience, the Commission 
believes that representatives from a clearing agency's owners and 
participants will likely have an understanding of the clearing agency's 
operations and procedures, as well as the complex risk management 
issues that the clearing agency's board must consider. In this regard, 
requiring the risk management committee to include representatives from 
the clearing agency's owners and participants helps ensure that the 
risk management committee's recommendations to the board reflect these 
stakeholders' unique perspectives and expertise on risk management 
issues.
---------------------------------------------------------------------------

    \122\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)(1)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------

    Proposed Rule 17Ad-25(d)(1) requires that the risk management 
committee at all times include multiple representatives from the owners 
and participants of the registered clearing agency. By requiring the 
risk management committee to include representatives from the clearing 
agency's owners and participants, the Commission believes that the 
committee will likely include representation from a broad range of 
participants with different business strategies, models, and sizes. The 
committee generally should include both small and large participants. 
The Commission recognizes that, other than requiring that multiple 
representatives from the clearing agency's owners and participants 
serve on the committee at all times, the proposed rule does not require 
that a certain percentage or number of such representatives serve on 
the committee. Accordingly, the Commission believes that the proposed 
rule provides a registered clearing agency with some discretion to 
determine the appropriate composition for the risk management committee 
with respect to representation from its owners and participants. By 
requiring that the risk management committee include multiple 
representatives from the owners and participants of the clearing 
agency, the proposed rule helps ensure a minimum standard for the 
inclusion of market participants on risk management committees while 
providing sufficient flexibility to registered clearing agencies given 
the range of different sizes, business models, and governance 
structures across clearing agencies.
(c) Requirement To Reconstitute Membership
    Many registered clearing agencies have established policies and 
procedures for governance arrangements that help promote participation 
from a broader array of owners and participants on the risk management 
committee through the use of regular reconstitution.\123\ The 
Commission believes that codifying this practice will set a minimum 
standard for the reconstitution of the risk management committee's 
membership. Therefore, the Commission is proposing that the risk 
management committee reconstitute its membership on a regular 
basis.\124\ Requiring the risk management committee to regularly 
reconstitute its membership helps ensure that a broad range of owners 
and participants will be able to provide their risk management 
expertise and participate in the decision-making of the risk management 
committee over time. In the Commission's view, the proposed 
reconstitution requirement achieves the above objective of ensuring a 
broad range of participation on the risk management committee without 
imposing specific obligations related to owners, participants, or 
independent directors that may be suitable in some, but not necessarily 
all, cases.
---------------------------------------------------------------------------

    \123\ See, e.g., ICC, ICE Clear Credit Regulation and Governance 
Fact Sheet, at 3 (April 2022), https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf; OCC, 
Risk Committee Charter, at 1 (rev. Sept. 22, 2021), https://www.theocc.com/getmedia/e71a4c1d-52dc-4c95-aeb1-98dab9159f41/risk_committee_charter.pdf.
    \124\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)(1)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------

    Because the risk management committee is broadly responsible for 
providing recommendations to the board on all risk management related 
matters, it is important that the committee's membership reflects a 
wide range of owners and participants with relevant experience and 
expertise on a variety of risk management issues. By requiring the risk 
management committee to regularly reconstitute its membership, proposed 
Rule 17Ad-25(d)(1) helps ensure ongoing diversity of perspectives 
across owners and participants and expertise on the risk management 
committee. The Commission believes the proposed reconstitution 
requirement helps ensure that the risk management committee is well-
positioned to provide more effective recommendations to the board on 
all risk management matters. The Commission also believes the proposed 
reconstitution requirement helps ensure that the committee is able to 
provide fresh perspectives on risk management matters, which, in turn, 
helps promote more effective and reliable risk management practices at 
a registered clearing agency.
    The Commission acknowledges that proposed Rule 17Ad-25(d)(1) only 
requires the risk management committee to reconstitute its membership 
``on a regular basis.'' In this regard, the proposed rule provides a 
registered clearing agency with discretion to

[[Page 51833]]

determine the appropriate timing for reconstitution. For example, the 
charter for a registered clearing agency's risk management committee 
could establish that the committee will conduct a review of its members 
on an annual basis, or other specified length of time, to assess 
whether the committee continues to be an accurate reflection of the 
clearing agency's owners and participants. The charter could also 
establish that members of the committee serve for a specified term, or 
that the committee would rotate or replace directors on the committee 
at certain intervals absent a specified turnover threshold among 
directors. Additionally, registered clearing agencies could stagger 
terms in order to have regular turnover of participants and other 
members of the risk management committee.
3. Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-25(d). In addition, the Commission requests comments 
on the following specific issues:
    24. The Commission is not proposing to carve out the risk 
management committee from the director independence requirements under 
proposed Rule 17Ad-25(e). Should the Commission include such a carve-
out for the risk management committee so that a registered clearing 
agency would not be required to include independent directors on the 
committee? Why or why not? If not, should there be separate director 
independence requirements applicable only to the risk management 
committee that reflect the highly specialized risk management expertise 
needed to serve on the committee? Why or why not?
    25. Is the proposed requirement that the registered clearing 
agency's risk management committee be a committee of the board a more 
effective way to structure the risk management committee than requiring 
that the risk management committee be an external committee, such as a 
management committee or an advisory committee? Why or why not? If not, 
should the risk management committee be structured to represent more 
participants, regardless of whether those participants are represented 
on a clearing agency's board? Why or why not?
    26. The Commission is not specifying whose responsibility it is to 
determine the matters presented to the risk management committee for 
consideration. Should the Commission be more prescriptive and specify 
whose responsibility it is to make such determinations? If so, should 
the Commission require the risk management committee to designate 
thresholds or identify the types of risk management related matters 
that warrant consideration by the committee? Why or why not? Please 
explain.
    27. Is the proposed requirement that the risk management committee 
include at all times representatives from the registered clearing 
agency's owners and participants sufficient to help ensure that the 
directors serving on the committee will have the specific risk 
management expertise and relevant experience needed to make effective 
risk management decisions? Why or why not? In requiring that the risk 
management committee include such representatives at all times, should 
the Commission require that a specific percentage or number of 
representatives from the clearing agency's owners and participants 
serve on the risk management committee? Why or why not? If so, what 
percentage or number? Please explain with specific information.
    28. Should the Commission require the risk management committee to 
include at all times a specific percentage or number of representatives 
from small participants of the clearing agency in addition to 
representatives from the owners and participants more generally, as 
proposed? Why or why not? If so, what percentage or number? Please 
explain with specific information.
    29. The Commission is not specifying whose responsibility it is to 
determine the appropriate qualifications and expertise needed for a 
director to serve on the risk management committee. Should the 
Commission be more prescriptive and specify whose responsibility it is 
to make this determination, such as the nominating committee, or should 
this determination remain up to the discretion of the registered 
clearing agency? Why or why not? Please explain.
    30. The Commission requests comment on whether the requirement that 
a risk management committee ``reconstitute'' its membership on a 
regular basis is sufficiently clear. Is there additional guidance 
needed on what ``reconstitute'' means? Is it sufficiently clear that 
the term ``reconstitute'' refers to the membership of the risk 
management committee and not to the form of the committee? Why or why 
not? Should the Commission instead require that the membership be 
``rotated''? \125\ Please explain.
---------------------------------------------------------------------------

    \125\ The CFTC's proposal would require a risk management 
committee to ``rotate'' its membership on a regular basis. See supra 
note 52 and accompanying text.
---------------------------------------------------------------------------

    31. Has the Commission provided a sufficient explanation for what 
constitutes ``on a regular basis'' with respect to how often a risk 
management committee is required to reconstitute its membership? Why or 
why not? Would a more specific reconstitution requirement be 
appropriate? For example, should this requirement specify a frequency 
for the risk management committee's reconstitution (e.g., annually)? 
Why or why not? If so, please explain what the appropriate frequency 
should be.

D. Conflicts of Interest

1. Proposed Rules 17Ad-25(g) and (h)
    Proposed Rule 17Ad-25(g) would require each registered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to identify and document existing or 
potential conflicts of interest in the decision-making process of the 
clearing agency involving directors or senior managers of the 
registered clearing agency; and mitigate or eliminate and document the 
mitigation or elimination of such conflicts of interest. Additionally, 
proposed Rule 17Ad-25(h) would require registered clearing agencies to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to require a director to document and 
inform the registered clearing agency promptly of the existence of any 
relationship or interest that reasonably could affect the independent 
judgment or decision-making of the director.
2. Discussion
    At the time of the 2016 CCA Standards Adopting Release, the 
Commission declined to incorporate more prescriptive governance 
elements into the rule as urged by commenters, including specific 
requirements on conflicts of interest,\126\ based on the premise that 
the requirements in Section 17A of the Exchange Act relating to fair 
representation and the public interest provided sufficient

[[Page 51834]]

grounds to hold covered clearing agencies accountable to these 
concerns.\127\ At the time, the Commission also observed that as a 
general matter, the market for clearing agency services demonstrates 
evidence of a significant volume of activity being concentrated in a 
small number of large financial institutions.\128\ The concentration of 
clearing and settlement services within a handful of entities 
continues, suggesting that additional interventions may be 
appropriate.\129\ The Commission is concerned that this characteristic 
could impede the continued development of open, transparent, and 
competitive markets and, therefore, believes it is appropriate to 
propose requirements on registered clearing agencies on mitigating or 
eliminating conflicts of interest so that such conflicts do not 
undermine the integrity of decisions made in the governance of the 
clearing agency. The proposed rules are intended to address concerns 
that the institutions that currently dominate the securities markets 
would have conflicts of interest that influence their participation in 
the development of centralized trading and clearance and settlement 
systems for securities. As they relate to clearing agencies that clear 
security-based swaps, the proposed rules would also advance the policy 
objectives set forth in Section 765 by establishing new requirements 
for policies and procedures that require such clearing agencies to 
identify, mitigate or eliminate, and document the identification and 
mitigation or elimination of conflicts of interest.
---------------------------------------------------------------------------

    \126\ See CCA Standards Adopting Release, supra note 13, at 
70804 (stating that ``[o]ne commenter stated that proposed Rule 
17Ad-22(e)(2) does not require covered clearing agencies to resolve 
conflicts of interests among board members and management and urged 
the Commission explicitly to require covered clearing agencies to 
document and maintain policies and procedures governing the 
resolution of conflicts of interests that may impact certain 
decisions by the board of directors. The Commission notes . . . that 
the commenter's concern is addressed by Section 17A(b)(3)(F) of the 
Exchange Act, which requires that the rules of a clearing agency be 
designed, in general, to protect investors and the public 
interest'').
    \127\ See 15 U.S.C. 78q-1(b)(3)(C).
    \128\ See CCA Standards Adopting Release, supra note 13, at 
70793 (stating that ``the Commission has considered the level of 
concentration in the provision of clearing agency services'' and 
acknowledging concerns ``that at present the clearance and 
settlement industry, like much of the financial sector, can be 
described as highly concentrated, and . . . that it is paramount . . 
. [to] promote the proliferation of viable new clearing agencies, 
given that existing clearing agencies typically serve as 
intermediaries for trillions of dollars in trading volumes'').
    \129\ See Staff Report on Clearing Agencies, supra note 27, at 
21.
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    With the above in mind, requirements on registered clearing 
agencies to address conflicts of interest would strengthen the 
integrity of a registered clearing agency's governance arrangements, 
including those regarding director independence, the fitness standards 
applied and nominations made by the nominating committee, and the 
independent opinions and recommendations made by the risk management 
committee previously discussed. Proposed Rules 17Ad-25(g) and (h) help 
promote the integrity of these governance arrangements by helping 
ensure that a registered clearing agency is capable of both identifying 
potential conflicts when they arise and subjecting conflicts to a 
transparent and uniform process of review, mitigation or elimination, 
and documentation. Specifically, the proposed rules would help ensure 
that potential conflicts of interest are identified and documented, 
that policies and procedures for their management have been established 
ex ante to help ensure a consistent approach over time, and that cases 
are subject to established processes for review and mitigation or 
elimination. In some cases, for example, a conflicts of interest policy 
may simply require that a director or senior manager recuse herself 
from a particular decision to mitigate or eliminate the conflict of 
interest. At the same time, the Commission believes that disclosure, 
while an effective tool for the clearing agency to identify and 
recognize a conflict of interest, is insufficient by itself to reduce 
the potential harm a conflict of interest may have on the clearing 
agency. Instead, the Commission believes that as the clearing agency is 
best positioned to identify and address conflicts of interest that may 
arise in its operations and risk management and decision-making, the 
clearing agency is best positioned through reasonable policies and 
procedures to mitigate--namely, reduce--or eliminate these conflicts of 
interest so that such conflicts do not undermine the integrity of 
decisions made in the governance of the clearing agency. In addition, 
the policies and procedures approach helps ensure the documentation of 
conflicts of interest and their mitigation or elimination, helping the 
Commission to assess and compare the types of conflicts that arise 
across clearing agencies to help promote more effective oversight and 
regulation of clearing agencies.
    In the absence of policies and procedures to address conflicts of 
interest, directors and senior managers of a registered clearing agency 
could undermine the purpose of requiring independent directors and 
centralizing the nominating process for new directors in a nominating 
committee composed of a majority of independent directors. More 
broadly, the proposed rules help to ensure that when directors and 
senior managers develop relationships that create potential conflicts 
of interest, the clearing agency has a process to manage those 
relationships to mitigate or eliminate conflicts so that they do not 
undermine the integrity of decisions made in the governance of the 
clearing agency.
(a) Potential Conflicts
    Under proposed Rule 17Ad-25(g), the registered clearing agency must 
be able to identify and document both existing and potential conflicts 
of interest involving directors or senior managers of the registered 
clearing agency. The rule is intended to address the conflicts of 
interests of directors and senior managers that could undermine the 
decision-making process within a registered clearing agency or 
interfere with fair representation and equitable treatment of clearing 
members or other market participants by a registered clearing agency. 
Being able to identify potential conflicts of interest is critical to 
ensuring the effective identification and management of actual 
conflicts of interest. In other words, a clearing agency must be able 
to spot close cases, where another director, manager, employee, or 
observer might perceive a conflict of interest, in order to more 
effectively manage actual conflicts and help ensure the integrity of 
decisions made in the governance of the clearing agency.
    As previously discussed in Part II.A, it is important for the 
registered clearing agency to consider the differing incentives and 
interests of individual directors, once they are on the board, when 
they are governing the registered clearing agency. The board as a whole 
is ultimately responsible for overseeing the clearing agency's 
compliance with the regulatory obligations under the Dodd-Frank Act and 
the Exchange Act, including the open and fair access requirements.\130\ 
Yet, depending on their affiliation with owners, large participants, 
small participants, or indirect participants, individual directors may 
be subject to different perspectives and motivations when fulfilling 
these duties and roles. Like participants themselves, direct 
participant directors may on balance be more likely to favor reducing 
or minimizing the risk exposure of the clearing agency, potentially at 
the expense of more open access; in contrast, indirect participant 
directors may be inclined to favor expanded access to products and 
services, which may increase the amount of risk that the clearing 
agency must successfully manage.\131\
---------------------------------------------------------------------------

    \130\ See Regulation MC Proposing Release, supra note 1, at 
65888.
    \131\ See id.
---------------------------------------------------------------------------

    The Commission believes that because interests and incentives may 
vary among directors and over time for

[[Page 51835]]

a range of reasons, it is not possible to predict how any individual 
director will address particular matters. For this reason, the approach 
taken in proposed Rule 17Ad-25(g)--as well as proposed Rule 17Ad-
25(h)--is intended to achieve an appropriate balance among these 
various considerations by taking a principles-based approach to 
addressing conflicts of interest. While the proposed rule provides the 
registered clearing agency with a certain level of discretion to 
address specific facts and circumstances it faces in light of its 
governance structure, the product it clears, and the market it serves, 
it is designed to complement other applicable, more prescriptive 
requirements in this proposal, which the registered clearing agency may 
also separately apply where relevant. Additionally, the proposed rule 
is intended to limit the clearing agency's discretion through more 
prescriptive procedural requirements the clearing agency must undertake 
to establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to document the identification, 
mitigation or elimination of conflicts of interest under proposed Rule 
17Ad-25(g).
(b) Obligation of Directors To Report
    Because a registered clearing agency may not have access to 
information necessary to identify a potential conflict of interest, 
proposed Rule 17Ad-25(h) would also require a registered clearing 
agency to have policies and procedures that require a director to 
document and inform the registered clearing agency promptly of the 
existence of any relationship or interest that reasonably could affect 
the independent judgment or decision-making of the director. The 
proposed rule takes elements from the ``material relationship'' 
definition, which was carried forward from the Commission's previous 
proposal in Regulation MC,\132\ without incorporating the definition 
into the proposed rule itself. Specifically, the Commission is 
requiring policies and procedures that focus on any relationship or 
interest that reasonably could affect the independent judgment or 
decision-making of the director, rather than material relationships or 
interests, so that the registered clearing agency--not the party with a 
reporting obligation--can determine whether a relationship or interest 
is subject to mitigation or elimination under the conflicts of interest 
policy. This approach helps ensure that the registered clearing agency 
has sufficient information to investigate, identify and address 
potential conflicts.
---------------------------------------------------------------------------

    \132\ See id. at 65896-97.
---------------------------------------------------------------------------

(c) Policies and Procedures Approach
    Because organizational structures vary across clearing agencies, as 
do the products, markets, and market participants served by the 
clearing agency, the Commission has taken a policies and procedures 
approach in the proposed rule to manage conflicts. This provides 
registered clearing agencies with discretion to design policies that 
fit their particular structure and circumstances, and help ensure that 
policies and procedures remain effective over time as circumstances 
change. While the Commission has identified some specific circumstances 
in proposed Rules 17Ad-25(f) that preclude a director from being an 
independent director because they present a clear conflict of interest, 
as a general matter the Commission believes that a clearing agency 
should have discretion to assess conflicts and determine how to 
mitigate or eliminate them.
3. Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rules 17Ad-25(g) and (h). In addition, the Commission requests 
comments on the following specific issues:
    32. Are proposed Rules 17Ad-25(g) and (h) sufficient to have 
registered clearing agencies address conflicts of interest within their 
governance arrangements? Why or why not? Please provide specific 
examples to illustrate your points, if possible.
    33. Do commenters agree with the potential conflict concerns that 
the Commission has identified? What effect would the identified 
conflicts of interest likely have? Should the Commission focus on any 
of these conflicts more than others? Are there other existing conflicts 
concerns that commenters believe warrant scrutiny? If so, what are they 
and how are they likely to affect registered clearing agencies? Which 
conflicts of interest could potentially cause the greatest harm to a 
registered clearing agency? Please explain.
    34. What potential new conflicts of interest could arise that the 
Commission should consider? What other parties may have conflicts of 
interest that would affect whether they should control or participate 
in the governance of a registered clearing agency? In what 
circumstances do these conflicts of interest arise?
    35. Are there any additional requirements and/or guidance that the 
Commission could provide to help registered clearing agencies evaluate 
the relationships of their directors and senior managers to identify 
potential sources of conflicts? Please explain with specifics in terms 
of processes that would help identify both existing and potential 
conflicts of interest involving directors or senior managers of the 
registered clearing agency.
    36. In requiring registered clearing agencies to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to require a director to document and inform the 
registered clearing agency promptly of the existence of any 
relationship or interest that reasonably could affect the independent 
judgment or decision-making of the director, does proposed Rule 17Ad-
25(h) provide sufficient requirements to have directors document and 
inform the registered clearing agency promptly of potential conflicts 
of interest? Why or why not?
    37. Is the ``reasonably could affect'' standard proposed in Rule 
17Ad-25(h) sufficient? Why or why not?
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    \133\ The proposed rule would not apply to utility companies, 
such as a power company providing general power services for the 
registered clearing agency, although general power services are 
necessary to allow a registered clearing agency to function and 
operate, as a general matter. The Commission believes that such 
services neither support the core clearance and settlement 
functionality of the registered clearing agency nor are material to 
the clearing agency's business, in that the power company does not 
perform the core clearance and settlement functionality or material 
clearing agency business functions itself. At the same time, the 
registered clearing agency should be aware of how issues relating to 
such services may impact its obligations under the Exchange Act. 
This is consistent with Commission staff's views. See, e.g., 
Division of Trading and Markets: Responses to Frequently Asked 
Questions Concerning Regulation SCI (rev. Aug. 21, 2019), https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml (stating 
that ``an issue at a power utility may interrupt the electric power 
supplied to an SCI entity's SCI systems. Even if the outage at the 
power utility's system would not itself be an SCI event, there is a 
significant likelihood that an SCI entity would nonetheless 
experience an SCI event following such an outage'').
---------------------------------------------------------------------------

E. Board Obligation To Oversee Service Providers for Critical Services

1. Proposed Rule 17Ad-25(i)
    Proposed Rule 17Ad-25(a) would define the term ``service provider 
for critical services'' to mean any person that is contractually 
obligated to the registered clearing agency for the purpose of 
supporting clearance and settlement functionality or any other purposes 
material to the business of the registered clearing agency.\133\ 
Proposed Rule 17Ad-25(i)(1) would require each registered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to enable the board to confirm and 
document that risks

[[Page 51836]]

related to critical service provider relationships are managed in a 
manner consistent with the registered clearing agency's risk management 
framework, and to review senior management's monitoring of 
relationships with service providers for critical services. Proposed 
Rule 17Ad-25(i)(2) would require each registered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to enable the board to approve policies 
and procedures that govern the relationship with service providers for 
critical services. Proposed Rule 17Ad-25(i)(3) would require each 
registered clearing agency to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to enable 
the board to review and approve plans for entering into third-party 
relationships where the engagement entails being a service provider for 
critical services to the registered clearing agency. Proposed Rule 
17Ad-25(i)(4) would require each registered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to enable the board to, through regular 
reporting to the board by senior management, confirm that senior 
management takes appropriate actions to remedy significant 
deterioration in performance or address changing risks or material 
issues identified through ongoing monitoring.
2. Discussion
    Under existing requirements, the Commission requires registered 
clearing agencies to manage operational risk, which can include risks 
associated with relationships with service providers for critical 
services. Rule 17Ad-22(d)(4) under the Exchange Act requires a 
registered clearing agency that is not a covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to identify sources of operational risk 
and minimize them through the development of appropriate systems, 
controls, and procedures; implement systems that are reliable, 
resilient and secure, and have adequate, scalable capacity; and have 
business continuity plans that allow for timely recovery of operations 
and fulfillment of a clearing agency's obligations.\134\ Rule 17Ad-
22(e)(17) under the Exchange Act requires a covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to manage the covered clearing agency's 
operational risks by, among other things, identifying the plausible 
sources of operational risk, both internal and external, and mitigating 
their impact through the use of appropriate systems, policies, 
procedures, and controls.\135\ Additionally, under Regulation SCI, the 
Commission requires registered clearing agencies as SCI entities to 
conduct risk assessments of SCI systems at least once per year and 
report the findings to senior management and the board of 
directors.\136\
---------------------------------------------------------------------------

    \134\ See 17 CFR 240.17Ad-22(d)(4).
    \135\ See 17 CFR 240.17Ad-22(e)(17).
    \136\ See 17 CFR 242.1000-1007.
---------------------------------------------------------------------------

    Based on its supervisory experience, the Commission has observed 
that clearing agencies have used service providers to help ensure the 
prompt and accurate clearance and settlement of securities 
transactions, and that in some cases, service providers are affiliates 
or a parent company within the same holding company structure as the 
registered clearing agency itself. Service providers may also be third 
party entities, such as technology providers, data providers, or 
providers of other services. Because of the range of relationships and 
needs of a registered clearing agency, service providers can perform a 
wide variety of functions. For example, a clearing agency may contract 
with its parent company to staff the registered clearing agency.\137\ A 
clearing agency may contract with one or more investment advisers to 
help facilitate the closing out of a defaulting participant's 
portfolio.\138\ A clearing agency may use one or more data service 
providers to help calculate pricing information for securities.\139\ A 
clearing agency may also purchase technology services from service 
providers that may help to facilitate clearance and settlement in a 
number of ways. In each of the cases described above, failure of the 
service provider to perform its obligations would pose significant 
operational risks and have critical effects on the ability of the 
registered clearing agency to perform its risk management function and 
facilitate prompt and accurate clearance and settlement. In this 
regard, under existing requirements, including Regulation SCI, 
outsourcing a clearance and settlement functionality to a service 
provider for critical services does not relieve the registered clearing 
agency of its statutory and regulatory obligations, which remain with 
the registered clearing agency.\140\
---------------------------------------------------------------------------

    \137\ See, e.g., DTCC, Businesses and Subsidiaries, https://www.dtcc.com/about/businesses-and-subsidiaries; see also Part IV.B.1 
(explaining that DTC, FICC, and NSCC are clearing agency 
subsidiaries of DTCC).
    \138\ See, e.g., NSCC, Disclosure Framework for Covered Clearing 
Agencies and Financial Market Infrastructures (Dec. 2021), at 84, 
https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf (``NSCC utilizes the 
services of investment advisors and executing brokers to facilitate 
such [close-out purchase and sale] transactions [for open Continuous 
Net Settlement (CNS) positions] promptly following its determination 
to cease to act. NSCC may engage in hedging transactions or 
otherwise take action to minimize market disruption as a result of 
such purchases and sales.'').
    \139\ See, e.g., FICC, Disclosure Framework for Covered Clearing 
Agencies and Financial Market Infrastructures (Dec. 2021), at 58, 
65, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf (``Collateral securities 
are re-priced every night, from pricing sources utilized by FRM's 
[Financial Risk Management's] Securities Valuation unit . . . . FICC 
utilizes multiple third-party vendors to price its eligible 
securities and uses a pricing hierarchy to determine a price for 
each security.'').
    \140\ See Regulation SCI Adopting Release, supra note 39, at 
77276 (expressing that an ``SCI entity should be responsible for 
managing its relationship with third parties operating systems on 
behalf of the SCI entity through due diligence, contract terms, and 
monitoring of third party performance'').
---------------------------------------------------------------------------

    As firms explore new technologies that can facilitate prompt and 
accurate clearance and settlement in new and innovative ways, clearing 
agencies may increasingly determine that service providers will offer 
the most effective technology to perform key functions.\141\ Reliance 
on service providers will require careful oversight of these 
relationships because service provider relationships are a key source 
of operational risk to a registered clearing agency, risk which can 
result in service outages that, due to the centralizing nature of 
registered clearing agencies, could have implications for the national 
system for clearance and settlement.
---------------------------------------------------------------------------

    \141\ See id. at 72252-53.
---------------------------------------------------------------------------

    Ultimately, it is the responsibility of the board to oversee the 
relationships that management establishes with service providers to 
help ensure that management is performing its function more effectively 
and that the clearing agency can facilitate prompt and accurate 
clearance and settlement. Accordingly, the Commission believes it is 
appropriate to propose certain requirements relating to the board 
oversight of service providers for critical services.
(a) Definition of Service Providers for Critical Services
    Registered clearing agencies perform some oversight of certain 
service provider relationships, pursuant to existing Commission 
requirements with respect to these relationships.\142\ Against this 
backdrop and as part of the evolution of the registered clearing agency 
regulatory framework, the

[[Page 51837]]

Commission proposes a companion governance requirement to these 
existing rules that makes explicit the registered clearing agency's 
board obligation to oversee the range of its service providers for 
critical services. In this regard, proposed Rule 17Ad-25(a) would 
define the scope of ``service provider for critical services'' to mean 
any person that is contractually obligated to the registered clearing 
agency for the purpose of supporting clearance and settlement 
functionality or any other purposes material to the business of the 
registered clearing agency. Absent regular monitoring and oversight, 
these relationships could endanger the operational resilience of a 
registered clearing agency and call into question the registered 
clearing agency's ability to meet its obligations under the Exchange 
Act.
---------------------------------------------------------------------------

    \142\ See 17 CFR 240.17Ad-22(d)(4) and (e)(17); 17 CFR 242.1000-
1007.
---------------------------------------------------------------------------

(b) Obligations of the Board
    In addition, proposed Rule 17Ad-25(i) would explicitly obligate the 
registered clearing agency to have policies and procedures that require 
its board to oversee a registered clearing agency's relationships with 
service providers for critical services. Proposed Rule 17Ad-25(i) 
includes a policies and procedures approach because, the Commission 
believes that, given the range of potential service provider 
relationships, the risks that they pose, and the different ways in 
which they might interact with different types of products, markets, 
and market participants, a registered clearing agency will need to 
exercise its discretion and judgment in managing these risks and 
reviewing steps taken by management.
    Accordingly, under paragraphs (1) and (2), the board would be 
charged with reviewing senior management's monitoring of each 
relationship with a service provider for critical services, confirming 
and documenting that the risks related to such relationships have been 
considered and addressed consistent with the clearing agency's risk 
management framework, and, more generally, approving policies and 
procedures that govern such relationships. One method of confirming and 
documenting the risks posed by a service provider for critical services 
to the registered clearing agency would be for the board to complete a 
self-assessment based on the format and substance of Annex F in the 
PFMI \143\ that highlights oversight expectations applicable to 
critical service providers. Annex F, in its form as of the date of this 
publication, provides a comprehensive basis for the board of a 
registered clearing agency to use to assess a service provider's risk 
identification and management, information security management, 
reliability and resilience, technology planning, and the strength of 
communications with users. Completing such a self-assessment is not 
mandatory but may be helpful for the registered clearing agency to 
demonstrate compliance with this element of proposed Rule 17Ad-
25(i)(1).
---------------------------------------------------------------------------

    \143\ See PFMI, supra note 4, at 170-71.
---------------------------------------------------------------------------

    Paragraph (1) would also require review of senior management's 
oversight of a service provider relationship. The Commission believes 
that the board should be aware of the risks flowing into the registered 
clearing agency, including through its relationships with service 
providers for critical services, and maintain awareness of those risks 
over time by monitoring management's oversight of the relationship. In 
its traditional function as a check on management, the board can help 
ensure that, for example, management assesses and addresses performance 
issues by the provider under any agreement with the provider and helps 
to ensure that product or other deliverables are provided timely and 
consistent with the terms of the agreement.
    Under paragraph (3), the board should review and approve plans for 
entering into third-party relationships where the engagement entails 
being a service provider for critical services to the registered 
clearing agency. The Commission believes the board's participation in 
this regard is required as part of sound risk management when the 
clearing agency enters into contractual relationships with third 
parties. Board involvement would help ensure that the terms of 
performance for the service provider are sufficient to support the 
needs of the registered clearing agency and any increased level of risk 
to the registered clearing agency is evaluated, assessed, and accounted 
for. If renewal of third-party contracts or performance issues are 
called into question, the Commission believes that the Board should 
generally review such matters as part of its oversight responsibilities 
in existing governance arrangements and requirements.\144\
---------------------------------------------------------------------------

    \144\ See generally 17 CFR 240.17Ad-22(d)(8), (e)(2). Existing 
Rules 17Ad-22(d)(8) and (e)(2) impose obligations on a governance 
arrangements of the clearing agency to promote the effectiveness of 
the clearing agency's risk management procedures. Proposed Rule 
17Ad-25(i)(3) would impose obligations on the Board when initiating 
a third-party relationship.
---------------------------------------------------------------------------

    Finally, under paragraph (4), the board would have responsibility 
for overseeing the extent to which senior management remedies 
performance issues under a service provider contract. A key source of 
risk in any service provider relationship to a registered clearing 
agency is the operational risks that may arise if a service provider is 
not performing pursuant to the agreed terms of the contractual 
relationship. Without the board's effective ongoing monitoring of such 
risks and oversight of management's remedial actions to control such 
risks, the registered clearing agency may be faced with increasing 
levels of risk that undermine sound risk management and operational 
resilience. Accordingly, the Commission believes that policies and 
procedures should specifically provide for regular reporting to the 
board by senior management to ascertain whether senior management is 
taking appropriate remedial actions to mitigate or eliminate the risks 
of a critical service provider's significant performance deterioration 
or other material changes in the relationship that would result in an 
unacceptable increase in risk to the registered clearing agency if not 
remedied in a timely manner.
3. Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-25(i). In addition, the Commission requests comments 
on the following specific issues:
    38. Is the definition of ``service provider for critical services'' 
sufficiently clear and properly scoped? Why or why not? Please explain 
and include alternative definitions, if possible.
    39. In requiring registered clearing agencies to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to enable the board to oversee relationships with 
service providers of critical services, should the Commission provide 
specific guidance regarding the means and measures by which the board 
performs such oversight responsibilities? Why or why not?
    40. In requiring registered clearing agencies to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to confirm and document that risks related to 
relationships with service providers for critical services are managed 
in a manner consistent with its risk management framework, should the 
Commission require--rather than provide as guidance, as currently 
formulated--that the board confirm and document the risks through a 
self-assessment as discussed above? Why or why not?

[[Page 51838]]

F. Obligation to Formally Consider Stakeholder Viewpoints

1. Proposed Rule 17Ad-25(j)
    Proposed Rule 17Ad-25(j) would require each registered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to solicit, consider, and document 
its consideration of the views of participants and other relevant 
stakeholders of the registered clearing agency regarding material 
developments in its governance and operations on a recurring basis.
2. Discussion
    Currently, all registered clearing agencies are covered clearing 
agencies and, as such, they are subject to requirements for their 
governance arrangements to include policies and procedures that support 
the public interest and the objectives of owners and participants, as 
well as that consider the interests of participants' customers, 
securities issuers and holders, and other relevant stakeholders.\145\ 
However, no parallel requirement exists for registered clearing 
agencies that are subject to Rule 17Ad-22(d). Based on its supervisory 
experience, the Commission believes that enhancing clearing agency 
governance practices will facilitate the ability of clearing agencies 
subject to Rule 17Ad-22(d) to obtain and consider the views of a 
diverse cross-section of their participants and stakeholders, who will 
likely bear any of the losses incurred as a result of the clearing 
agency's decisions with respect to its governance and operations. 
Accordingly, the proposed rule would supplement existing Commission 
requirements by also requiring that a registered clearing agency have 
policies and procedures to solicit, consider, and document its 
consideration of the views of participants and other relevant 
stakeholders regarding material developments in the clearing agency's 
governance and operations. The Commission believes that other relevant 
stakeholders generally would include investors, customers of 
participants, as well as securities issuers.
---------------------------------------------------------------------------

    \145\ See 17 CFR 240.17Ad-22(e)(2)(iii) and (vi).
---------------------------------------------------------------------------

    The Commission understands that many registered clearing agencies 
already have established committees, working groups, and other fora of 
varying size, scope, and formality to share and solicit information 
with participants, the customers of their participants, and other 
stakeholders regarding changes to risk management and other services 
offered by the clearing agency. These groups and fora are useful tools 
for information sharing and gathering, and help promote an open 
dialogue between the clearing agency, its participants, and other 
relevant stakeholders. Accordingly, the Commission is proposing Rule 
17Ad-25(j) to help promote the formalization of these processes and 
structures to help ensure their ongoing use, both for the existing set 
of registered clearing agencies and for potential future registrants. 
The Commission believes that the proposed rule would help ensure that 
these types of groups have a clear purpose and scope by requiring that 
registered clearing agencies solicit views from relevant stakeholders 
in addition to their participants and document their consideration of 
views expressed, and that the views solicited concern topics related to 
material developments in a clearing agency's governance and operations. 
Soliciting and considering viewpoints from participants and other 
relevant stakeholders helps ensure that the board of a registered 
clearing agency is informed of the full range of views across its 
participants and stakeholders while making decisions related to 
material developments in the clearing agency's governance and 
operations.
    In addition, the Commission believes that requiring registered 
clearing agencies to document their consideration of such viewpoints 
would help ensure that a record exists of the viewpoints provided by 
participants and other relevant stakeholders regarding material 
developments in a clearing agency's governance and operations, ensuring 
that the clearing agency indicated that it had received such viewpoints 
and evaluated their merits. Such a requirement also helps promote 
confidence in the use of such fora and other structures because records 
will help demonstrate the ways in which registered clearing agencies 
consider and engage with stakeholder viewpoints. Building a record of 
such engagements also would help the Commission itself evaluate the 
ways in which clearing agencies consider stakeholder viewpoints and 
balance potentially competing viewpoints, facilitating the Commission's 
monitoring and oversight of registered clearing agencies and their 
impact on the U.S. securities market.
3. Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-25 (j). In addition, the Commission requests 
comments on the following specific issues:
    41. The Commission understands that some registered clearing 
agencies have established multiple groups or fora to target specific 
topics or types of participants when sharing and soliciting 
information. What should a registered clearing agency consider when 
determining to establish one versus multiple fora for soliciting 
viewpoints? Why? How should it select the types of stakeholders or 
market participants from whom it solicits information? Are there 
particular topics for which a group or fora should be required under 
the rule? Are there any merits in limiting the number of different 
groups or fora to avoid overly fragmenting the discussion of topics and 
solicitation of viewpoints? Please explain with specific examples, if 
possible.
    42. Should the rule include specific requirements applicable to 
committees, working groups, or other fora when established by a 
clearing agency? Please explain.
    43. The proposed rule would require that a registered clearing 
agency solicit viewpoints regarding material developments in its 
governance and operations. Does limiting the topics for soliciting 
viewpoints to ``material'' aspects of a clearing agency's governance 
and operations provide for the appropriate scope of topics for which a 
clearing agency should solicit viewpoints? Why or why not? Should the 
rule limit the topics for soliciting viewpoints only to risk 
management? Why or why not? Conversely, should the set of topics be 
expanded to include topics such as participation requirements, products 
cleared, fees, new technologies, services, or other topics relevant to 
participants and other stakeholders? Please explain with specific 
examples, if possible.
    44. The proposed rule would require that the registered clearing 
agency solicit viewpoints on a recurring basis. How frequently should a 
registered clearing agency solicit viewpoints? Should the requirement 
apply on an annual basis, a quarterly basis, or some other frequency? 
How should a clearing agency balance the frequency of its outreach 
against the obligation to document its consideration of viewpoints 
received?
    45. Does the proposed rule interact with the board's fiduciary duty 
to the clearing agency? If so, how? Please explain with specific 
information.

G. Considerations Related to Implementation and Compliance

    The Commission believes it is important to establish governance 
requirements for registered clearing agencies given the potentially

[[Page 51839]]

significant risks posed by their size, systemic importance, and/or the 
risks inherent in the products they clear, and therefore believes that 
implementation of any of the requirements in proposed Rule 17Ad-25, if 
adopted, should be prompt. However, the Commission also recognizes that 
additional time may be warranted to address any new requirements, if 
adopted, by both clearing agencies currently registered with the 
Commission and those entities that intend to register as clearing 
agencies with the Commission while the rules are being finalized.
    The Commission intends to review any application for registration 
as a clearing agency pursuant to the requirements of Section 17A of the 
Exchange Act and the rules and regulations thereunder, including Rule 
17Ad-22 and any amendments thereto, and notes that the compliance date 
would apply to all clearing agencies, including an applicant for 
registration as a clearing agency whose application is pending upon the 
compliance date. In reviewing such an application, Section 17A(b)(3) of 
the Exchange Act requires that a clearing agency shall not be 
registered unless the Commission determines that an applicant's rules 
and operations satisfy each of the requirements set forth in Section 
17A(b)(3).\146\ Following registration, any registered clearing agency 
would need to address compliance with any of the requirements in 
proposed Rule 17Ad-25, if adopted.
---------------------------------------------------------------------------

    \146\ See 15 U.S.C. 78q-1(b)(3).
---------------------------------------------------------------------------

    The Commission is also mindful of the time and costs that may be 
incurred by registered clearing agencies to implement aspects of 
proposed Rule 17Ad-25, if adopted, namely the independence requirements 
for the board and board committees. Implementation of these proposed 
requirements could require changes to policies and procedures currently 
utilized to comply with the Commission's clearing agency rules. These 
burdens could be exacerbated if affected clearing agencies must begin 
complying with any proposed Rule 17Ad-25, if adopted, in their existing 
policies and procedures at or near the same time that they are making 
changes to their board and board committee composition by undertaking 
the steps to identify and select candidates to accommodate these 
proposed requirements. The Commission believes that implementation of 
the proposed rules, if adopted, can and should be done in a manner that 
carries out the fundamental policy goals of the rules while minimizing 
burdens and disruptions as much as practicable, including minimizing 
the prospect of current directors having to resign before their terms 
expire. The Commission believes that this should be done pursuant to a 
phased-in compliance schedule whereby the proposed rules, if adopted, 
would have a compliance date that is 180 days from publication of the 
final rules in the Federal Register for all the provisions other than 
proposed Rule 17Ad-25(b)(1), (c)(2), and (e), and 24 months from 
publication of the final rules in the Federal Register for the 
independence requirement for the board and board committees under 
proposed Rule 17Ad-25(b)(1), (c)(2), and (e).
1. Request for Comment
    46. Are the 180-day and 24-month compliance periods appropriate? 
Why or why not? Please be specific.
    47. Does the phased-in compliance date envisioned by the Commission 
adequately address the time and resources needed for clearing agencies 
to comply with proposed Rule 17Ad-25 if adopted? Please explain. Should 
specific requirements be phased in over time, such as to allow current 
directors to serve their complete term rather than needing to resign 
early in order to adjust the number of independent directors on a 
board? If so, what is the appropriate number of days that would allow 
current directors to serve their complete terms?

H. General Request for Comment

    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-25.

IV. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic consequences and 
effects of the proposed rules, including their benefits and costs.\147\ 
The Commission acknowledges that, since many of these proposals could 
require a clearing agency to adopt new policies and procedures, the 
economic effects and consequences of these rules include those flowing 
from the substantive results of those new policies and procedures. 
Further, as stated above, Section 17A of the Exchange Act directs the 
Commission to have due regard for the public interest, the protection 
of investors, the safeguarding of securities and funds, and maintenance 
of fair competition among brokers and dealers, clearing agencies, and 
transfer agents when using its authority to facilitate the 
establishment of a national system for clearance and settlement of 
transactions in securities.\148\
---------------------------------------------------------------------------

    \147\ Under Section 3(f) of the Exchange Act, whenever the 
Commission engages in rulemaking under the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, it must consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f). In addition, Section 23(a)(2) of the Exchange Act prohibits 
the Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
    \148\ See 15 U.S.C. 78q-1(a)(2)(A).
---------------------------------------------------------------------------

    This section addresses the likely economic effects of the proposed 
rules, including their anticipated and estimated benefits and costs and 
their likely effects on efficiency, competition, and capital formation. 
Many of the benefits and costs are difficult to quantify. For example, 
the issue of misaligned incentives is a core economic matter that is 
persistent across many different types of economic interactions among 
clearing agency stakeholders. Incentives affect the economic outcome of 
a transaction but there is little data about how decision-making 
processes directly affect monetary gains and losses. In addition, 
quantification of these incentive effects is particularly challenging 
due to the number of assumptions that would be needed to forecast how 
clearing agencies would respond to the proposed rules, and how those 
responses would, in turn, affect the broader market for cleared 
securities products. While the Commission has attempted to quantify 
economic effects where possible, much of the discussion of economic 
effects is qualitative in nature. The Commission also discusses the 
potential economic effects of certain alternatives to the approaches 
recommended in this proposal.

[[Page 51840]]

B. Economic Baseline

    To consider the effect of the proposed rules, the Commission first 
explains the current state of affairs in the market (the economic 
baseline). All the potential benefits and costs from adopting the 
proposed rules are changes relative to the economic baseline. The 
economic baseline in this proposal considers (1) the current market for 
registered clearing agency activities, including the number of 
registered clearing agencies, the distribution of participants across 
these clearing agencies, and the volume of transactions these clearing 
agencies process, (2) the current regulatory framework for registered 
clearing agencies, and (3) the current practices of registered clearing 
agencies that relate to the proposed rules.
1. Description of Market
    Of the nine registered clearing agencies, there are currently seven 
operating businesses.\149\ Six provide CCP services and one provides 
CSD services.\150\ NSCC, FICC, and DTC are all registered clearing 
agencies that are DTCC subsidiaries. Together they offer clearance and 
settlement services for equities, corporate and municipal bonds, 
government and mortgage-backed securities, derivatives, money market 
instruments, syndicated loans, mutual funds, and alternative investment 
products in the United States. ICC and ICEEU are both registered 
clearing agencies for credit default swaps (``CDS''), and are both 
subsidiaries of Intercontinental Exchange, Inc. (``ICE''). LCH SA, a 
France-based subsidiary of LCH Group Holdings Ltd, is a registered 
clearing agency that also offers clearing for CDS. The seventh 
registered clearing agency, OCC, offers clearing services for exchange-
traded U.S. equity options.
---------------------------------------------------------------------------

    \149\ There are two registered but inactive clearing agencies: 
BSECC and SCCP. Neither has provided clearing services in well over 
a decade. See Exchange Act Release No. 63629 (Jan. 3, 2011) (BSECC 
``returned all clearing funds to its members by September 30, 2010, 
and [] no longer maintains clearing members or has any other 
clearing operations as of that date. [] BSECC [] maintain[s] its 
registration as a clearing agency with the Commission for possible 
active operations in the future.''); Exchange Act Release No. 63268 
(Nov. 8, 2010) (``SCCP ``returned all clearing fund deposits by 
September 30, 2009; [and] as of that date SCCP no longer maintains 
clearing members or has any other clearing operations. [] SCCP [] 
maintain[s] its registration as a clearing agency for possible 
active operations in the future.''). Because they do not provide 
clearing services, BSECC and SCCP are not included in the economic 
baseline or the consideration of benefits and costs. They are 
included in the PRA for purposes of the PRA estimate, see infra at 
Section V.
    \150\ See supra note 17 (summarizing typical CCP services) and 
note 18 (summarizing typical CSD services).
---------------------------------------------------------------------------

    Registered clearing agencies broadly operate under one of two 
models. Specifically, the clearing agency may be organized so that the 
participants are owners of the clearing agency,\151\ or so that 
participants are not owners of the clearing agency.\152\
---------------------------------------------------------------------------

    \151\ See supra note 32 (explaining the ownership structure of 
DTCC and its subsidiary clearing agencies).
    \152\ OCC is owned by certain options exchanges. ICC and ICEEU 
are both subsidiaries of ICE, which is listed on the New York Stock 
Exchange. LCH SA is a subsidiary of LCH Group Holdings, Ltd., which 
is majority-owned by London Stock Exchange Group plc (a publicly 
traded company).
---------------------------------------------------------------------------

    Registered clearing agencies currently feature specialization and 
limited competition. For example, there is only one registered clearing 
agency serving as a central counterparty for each of the following 
asset classes: Exchange-traded equity options (OCC), government 
securities (FICC), mortgage-backed securities (FICC), and equity 
securities (NSCC). There is also only one registered clearing agency 
providing central securities depository services (DTC). Registered 
clearing agency activities exhibit high barriers to entry and economies 
of scale. These features of the existing market, and the resulting 
concentration of clearing and settlement services within a handful of 
entities, informs the Commission's examination of the effects of the 
proposed rules on competition, efficiency, and capital formation, as 
discussed below. Table 1 summarizes the most recent data on the number 
of participants at each registered clearing agency.\153\
---------------------------------------------------------------------------

    \153\ Participant statistics are taken from the websites of each 
of the listed clearing agencies as of August 2021, September 2021, 
or October 2021. See DTCC, NSCC Member Directories, http://www.dtcc.com/client-center/nscc-directories; DTCC, DTC Member 
Directories, http://www.dtcc.com/client-center/dtc-directories; 
DTCC, FICC-GOV Member Directories, http://www.dtcc.com/client-center/ficc-gov-directories; DTCC, FICC-MBS Member Directories, 
http://www.dtcc.com/client-center/ficc-mbs-directories; ICE, ICE 
Clear Credit Participants, https://www.theice.com/clear-credit/participants; ICE, ICE Clear Europe Membership, https://www.theice.com/clear-europe/membership; LCH, LCH SA Membership, 
https://www.lch.com/membership/member-search; OCC, Member Directory, 
http://www.theocc.com/Company-Information/Member-Directory.

     Table 1--Number of Participants at Registered Clearing Agencies
------------------------------------------------------------------------
                                                             Number of
               Registered clearing agency                  participants
------------------------------------------------------------------------
Subsidiaries of The Depository Trust & Clearing
 Corporation
  National Securities Clearing Corporation..............           3,532
  The Depository Trust Company..........................             841
  Fixed Income Clearing Corporation (Government                      204
   Securities Division).................................
  Fixed Income Clearing Corporation (Mortgage Backed                 140
   Securities Division).................................
Subsidiaries of Intercontinental Exchange
  ICE Clear Credit......................................              29
  ICE Clear Europe (CDS Participants Only)..............              30
Subsidiaries of LCH
  LCH SA (CDSClear Participants Only)...................              25
The Options Clearing Corporation........................             184
------------------------------------------------------------------------


[[Page 51841]]

    Registered clearing agencies have become an essential part of the 
infrastructure of the U.S. securities markets due to their role as 
intermediaries.\154\ Many securities transactions are centrally cleared 
by clearing agencies. For example, in 2021 approximately $1.1 trillion 
(65%) of the notional amount of all single-name CDS transactions in the 
United States were centrally cleared.\155\ In addition, in 2021 DTCC 
processed $2.4 quadrillion in securities transactions, and OCC cleared 
9.9 billion individual options contracts.\156\
---------------------------------------------------------------------------

    \154\ See supra Part I.
    \155\ Data from DTCC's Trade Information Warehouse, compiled by 
Commission staff.
    \156\ See OCC, Annual Report (2021), https://annualreport.theocc.com; DTCC, Annual Report (2021), https://
www.dtcc.com/~/media/files/downloads/about/annual-reports/DTCC-2021-
Annual-Report. Within DTCC, NSCC cleared $2.0 trillion of equity 
trades every day on average, FICC cleared a total of $1.4 
quadrillion of government securities transactions and $69 trillion 
of agency mortgage-backed securities transactions, and DTC settled a 
total of $152 trillion of securities.
---------------------------------------------------------------------------

    Central clearing generally benefits the markets in which it is 
available through significantly reducing participants' counterparty 
risk and through more efficient netting of margin. Consequently, 
central clearing also benefits the financial system as a whole by 
increasing financial resilience and the ability to monitor and manage 
risk.\157\ Notwithstanding the benefits, central clearing concentrates 
risk in the clearing agency.\158\ Disruption to a clearing agency's 
operations, or failure on the part of a clearing agency to meet its 
obligations, could serve as a source of contagion, resulting in 
significant costs not only to the clearing agency itself or its 
participants but also to other market participants and the broader U.S. 
financial system.\159\ As a result, proper management of the risks 
associated with central clearing helps ensure the stability of the U.S. 
securities markets and the broader U.S. financial system.\160\
---------------------------------------------------------------------------

    \157\ See Darrell Duffie, Still the World's Safe Haven? 
Redesigning the U.S. Treasury Market After the COVID-19 Crisis, 
Hutchins Center Working Paper No. 62 (June 2020), at 15, https://www.brookings.edu/wp-content/uploads/2020/05/wp62_duffie_v2.pdf 
(``Central clearing increases the transparency of settlement risk to 
regulators and market participants, and in particular allows the CCP 
to identify concentrated positions and crowded trades, adjusting 
margin requirements accordingly. Central clearing also improves 
market safety by lowering exposure to settlement failures. . . . As 
depicted, settlement failures rose less in March [2020] for [U.S. 
Treasury] trades that were centrally cleared by FICC than for all 
trades involving primary dealers. A possible explanation is that 
central clearing reduces `daisy-chain' failures, which occur when 
firm A fails to deliver a security to firm B, causing firm B to fail 
to firm C, and so on.'').
    \158\ See generally Albert J. Menkveld & Guillaume Vuillemey, 
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153 
(2021).
    \159\ See generally Dietrich Domanski, Leonardo Gambacorta & 
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS 
Q. Rev. (Dec. 2015), https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf 
(describing links between CCP financial risk management and systemic 
risk); Darrell Duffie, Ada Li & Theo Lubke, Policy Perspectives on 
OTC Derivatives Market Infrastructure, Fed. Res. Bank N.Y. Staff 
Rep. No. 424, at 9 (Mar. 2010), http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is successful in clearing a 
large quantity of derivatives trades, the CCP is itself a 
systemically important financial institution. The failure of a CCP 
could suddenly expose many major market participants to losses. Any 
such failure, moreover, is likely to have been triggered by the 
failure of one or more large clearing agency participants, and 
therefore to occur during a period of extreme market fragility.''); 
Craig Pirrong, The Inefficiency of Clearing Mandates, Policy 
Analysis No. 655, at 11-14, 16-17, 24-26 (July 2010), http://www.cato.org/pubs/pas/PA665.pdf (stating, among other things, that 
``CCPs are concentrated points of potential failure that can create 
their own systemic risks,'' that ``[a]t most, creation of CCPs 
changes the topology of the network of connections among firms, but 
it does not eliminate these connections,'' that clearing may lead 
speculators and hedgers to take larger positions, that a CCP's 
failure to effectively price counterparty risks may lead to moral 
hazard and adverse selection problems, that the main effect of 
clearing would be to ``redistribute losses consequent to a 
bankruptcy or run,'' and that clearing entities have failed or come 
under stress in the past, including in connection with the 1987 
market break); Hubbard supra note 57, at 96 (``In short, the 
systemic consequences from a failure of a major CCP, or worse, 
multiple CCPs, would be severe. Pervasive reforms of derivatives 
markets following 2008 are, in effect, unfinished business; the 
systemic risk of CCPs has been exacerbated and left unaddressed.''); 
Froukelien Wendt, Central Counterparties: Addressing their Too 
Important to Fail Nature, IMF Working Paper No. 15/21 (Jan. 2015), 
http://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf (assessing the 
potential channels for contagion arising from CCP 
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A 
Fresh Look, IMF Working Paper No. 11/66 (Mar. 2011), at 5-11, http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing factors 
that could lead central counterparties to be ``risk nodes'' that may 
threaten systemic disruption).
    \160\ See Paolo Saguato, Financial Regulation, Corporate 
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J. 
1071, 1074-75 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3269060 (``[T]he decision to centralize risk 
in clearinghouses made them critical for the stability of the 
financial system, to the point that they are considered not only 
too-big-to-fail, but also too-important-to-fail institutions.'').
---------------------------------------------------------------------------

2. Overview of the Existing Regulatory Framework
    The existing regulatory framework for clearing agencies registered 
with the Commission includes Section 17A of the Exchange Act and the 
Dodd-Frank Act, and the related rules adopted by the Commission. The 
current regulatory system is discussed in Parts I, II and III of this 
proposal.
    The Commission is aware that clearing agencies registered in the 
U.S. may also be subject to other domestic or foreign regulators. 
Specifically, clearing agencies operating in the U.S. may also be 
subject to regulation by the CFTC (as clearing agencies for futures or 
swaps) and the Board of Governors of the Federal Reserve System (as 
systemically important financial market utilities or state member 
banks).\161\ In addition, clearing agencies operating in the U.S. may 
be subject to foreign clearing agency regulators. For example, LCH SA 
is regulated by l'Autorit[eacute] des march[eacute]s financiers, 
l'Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution, 
and the Banque de France, and is subject to EMIR.\162\ ICEEU is 
regulated by the Bank of England and is subject to EMIR.\163\
---------------------------------------------------------------------------

    \161\ Currently, ICC, ICEEU, LCH SA, and OCC are regulated by 
the CFTC. DTC, FICC, NSCC, ICC, and OCC have been designated 
systemically important financial market utilities. DTC is also a 
state member bank of the Federal Reserve System.
    \162\ See LCH, Company Structure, https://www.lch.com/about-us/structure-and-governance/company-structure.
    \163\ See ICE, ICEEU Regulation, https://www.theice.com/clear-europe/regulation.
---------------------------------------------------------------------------

    The Commission also considers relevant international standards when 
engaged in rulemaking for clearing agencies. For example, in 2012, the 
Committee on Payments and Market Infrastructure (CPMI) and the 
International Organization of Securities Commissions (IOSCO) issued the 
PFMI, a set of international standards for financial market 
infrastructures.\164\ In connection with rulemaking required by Section 
805(a)(2)(A) of the Clearing Supervision Act, 12 U.S.C. 5464(a)(2)(A), 
the Commission considered the principles and responsibilities in the 
PFMI when adopting Rule 17Ad-22(e).\165\
---------------------------------------------------------------------------

    \164\ See PFMI, supra note 4.
    \165\ CCA Standards Adopting Release, supra note 13, at 70789, 
70796-97. A CPMI-IOSCO assessment report also has assessed that the 
Commission's rules are consistent with the PFMI principles. See 
CPMI-IOSCO, Implementation monitoring of PFMI: Assessment report for 
the United States--Payment systems, central securities depositories 
and securities settlement systems (May 31, 2019), at 2, https://www.bis.org/cpmi/publ/d184.pdf (presenting the conclusions drawn by 
the CPMI and IOSCO from a Level 2 assessment).
---------------------------------------------------------------------------

    Table 2 summarizes the board composition and independent director 
requirements of the CFTC, the Board of Governors of the Federal Reserve 
System, and EMIR, as well as the related principle in the PFMI.

[[Page 51842]]



   Table 2--Board Composition and Independent Director Requirements of
          CFTC, Board of Governors, EMIR, and CPMI-IOSCO (PFMI)
------------------------------------------------------------------------
                                   Board composition and independence
         Organization                         requirements
------------------------------------------------------------------------
CFTC.........................  ``A derivatives clearing organization
                                shall ensure that the composition of the
                                governing board or board-level committee
                                of the derivatives clearing organization
                                includes market participants and
                                individuals who are not executives,
                                officers, or employees of the
                                derivatives clearing organization or an
                                affiliate thereof.'' (17 CFR 39.26).
Board of Governors of the      `` . . . the designated financial market
 Federal Reserve System.        utility has governance arrangements that
                                are designed to ensure . . . [t]he board
                                of directors includes a majority of
                                individuals who are not executives,
                                officers, or employees of the designated
                                financial market utility or an affiliate
                                of the designated financial market
                                utility'' (12 CFR 234.3(a)(2)(iv)(D)).
European Market                ``A CCP shall have a board. At least one
 Infrastructure Regulation      third, but no less than two, of the
 (EMIR).                        members of that board shall be
                                independent. Representatives of the
                                clients of clearing members shall be
                                invited to board meetings for matters
                                relevant to Articles 38 and 39. The
                                compensation of the independent and
                                other non-executive members of the board
                                shall not be linked to the business
                                performance of the CCP'' (Regulation
                                (EU) No 648/2012 of the European
                                Parliament and of the Council of 4 July
                                2012, Title IV, Article 27).
                               `` `independent member' of the board
                                means a member of the board who has no
                                business, family or other relationship
                                that raises a conflict of interests
                                regarding the CCP concerned or its
                                controlling shareholders, its management
                                or its clearing members, and who has had
                                no such relationship during the five
                                years preceding his membership of the
                                board'' (Regulation (EU) No 648/2012 of
                                the European Parliament and of the
                                Council of 4 July 2012, Title I, Article
                                2(28)).
CPMI-IOSCO...................  ``[Board] members should be able to
                                exercise objective and independent
                                judgment. Independence from the views of
                                management typically requires the
                                inclusion of non-executive board
                                members, including independent board
                                members, as appropriate. Definitions of
                                an independent board member vary and
                                often are determined by local laws and
                                regulations, but the key characteristic
                                of independence is the ability to
                                exercise objective, independent judgment
                                after fair consideration of all relevant
                                information and views and without undue
                                influence from executives or from
                                inappropriate external parties or
                                interests. The precise definition of
                                independence used by an F[inancial]
                                M[arket] I[nfrastructure (FMI)] should
                                be specified and publicly disclosed, and
                                should exclude parties with significant
                                business relationships with the FMI,
                                cross-directorships, or controlling
                                shareholdings, as well as employees of
                                the organization'' (PFMI, Sec.   3.2.10,
                                footnotes omitted).
------------------------------------------------------------------------

    In addition to Federal regulation, as noted earlier, clearing 
agencies must also follow state laws applicable to their choice of 
organization, such as limited liability companies, corporations, or 
trusts.\166\
---------------------------------------------------------------------------

    \166\ For example, ``The New York State Department of Financial 
Services supervises DTC as a New York State-chartered trust 
company.'' See Board of Governors of the Federal Reserve System, 
Designated Financial Market Utilities. https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm. The 
OCC is a Delaware corporation. See OCC, Certificate of 
Incorporation, https://www.theocc.com/Company-Information/Documents-and-Archives/OCC-Certificate-of-Incorporation.
---------------------------------------------------------------------------

3. Divergent Incentives of Clearing Agency Stakeholders
    Several researchers have commented that the misalignment of 
interests between clearing agency stakeholders (owners and non-owner 
participants, for example) weakens the effectiveness of clearing 
agencies' risk management under the existing regulatory framework.\167\ 
Less effective risk management, in turn, impedes the resilience of 
individual clearing agencies, the clearing services market, and the 
broader financial markets, as well as competition among participants. 
However, academic literature has not coalesced around a standard model 
describing clearing agency governance, leaving some uncertainty about 
the theoretically best way to mitigate divergent incentives.\168\
---------------------------------------------------------------------------

    \167\ See Saguato, supra note 160, at 5, 13 (stating that 
``effective risk management in financial institutions can be 
achieved only if the final risk bearers have a voice in the 
governance of the firm'' and that ``the existing regulatory 
framework underestimates and does not address the misaligned 
incentives that spill from the agency costs of the separation of 
risk and control and from the member-shareholder divide . . .''); 
Hester Peirce, Derivatives Clearinghouses: Clearing the Way to 
Failure, 64 Clev. St. L. Rev. 589 (2016), https://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=3915&context=clevstlrev (arguing that 
clearing members must play a central role in risk management); Craig 
Pirrong, The Economics of Central Clearing: Theory and Practice, 
ISDA Discussion Papers Series No. 1 (May 2011), at 3, https://www.isda.org/a/yiEDE/isdadiscussion-ccp-pirrong.pdf (``CCPs should 
be organized so as to align the control of risks with those who bear 
the consequences of risk management decisions.'').
    \168\ See Menkveld & Vuillemey, supra note 158, at 21 (``While 
the literature on central clearing has made significant progress 
over the past ten years, a number of important questions remain 
open. On the theoretical front, there is still no standard model of 
. . . [CCP] governance.'').
---------------------------------------------------------------------------

    As discussed more fully below, the Commission is aware of divergent 
incentives at some clearing agencies between clearing agency owners and 
non-owner participants, and the importance of actively addressing these 
divergent incentives through proactive measures to achieve sound 
governance and resilience. In the 2020 Staff Report on the Regulation 
of Clearing Agencies, Commission staff emphasized that ``robust written 
rules, policies, and procedures are important to clearing agency 
functioning, but represent only the first step in achieving resilience 
and compliance. To achieve real-life outcomes that help promote 
resilience and compliance, rules, policies, and procedures must be . . 
. subject to sound governance that ensures they will be executed 
promptly and effectively.'' \169\
---------------------------------------------------------------------------

    \169\ Staff Report on Clearing Agencies, supra note 27, at 25.
---------------------------------------------------------------------------

(a) Divergent Incentives of Owners vs. Non-Owner Participants
    Because clearing agencies mutualize risk among participants but not 
all participants necessarily hold an equity interest in the clearing 
agencies,\170\ the incentives of clearing agency owners can differ from 
the incentives of clearing agency participants.\171\ For example, 
owners have an incentive to transfer as much risk of loss as possible 
to non-owner participants or to lower risk management standards.\172\ 
In such

[[Page 51843]]

cases, the owners benefit by receiving higher profits or tying up less 
capital in their investment while participants are left with greater 
potential losses in the event of a counterparty default or non-default 
loss and potentially higher margin and default fund requirements.
---------------------------------------------------------------------------

    \170\ For example, OCC, ICC, ICEEU, and LCH SA are not owned by 
participants.
    \171\ See Saguato, supra note 160, at 1099 (``This new agency 
conflict that stems from the separation of risk and control and from 
the `member-shareholder divide' misaligns the incentives of the 
clearinghouse from those of its members . . .''). This specific 
agency conflict is less of a concern in cases where clearing agency 
participants own shares of the clearing agency, because there is 
less separation of risk and control. For example, DTC, NSCC, and 
FICC operate under a utility model, where the participants own 
shares of the parent company, DTCC.
    \172\ See Menkveld & Vuillemey, supra note 158, at 20 (noting 
that because participants are a ``captive clientele,'' clearing 
agencies could be incentivized to relax risk management standards); 
Saguato, supra note 160, at 1099, 1102. However, it is possible that 
a captive clientele could also incentivize a clearing agency to 
increase its risk management standards if there is participant 
representation in the governance structure.
---------------------------------------------------------------------------

(b) Divergent Incentives Among Participants
    In addition, different types of participants (direct vs indirect 
participants or large vs small participants, for example) have 
divergent incentives. For example, large direct participants have 
incentives to influence the clearing agency to adopt policies that 
would exclude smaller dealers from participating directly in the 
clearing agency.\173\ Because there is only one registered clearing 
agency serving as a central counterparty for some asset classes, such 
policies could negatively affect competition among clearing agency 
participants. The diverging incentives of large direct participants 
compared to smaller indirect participants are mitigated by Rule 17Ad-
22, which in part generally requires a clearing agency to admit 
participants who meet minimum standards.\174\
---------------------------------------------------------------------------

    \173\ See Kristin N. Johnson, Commentary on the Abraham L. 
Pomerantz Lecture: Clearinghouse Governance: Moving Beyond Cosmetic 
Reform, 77 Brook. L. Rev. 2, 698 (2012), https://brooklynworks.brooklaw.edu/blr/vol77/iss2/5 (``Large dealers have 
incentives to limit smaller dealers' access to clearinghouse 
membership. When large dealers act as brokers for the smaller 
nonmember dealers, the larger dealers earn revenues for executing 
transactions for dealers who are nonmembers and ineligible for 
membership. If eligibility standards preclude smaller dealers from 
gaining the full benefits of membership, then small dealers who 
desire to execute transactions must seek the assistance of the 
larger dealers who are members. Thus, large dealers have commercial 
incentives to ensure that smaller dealers remain ineligible for 
membership.''); Sean Griffith, Governing Systemic Risk: Towards a 
Governance Structure for Derivatives Clearinghouses, 61 Emory L. J. 
1153, 1197 (2012), https://scholarlycommons.law.emory.edu/elj/vol61/iss5/3 (``The major dealers may also use their influence over 
clearinghouses to protect [their] trading profits, using the 
clearinghouse as a means of increasing their market share and 
excluding competitors.'').
    \174\ See 17 CFR 240.17Ad-22(b)(5)-(b)(7) and (e)(18).
---------------------------------------------------------------------------

    Large participants also have incentives to influence the clearing 
agency to adopt policies that could allocate a disproportionately large 
risk of loss to smaller participants by allowing the large participant 
to contribute lower quality collateral to satisfy margin or default 
fund requirements or by promoting margin requirements that are not 
commensurate with the risks and particular attributes of each 
participant's specific products, portfolio, and market. The diverging 
incentives of large participants compared to smaller direct 
participants are also mitigated by Rule 17Ad-22, which in part 
generally requires a clearing agency to establish minimum margin and 
liquidity requirements.\175\ By establishing minimum margin and 
liquidity requirements, Rule 17Ad-22 reduces a large participant's 
ability to obtain or maintain a competitive advantage through 
activities such as providing lower quality collateral or promoting 
margin requirements that are not commensurate with the risks and 
particular attributes of each participant's specific products, 
portfolio, and market.
---------------------------------------------------------------------------

    \175\ See 17 CFR 240.17Ad-22(e)(5)-(e)(6).
---------------------------------------------------------------------------

(c) Incentives of Clearing Agency Stakeholders Could Diverge From the 
Interest of the Broader Financial Markets
    Clearing agency stakeholders, such as owners and direct and 
indirect participants, also have incentives that may not be in 
alignment with the interests of the broader financial markets.\176\ Any 
such misalignment, if left unmitigated, could limit the benefits of 
central clearing and hinder the resilience of other financial market 
intermediaries and the broader financial market.\177\ For example, in 
securities markets where all or part of a transaction may not be 
subject to a central clearing requirement, a single participant or a 
small group of participants may have a profit incentive to select bi-
lateral clearing over central clearing \178\ or seek to influence a 
clearing agency to not clear a security that would profit the 
participants more if the security were cleared bi-laterally. Not only 
could such incentives limit the benefits of central clearing, but they 
could also impede resilience in the broader financial market by 
increasing systemic risk.\179\ In addition, indirect participants that 
are not permitted to directly access clearing services have incentives 
to ``avoid clearing and seek higher-margin trading activity through 
faux customization.'' \180\ This, too, could hinder resilience in the 
broader financial market by increasing systemic risk. Lastly, as 
pointed out in a BIS and IOSCO report, ``. . . an FMI and its 
participants may generate significant negative externalities for the 
entire financial system and real economy if they do not adequately 
manage their risks.'' \181\ To the extent these negative externalities 
are not adequately internalized by the clearing agency or otherwise 
mitigated, they could present systemic risks to the broader financial 
markets.\182\
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    \176\ Cf. Bank of England, The Bank of England's supervision of 
financial market infrastructures--Annual Report (Mar. 2015), at 
Chapter 2.1.4 (``Strong user and independent representation in [UK 
CCPs] governance structures should help ensure that UK CCPs focus 
not only on the management of microprudential risks to themselves 
but also on systemic risks.'').
    \177\ See Griffith, supra note 173, at 1210 (``[T]he containment 
of systemic risk [is] a public good. . . . Because no private party 
can enjoy the full benefit of eliminating systemic risk, no private 
party has an incentive to fully internalize the cost of doing so. As 
a result, no private party can simply be entrusted with the means of 
doing so because it is more likely to use those means to some other 
ends. . . . In other words, none of the commercial parties has the 
right incentives.'').
    \178\ Cf. Treasury Market Practices Group (TMPG), Best Practice 
Guidance on Clearing and Settlement, at 3 (July 2019), https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_BestPractices_071119.pdf (in commenting on the ``potential role 
for expanded central clearing'' in the secondary U.S. Treasuries 
market, the TMPG noted that ``changes to market structure that have 
occurred have also resulted in a substantial increase, in both 
absolute and percentage terms, in the number of trades that clear 
bilaterally rather than through a central counterparty. This 
principally stems from the increased prevalence of P[rincipal] 
T[rading] F[irm] activity on I[nter]D[ealer ]B[roker] platforms.'').
    \179\ See Griffith, supra note 173, at 1197 (``[D]ealers have a 
clear incentive to protect the profits they receive from the 
bilateral market . . . by keeping trades off of clearinghouses. 
Keeping trades off of clearinghouses has obvious systemic risk 
implications: a clearinghouse cannot contain the risk of trades that 
it does not clear.''). Though bi-lateral clearing serves a well-
defined function in eliminating basis risk and allowing for more 
precise hedging, its benefits in terms of systemic risk mitigation 
are more limited relative to centralized clearing.
    \180\ See Griffith, supra note 173, at 1200.
    \181\ See PFMI, supra note 4, at 11.
    \182\ Cf. id. at 128 (Noting that regulators have a role in 
addressing negative externalities. ``[R]egulation, supervision, and 
oversight of an FMI are needed to . . . address negative 
externalities that can be associated with the FMI, and to foster 
financial stability generally.''); Menkveld & Vuillemey, supra note 
158, at 22 (``Network externalities create a role for regulators to 
coordinate investors on a socially desirable equilibrium.'').
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4. Current Governance Practices
    Registered clearing agencies must operate in compliance with Rule 
17Ad-22, though they may vary in the particular ways they achieve such 
compliance. Some variation in practices across registered clearing 
agencies derives from the products they clear and the markets they 
serve.
    An overview of current practices at the seven operating clearing 
agencies is set forth below and includes discussion of clearing agency 
boards' policies and procedures related to the composition of the board 
and board committees,

[[Page 51844]]

conflicts of interests involving directors and senior managers, the 
obligations of the board regarding overseeing relationships with 
service providers for critical services, and consideration of 
stakeholders' views. This discussion is based on the Commission's 
general understanding of current practices as of the date of this 
proposal and reflects the Commission's experience supervising 
registered clearing agencies.
(a) Current Practices Regarding Board Composition
    Each registered clearing agency has a board that governs its 
operations and supervises senior management. Section 17A(b)(3)(C) of 
the Exchange Act prohibits a clearing agency from registering unless 
the Commission finds that ``the rules of the clearing agency assure a 
fair representation of its shareholders (or members) and participants 
in the selection of its directors and administration of its affairs. 
(The Commission may determine that the representation of participants 
is fair if they are afforded a reasonable opportunity to acquire voting 
stock of the clearing agency, directly or indirectly, in reasonable 
proportion to their use of such clearing agency.).'' \183\ In addition, 
Rule 17Ad-22(e)(2) requires governance arrangements that support the 
objectives of owners and participants and consider the interests of 
other relevant stakeholders.
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    \183\ 15 U.S.C. 78q-1(b)(3)(C).
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(1) Independent Directors
    Clearing agencies currently use various definitions of independence 
and independent director. In addition, current practices vary widely 
regarding the board and board committee requirements for independent 
directors (as the term is currently used by clearing agencies). For 
example, clearing agencies' existing requirements for the minimum 
percentage of independent directors on the board ranges from 0% to 55%. 
Table 3 summarizes the general board composition and independent 
director requirements of each operating clearing agency.

         Table 3--Board Composition and Independent Director Requirements of Operating Clearing Agencies
----------------------------------------------------------------------------------------------------------------
          Clearing agency                Board composition requirements      Definition of independent director
----------------------------------------------------------------------------------------------------------------
DTC, FICC, and NSCC (all use the     22 directors: 1 non-executive Chair,   Independent director is not defined.
 same board as DTCC).                 1 DTCC executive (DTCC's Pres. &       Independence is listed as one of a
                                      CEO), 14 participant-owner             number of ``characteristics
                                      directors, 4 non-participant           essential for effectiveness as a
                                      directors, 1 director designated by    Board member.'' (See DTCC Board
                                      DTCC preferred stock shareholder       Election Procedures.\a\)
                                      ICE, 1 director designated by DTCC
                                      preferred stock shareholder FINRA.
                                      (See https://www.dtcc.com/about/leadership leadership.).
OCC................................  20 directors: 1 management director    A public director ``lacks material
                                      (Chair), 5 public directors, 9         relationships to OCC, OCC's senior
                                      participant directors, 5 exchange      management, and other directors''
                                      directors. (See https://               and is ``not affiliated with any
                                      www.theocc.com/Company-Information/    national securities exchange or
                                      Board-of-Directors; OCC Board          national securities association or
                                      Charter.\b\).                          with any broker or dealer in
                                                                             securities.'' (OCC Board Charter at
                                                                             4, 6).
                                     .....................................  ``A substantial portion of directors
                                                                             shall be `independent' of OCC and
                                                                             OCC's management as defined by
                                                                             applicable regulatory requirements
                                                                             and the judgment of the Board.''
                                                                             (OCC Board Charter at 4-5).
ICE Clear Credit...................  9 directors (a/k/a Board of            An independent director must satisfy
                                      Managers): at least 5 independent      the independence requirements in
                                      directors and 2 management directors.  the NYSE Listed Company Manual.\d\
                                                                             An independent director also may
                                                                             not (among other things):
                                     5 directors elected by ICE US Holding   ``have any material
                                      Company L.P. (3 of 5 are independent   relationships with the Company and
                                      and the remaining 2 are from ICE       its subsidiaries.''
                                      management). The Risk Committee
                                      designates four nominees (two must
                                      be independent and two may be non-
                                      independent). (See ICC Regulation
                                      and Governance Fact Sheet \c\ at 2.).
                                     .....................................   be affiliated with a Member
                                                                             Organization or, within the last
                                                                             year, (a) be employed by a Member
                                                                             Organization, (b) have an immediate
                                                                             family member who was an executive
                                                                             officer of a Member Organization,
                                                                             or (c) have received from any
                                                                             Member Organization more than
                                                                             $100,000 per year in direct
                                                                             compensation. (See ICC Independence
                                                                             Policy.\e\)
ICE Clear Europe...................  6 to 12 directors (currently 10): at   Independent director ``means a
                                      least \1/3\ independent directors      person who meets the independence
                                      (excluding the Chair), 1 director      criteria for a director, as defined
                                      approved by the Bank of England, and   under relevant applicable
                                      the president of ICEEU. (See ICEEU     legislation and who is appointed as
                                      Organizational Structure Disclosure    a non-executive director'' (ICEEU
                                      \f\ at 1; ICEEU Articles of            Articles of Association at
                                      Association \g\ at paragraph 26.).     paragraph 3).
LCH SA.............................  3 to 18 directors (currently 11 with   Independent director ``means an
                                      5 independent): ``the board shall be   independent director, who satisfies
                                      composed of the following categories   applicable Regulatory Requirements
                                      of Directors:'' an independent         regarding independent directors and
                                      Chair, independent directors,          who is appointed in accordance with
                                      executive directors, a director        the Nomination Committee terms of
                                      proposed by Euronext, user             reference'' (LCH SA Terms of
                                      directors, and a director              Reference of the Board at 2).
                                      representing London Stock Exchange
                                      Group plc. (See https://www.lch.com/about-us/structure-and-governance/board-directors-0; LCH SA Terms of
                                      Reference of the Board \h\ at 4-5.).
----------------------------------------------------------------------------------------------------------------
a. DTCC, Procedure for the Annual Nomination and Election of the Board of Directors (Feb. 11, 2021), (``DTCC
  Nomination and Election Procedure''), https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Election-Procedure.pdf.

[[Page 51845]]

 
b. OCC, Board of Directors Charter and Corporate Governance Principles (Sept. 22, 2021), https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf.
c. ICE, ICC Regulation and Governance Fact Sheet, https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.
d. See Section 303.A.02 of the NYSE Listed Company Manual, https://nyseguide.srorules.com/listed-company-manual
  (``No director qualifies as `independent' unless the board of directors affirmatively determines that the
  director has no material relationship with the listed company (either directly or as a partner, shareholder or
  officer of an organization that has a relationship with the company).'' The independence requirements also
  list five situations that would preclude a director from being considered independent).
e. ICE, Independence Policy of the Board of Directors of Intercontinental Exchange, Inc., https://s2.q4cdn.com/154085107/files/doc_downloads/governance_docs/ICE-Independence-Policy.pdf.
f. ICE, ICEEU Organizational Structure, Objectives and Strategy, https://www.theice.com/publicdocs/clear_europe/Organisational_Structure_Objectives_Strategy.pdf.
g. ICE, Articles of Association of ICEEU (Jan. 29, 2021), https://www.theice.com/publicdocs/regulatory_filings/ICEEU-2021-013.pdf.
h. LCH SA, Terms of Reference of the Board (Aug. 18, 2020), https://www.lch.com/system/files/media_root/LCHSA_Governance%20Arrangements_CFTC%20Self-Certif_18%20Aug%202020.pdf.

(2) Nominating Committee
    Six of the seven operating clearing agency boards have a nominating 
committee or a committee that serves a similar function. Current 
practices regarding the minimum level of independent directors on the 
nominating committee vary widely. For example, DTC, NSCC, and FICC 
require that the nominating committee be composed entirely of ``non-
management'' directors; ICEEU requires that a majority of the 
nominating committee be independent directors (as defined by ICEEU); 
LCH SA requires that its nomination committee include an independent 
chair, at least two independent directors (as defined by LCH SA), and 
one user director; and OCC requires only that the chairman of the 
nominating committee be a ``public director.'' \184\ As stated 
previously, the definition of independent director varies across 
clearing agencies.\185\
---------------------------------------------------------------------------

    \184\ See DTCC Governance Committee Charter 1 (Feb. 2020), 
https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Governance-Committee-Charter.pdf (``All members 
of the Committee shall be members of the Board who are not employed 
by DTCC (`non-management' directors).''); ICEEU Compliance with PFMI 
17 (Jan. 31, 2021), https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Disclosure_Framework.pdf (``[T]he Nominations and 
Compensation Committee may consist of up to five Committee Members 
the majority of which must be [Independent Non-Executive 
Directors].''); LCH SA Terms of Reference of the Nomination 
Committee of the Board of Directors (Sept. 9, 2020), https://www.lch.com/system/files/media_root/LCH%20SA%20-%20NomCom%20ToRs.pdf 
(``[The] membership shall comprise the Chairman, at least two 
Independent Directors, one User Director and the LSEG Director. The 
size of the Committee . . . for the current time, will comprise four 
to six directors.''); OCC Governance and Nominating Committee 
Charter 1 (Sept. 22, 2021), https://www.theocc.com/getmedia/483ac739-0d43-46d2-a1ca-7ed38094975c/governance_nominating_charter.pdf (``The Committee will be composed 
of at least one Public Director, one Exchange Director, and one 
Member Director. No Management Director will be a member of the 
Committee . . . . The Committee Chair will be designated by the 
Board from among the Public Director Committee members.'').
    \185\ See supra Table 3 and accompanying text.
---------------------------------------------------------------------------

    All seven boards have fitness standards for directors and processes 
for identifying and selecting directors. The fitness standards and 
processes for identifying and selecting directors vary across clearing 
agencies. For example, OCC's nominating committee is required to 
``identify, screen and review individuals qualified to be elected or 
appointed [to the Board] after consultation with the Chairman,'' \186\ 
whereas DTCC's governance committee, which serves as the nominating 
committee for DTC, NSCC, and FICC, is not required to consult with the 
chairman. Instead, DTCC's governance committee ``considers possible 
nominations on its own initiative and invites suggestions from all 
participants of each of DTCC's clearing and depository subsidiaries . . 
. . The Governance Committee may also use a professional director 
search consultant to assist in identifying candidates for the non-
participant Board positions.'' \187\
---------------------------------------------------------------------------

    \186\ OCC Governance and Nominating Committee Charter, supra 
note 184, at 3.
    \187\ DTCC, Procedure for the Annual Nomination and Election of 
the Board of Directors (Feb. 11, 2021), at 2, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Election-Procedure.pdf.
---------------------------------------------------------------------------

(3) Risk Management Committee
    The Commission already requires that all seven operating clearing 
agencies have risk management committees, because they are covered 
clearing agencies.\188\ All seven clearing agencies include 
representatives from participants on the risk management committee, 
though only four clearing agencies require it.\189\ Six of the seven 
operating clearing agencies identify the risk management committee as a 
board committee.\190\ Three of the seven operating clearing agencies 
require the risk management committee to be reconstituted on a regular 
basis.\191\
---------------------------------------------------------------------------

    \188\ Covered clearing agencies are required to have risk 
management committees to comply with 17 CFR 240.17Ad-22(e)(3)(iv).
    \189\ OCC, ICC, ICEEU, and LCH SA each require that the risk 
committee include representatives from participants. Article 28 of 
EMIR requires that a clearing agency have a risk committee that 
includes representatives of its clearing members. See EMIR, supra 
note 105, at art. 28(1).
    \190\ DTC, NSC, FICC, OCC, ICEEU, and LCH SA.
    \191\ OCC, ICC, and LCH SA require that the committee be 
reconstituted annually.
---------------------------------------------------------------------------

(b) Current Practices Regarding Conflicts of Interest Involving 
Directors or Senior Managers
    The boards of all seven operating clearing agencies have policies 
and procedures in place to identify and mitigate conflicts of interests 
involving directors or senior managers. All seven boards also require 
directors to notify the clearing agency if a conflict of interest 
arises.
(c) Current Practices Regarding Board Oversight of Relationships With 
Service Providers for Critical Services
    The Commission already requires registered clearing agencies to 
manage risks from operations,\192\ which can include risks associated 
with relationships with service providers.\193\ The Commission is aware 
that at least some clearing agencies periodically inform their boards 
regarding risk management associated with service providers for 
critical services.
---------------------------------------------------------------------------

    \192\ See 17 CFR 240.17Ad-22(d)(4), (e)(17).
    \193\ In addition, DTC, as a state member bank of the Federal 
Reserve System, has received guidance from the Board of Governors of 
the Federal Reserve System regarding managing service provider 
risks. See SR Letter 13-19/CA Letter 13-21, Guidance on Managing 
Outsourcing Risk (Dec. 5, 2013, rev. Feb. 26, 2021). The Board of 
Governors of the Federal Reserve System, jointly with the Federal 
Deposit Insurance Corporation and the Office of the Comptroller of 
the Currency, proposed updated guidance for banking organizations in 
2021 regarding the management of risks arising from third-party 
relationships. See Board of Governors of the Federal Reserve System, 
Federal Deposit Insurance Corporation, Office of the Comptroller of 
the Currency, Proposed Interagency Guidance on Third-Party 
Relationships: Risk Management, 86 FR 38182, 38193 (July 19, 2021). 
The proposed guidance is not yet final.
---------------------------------------------------------------------------

    The Commission also requires that SCI entities--including 
registered clearing agencies--conduct risk assessments of ``SCI 
systems'' at least once per year in accordance with Regulation SCI and 
report the findings to senior management and the board of

[[Page 51846]]

directors.\194\ Insofar as service providers for critical services are 
the providers of SCI systems, each registered clearing agency board 
likely already has written policies and procedures reasonably designed 
to enable the board of directors to oversee service providers for 
critical services, including confirming that the risks related to 
service provider relationships are managed in a manner consistent with 
its risk management framework, reviewing senior management's monitoring 
of relationships with service providers for critical services, and 
confirming that senior management takes appropriate actions to remedy 
significant deterioration in performance or address changing risks or 
material issues identified through ongoing monitoring of service 
providers for critical services.\195\
---------------------------------------------------------------------------

    \194\ See 17 CFR 242.1000-1007.
    \195\ See Regulation SCI Adopting Release, supra note 39, at 
77276 (noting that ``The Commission agrees with the comment that an 
SCI entity should be responsible for managing its relationship with 
third parties operating systems on behalf of the SCI entity through 
due diligence, contract terms, and monitoring of third party 
performance. [. . .] The Commission believes that it would be 
appropriate for an SCI entity to evaluate the challenges associated 
with oversight of third-party vendors that provide or support its 
applicable systems subject to Regulation SCI. If an SCI entity is 
uncertain of its ability to manage a third-party relationship 
(whether through due diligence, contract terms, monitoring, or other 
methods) to satisfy the requirements of Regulation SCI, then it 
would need to reassess its decision to outsource the applicable 
system to such third party.'').
---------------------------------------------------------------------------

(d) Current Practices Regarding Board Consideration of Stakeholder 
Viewpoints
    Currently, each covered clearing agency is required to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide governance arrangements that consider 
the interests of participants' customers, securities issuers and 
holders, and other relevant stakeholders of the covered clearing 
agency.\196\ The Commission understands that clearing agency boards 
currently use both formal and informal channels to solicit, receive, 
and consider the viewpoints of participants and other relevant 
stakeholders.\197\ Clearing agency participants acknowledge that their 
ability to offer viewpoints has yielded positive but mixed 
results.\198\
---------------------------------------------------------------------------

    \196\ See 17 CFR 240.17Ad-22(e)(2)(vi).
    \197\ See, e.g., OCC, Order Approving Proposed Rule Change, 
Exchange Act Release No. 88029 (Jan. 24, 2020), 85 FR 5500, 5508 
(Jan. 30, 2020) (``OCC also describes the formal and informal 
mechanisms that OCC employs to solicit feedback from Clearing 
Members and other interested stakeholders, including its Financial 
Risk Advisory Committee, Operations Roundtable, multiple letters and 
open calls with Clearing Members and other interested stakeholders, 
and routine in-person meetings with trade groups and individual 
firms.''); Cf. J.P. Morgan et al., A Path Forward for CCP 
Resilience, Recovery and Resolution (Mar. 10, 2020), https://www.jpmorgan.com/content/dam/jpm/cib/complex/content/news/a-path-forward-for-ccp-resilience-recovery-and-resolution/pdf-0.pdf 
(``[C]learing participants have provided diverse perspectives and 
detailed feedback to CCPs and regulators through individual firm and 
industry association position papers, targeted comment letters, and 
participation in regulatory and industry-sponsored forums on a 
global scale.'').
    \198\ See, e.g., J.P. Morgan et al., supra note 197, at 1 
(explaining that ``[w]hile CCPs and the regulatory community have 
taken significant steps to address the feedback received, there 
remain outstanding issues that require additional attention'' and 
recommending ``[e]nhancing governance practices to obtain and 
address input from a broader array of market participants on 
relevant risk issues'' to enhance CCP resilience).
---------------------------------------------------------------------------

C. Consideration of Benefits and Costs

    The discussion below sets forth the potential economic effects 
stemming from adopting the proposed rules, including the effects on 
efficiency, competition, and capital formation.
    The benefits and costs discussed in this section are relative to 
the economic baseline discussed earlier, which includes clearing 
agencies' current practices. In some instances, the proposed rules 
reflect what we believe to be current practices at many registered 
clearing agencies. To the extent that a clearing agency's current 
practices could reasonably be considered to be in compliance with a 
proposed rule, the clearing agency and broader market would have 
already absorbed the benefits of the proposed rule and so might not 
experience any direct benefits if the Commission adopts the rule.\199\ 
In these cases, the Commission believes that imposing these 
requirements on all registered clearing agencies would have the effect 
of imposing consistent governance standards across all registered 
clearing agencies.
---------------------------------------------------------------------------

    \199\ However, a clearing agency whose current practices could 
reasonably be considered to be in compliance with the proposed rules 
might still be required to expend resources if the Commission 
adopted the rule, because the clearing agency would likely need to 
review its policies and procedures in response to the adoption.
---------------------------------------------------------------------------

    If adopted, many of the proposed rules could result in a clearing 
agency needing to amend its bylaws, rulebook, or other governance 
documents. Because clearing agencies are SROs, any such amendments that 
constitute rule changes would be subject to Commission review pursuant 
to Rule 19b-4. Adopting the proposed rules could also cause a clearing 
agency to make different business decisions, such as capital 
expenditure decisions, which would not be subject to the same 
Commission review process.
    It is uncertain to what extent the costs discussed in this section 
would be borne by clearing agencies, as opposed to participants. For 
clearing agencies owned by participants, all of the costs will 
ultimately be passed on to participants because they are residual 
beneficiaries of the clearing agency. For clearing agencies not owned 
by participants, the level of pass through would depend upon a number 
of factors, including the lack of competition among clearing agencies.
1. Economic Considerations for Rule Proposals Regarding Board 
Composition
    As discussed in more detail above, proposed Rules 17Ad-25(b), (e), 
and (f) would (1) require that a majority of the board (or 34 percent, 
if a majority of the voting rights are directly or indirectly held by 
participants) be independent directors (as determined by the clearing 
agency and precluding certain circumstances that impact independence), 
(2) establish minimum independent director requirements for the 
composition of certain board committees, and (3) identify circumstances 
that would exclude a director from being an independent director.\200\
---------------------------------------------------------------------------

    \200\ See supra Part III.A.1 (discussing proposed Rules 17Ad-
25(b), (e), and (f)).
---------------------------------------------------------------------------

    To the extent an operating clearing agency could determine that its 
current board meets the proposed minimum requirements for independent 
directors on the board and board committees, adopting the proposed rule 
will not directly affect the effectiveness of the clearing agency's 
governance or directly affect the management of divergent interests 
between owners and participants, among various types of participants, 
and between clearing agency stakeholders and the broader financial 
markets.
    To the extent operating clearing agencies would need to change the 
composition of their boards or board committees to meet the proposed 
minimum requirements, the proposed rule could help promote more 
effective governance by providing impartial perspectives and helping 
mitigate the impact of the divergent interests between owners and 
participants, among various types of participants, and between clearing 
agency stakeholders and the broader financial markets. The Commission 
believes that more effective governance will improve the effectiveness 
of a clearing agency's risk management practices, which will promote 
resilience at individual clearing agencies and in the broader

[[Page 51847]]

financial markets.\201\ For example, more effectively managing 
divergent interests could help the clearing agency better internalize 
the costs of participant defaults and non-default losses, which could 
mitigate a clearing agency's incentive to underinvest in risk 
management services such as liquidity arrangements and risk modelling. 
The proposed rules could also help clearing agencies ensure that an 
appropriate risk-based margin system is in place.
---------------------------------------------------------------------------

    \201\ See Paolo Saguato, The Unfinished Business of Regulating 
Clearinghouses, 2020 Colum. Bus. L. Rev. 449, 488 (2020), https://journals.library.columbia.edu/index.php/CBLR/article/view/7219/3838 
(``The agency costs between clearinghouses' shareholders and members 
(the former participating in the profits of the business, and the 
latter bearing its final costs) increase the moral hazard of these 
institutions and threaten clearinghouses' systemic resilience.''); 
Saguato, supra note 160.
---------------------------------------------------------------------------

    The Commission also believes that better managing the divergent 
interests could improve the ability of indirect participants to compete 
with direct participants of the clearing agency. Given that the cleared 
derivatives market is an imperfect substitute for uncleared 
derivatives, some commentators argue that large dealers may have an 
incentive to protect economic rents and therefore may urge boards to 
adopt policies that restrict the classes or volume of transactions that 
may use clearinghouse platforms.\202\
---------------------------------------------------------------------------

    \202\ See Johnson, supra note 173, at 698-700.
---------------------------------------------------------------------------

    Some academic literature on corporate governance could be 
interpreted to suggest that, under the proposed definition of 
independent director and the proposed minimum requirements for 
independent directors on the board and board committees, divergent 
interests between owners and participants, among various types of 
participants, and between clearing agency stakeholders and the broader 
financial markets may continue to adversely impact governance because 
independent directors in closely held companies will cede to the 
interests of controlling shareholders unless they are affirmatively 
incentivized to protect the interests of one or more stakeholder 
groups.\203\ One author suggests that independent directors will be 
more effective if (1) their explicit purpose is to ``prevent minority 
expropriation at the hands of the block-holders,'' (2) there is a 
strong regulation and enforcement regime, and (3) the nomination 
procedure and the design of incentives guarantee the independent 
director is accountable to a specific constituency other than 
controlling shareholders.\204\ Another author argues that including 
independent directors in the governance process provides a roadmap, but 
does not guarantee results in terms of favoritism and objectivity.\205\ 
While studies on the benefits of independent directors offer mixed 
results and while independence alone is unlikely to be sufficient to 
motivate a director to act in the public interest,\206\ director 
independence, particularly when complemented with other governance 
requirements, may help mitigate divergent incentives.
---------------------------------------------------------------------------

    \203\ See, e.g., Clarke, supra note 94, at 85 (``The dominant 
view has been that directors who are responsible to many 
constituencies are in effect responsible to none . . . ''); Lucian 
A. Bebchuk & Assaf Hamdani, Independent Directors and Controlling 
Shareholders, 165 Univ. Pa. L. Rev. 1271, 1274 (2017), https://scholarship.law.upenn.edu/penn_law_review/vol165/iss6/1/ (taking the 
position that the best way to help ensure an independent director 
does not capitulate to controlling shareholders' or management's 
interests is to help ensure the independent director is accountable 
to (i.e., nominated by) another group of stakeholders).
    \204\ See Maria Gutierrez & Maribel Saez, Deconstructing 
Independent Directors, 13 J. Corp. L. Stud. 63, 90 (2013).
    \205\ See Dravis, supra note 80.
    \206\ See Clarke, supra note 94, at 82-83 (``If one is to rely 
on NMDs [Non-Management Director's] to exercise their voting power 
in favor of compliance with external standards, then there needs to 
be some reason for believing that NMDs will be more likely to do so 
than non-NMDs. Both kinds of directors can be subject to sanctions 
for voting to violate clear legal obligations. If the purpose is to 
encourage corporations to act in accordance with principles that do 
not constitute legal obligations (for example, ``maximize local 
employment''), then it is unlikely that NMDs elected by, and 
accountable to, profit-maximizing shareholders will produce this 
result. A director serving the ``public interest'' should arguably 
be independent of everyone--dominant shareholders, management, and 
indeed all those who have an interest in the company--and follow 
only the dictates of her conscience. Assuming accountability to be a 
good thing, however, it is hard to see how such a director could 
properly be made accountable. In the real world, of course, any 
director without security of tenure will, in the absence of 
counterincentives and assuming that the position is desirable, tend 
to be accountable to whoever was responsible for appointing her.'').
---------------------------------------------------------------------------

    The Commission believes that the proposed independence rules will 
work in conjunction with (1) existing governance rules that emphasize 
the clearing agency's responsibility to owners, participants and other 
stakeholders,\207\ (2) Commission enforcement of securities 
regulations, and (3) the adoption of other rules in this proposal (such 
as the proposed nominating committee requirements) to help independent 
directors mitigate the effects of divergent interests between owners 
and participants, among various types of participants, and between 
clearing agency stakeholders and the broader financial markets.
---------------------------------------------------------------------------

    \207\ See, e.g., Rule 17Ad-22(e)(2).
---------------------------------------------------------------------------

    In addition, the Commission believes that standardizing the 
definition of independent director could improve efficiency by reducing 
economic frictions and search costs related to monitoring by 
stakeholders.
    The Commission is aware of three primary costs associated with 
adopting the proposed rules regarding the composition of the board. 
First, adopting the proposed rules would cause clearing agency boards 
to immediately expend resources memorializing information that has been 
gathered for consideration in determining each director's independence, 
and then preserving the records of the determination. The Commission 
estimates that each registered, operating clearing agency would incur a 
one-time burden of approximately $20,353 \208\ to comply with proposed 
Rules 17Ad-25(b), (e), and (f) if the rules were adopted. Clearing 
agencies would also expend future resources to repeat the above process 
of memorializing information and documenting a determination, likely 
twice a year. The Commission estimates that each registered, operating 
clearing agency would incur an annual, recurring burden of 
approximately $40,706 \209\ to comply with proposed Rules 17Ad-25(b), 
(e), and (f) if the rules were adopted.
---------------------------------------------------------------------------

    \208\ This figure is calculated as follows: Chief Compliance 
Officer for 5 hours at $577 per hour + Compliance Attorney for 44 
hours at $397 per hour = $2,885 + $17,468 = $20,353. No hours are 
allocated to proposed Rules 17Ad-25(e) or (f). See infra notes 236 
and 237. The per-hour costs ($577 for a Chief Compliance Officer and 
$397 for a Compliance Attorney) are from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, modified by 
Commission staff to account for an 1800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead. See SIFMA, Management and 
Professional Earnings in the Securities Industry--2013 (Oct. 7, 
2013), https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/.
    \209\ This figure is calculated as follows: Chief Compliance 
Officer for 10 hours at $577 per hour + Compliance Attorney for 88 
hours at $397 per hour = $5,770 + $34,936 = $40,706. No hours are 
allocated to proposed Rules 17Ad-25(e) or (f). See infra note 239. 
The per-hour costs ($577 for a Chief Compliance Officer and $397 for 
a Compliance Attorney) are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 208.
---------------------------------------------------------------------------

    Second, clearing agencies may need to add independent directors to 
the board, either by replacing directors or increasing the board 
size.\210\ As mentioned earlier, approaches to defining independence 
for directors vary across clearing agencies. Thus, if proposed Rules 
17Ad-25(b), (e), and (f) were adopted, to the extent that a clearing 
agency's definition of an

[[Page 51848]]

``independent director'' conflicts with the proposed rules, including 
the prohibitions in proposed Rule 17Ad-25(f), a clearing agency 
currently reporting a majority of its directors as independent (or 34 
percent, if a majority of the voting rights are directly or indirectly 
held by participants) on its board may need to replace directors to 
comply with the rule requirements.\211\
---------------------------------------------------------------------------

    \210\ Alternatively, clearing agencies might achieve compliance 
by reducing the board size and eliminating a sufficient number of 
non-independent directors.
    \211\ On the other hand, a clearing agency that does not require 
a minimum percentage of independent directors could determine that 
its current slate of directors already satisfies the independence 
requirements in the proposed rules.
---------------------------------------------------------------------------

    Adding independent directors would require a clearing agency to 
expend resources conducting a search for new directors. The costs 
incurred by the clearing agency may vary based on whether it conducts 
its own search or retains an outside consultant. The Commission 
estimates that retaining a recruitment specialist to secure an 
independent director could cost approximately $90,000 per 
director.\212\
---------------------------------------------------------------------------

    \212\ The Commission is basing this estimate on a report by The 
Good Search noting that the retainer fee for outside directors is on 
average $90,000. See The Good Search, Retained Search Fees, https://tgsus.com/executive-search-blog/retained-search-fees/. The 
Commission believes that this amount could serve as a proxy for the 
amount of any fee to be charged by a recruitment firm that would 
conduct a national search for an independent director.
---------------------------------------------------------------------------

    Third, to the extent that non-independent directors tend to have 
more relevant knowledge and experience than independent directors do, 
requiring that a majority of directors (or 34 percent, if a majority of 
the voting rights are directly or indirectly held by participants) be 
independent could reduce the depth or breadth of relevant expertise 
that can be brought to clearing agency boards. A reduced level of 
combined experience on a clearing agency board might impair clearing 
agency efficiency in the near term. However, the Commission believes 
that any such effect would be short-lived, as new independent directors 
gain more experience and prospective director nominees to the board 
that may not meet existing experience criteria would qualify under the 
proposed new independence requirements and fitness standards.
    The Commission believes that the expected costs to implement 
proposed Rules 17Ad-25(b), (e), and (f) are sufficiently small that 
they would not have a material effect on (1) competition among the 
existing clearing agencies or on a new entrant's ability to enter the 
market; (2) capital formation, including clearing agencies' ability to 
raise capital; and (3) the efficiency of clearing agencies or their 
participants. For example, the Commission estimates that a clearing 
agency would spend approximately $20,353 plus whatever director search 
costs were necessary in the first year if the rules were adopted (which 
the Commission estimates to be up to $90,000 per director), and $40,706 
in each year thereafter.
2. Economic Considerations for Rule Proposals Regarding the Nominating 
Committee
    As discussed in more detail above, proposed Rule 17Ad-25(c) would 
establish minimum requirements for nominating committees, including a 
minimum composition requirement, fitness standards for serving on the 
board, and a documented process for evaluating board nominees, 
including those who would meet the Commission's proposed independence 
criteria.\213\
---------------------------------------------------------------------------

    \213\ See supra Part III.B (discussing proposed Rule 17Ad-
25(c)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------

    Given that six of the seven operating clearing agencies already 
have nominating committees (or a committee that serves a similar 
function), the primary benefit of adopting proposed Rule 17Ad-25(c) 
would be to increase the number of independent directors on existing 
nominating committees. Insofar as a lack of independent directors on a 
clearing agency's nominating committee has prevented the clearing 
agency from having a fairer representation of their shareholders and 
participants in the selection of their directors and the administration 
of their affairs, proposed Rule 17Ad-25(c) would help the clearing 
agency better meet Section 17A's fair representation requirements.
    Adopting proposed Rule 17Ad-25(c) would cause clearing agency 
boards to immediately expend resources reviewing, revising, and 
possibly creating governance documents and related policies and 
procedures. The Commission estimates that each registered, operating 
clearing agency would incur a one-time burden of approximately $35,060 
\214\ to comply with proposed Rule 17Ad-25(c) if the rule was adopted. 
Clearing agencies would also need to expend future resources for 
monitoring, compliance, and documentation activities related to the new 
or revised policies and procedures. The Commission estimates that each 
registered, operating clearing agency would incur an annual, recurring 
burden of approximately $11,910 \215\ to comply with proposed Rule 
17Ad-25(c) if the rule were adopted.
---------------------------------------------------------------------------

    \214\ This figure is calculated as follows: Assistant General 
Counsel for 30 hours at $507 per hour + Compliance Attorney for 50 
hours at $397 per hour = $15,210 + $19,850 = $35,060. See infra note 
242. The per-hour costs ($507 for an Assistant General Counsel, and 
$397 for a Compliance Attorney) are from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, supra note 
208.
    \215\ This figure is calculated as follows: Compliance Attorney 
for 30 hours at $397 per hour = $11,910. See infra note 244. The 
$577 per hour cost for a Chief Compliance Officer is from SIFMA's 
Management and Professional Earnings in the Securities Industry--
2013, supra note 208.
---------------------------------------------------------------------------

    The Commission believes that the expected costs to implement 
proposed Rule 17Ad-25(c) are sufficiently small that they would not 
have a material effect on (1) competition among the existing clearing 
agencies or on a new entrant's ability to enter the market; (2) capital 
formation, including clearing agencies' ability to raise capital; and 
(3) the efficiency of clearing agencies or their participants.
3. Economic Considerations for Rule Proposals Regarding the Risk 
Management Committee
    As discussed in more detail above, proposed Rule 17Ad-25(d) would 
require each registered clearing agency to establish a risk management 
committee (or committees) and establish minimum requirements for the 
composition, reconstitution, and function of such risk management 
committees. Based on the Commission staff's review of relevant 
governance documents, the Commission understands that many registered 
clearing agencies currently have written governance arrangements that 
largely conform to the requirements for risk management committees in 
proposed Rule 17Ad-25(d). The Commission believes that each clearing 
agency's governance documents and related policies and procedures would 
need minimal modifications if proposed Rule 17Ad-25(d) were adopted. To 
the extent that a clearing agency's existing governance documents and 
related policies and procedures could reasonably be considered to be in 
compliance with the proposed rules, the benefits of the proposed rule 
would already be incorporated by market participants.
    Adopting proposed Rule 17Ad-25(d) would cause clearing agency 
boards to immediately expend resources reviewing, revising, and 
possibly creating governance documents and related policies and 
procedures. The Commission estimates that each registered, operating 
clearing agency would incur a one-time burden of approximately $3,506 
\216\ to comply

[[Page 51849]]

with proposed Rule 17Ad-25(d) if the rule was adopted. Clearing 
agencies would also need to expend future resources for monitoring, 
compliance, and documentation activities related to the new or revised 
governance documents and related policies and procedures. The 
Commission estimates that each registered, operating clearing agency 
would incur an annual, recurring burden of approximately $1,191 \217\ 
to comply with proposed Rule 17Ad-25(d) if the rule was adopted.
---------------------------------------------------------------------------

    \216\ This figure is calculated as follows: Assistant General 
Counsel for 3 hours at $507 per hour + Compliance Attorney for 5 
hours at $397 per hour = $1,521 + $1,985 = $3,506. See infra note 
248. The per-hour costs ($507 for an Assistant General Counsel, and 
$397 for a Compliance Attorney) are from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, supra note 
208.
    \217\ This figure is calculated as follows: Compliance Attorney 
for 3 hours at $397 per hour = $1,191. See infra note 250. The per-
hour cost is from SIFMA's Management and Professional Earnings in 
the Securities Industry--2013, supra note 208.
---------------------------------------------------------------------------

    The Commission believes that the expected costs to implement 
proposed Rule 17Ad-25(d) are sufficiently small that they would not 
have a material effect on (1) competition among the existing clearing 
agencies or on a new entrant's ability to enter the market; (2) capital 
formation, including clearing agencies' ability to raise capital; and 
(3) the efficiency of clearing agencies or their participants.
4. Economic Considerations for Rule Proposals Regarding Conflicts of 
Interest Involving Directors or Senior Managers
    As discussed in more detail above, proposed Rules 17Ad-25(g) and 
(h) would (1) require policies and procedures that identify and 
document existing or potential conflicts of interest, mitigate or 
eliminate the conflicts of interest and document the actions 
taken,\218\ and (2) require policies and procedures that obligate 
directors to report potential conflicts.\219\
---------------------------------------------------------------------------

    \218\ See supra Part III.D.1 (discussing proposed Rule 17Ad-
25(g)).
    \219\ See supra Part III.D.1 (discussing proposed Rule 17Ad-
25(h)).
---------------------------------------------------------------------------

    The Commission believes that each clearing agency's existing 
policies and procedures for identifying, reporting, and mitigating 
conflicts of interest by directors or senior managers would need 
minimal modifications if the proposed rules were adopted. To the extent 
a clearing agency's existing policies and procedures could reasonably 
be considered to be in compliance with the proposed rules, the benefits 
discussed below would already be incorporated by market participants.
    The Commission believes that adopting the proposed rules regarding 
conflicts of interest would help clearing agencies continue to identify 
and mitigate conflicts of interest by directors and senior managers as 
circumstances change. For example, by codifying current best practices, 
the proposed rules would reduce the future ability of clearing agencies 
to change a clearing agency's conflict of interest disclosure 
requirements to the detriment of participants and the economic 
efficiency of the clearing market.
    In addition, to the extent that adopting the proposed rule would 
require clearing agencies to strengthen policies and procedures that 
deal with identifying, reporting, mitigating or eliminating, and 
documenting conflicts of interest, strengthening those policies and 
procedures could reduce the monitoring costs borne by clearing agency 
stakeholders.
    Finally, to the extent a previously undisclosed conflict of 
interest resulted in less favorable outcomes for the clearing agency--
such as higher expenses with service providers or the loss of business 
from smaller participants--adopting the proposed rule would improve the 
clearing agency's profitability (operating efficiency) and the economic 
efficiency of the clearing market.
    Adopting the proposed rules regarding conflicts of interest would 
cause clearing agency boards to immediately expend resources reviewing, 
revising, and possibly creating governance documents and related 
policies and procedures. The Commission estimates that each registered, 
operating clearing agency would incur a one-time burden of 
approximately $6,945 \220\ to comply with proposed Rules 17Ad-25(g) and 
(h) if the rules were adopted. Clearing agencies would also need to 
expend future resources for monitoring, compliance, and documentation 
activities related to the new or revised policies and procedures. The 
Commission estimates that each registered, operating clearing agency 
would incur an annual, recurring burden of approximately $2,382 \221\ 
to comply with proposed Rules 17Ad-25(g) and (h) if the rules were 
adopted.
---------------------------------------------------------------------------

    \220\ This figure is calculated as follows: Assistant General 
Counsel for 9 hours at $507 per hour + Compliance Attorney for 6 
hours at $397 per hour = $4,563 + $2,382 = $6,945. The Assistant 
General Counsel's 9 hours are allocated among the proposed rules: 8 
hours for proposed Rule 17Ad-25(g) and 1 hour for proposed Rule 
17Ad-25(h). The Compliance Attorney's 6 hours are allocated among 
the proposed rules: 5 hours for proposed Rule 17Ad-25(g) and 1 hour 
for proposed Rule 17Ad-25(h). See infra notes 251, 253, and 255. The 
per-hour costs ($507 for an Assistant General Counsel and $397 for a 
Compliance Attorney) are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 208.
    \221\ This figure is calculated as follows: Compliance Attorney 
for 6 hours at $397 per hour = $2,382. The Compliance Attorney's 6 
hours are allocated among the proposed rules: 5 hours for proposed 
Rule 17Ad-25(g) and 1 hour for proposed Rule 17Ad-25(h). See infra 
notes 252, 254, and 256. The per-hour cost is from SIFMA's 
Management and Professional Earnings in the Securities Industry--
2013, supra note 208.
---------------------------------------------------------------------------

    The Commission believes that the expected costs to implement 
proposed Rules 17Ad-25(g) and (h) are sufficiently small that they 
would not have a material effect on (1) competition among the existing 
clearing agencies or on a new entrant's ability to enter the market; 
(2) capital formation, including clearing agencies' ability to raise 
capital; and (3) the efficiency of clearing agencies or their 
participants.
5. Economic Considerations for Rule Proposals Regarding Oversight of 
Service Providers for Critical Services
    As discussed in more detail above, proposed Rule 17Ad-25(i) would 
require policies and procedures enabling the board to oversee 
relationships with service providers for critical services.
    The Commission believes that, to the extent a clearing agency's 
risk management framework does not already consider how reliance on an 
affiliated or third-party service provider might affect clearing 
agency's risks, adopting the proposed rule would enhance the 
effectiveness of a clearing agency's risk management framework. A more 
effective risk management framework would reduce the probability of 
clearing agency failure or financial distress. The reduced probability 
of these outcomes directly and positively affects the stability of the 
broader financial system.
    Adopting the proposed rules regarding the board's ultimate 
responsibility for the oversight of relationships with service 
providers for critical services would cause clearing agency boards to 
immediately expend resources reviewing, revising, and possibly creating 
governance documents and related policies and procedures. For example, 
boards might need to create or revise policies for overseeing 
relationships with service providers for critical services. The 
Commission estimates that each registered, operating clearing agency 
would incur a one-time burden of approximately $35,060 \222\ to

[[Page 51850]]

comply with proposed Rule 17Ad-25(i) if the rule was adopted. Clearing 
agency boards would also need to expend future resources for 
monitoring, compliance, and documentation activities related to the new 
or revised policies and procedures. The Commission estimates that each 
registered, operating clearing agency would incur an annual, recurring 
burden of approximately $11,910 \223\ to comply with proposed Rule 
17Ad-25(i) if the rule was adopted.
---------------------------------------------------------------------------

    \222\ This figure is calculated as follows: Assistant General 
Counsel for 30 hours at $507 per hour + Compliance Attorney for 50 
hours at $397 per hour = $15,210 + $19,850 = $35,060. See infra note 
261. The per-hour costs ($507 for an Assistant General Counsel and 
$397 for a Compliance Attorney) are from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, supra note 
208.
    \223\ This figure is calculated as follows: Compliance Attorney 
for 30 hour at $397 per hour = $11,910. See infra note 263. The per-
hour cost is from SIFMA's Management and Professional Earnings in 
the Securities Industry--2013, supra note 208.
---------------------------------------------------------------------------

    The Commission believes that the expected costs to implement 
proposed Rule 17Ad-25(i) are sufficiently small that they would not 
have a material effect on (1) competition among the existing clearing 
agencies or on a new entrant's ability to enter the market; (2) capital 
formation, including clearing agencies' ability to raise capital; and 
(3) the efficiency of clearing agencies or their participants.
6. Economic Considerations for Rule Proposals Regarding Formalized 
Solicitation, Consideration, and Documentation of Stakeholders' 
Viewpoints
    As discussed in more detail above, proposed Rule 17Ad-25(j) would 
require policies and procedures to solicit, consider, and document the 
registered clearing agency's consideration of the views of its 
participants and other relevant stakeholders regarding material 
developments in its governance and operations.
    The Commission believes that, to the extent clearing agency boards' 
inadequate solicitation of stakeholder viewpoints has caused some 
stakeholder views not to be considered, adopting the proposed rules 
regarding the solicitation, consideration, and documentation of 
stakeholders' views would improve boards' consideration of different 
stakeholder views. The Commission believes the improved consideration 
of different views would help persuade stakeholders with divergent 
interests to assert their needs more vigorously, which would encourage 
debate amongst actors with different goals. More informed debates 
would, in turn, help to foster consensus agreements with mandates and 
other decisions that are supported by a broader spectrum of 
stakeholders. Consequently, clearing agencies would identify and 
develop rule proposals that (to the extent the Commission considers 
them) would be more likely to meet the public interest requirements 
under Section 17A of the Exchange Act.\224\
---------------------------------------------------------------------------

    \224\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Adopting the proposed rules regarding obligations of the board 
would cause clearing agency boards to immediately expend resources 
reviewing, revising, and possibly creating governance documents and 
related policies and procedures. For example, boards might need to 
create policies for soliciting, considering, and documenting the 
consideration of stakeholders' views. The Commission estimates that 
each registered, operating clearing agency would incur a one-time 
burden of approximately $6,438 \225\ to comply with proposed Rule 17Ad-
25(j) if the rule was adopted. Clearing agency boards would also need 
to expend future resources for monitoring, compliance, and 
documentation activities related to the new or revised policies and 
procedures. The Commission estimates that each registered, operating 
clearing agency would incur an annual, recurring burden of 
approximately $1,588 \226\ to comply with proposed Rule 17Ad-25(j) if 
the rule was adopted.
---------------------------------------------------------------------------

    \225\ This figure is calculated as follows: Assistant General 
Counsel for 8 hours at $507 per hour + Compliance Attorney for 6 
hours at $397 per hour = $4,056 + $2,382 = $6,438. See infra note 
267. The per-hour costs ($507 for an Assistant General Counsel and 
$397 for a Compliance Attorney) are from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, supra note 
208.
    \226\ This figure is calculated as follows: Compliance Attorney 
for 4 hours at $397 per hour = $1,588. See infra note 269. The per-
hour cost is from SIFMA's Management and Professional Earnings in 
the Securities Industry--2013, supra note 208.
---------------------------------------------------------------------------

    The Commission believes that the expected costs to implement 
proposed Rule 17Ad-25(j) are sufficiently small that they would not 
have a material effect on (1) competition among the existing clearing 
agencies or on a new entrant's ability to enter the market; (2) capital 
formation, including clearing agencies' ability to raise capital; and 
(3) the efficiency of clearing agencies or their participants.

D. Reasonable Alternatives to the Proposed Rule

1. More Flexibility in Governance, Operations, and Risk Management
    The Commission believes that when determining the content of its 
policies and procedures, each clearing agency must have the ability to 
consider the effects of its unique characteristics and circumstances, 
including ownership and governance structures, on direct and indirect 
participants, markets served, and the risks inherent in products 
cleared.\227\
---------------------------------------------------------------------------

    \227\ See CCA Standards Adopting Release, supra note 13, at 
70806 (``The Commission believes it is appropriate to provide 
covered clearing agencies with flexibility, subject to their 
obligations and responsibilities as SROs under the Exchange Act, to 
structure their default management processes to take into account 
the particulars of their financial resources, ownership structures, 
and risk management frameworks.'').
---------------------------------------------------------------------------

    It has been the Commission's experience that particular securities 
markets (e.g., equities, fixed income, and options) have unique 
conventions, characteristics, and structures that are best addressed on 
a market-by-market basis. The Commission recognizes that a less 
prescriptive approach can help promote efficient and effective 
practices and encourage regulated entities to consider how to manage 
their regulatory obligations and risk management practices in a way 
that complies with Commission rules, while considering the particular 
characteristics of their business.\228\
---------------------------------------------------------------------------

    \228\ See CCA Standards Adopting Release, supra note 13, at 
70801; see also Randall S. Kroszner, Central Counterparty Clearing: 
History, Innovation, and Regulation, 30 Econ. Persp. 37, 39 (2006) 
(``[37, 39 (2006) (``[M]ore intense government regulation of CCPs 
may prove counterproductive if it creates moral hazard or impedes 
the ability of CCPs to develop new approaches to risk 
management.'').
---------------------------------------------------------------------------

    Even where current practices at clearing agencies do not 
significantly differ from the proposed rules, clearing agencies could 
still potentially face costs associated with the limitations on 
discretion that would result from the rules, including costs related to 
limiting a clearing agency's flexibility to respond to changing 
economic environments. For example, to the extent that clearing 
agencies having boards with a majority of independent directors value 
the ability to sometimes have less than a majority of independent 
directors on the board of directors, they may incur additional costs 
because, if proposed rules were adopted, they would lose the option to 
do so.
    Although there may be costs to limiting the degree of discretion 
clearing agencies have over governance, operations, and risk 
management, the Commission believes there are also potential benefits. 
For example, clearing agencies may not fully internalize the social 
costs of differing incentives between owners and participants, among 
various types of participants, and between clearing agency stakeholders 
and the broader financial markets and thus, without more granular 
regulations,

[[Page 51851]]

may not appropriately address the needs and incentives of the direct or 
indirect participants or the broader financial market.
2. Ownership Limits
    In 2010, the Commission proposed Regulation MC, which was 
``designed to mitigate potential conflicts of interest . . . through 
conditions and structures related to ownership, voting, and 
governance.'' \229\ Regulation MC proposed mitigating divergent 
incentives, especially between larger and smaller owners, by imposing 
maximum ownership limits. Specifically, Regulation MC proposed that 
security-based swap clearing agencies be required to choose one of two 
governance alternatives. The Voting Interest Alternative in part 
prevented any single participant from having more than 20 percent 
ownership or voting interest in a clearing agency, and limited total 
participant ownership or voting rights to no more than 40 percent. The 
Voting Interest Alternative also required that at least 35 percent of 
the board be independent directors.
---------------------------------------------------------------------------

    \229\ See Regulation MC Proposing Release, supra note 1, at 
65882.
---------------------------------------------------------------------------

    The Governance Interest Alternative in part limited any participant 
to no more than 5 percent ownership or voting rights in the clearing 
agency, and required that at least 51 percent of the board be 
independent directors.
    The Commission has not proposed ownership limits in the current 
proposal because (1) rules during the intervening time have 
significantly altered how clearing agencies must treat smaller 
participants \230\ and (2) bright-line ownership limits are easy to 
manipulate, for example by obfuscating beneficial ownership or by 
getting extremely close to the limit.
---------------------------------------------------------------------------

    \230\ See supra Part II.B. (discussing, in part, how the 
Commission has adopted rules to promote access to registered 
clearing agencies, including access for smaller participants).
---------------------------------------------------------------------------

3. Increase Shareholders' At-Risk Capital (``Skin in the Game'')
    The proposed rules are intended, in part, to better manage 
divergent incentives of clearing agency owners and non-owner 
participants. One suggested cause of the incentive misalignment is 
owners' lack of at-risk capital (``skin in the game'').\231\ Under the 
existing regulatory structure, for-profit clearing agencies can 
bifurcate risk from reward, sending the reward (e.g., profits) to 
owners and requiring participants to hold disproportionate risks (e.g., 
responsibility for non-default losses or participants' defaulted 
positions). Thus, it is reasonable to consider using skin in the game 
to correct the incentive alignment.\232\
---------------------------------------------------------------------------

    \231\ See, e.g., Saguato, supra note 201, at 488 (``[There is] 
significant imbalance of the economic exposure of clearing members 
vis-[agrave]-vis clearinghouses and their holding groups. This 
imbalance . . . results in the misaligned incentives of members and 
share-holders, which creates agency costs between the firms' primary 
stakeholders that threaten clearinghouses' systemic resilience.'').
    \232\ See OCC, Order Approving Proposed Rule Change to Establish 
OCC's Persistent Minimum Skin-In-The-Game, Exchange Act Release No. 
92038 (May 27, 2021), 86 FR 29861, 29863 (June 3, 2021) (``The 
Commission continues to regard skin-in-the-game as a potential tool 
to align the various incentives of a covered clearing agency's 
stakeholders, including management and clearing members.'').
---------------------------------------------------------------------------

    The Commission is not currently proposing skin-in-the-game 
requirements. Instead, the Commission is proposing using governance 
requirements to help manage the divergent incentives of clearing agency 
shareholders and participants. The Commission believes that the 
improved management of misaligned incentives will help facilitate 
clearing agencies' ability to adopt policies, such as skin-in-the-game 
requirements, that can further ameliorate the divergent incentives of 
shareholders and participants.
4. Increase Public Disclosure
    One of the purposes of the proposed rules is to increase 
transparency into board governance. Increased transparency could also 
be achieved by requiring clearing agencies to enhance their governance 
disclosures. For example, the Commission could require clearing 
agencies to publicly disclose, for each director, the existence of any 
relationship or interest that reasonably could affect the independent 
judgment or decision-making of the director. This requirement could 
include each director's affiliation with clearing agency participants. 
The Commission could require these disclosures to be submitted in a 
structured (i.e., machine-readable) data language, which could augment 
any transparency benefits resulting from the disclosures by increasing 
the efficiency with which they are processed.

E. Request for Comment

    The Commission requests comment on all aspects of this initial 
economic analysis, including the potential benefits and costs, all 
effects on efficiency, competition (including any effects on barriers 
to entry), and capital formation, and reasonable alternatives to the 
proposed rules. We request and encourage any interested person to 
submit comments regarding the proposed rules, our analysis of the 
potential effects of the proposed rules, and other matters that may 
have an effect on the proposed rules. We request that commenters 
identify sources of data and information as well as provide data and 
information to assist us in analyzing the economic consequences of the 
proposed rules and each reasonable alternative. We also are interested 
in comments on the qualitative benefits and costs we have identified 
and any benefits and costs we may have overlooked, including those 
associated with each reasonable alternative. In addition, we are 
interested in comments on any other reasonable alternative, including 
any alternative that would distinguish registered clearing agencies 
based on certain factors, such as organizational structure or products 
cleared.

V. Paperwork Reduction Act

    Certain provisions of the proposed rules contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\233\ We are submitting the proposed 
collections of information to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\234\ The title for the 
collection of information is: ``Clearing Agency Standards for Operation 
and Governance'' (OMB Control No. 3235-0695).\235\ An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid OMB 
control number.
---------------------------------------------------------------------------

    \233\ 44 U.S.C. 3502.
    \234\ 44 U.S.C. 3507.
    \235\ Id.
---------------------------------------------------------------------------

    As discussed further below, proposed Rules 17Ad-25(b) through (d) 
and ((g) through (j) each contain collections of information. The 
collections in proposed Rules 17Ad-25(b) through (d) and (g) through 
(j) are mandatory. Respondents under these rules are registered 
clearing agencies, of which there are currently nine. The Commission 
estimates for purposes of the PRA that one additional entity may seek 
to register as a clearing agency in the next three years, and so for 
purposes of this proposal the Commission has assumed ten respondents.

A. Rule 17Ad-25(b)

    The elements of proposed Rule 17Ad-25(b) are discussed in Part 
III.A.1. The purpose of the rule is to require either a majority or 34 
percent of independent directors, depending on the circumstances set 
forth in the rule. Proposed Rule 17Ad-25(b)(2) would

[[Page 51852]]

impose a collection of information requirement.
    The Commission estimates that proposed Rule 17Ad-25(b)(2) would 
require respondent clearing agencies to incur a one-time burden of 44 
hours \236\ to memorialize information that has been gathered for the 
person(s) making the determination to consider prior to making it, as 
well as 5 hours \237\ to document and preserve the records of the 
determination. The Commission estimates that the initial activities 
required by Rule 17Ad-25(b)(2) would impose an aggregate initial burden 
on respondent clearing agencies of 490 hours.\238\ Due to the fact that 
board composition changes on occasion after elections or due to 
unexpected events such as restructuring, resignations, or deaths, the 
Commission estimates that respondent clearing agencies would incur an 
ongoing annual burden of 98 hours to repeat the above process of 
memorializing information and documenting a determination twice a 
year.\239\ The Commission estimates that the ongoing activities 
required by Rule 17Ad-25(b)(2) would impose an aggregate ongoing burden 
on respondent clearing agencies of 980 hours.\240\
---------------------------------------------------------------------------

    \236\ This figure is calculated as follows: ((Chief Compliance 
Officer for 4 hours) + (Compliance Attorney for 40 hours)) = 44 
hours.
    \237\ This figure is calculated as follows: ((Chief Compliance 
Officer for 1 hours) + (Compliance Attorney for 4 hours)) = 5 hours.
    \238\ This figure is calculated as follows: 49 hours x 10 
respondent clearing agencies = 490 hours.
    \239\ This figure is calculated as follows: ((Chief Compliance 
Officer for 10 hours) + (Compliance Attorney for 88 hours)) = 98 
hours.
    \240\ This figure is calculated as follows: 98 hours x 10 
respondent clearing agencies = 980 hours.
---------------------------------------------------------------------------

B. Rule 17Ad-25(c)

    As discussed in Part III.B above, the Commission is proposing 
certain composition and process requirements for nominating committees 
of registered clearing agencies. As proposed, Rule 17Ad-25(c)(1) 
through (4) would add governance requirements regarding the nominating 
committee of the Board that do not appear in the existing requirements 
for governance arrangements in Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2).\241\ Based on the Commission staff's review of relevant 
governance documents, the Commission understands that many registered 
clearing agencies currently have written governance arrangements 
broadly similar to the requirements for nominating committees in 
proposed Rule 17Ad-25(c)(1) through (4). Therefore, the Commission 
would expect that the PRA burden for a respondent clearing agency 
includes the incremental burdens of reviewing and revising existing 
governance documents and related policies and procedures, and creating 
new governance documents and related policies and procedures, as 
necessary, pursuant to the proposed rule. Accordingly, the Commission 
estimates that respondent clearing agencies would incur an aggregate 
one-time burden of approximately 800 hours to review and revise 
existing governance documents and related policies and procedures and 
to create new governance documents and related policies and procedures, 
as necessary.\242\
---------------------------------------------------------------------------

    \241\ 17 CFR 240.17Ad-22(d)(8), (e)(2).
    \242\ This figure is calculated as follows: ((Assistant General 
Counsel for 30 hours) + (Compliance Attorney for 50 hours)) = 80 
hours x 10 respondent clearing agencies = 800 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-25(c)(1) through (4) would also impose ongoing 
burdens on a respondent clearing agency. The proposed rule would 
require ongoing monitoring and compliance activities with respect to 
governance documents and related policies and procedures created in 
response to the proposed rule. The proposed rule would also require 
ongoing documentation activities with respect to the implementation of 
a written process for a nominating committee to evaluate board 
nominees, including those who would meet the definition of an 
independent director, pursuant to the proposed rule. Based on the 
Commission's previous estimates for ongoing monitoring and compliance 
burdens with respect to Rule 17Ad-22,\243\ the Commission estimates 
that the ongoing activities required by proposed Rule 17Ad-25(c)(1) 
through (4) would impose an aggregate annual burden on respondent 
clearing agencies of 300 hours.\244\
---------------------------------------------------------------------------

    \243\ See Clearing Agency Standards Adopting Release, supra note 
8, at 66260-63; CCA Standards Adopting Release, supra note 13, at 
70891-99.
    \244\ This figure is calculated as follows: (Compliance Attorney 
for 30 hours) x 10 respondent clearing agencies = 300 hours.
---------------------------------------------------------------------------

C. Rule 17Ad-25(d)

    Proposed Rule 17Ad-25(d)(1) would require a registered clearing 
agency to establish a risk management committee (or committees) to 
assist the board of directors in overseeing the risk management of the 
registered clearing agency. Under proposed Rule 17Ad-25(d)(1), each 
risk management committee would be required to reconstitute its 
membership on a regular basis and at all times include representatives 
from shareholders (or members) and participants of the registered 
clearing agency. Proposed Rule 17Ad-25(d)(2) would require each risk 
management committee, in the performance of its duties, to be able to 
provide a risk-based, independent, and informed opinion on all matters 
presented to it for consideration in a manner that supports the safety 
and efficiency of the registered clearing agency.\245\
---------------------------------------------------------------------------

    \245\ See supra Part III.C.1 (discussing proposed Rule 17Ad-
25(d)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------

    The purpose of this collection of information is to promote sound 
risk management and governance arrangements at registered clearing 
agencies, to help ensure diversity of perspective across shareholders 
(or members) and participants in the oversight of registered clearing 
agencies' risk management practices, and to mitigate potential or 
existing conflicts of interest that could undermine the recommendations 
of risk management committees.
    Proposed Rule 17Ad-25(d)(1) through (2) would add governance 
requirements regarding the risk management committee (or committees) of 
a registered clearing agency's board of directors that do not appear in 
the existing requirements for governance arrangements in Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2).\246\ Based on the Commission staff's review 
of relevant governance documents, the Commission understands that many 
registered clearing agencies currently have written governance 
arrangements that largely conform to the requirements for risk 
management committees in proposed Rule 17Ad-25(d)(1) through (2). 
Therefore, the Commission would expect that the PRA burden for a 
respondent clearing agency includes the incremental burdens of 
reviewing and revising its existing governance documents and related 
policies and procedures and creating new governance documents and 
related policies and procedures, as necessary, pursuant to the proposed 
rule.\247\ Accordingly, the Commission estimates that respondent 
clearing agencies would incur an aggregate one-time burden of 
approximately 80 hours to review and revise existing governance 
documents and related policies and procedures and to create new 
governance documents

[[Page 51853]]

and related policies and procedures, as necessary.\248\
---------------------------------------------------------------------------

    \246\ See 17 CFR 240.17Ad-22(d)(8), (e)(2).
    \247\ Because the written governance arrangements at many 
registered clearing agencies already largely conform to the proposed 
requirements for risk management committees, the Commission believes 
that registered clearing agencies may need to make only limited 
changes to update their governing documents and related policies and 
procedures to help ensure compliance with proposed Rule 17Ad-
25(d)(1) through (2).
    \248\ This figure is calculated as follows: ((Assistant General 
Counsel for 3 hours) + (Compliance Attorney for 5 hours)) = 8 hours 
x 10 respondent clearing agencies = 80 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-25(d)(1) through (2) would also impose ongoing 
burdens on a respondent clearing agency. The proposed rule would 
require ongoing monitoring and compliance activities with respect to 
the governance documents and related policies and procedures created in 
response to the proposed rule. The proposed rule would also require 
ongoing documentation activities with respect to the establishment of a 
risk management committee (or committees) pursuant to the proposed 
rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance burdens with respect to Rule 17Ad-22,\249\ 
the Commission estimates that the ongoing activities required by 
proposed Rule 17Ad-25(d)(1) through (2) would impose an aggregate 
annual burden on respondent clearing agencies of 30 hours.\250\
---------------------------------------------------------------------------

    \249\ See Clearing Agency Standards Adopting Release, supra note 
8, at 66260-63; CCA Standards Adopting Release, supra note 13, at 
70891-99.
    \250\ This figure is calculated as follows: (Compliance Attorney 
for 3 hours) x 10 respondent clearing agencies = 30 hours.
---------------------------------------------------------------------------

D. Rule 17Ad-25(g)

    Proposed Rule 17Ad-25(g)(1) would contain similar provisions to 
Rules 17Ad-22(d)(8) and 17Ad-22(e)(2) in that they reference clear and 
transparent governance arrangements, but also adds additional 
requirements that do not appear in those rules. The Commission 
therefore would expect that a respondent clearing agency may have 
written rules, policies, and procedures similar to the requirements in 
the rule, and the PRA burden includes the incremental burdens of 
reviewing and revising current policies and procedures and creating new 
policies and procedures, as necessary, pursuant to the rule. 
Accordingly, based on the similar provisions and the corresponding 
burden estimates previously made by the Commission for Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2), the Commission estimates that respondent 
clearing agencies would incur an aggregate one-time burden of 
approximately 80 hours to review and revise existing policies and 
procedures and to create new policies and procedures as necessary to 
help ensure compliance with proposed Rule 17Ad-25(g)(1).\251\
---------------------------------------------------------------------------

    \251\ This figure is calculated as follows: ((Assistant General 
Counsel for 5 hours) + (Compliance Attorney for 3 hours)) = 8 hours 
x 10 respondent clearing agencies = 80 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(g)(1) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2) and because the modifications to Rule 17Ad-25(g)(1) will 
require updating current policies and procedures or establishing new 
policies and procedures to help ensure compliance, the Commission 
estimates that the ongoing activities required by Rule 17Ad-25(g)(1) 
would impose an aggregate annual burden on respondent clearing agencies 
of 30 hours.\252\
---------------------------------------------------------------------------

    \252\ This figure is calculated as follows: (Compliance Attorney 
for 3 hours) x 10 respondent clearing agencies = 30 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-25(g)(2) would contain similar provisions to 
Rules 17Ad-22(d)(8) and 17Ad-22(e)(2) in that they reference clear and 
transparent governance arrangements, but also adds additional 
requirements that do not appear in those rules. The Commission 
therefore would expect that a respondent clearing agency may have 
written rules, policies, and procedures similar to the requirements in 
the rule and that the PRA burden includes the incremental burdens of 
reviewing and revising current policies and procedures and creating new 
policies and procedures, as necessary, pursuant to the rule. The 
Commission recognizes that while registered clearing agencies may have 
existing policies and procedures to comply with proposed Rule 17Ad-
25(g)(1), they may not have current policies and procedures designed 
specifically to mitigate and document the how the conflict of interest 
was mitigated, as required by Rule 17Ad-25(g)(2). Accordingly, based on 
the similar provisions and the corresponding burden estimates 
previously made by the Commission for Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2), the Commission estimates that respondent clearing agencies 
would incur an aggregate one-time burden of approximately 50 hours to 
review and revise existing policies and procedures and to create new 
policies and procedures as necessary to help ensure compliance with 
proposed Rule 17Ad-25(g)(2).\253\
---------------------------------------------------------------------------

    \253\ This figure is calculated as follows: ((Assistant General 
Counsel for 3 hours) + (Compliance Attorney for 2 hours)) = 5 hours 
x 10 respondent clearing agencies = 50 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(g)(2) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2) and because the modifications to Rule 17Ad-25(g)(2) will 
require updating current policies and procedures or establishing new 
policies and procedures to help ensure compliance, the Commission 
estimates that the ongoing activities required by Rule 17Ad-25(g)(2) 
would impose an aggregate annual burden on respondent clearing agencies 
of 20 hours.\254\
---------------------------------------------------------------------------

    \254\ This figure is calculated as follows: (Compliance Attorney 
for 2 hours) x 10 respondent clearing agencies = 20 hours.
---------------------------------------------------------------------------

E. Rule 17Ad-25(h)

    Proposed Rule 17Ad-25(h) would contain similar provisions to Rules 
17Ad-22(d)(8) and 17Ad-22(e)(2) in that they reference clear and 
transparent governance arrangements, but also adds additional 
requirements that do not appear in those rules. The Commission 
therefore would expect that a respondent clearing agency may have 
written rules, policies, and procedures similar to the requirements in 
the rule and that the PRA burden includes the incremental burdens of 
reviewing and revising current policies and procedures and creating new 
policies and procedures, as necessary, pursuant to the rule. 
Accordingly, based on the similar provisions and the corresponding 
burden estimates previously made by the Commission for Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2), the Commission estimates that respondent 
clearing agencies would incur an aggregate one-time burden of 
approximately 20 hours to review and revise existing policies and 
procedures and to create new policies and procedures as necessary to 
help ensure compliance with proposed Rule 17Ad-25(h).\255\
---------------------------------------------------------------------------

    \255\ This figure is calculated as follows: ((Assistant General 
Counsel for 1 hours) + (Compliance Attorney for 1 hours)) = 2 hours 
x 10 respondent clearing agencies = 20 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(h) also imposes ongoing burdens on a respondent 
clearing agency. The rule requires ongoing monitoring and compliance 
activities with respect to its policies and procedures under the rule. 
Based on the Commission's previous estimates for ongoing monitoring and 
compliance burdens with respect to Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2) and because the modifications to Rule 17Ad-25(h) will require 
updating current policies and procedures or establishing new

[[Page 51854]]

policies and procedures to help ensure compliance, the Commission 
estimates that the ongoing activities required by Rule 17Ad-25(h) would 
impose an aggregate annual burden on respondent clearing agencies of 10 
hours.\256\
---------------------------------------------------------------------------

    \256\ This figure is calculated as follows: (Compliance Attorney 
for 1 hours) x 10 respondent clearing agencies = 10 hours.
---------------------------------------------------------------------------

F. Rule 17Ad-25(i)

    As discussed in Section III.F above, the Commission is proposing 
certain obligations of the board to oversee service providers for 
critical services to a registered clearing agency under proposed Rule 
17Ad-25(i). Such obligation does not appear in the existing 
requirements for governance arrangements in Rules 17Ad-22(d)(8) and 
17Ad-22(e)(2),\257\ but certain aspects of the proposed rule may be 
addressed in existing requirements. For example, proposed rule 17Ad-
25(i)(1) references the existence of a risk management framework but 
does not itself require the creation of such framework. Instead, 
maintenance of a risk management framework is already required for all 
currently registered clearing agencies under Rule 17Ad-
22(e)(3)(i).\258\ Additionally, as discussed above, there are existing 
requirements for managing operational risk under Rule 17Ad-22(d)(4) 
\259\ and Rule 17Ad-22(e)(17).\260\ Therefore, the Commission would 
expect that the PRA burden for a respondent clearing agency includes 
the incremental burdens of reviewing and revising its existing 
governance documents and related policies and procedures and creating 
new governance documents and related policies and procedures, as 
necessary, pursuant to the proposed rule. Accordingly, the Commission 
estimates that respondent clearing agencies would incur an aggregate 
one-time burden of approximately 800 hours to review and revise 
existing governance documents and related policies and procedures and 
to create new governance documents and related policies and procedures, 
as necessary.\261\
---------------------------------------------------------------------------

    \257\ 17 CFR 240.17Ad-22(d)(8), (e)(2).
    \258\ 17 CFR 240.17Ad-22(e)(3)(i).
    \259\ 17 CFR 240.17Ad-22(d)(4).
    \260\ 17 CFR 240.17Ad-22(e)(17).
    \261\ This figure is calculated as follows: ((Assistant General 
Counsel for 30 hours) + (Compliance Attorney for 50 hours)) = 80 
hours x 10 respondent clearing agencies = 800 hours.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-25(i) would also impose ongoing burdens on a 
respondent clearing agency. The proposed rule would require ongoing 
documentation, monitoring, and compliance activities with respect to 
the governance documents and related policies and procedures created in 
response to the proposed rule. Based on the Commission's previous 
estimates for ongoing monitoring and compliance burdens with respect to 
Rule 17Ad-22,\262\ the Commission estimates that the ongoing activities 
required by Rule 17Ad-25(i) would impose an aggregate annual burden on 
respondent clearing agencies of 300 hours.\263\
---------------------------------------------------------------------------

    \262\ See Clearing Agency Standards Adopting Release, supra note 
38, at 66260-63; CCA Standards Adopting Release, supra note 38, at 
70891-99.
    \263\ This figure is calculated as follows: (Compliance Attorney 
for 30 hours) x 10 respondent clearing agencies = 300 hours.
---------------------------------------------------------------------------

G. Rule 17Ad-25(j)

    Proposed Rule 17Ad-25(j) would require a registered clearing agency 
to establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to solicit, consider, and document its 
consideration of the views of participants and other relevant 
stakeholders of the registered clearing agency regarding material 
developments in the clearing agency's governance and operations on a 
recurring basis.\264\
---------------------------------------------------------------------------

    \264\ See supra Part III.F.2 (discussing proposed Rule 17Ad-
25(j)); infra Part VIII (providing the proposed rule text).
---------------------------------------------------------------------------

    Proposed Rule 17Ad-25(j) contains similar provisions to Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2) but would also impose additional governance 
obligations that do not appear in the existing requirements for 
governance arrangements in Rule 17Ad-22.\265\ Therefore, the Commission 
would expect that a respondent clearing agency may have written rules, 
policies, and procedures similar to some of the requirements in the 
proposed rule and that the PRA burden includes the incremental burdens 
of reviewing and revising existing policies and procedures and creating 
new policies and procedures, as necessary, pursuant to the proposed 
rule. Accordingly, based on the similar policies and procedures 
requirements and the corresponding burden estimates previously made by 
the Commission for Rules 17Ad-22(d)(8) and 17Ad-22(e)(2),\266\ the 
Commission estimates that respondent clearing agencies would incur an 
aggregate one-time burden of approximately 140 hours to review and 
revise existing policies and procedures and to create new policies and 
procedures, as necessary.\267\
---------------------------------------------------------------------------

    \265\ See 17 CFR 240.17Ad-22(d)(8), (e)(2).
    \266\ See Clearing Agency Standards Adopting Release, supra note 
8, at 66260; CCA Standards Adopting Release, supra note 13, at 
70891-92.
    \267\ This figure was calculated as follows: ((Assistant General 
Counsel for 8 hours) + (Compliance Attorney for 6 hours)) = 14 hours 
x 10 respondent clearing agencies = 140 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(j) also imposes ongoing burdens on a respondent 
clearing agency. The proposed rule would require ongoing monitoring and 
compliance activities with respect to the written policies and 
procedures created in response to the proposed rule. The proposed rule 
would also require ongoing documentation activities with respect to the 
board's consideration of participants' and relevant stakeholders' views 
pursuant to the proposed rule. Based on the Commission's previous 
estimates for ongoing monitoring and compliance burdens with respect to 
Rule 17Ad-22,\268\ the Commission estimates that the ongoing activities 
required by proposed Rule 17Ad-25(j) would impose an aggregate annual 
burden on respondent clearing agencies of 40 hours.\269\
---------------------------------------------------------------------------

    \268\ See Clearing Agency Standards Adopting Release, supra note 
8, at 66260-63; CCA Standards Adopting Release, supra note 13, at 
70891-99.
    \269\ This figure was calculated as follows: (Compliance 
Attorney for 4 hours) x 10 respondent clearing agencies = 40 hours.
---------------------------------------------------------------------------

H. Chart of Total PRA Burdens

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Initial burden  Ongoing burden   Total annual
      Name of information  collection              Type of burden            Number of      per entity      per entity      burden per    Total industry
                                                                            respondents       (hours)         (hours)     entity (hours)  burden (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
17Ad-25(b)................................  Recordkeeping...............              10              49              98             147           1,470
17Ad-25(c)................................  Recordkeeping...............              10              80              30             110           1,100
17Ad-25(d)................................  Recordkeeping...............              10               8               3              11             110
17Ad-25(g)................................  Recordkeeping...............              10              13               5              18             180
17Ad-25(h)................................  Recordkeeping...............              10               2               1               3              30
17Ad-25(i)................................  Recordkeeping...............              10              80              30             110           1,100
17Ad-25(j)................................  Recordkeeping...............              10              14               4              18             180
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 51855]]

I. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    1. Evaluate whether the proposed collection of information is 
necessary for the proper performance of the Commission's functions, 
including whether the information shall have practical utility;
    2. Evaluate the accuracy of the Commission's estimates of the 
burden of the proposed collection of information;
    3. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    4. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
    5. Evaluate whether the proposed rules would have any effects on 
any other collection of information not previously identified in this 
section.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the OMB Desk Officer for the 
Securities and Exchange Commission, 
[email protected], and should also send a copy 
of their comments to Secretary, Securities and Exchange Commission, 100 
F Street NE, Washington, DC 20549-1090, with reference to File Number 
S7-21-22. Requests for materials submitted to OMB by the Commission 
with regard to this collection of information should be in writing, 
with reference to File Number S7-21-22 and be submitted to the 
Securities and Exchange Commission, Office of FOIA/PA Services, 100 F 
Street NE, Washington, DC 20549-2736. As OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of publication.

VI. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in (i) an annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (ii) 
a major increase in costs or prices for consumers or individual 
industries; or (iii) significant adverse effect on competition, 
investment, or innovation.\270\ The Commission requests comment on the 
potential impact of proposed Rule 17Ad-25 on the economy on an annual 
basis, any potential increase in costs or prices for consumers or 
individual industries, and any potential effect on competition, 
investment, or innovation. Commenters are requested to provide 
empirical data and other factual support for their views to the extent 
possible.
---------------------------------------------------------------------------

    \270\ Public Law 104-121, 110 Stat. 857 (1996) (codified in 
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\271\ Section 603(a) of the Administrative Procedure Act,\272\ 
as amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules to determine the 
impact of such rulemaking on ``small entities.'' \273\ Section 605(b) 
of the RFA states that this requirement shall not apply to any proposed 
rule which, if adopted, would not have a significant impact on a 
substantial number of small entities.\274\
---------------------------------------------------------------------------

    \271\ See 5 U.S.C. 601 et seq.
    \272\ 5 U.S.C. 603(a).
    \273\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this proposed rulemaking, are set forth 
in Rule 0-10, 17 CFR 240.0-10.
    \274\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Registered Clearing Agencies

    Proposed Rule 17Ad-25 would apply to all registered clearing 
agencies. For the purposes of Commission rulemaking and as applicable 
to proposed Rule 17Ad-25, a small entity includes, when used with 
reference to a clearing agency, a clearing agency that (i) compared, 
cleared, and settled less than $500 million in securities transactions 
during the preceding fiscal year, (ii) had less than $200 million of 
funds and securities in its custody or control at all times during the 
preceding fiscal year (or at any time that it has been in business, if 
shorter), and (iii) is not affiliated with any person (other than a 
natural person) that is not a small business or small 
organization.\275\
---------------------------------------------------------------------------

    \275\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission,\276\ the Commission 
believes that all such registered clearing agencies exceed the 
thresholds defining ``small entities'' set out above. While other 
clearing agencies may emerge and seek to register as clearing agencies 
with the Commission, the Commission believes that no such entities 
would be ``small entities'' as defined in Exchange Act Rule 0-10.\277\
---------------------------------------------------------------------------

    \276\ In 2021, DTCC processed $2.37 quadrillion in financial 
transactions. Within DTCC, DTC settled $152 trillion of securities 
and held securities valued at $87.1 trillion, NSCC processed an 
average daily value of $2.029 trillion in equity securities, and 
FICC cleared $1.4 quadrillion of transactions in government 
securities and $69 trillion of transactions in agency mortgage-
backed securities. See DTCC, 2021 Annual Report, https://www.dtcc.com/annuals/2021/. ICE averaged daily trade volume of 5.97 
million contracts and total revenues of $7.1 billion in 2021. See 
ICE, 2021 Annual Report, https://s2.q4cdn.com/154085107/files/doc_financials/2021/ar/250217_009_Web_BMK-(1).pdf. In addition, OCC 
cleared more than 7.5 billion contracts and held margin of $180 
billion at the end of 2020. See OCC, 2020 Annual Report, https://annualreport.theocc.com/. These trade volumes exceed the $500 
million threshold for small entities.
    \277\ See 17 CFR 240.0-10(d). The Commission based this 
determination on its review of public sources of financial 
information about registered clearing agencies.
---------------------------------------------------------------------------

B. Certification

    For the reasons described above, the Commission certifies that 
proposed Rule 17Ad-25 would not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA. The 
Commission requests comment regarding this certification. The 
Commission requests that commenters describe the nature of any impact 
on small entities and provide empirical data to support the extent of 
the impact. Persons wishing to submit written comments should refer to 
the instructions for submitting comments in the front of this release.

VIII. Statutory Authority and Text of Proposed Rule

    The Commission is proposing Rule 17Ad-25 under the Commission's 
rulemaking authority in the Exchange Act, particularly Section 17(a), 
15 U.S.C. 78q(a), Section 17A, 15 U.S.C. 78q-1, Section 23(a), 15 
U.S.C. 78w(a), Section 765 of the Dodd-Frank Act, and 805 of the 
Clearing Supervision Act, 15 U.S.C. 8343 and 15 U.S.C. 5464 
respectively.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

[[Page 51856]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Section 240.17Ad-25 is added to read as follows:


Sec.  240.17Ad-25  Clearing agency boards of directors and conflicts of 
interest.

    (a) Definitions. All terms used in this section have the same 
meaning as in the Securities Exchange Act of 1934, and unless the 
context otherwise requires, the following definitions apply for 
purposes of this section:
    Affiliate means a person that directly or indirectly controls, is 
controlled by, or is under common control with the registered clearing 
agency.
    Board of directors means the board of directors or equivalent 
governing body of the registered clearing agency.
    Director means a member of the board of directors or equivalent 
governing body of the registered clearing agency.
    Family member means any child, stepchild, grandchild, parent, 
stepparent, grandparent, spouse, sibling, niece, nephew, mother-in-law, 
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law, including adoptive relationships, any person (other than a 
tenant or employee) sharing a household with the director or a nominee 
for director, a trust in which these persons (or the director or a 
nominee for director) have more than fifty percent of the beneficial 
interest, a foundation in which these persons (or the director or a 
nominee for director) control the management of assets, and any other 
entity in which these persons (or the director or a nominee for 
director) own more than fifty percent of the voting interests.
    Independent director means a director of the registered clearing 
agency who has no material relationship with the registered clearing 
agency or any affiliate thereof.
    Material relationship means a relationship, whether compensatory or 
otherwise, that reasonably could affect the independent judgment or 
decision-making of the director. A material relationship also includes 
a relationship that existed during a lookback period of one year 
counting back from making the initial determination in paragraph (b)(2) 
of this section.
    Service provider for critical services means any person that is 
contractually obligated to the registered clearing agency for the 
purpose of supporting clearance and settlement functionality or any 
other purposes material to the business of the registered clearing 
agency.
    (b) Composition of the board of directors. (1) A majority of the 
members of the board of directors of a registered clearing agency must 
be independent directors, unless a majority of the voting rights issued 
as of the immediately prior record date are directly or indirectly held 
by participants, in which case at least 34 percent of the members of 
the board of directors must be independent directors.
    (2) Each registered clearing agency shall broadly consider all the 
relevant facts and circumstances, including under paragraph (g) of this 
section, on an ongoing basis, to affirmatively determine that a 
director does not have a material relationship with the registered 
clearing agency or an affiliate of the registered clearing agency, and 
is not precluded from being an independent director under paragraph (f) 
of this section, in order to qualify as an independent director. In 
making such determination, a registered clearing agency must:
    (i) Identify the relationships between a director, the registered 
clearing agency, and any affiliate thereof and any circumstances under 
paragraph (f) of this section;
    (ii) Evaluate whether any relationship is likely to impair the 
independence of the director in performing the duties of director; and
    (iii) Document this determination in writing.
    (c) Nominating committee. (1) Each registered clearing agency must 
establish a nominating committee and a written evaluation process 
whereby such nominating committee shall evaluate nominees for serving 
as directors.
    (2) A majority of the directors serving on the nominating committee 
must be independent directors, and the chair of the nominating 
committee must be an independent director.
    (3) The fitness standards for serving as a director shall be 
specified by the nominating committee, documented in writing, and 
approved by the board of directors. Such fitness standards must be 
consistent with the requirements of this section and include that the 
individual is not subject to any statutory disqualification as defined 
under Section 3(a)(39) of the Act.
    (4) The nominating committee must document the outcome of the 
written evaluation process consistent with the fitness standards 
required under paragraph (c)(3) of this section. Such process shall:
    (i) Take into account each nominee's expertise, availability, and 
integrity, and demonstrate that the board of directors, taken as a 
whole, has a diversity of skills, knowledge, experience, and 
perspectives;
    (ii) Demonstrate that the nominating committee has considered 
whether a particular nominee would complement the other board members, 
such that, if elected, the board of directors, taken as a whole, would 
represent the views of the owners and participants, including a 
selection of directors that reflects the range of different business 
strategies, models, and sizes across participants, as well as the range 
of customers and clients the participants serve;
    (iii) Demonstrate that the nominating committee considered the 
views of other stakeholders who may be impacted by the decisions of the 
registered clearing agency, including transfer agents, settlement 
banks, nostro agents, liquidity providers, technology or other service 
providers; and
    (iv) Identify whether each selected nominee would meet the 
definition of independent director in paragraphs (a) and (f) of this 
section, and whether each selected nominee has a known material 
relationship with the registered clearing agency or any affiliate 
thereof, an owner, a participant, or a representative of another 
stakeholder of the registered clearing agency described in paragraph 
(c)(4)(iii) of this section.
    (d) Risk management committee. (1) Each registered clearing agency 
must establish a risk management committee (or committees) to assist 
the board of directors in overseeing the risk management of the 
registered clearing agency. The membership of each risk management 
committee must be reconstituted on a regular basis and at all times 
include representatives from the owners and participants of the 
registered clearing agency.
    (2) In the performance of its duties, the risk management committee 
must be able to provide a risk-based, independent, and informed opinion 
on all matters presented to the committee for consideration in a manner 
that supports the safety and efficiency of the registered clearing 
agency.
    (e) Committees generally. If any committee has the authority to act 
on

[[Page 51857]]

behalf of the board of directors, the composition of that committee 
must have at least the same percentage of independent directors as is 
required for the board of directors, as set forth in paragraph (b)(1) 
of this section.
    (f) Circumstances that preclude directors from being independent 
directors. In addition to how the definition of independent director 
set forth in this section is applied by a registered clearing agency, 
the following circumstances preclude a director from being an 
independent director, subject to a lookback period of one year 
(counting back from making the initial determination in paragraph 
(b)(2) of this section) applying to paragraphs (f)(2) through (6) of 
this section:
    (1) The director is subject to rules, policies, or procedures by 
the registered clearing agency that may undermine the director's 
ability to operate unimpeded, such as removal by less than a majority 
vote of shares that are entitled to vote in such director's election;
    (2) The director, or a family member, has an employment 
relationship with or otherwise receives compensation other than as a 
director from the registered clearing agency or any affiliate thereof, 
or the holder of a controlling voting interest of the registered 
clearing agency;
    (3) The director, or a family member, is receiving payments from 
the registered clearing agency, or any affiliate thereof, or the holder 
of a controlling voting interest of the registered clearing agency, 
that reasonably could affect the independent judgment or decision-
making of the director, other than the following:
    (i) Compensation for services as a director on the board of 
directors or a committee thereof; or
    (ii) Pension and other forms of deferred compensation for prior 
services not contingent on continued service;
    (4) The director, or a family member, is a partner in, or 
controlling shareholder of, any organization to or from which the 
registered clearing agency, or any affiliate thereof, or the holder of 
a controlling voting interest of the registered clearing agency, is 
making or receiving payments for property or services, other than the 
following:
    (i) Payments arising solely from investments in the securities of 
the registered clearing agency, or affiliate thereof; or
    (ii) Payments under non-discretionary charitable contribution 
matching programs;
    (5) The director, or a family member, is employed as an executive 
officer of another entity where any executive officers of the 
registered clearing agency serve on that entity's compensation 
committee; or
    (6) The director, or a family member, is a partner of the outside 
auditor of the registered clearing agency, or any affiliate thereof, or 
an employee of the outside auditor who is working on the audit of the 
registered clearing agency, or any affiliate thereof.
    (g) Conflicts of interest. Each registered clearing agency must 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to:
    (1) Identify and document existing or potential conflicts of 
interest in the decision-making process of the clearing agency 
involving directors or senior managers of the registered clearing 
agency; and
    (2) Mitigate or eliminate and document the mitigation or 
elimination of such conflicts of interest.
    (h) Obligation of directors to report conflicts. Each registered 
clearing agency must establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to require a 
director to document and inform the registered clearing agency promptly 
of the existence of any relationship or interest that reasonably could 
affect the independent judgment or decision-making of the director.
    (i) Obligation of board of directors to oversee relationships with 
service providers for critical services. Each registered clearing 
agency must establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to enable the board of 
directors to:
    (1) Confirm and document that risks related to relationships with 
service providers for critical services are managed in a manner 
consistent with its risk management framework, and review senior 
management's monitoring of relationships with service providers for 
critical services;
    (2) Approve policies and procedures that govern the relationship 
with service providers for critical services;
    (3) Review and approve plans for entering into third-party 
relationships where the engagement entails being a service provider for 
critical services to the registered clearing agency; and
    (4) Through regular reporting to the board of directors by senior 
management, confirm that senior management takes appropriate actions to 
remedy significant deterioration in performance or address changing 
risks or material issues identified through ongoing monitoring.
    (j) Obligation of board of directors to solicit and consider 
viewpoints of participants and other relevant stakeholders. Each 
registered clearing agency must establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to solicit, 
consider, and document its consideration of the views of participants 
and other relevant stakeholders of the registered clearing agency 
regarding material developments in its governance and operations on a 
recurring basis.

    By the Commission.
    Dated: August 8, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-17316 Filed 8-22-22; 8:45 am]
BILLING CODE 8011-01-P