[Federal Register Volume 88, Number 232 (Tuesday, December 5, 2023)]
[Rules and Regulations]
[Pages 84454-84511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25807]



[[Page 84453]]

Vol. 88

Tuesday,

No. 232

December 5, 2023

Part III





 Securities and Exchange Commission





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





17 CFR Part 240





Clearing Agency Governance and Conflicts of Interest; Final Rule

  Federal Register / Vol. 88 , No. 232 / Tuesday, December 5, 2023 / 
Rules and Regulations  

[[Page 84454]]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-98959; File No. S7-21-22]
RIN 3235-0695


Clearing Agency Governance and Conflicts of Interest

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting rules under the Securities Exchange Act of 1934 (``Exchange 
Act'') to 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 rules 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 rules establish new requirements for board and 
committee composition, independent directors, management of conflicts 
of interest, and board oversight.

DATES: 
    Effective date: February 5, 2024.
    Compliance date: The applicable compliance dates are discussed in 
Part III of this release.

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

SUPPLEMENTARY INFORMATION: The Commission is adopting 17 CFR 240.17ad-
25 (``Rule 17Ad-25'') under the Exchange Act to establish new 
requirements for the board governance of registered clearing agencies 
and for the management of conflicts of interest by registered clearing 
agencies.\1\ Below is a table of citations to the rules being adopted 
in this release:
---------------------------------------------------------------------------

    \1\ This adopting release also modifies the proposed CFR 
designations to ensure the regulatory text conforms with section 
2.13 of the Document Drafting Handbook. See 1 CFR 21.11; Office of 
the Federal Register, Document Drafting Handbook (Aug. 2018 Edition, 
Revision 2.1, dated Oct. 2023), https://www.archives.gov/files/federal-register/write/handbook/ddh.pdf. Because the Commission 
proposed the new rules to contain an uppercase letter in their CFR 
citations, the Commission is modifying the CFR section designations 
at adoption to replace each such uppercase letter with the 
corresponding lowercase letter. Accordingly, 17 CFR 240.17Ad-25 will 
be designated at adoption as 17 CFR 240.17ad-25.

------------------------------------------------------------------------
           Commission reference                CFR citation  (17 CFR)
------------------------------------------------------------------------
Securities Exchange Act of 1934
 (``Exchange Act''):
  Rule 17Ad-25............................  Sec.   240.17ad-25.
  Rule 17Ad-25(a).........................  Sec.   240.17ad-25(a).
  Rule 17Ad-25(b).........................  Sec.   240.17ad-25(b).
  Rule 17Ad-25(b)(1)......................  Sec.   240.17ad-25(b)(1).
  Rule 17Ad-25(b)(2)......................  Sec.   240.17ad-25(b)(2).
  Rule 17Ad-25(b)(2)(i)...................  Sec.   240.17ad-25(b)(2)(i).
  Rule 17Ad-25(b)(2)(ii)..................  Sec.   240.17ad-
                                             25(b)(2)(ii).
  Rule 17Ad-25(b)(2)(iii).................  Sec.   240.17ad-
                                             25(b)(2)(iii).
  Rule 17Ad-25(c).........................  Sec.   240.17ad-25(c).
  Rule 17Ad-25(c)(1)......................  Sec.   240.17ad-25(c)(1).
  Rule 17Ad-25(c)(2)......................  Sec.   240.17ad-25(c)(2).
  Rule 17Ad-25(c)(3)......................  Sec.   240.17ad-25(c)(3).
  Rule 17Ad-25(c)(4)......................  Sec.   240.17ad-25(c)(4).
  Rule 17Ad-25(c)(4)(i)...................  Sec.   240.17ad-25(c)(4)(i).
  Rule 17Ad-25(c)(4)(ii)..................  Sec.   240.17ad-
                                             25(c)(4)(ii).
  Rule 17Ad-25(c)(4)(iii).................  Sec.   240.17ad-
                                             25(c)(4)(iii).
  Rule 17Ad-25(c)(4)(iv)..................  Sec.   240.17ad-
                                             25(c)(4)(iv).
  Rule 17Ad-25(d).........................  Sec.   240.17ad-25(d).
  Rule 17Ad-25(d)(1)......................  Sec.   240.17ad-25(d)(1).
  Rule 17Ad-25(d)(2)......................  Sec.   240.17ad-25(d)(2).
  Rule 17Ad-25(e).........................  Sec.   240.17ad-25(e).
  Rule 17Ad-25(f).........................  Sec.   240.17ad-25(f).
  Rule 17Ad-25(f)(1)......................  Sec.   240.17ad-25(f)(1).
  Rule 17Ad-25(f)(2)......................  Sec.   240.17ad-25(f)(2).
  Rule 17Ad-25(f)(3)......................  Sec.   240.17ad-25(f)(3).
  Rule 17Ad-25(f)(3)(i)...................  Sec.   240.17ad-25(f)(3)(i).
  Rule 17Ad-25(f)(3)(ii)..................  Sec.   240.17ad-
                                             25(f)(3)(ii).
  Rule 17Ad-25(f)(4)......................  Sec.   240.17ad-25(f)(4).
  Rule 17Ad-25(f)(4)(i)...................  Sec.   240.17ad-25(f)(4)(i).
  Rule 17Ad-25(f)(4)(ii)..................  Sec.   240.17ad-
                                             25(f)(4)(ii).
  Rule 17Ad-25(f)(5)......................  Sec.   240.17ad-25(f)(5).
  Rule 17Ad-25(f)(6)......................  Sec.   240.17Ad-2525(f)(6).
  Rule 17Ad-25(g).........................  Sec.   240.17ad-25(g).
  Rule 17Ad-2525(g)(1)....................  Sec.   240.17Ad-2525(g)(1).
  Rule 17Ad-25(g)(2)......................  Sec.   240.17ad-25(g)(2).
  Rule 17Ad-25(h).........................  Sec.   240.17ad-25(h).
  Rule 17Ad-25(i).........................  Sec.   240.17ad-25(i).
  Rule 17Ad-25(i)(1)......................  Sec.   240.17ad-25(i)(1).
  Rule 17Ad-25(i)(2)......................  Sec.   240.17ad-25(i)(2).
  Rule 17Ad-25(i)(3)......................  Sec.   240.17ad-25(i)(3).
  Rule 17Ad-25(i)(4)......................  Sec.   240.17ad-25(i)(4).
  Rule 17Ad-25(j).........................  Sec.   240.17ad-25(j).
------------------------------------------------------------------------

    With respect to board governance, Rules 17Ad-25(b), (e), and (f) 
establish requirements for board composition and independent directors, 
as discussed in Part II.A. Rules 17Ad-25(c) and (d) establish 
requirements for the nominating and risk management committees of the 
board, as discussed in Parts II.B and II.C respectively. With respect 
to conflicts of interest, Rules 17Ad-25(g) and (h) establish 
requirements for policies and procedures to identify, document, and 
mitigate or eliminate such conflicts of interest, as well as an 
obligation of directors to report such conflicts to the registered 
clearing agency, as discussed in Part II.D. In addition, Rules 17Ad-
5(i) and (j) establish obligations of the board to oversee the 
management of risks from relationships with service providers for core 
services, as discussed in Part II.E, and to solicit, consider and 
document the views of stakeholders, as discussed in Part II.F.
    As discussed further in Part III, the compliance date for Rule 
17Ad-25 is December 5, 2024, except that the compliance date for the 
independence requirements of the board and board committees in Rules 
17Ad-25(b)(1), (c)(2), and (e) is December 5, 2025.

Table of Contents

I. Introduction
II. Discussion of Comments Received and Final Rules
    A. Board Composition and Requirements for Independent Directors
    1. Proposed Rules 17Ad-25(b), (e), and (f)
    2. Overall Views
    3. Criteria for Independence
    4. Incentive Structures
    5. Ownership Structures
    6. Circumvention
    B. Nominating Committee
    1. Proposed Rule 17Ad-25(c)
    2. As ``Exclusive Venue'' for Considering Nominees
    3. Approach to Representation of Small and Medium-Sized Firms
    4. Percent of Directors That Are Independent Directors
    C. Risk Management Committee
    1. Proposed Rule 17Ad-25(d)
    2. RMC of the Board
    3. Annual Requirement To Re-Evaluate RMC Membership
    4. Harmonization With CFTC and EMIR Requirements
    5. Other Comments
    D. Conflicts of Interest
    1. Proposed Rules 17Ad-25(g) and (h)
    1. Mitigation or Elimination of Conflicts
    2. Use of ``Reasonably Designed'' Policies and Procedures 
Approach
    E. Management of Risks From Relationships With Service Providers 
for Core Services
    1. Proposed Rule 17Ad-25(i)
    2. Definition of Service Provider for Core Services
    3. Roles of Senior Management and the Board
    F. Obligation To Formally Consider Stakeholder Viewpoints
    1. Proposed Rule 17Ad-25(j)
    2. Concern Regarding Duplicative Requirements
    3. Proposed Scope of ``Governance and Operations''
    4. Frequency and Method of Outreach
    5. Use of Fora To Satisfy the Rule
    6. Documentation of Stakeholder Views
    7. Harmonization With CFTC Requirements for RWG
III. Compliance Dates
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Description of Market
    2. Overview of the Existing Regulatory Framework

[[Page 84455]]

    3. Divergent Incentives of Registered Clearing Agency 
Stakeholders
    4. Current Governance Practices
    C. Consideration of Benefits and Costs as Well as the Effects on 
Efficiency, Competition, and Capital Formation
    1. Economic Considerations for Final Rule Regarding Board 
Composition
    2. Economic Considerations for Final Rules Regarding the 
Nominating Committee
    3. Economic Considerations for Final Rules Regarding the Risk 
Management Committee
    4. Economic Considerations for Final Rules Regarding Conflicts 
of Interest Involving Directors or Senior Managers
    5. Economic Considerations for Final Rules Regarding Management 
of Risks From Relationships With Service Providers for Core Services
    6. Economic Considerations for Final Rules Regarding Formalized 
Solicitation, Consideration, and Documentation of Stakeholders' 
Viewpoints
    D. Reasonable Alternatives to the Final Rules
    1. Allow More Flexibility in Governance, Operations, and Risk 
Management
    2. Adopt More Prescriptive Governance Requirements
    3. Establish Limits on Participant Voting Interests
    4. Increase Shareholders' At-Risk Capital (``Skin in the Game'')
    5. Increase Public Disclosure
    6. Require Risk Working Group in Addition to Risk Committee
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
VI. Regulatory Flexibility Act
    A. Registered Clearing Agencies
    B. Certification
VII. Other Matters
Statutory Authority

I. Introduction

    Clear and transparent governance arrangements are integral to 
ensuring that a clearing agency is resilient because, among other 
things, such arrangements promote accountability and reliability in 
decision-making.\2\ Since the enactment of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'') in 2010,\3\ the 
Commission has adopted a series of rules intended to promote the 
resilience of registered clearing agencies,\4\ with the goal of 
establishing an evolving regulatory framework.\5\ As discussed in 
greater detail in the Governance Proposing Release,\6\ the Commission 
has continued to observe and learn from the recurring tensions that 
exist in the incentive structure of a clearing agency, including their 
potential effect on the participants of the clearing agency and the 
broader financial system.\7\ Accordingly, the Governance Proposing 
Release included new rules designed to help ensure that a registered 
clearing agency can effectively balance the differing incentives that 
exist among the clearing agency, its participants, and other key 
stakeholders.\8\ The proposed rules included more specific and defined 
parameters and requirements for governance intended to build upon and 
strengthen the existing requirements in Rule 17Ad-22 that have a 
broader and principles-based focus.\9\
---------------------------------------------------------------------------

    \2\ Release No. 34-95431 (Aug. 8, 2022), 87 FR 51812, 51813 
(Aug. 23, 2022) (``Governance Proposing Release'').
    \3\ Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ See, e.g., 17 CFR 240.17Ad-22 (``Rule 17Ad-22''); see also 
Release No. 34-88616 (Apr. 9, 2020), 85 FR 28853, 28855 (May 14, 
2020) (``CCA Definition Adopting Release''); Release No. 34-78961 
(Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016) (``CCA Standards 
Adopting Release''); Release No. 34-68080 (Oct. 22, 2012), 77 FR 
66219 (Nov. 2, 2012) (``Clearing Agency Standards Adopting 
Release'').
    \5\ Governance Proposing Release, supra note 2, at 51814.
    \6\ Id. at 51814-51819.
    \7\ Id. at 51814 (describing the same as ``clearing members and 
the larger financial community'').
    \8\ Id.
    \9\ Id.
---------------------------------------------------------------------------

    The Commission received comments on the Governance Proposing 
Release from registered clearing agencies, participants of registered 
clearing agencies and their customers, industry groups representing 
clearing agencies, their participants, and other market participants, 
academics, individual investors, and other interested parties.\10\ Many 
commenters were supportive of the proposed rules, though some 
commenters also expressed concerns regarding specific elements of 
certain rules. In Part II below, the Commission discusses these 
comments in detail and modifications made in response to the comments. 
In addition, the Commodity Futures Trading Commission (``CFTC'') 
recently adopted new requirements applicable to risk management 
committees (``RMCs'') and risk working groups (``RWGs'') of derivatives 
clearing organizations (``DCOs''),\11\ topics which are also addressed 
in the context of registered clearing agencies by the Commission's 
final rules discussed below. The Commission's final rules promote 
similar outcomes as the CFTC's rules, such as ensuring robust board 
oversight of senior management, and informing the board of stakeholder 
views, though in some cases the Commission has taken a different 
approach as to specific requirements because Rule 17Ad-25 also 
addresses additional topics, including board composition, director 
independence, and conflicts of interest. The differing approaches are 
explained further in Parts II.C.4 and II.F.7. Finally, these rules are 
being adopted pursuant to section 765 of the Dodd-Frank Act with 
respect to clearing of security-based swaps,\12\ which specifically 
directs the Commission to adopt rules to mitigate conflicts of interest 
for security-based swap clearing agencies.\13\
---------------------------------------------------------------------------

    \10\ The Commission voted to issue the Governance Proposing 
Release on August 8, 2022. The release was posted on the Commission 
website that day, and comment letters were received beginning the 
following day. The comment period closed on October 7, 2022. 
Comments received are available on the Commission's website at 
https://www.sec.gov/comments/s7-21-22/s72122.htm. The Commission has 
considered all comments received since August 8, 2022.
    \11\ See Governance Requirements for Derivatives Clearing 
Organizations, Final Rule, 88 FR 44675 (July 13, 2023).
    \12\ Public Law 111-203, 124 Stat. 1376 (2010).
    \13\ See Governance Proposing Release, supra note 2, at 51819 & 
n.49 (stating ``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.'').
---------------------------------------------------------------------------

II. Discussion of Comments Received and Final Rules

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 serving on the board of a 
registered clearing agency. First, proposed Rule 17Ad-25(b)(1) would 
require that a majority of the directors 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 of the registered clearing agency, then at least 34 
percent 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-

[[Page 84456]]

making of the director, and includes relationships that existed during 
a lookback period of one year counting back from making the initial 
independence determination made in accordance with 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 that a registered 
clearing agency 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, and is not precluded from 
being an independent director under proposed Rule 17Ad-25(f), 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, 
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 self-regulatory organizations (``SROs'') 
under Exchange Act section 17(a)(2) and rules thereunder.
    Proposed Rule 17Ad-25(e) would require that, if any committee has 
the authority to act on behalf of the board, the composition of that 
committee must have at least the same percentage of independent 
directors as is required under these rules for the board, 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 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 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. 
Proposed Rules 17Ad-25(f)(2) through (6) would be subject to a lookback 
period of one year, counting back from making the initial determination 
required by proposed Rule 17Ad-25(b)(2).
    Proposed Rule 17Ad-25(a) would define ``family member'' 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 any other entity in 
which these persons (or the director or a nominee for director) own 
more than fifty percent of the voting interests.
    The Commission is adopting Rules 17Ad-25(b), (e), and (f) generally 
as proposed but with technical changes to Rule 17Ad-25(a), Rule 17Ad-
25(b)(1), Rule 17Ad-25(b)(2), Rule 17Ad-25(b)(2)(i), and Rule 17Ad-
25(b)(2)(iii), for the reasons discussed below. In making the technical 
change to the definition of ``material relationship'' in Rule 17Ad-
25(a), the Commission is embedding the reference to a lookback period 
that was proposed in a standalone sentence into the initial sentence 
relating to relationships that could affect the independent judgment or 
decision-making of a director, in order to clarify that the lookback 
period is part of the overall reference to these relationships. In 
making the technical change to Rule 17Ad-25(b)(1), the Commission is 
replacing the term ``voting rights'' with ``voting interests,'' which 
would be consistent with the terms used elsewhere in the rule text, and 
which remains consistent with the concept as proposed. In making the 
technical change to Rule 17Ad-25(b)(2), the Commission is deleting the 
last proviso that stated, ``in order to qualify as an independent 
director,'' because this reference is unnecessary and does not describe 
all of the requirements for qualifying as an independent director. In 
making the technical change to Rule 17Ad-25(b)(2)(i), the Commission is 
reordering the language requiring identification of the relationships 
between a director and a registered clearing agency, and a director and 
any affiliate of a registered clearing agency. The proposed rule text 
implied that there needed to be identification of relationships between 
the registered clearing agency and its affiliates, which is not 
intended. In making the technical change to Rule 17Ad-25(b)(2)(iii), 
the Commission is specifying that the documentation requirement applies 
to both the registered clearing agency's evaluation of director 
independence and its ultimate determination (i.e., whether the director 
qualifies as an independent director or is not an independent 
director). Under the proposed text, the phrase ``this determination'' 
was intended to encompass broad consideration of all the relevant facts 
and circumstances on an ongoing basis. The Commission is modifying the 
text in adopted Rule 17Ad-25(b)(2)(iii) to be ``the evaluation and 
determination'' to specify that the documentation requirement applies 
to both the evaluation of independence and the ultimate determination 
regarding independence.
    In the Governance Proposing Release, the Commission stated that an

[[Page 84457]]

independent director can bolster a 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.\14\ Even the appearance of conflicts of 
interest can reduce confidence in the functioning of the registered 
clearing agency among direct and indirect participants of the 
registered clearing agency, other stakeholders, and the public, 
particularly during periods of market stress when general confidence in 
market resilience may be low.\15\ Indeed, as discussed in the 
Governance Proposing Release, each of the registered clearing agencies 
already requires a portion of their directors to have some 
characteristics of independence (establishing, for example, 
``nonexecutive'' or ``public'' directors).\16\ Further, 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, as discussed in the 
Governance Proposing Release, the risk mutualizing and trade guaranty 
features provided by many registered clearing agencies provide for the 
shift of the consequences of one party's actions to another in certain 
circumstances, such as after a participant default.\17\ These features 
both affect how different stakeholders maximize their own self-interest 
and also distinguish the governance of a registered clearing agency 
from other corporate entities. The Commission stated its belief that 
registered clearing agency processes involving risk management or 
director nominations are also implicated in managing the dynamics 
between owners and participants.\18\ 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. The Commission stated its belief 
that requiring a certain percentage of 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.\19\ Independent directors would help ensure that, when the 
interests between owners and participants diverge, the balancing of 
interests 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 payments 
from the registered clearing agency to such director), owners, or 
participants of the registered clearing agency. Achieving balance 
between stakeholders with divergent views could help the board 
adequately consider the respective needs of all such stakeholders and 
help promote the integrity of, and public confidence in, the registered 
clearing agency's risk management function.
---------------------------------------------------------------------------

    \14\ See Governance Proposing Release, supra note 2, at 51821.
    \15\ See id. at 51819; see also id. at 51812 n.3 (explaining 
that examples of indirect participants are 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).
    \16\ See id. at 51844.
    \17\ See id. at 51822.
    \18\ See id.
    \19\ See id. at 51823.
---------------------------------------------------------------------------

    Comments on the proposed board composition requirements and 
requirements for independent directors are discussed below.
2. Overall Views
    Of the comments received on the Governance Proposing Release, the 
majority were from individuals. Several expressed high-level views 
either in support or against the proposal,\20\ referencing, for 
example, their concerns that retail investors are being cheated due to 
clearing agency greed or conflicts of interest, or requesting retail 
investor representation on the board. Several commenters were 
specifically concerned with incidents of failures to deliver with their 
transactions, but did not discuss the rule proposals in the Governance 
Proposing Release.\21\ Many commenters were under the mistaken 
impression that the proposal would alter the status of certain entities 
as SROs.\22\ However, the Exchange Act clearly defines registered 
clearing agencies as SROs,\23\ and the proposed rule would have no 
impact on this status. As a general matter, the concerns expressed by 
these commenters regarding the perception of conflicts of interest at a 
registered clearing agency highlight the need to adopt Rule 17Ad-25, 
including the provisions for independent directors and to address 
conflicts of interest, to promote confidence in registered clearing 
agency governance through requirements intended to ensure transparency, 
fair representation, and effective decision-making at the board level.
---------------------------------------------------------------------------

    \20\ See, e.g., Timothy Washington (Aug. 12, 2022) 
(``Washington''); Andres Loubriel (Aug. 12, 2022) (``Loubriel''); 
Gerald (Aug. 12, 2022) (``Gerald''); Dylan Crosby (Aug. 12, 2022) 
(``Crosby''); Anonymous (Aug. 12, 2022) (``Anonymous 1''); Josh 
Zimmerman (Aug. 12, 2022) (``Zimmerman''); Nathan Rohde (Aug. 13, 
2022) (``Rohde''); Ian Marshall (Aug. 17, 2022) (``Marshall''); 
Anonymous (Aug. 26, 2022) (``Anonymous 4''); Harun Krishnan (Aug. 
26, 2022) (``Krishnan''); Matthew Fry (Aug. 26, 2022) (``Fry''); the 
Delois Albert Brassell Estate (Sept. 3, 2022) (``Delois Albert 
Brassell Estate''); Kaleab Tesema (Sept. 7, 2022) (``Tesema''); 
Jamario (Oct. 6, 2022) (``Jamario''); Ben Passlow (May 11, 2023) 
(``Passlow'') (each expressing views in support); see also Val 
Ayrapetov (Aug. 9, 2022) (``Ayrapetov''); George (Aug. 12, 2022) 
(``George''); Anonymous (Aug. 12, 2022) (``Anonymous 2''); M.B. 
(Oct. 6, 2022) (``M.B.'') (requesting creation of a retail-specific 
board member) (each expressing views against).
    \21\ See, e.g., Crosby, Loubriel; Zimmerman.
    \22\ See Anonymous 1; Christopher Hewitt (Aug. 12, 2022) 
(``Hewitt''); Mason Smith (Aug. 12, 2022) (``Smith''); Samuel Ryan 
(Aug. 12, 2022) (``Ryan''); Keith Clark (Aug. 12, 2022) (``Clark''); 
Dillon (Aug. 12, 2022) (``Dillon''); Evan (Aug. 12, 2022) (``Evan 
Letter''); John J. Kozubal (Oct. 6, 2022) (``Kozubal''); James Fox 
(Oct. 6, 2022) (``Fox''); Joe (Oct. 7, 2022) (``Joe''); Anonymous 
(Oct. 12, 2022) (``Anonymous 5''); Anonymous (Oct. 13, 2022) 
(``Anonymous 6''); Kens Bane (Jan. 16, 2023) (``Bane'').
    \23\ See 15 U.S.C. 78c(a)(23), (26).
---------------------------------------------------------------------------

    Several comments from representatives of trade groups or registered 
clearing agencies expressed general support for having an independent 
director requirement as a ``good first step,'' \24\ appropriately 
designed to reduce the risk of conflicts of interest \25\ and provide 
diverse viewpoints \26\ in a ``pragmatic'' \27\ way. One commenter 
supported the independent director requirement because it was 
consistent with public company listing rules and would be particularly 
useful in capturing a range of perspectives when combined with the 
requirement of a nominating committee to consider a broad range of 
views.\28\ Another commenter viewed the requirements as consistent with 
independent director requirements that were already incorporated into 
its

[[Page 84458]]

governance structure.\29\ Another group of commenters supported the 
independent director requirement because it was consistent with a 
whitepaper issued by the group in 2019 concerning the need for enhanced 
governance at clearing agencies to address their risk-related 
concerns.\30\
---------------------------------------------------------------------------

    \24\ See Thomas Price, Managing Director, Operations/Technology, 
Robert Toomey, Managing Director, Associate General Counsel, Head of 
Capital Markets, Joseph Corcoran, Managing Director, Associate 
General Counsel, Securities Industry and Financial Markets 
Association (Oct. 28, 2022) (``SIFMA'') at 2.
    \25\ See Chris Barnard (Sept. 9, 2022) (``Barnard''); Stephen W. 
Hall, Legal Director and Securities Specialist, and Houston Shaner, 
Senior Counsel, Better Markets, Inc. (Oct. 7, 2022) (``Better 
Markets'') at 5; Murray Pozmanter, Managing Director, President, 
Clearing Agency Services & Head of Global Business Operations, 
Depository Trust & Clearing Corporation (Oct. 7, 2022) (``DTCC'') at 
2.
    \26\ William C. Thum, Managing Director and Assistant General 
Counsel, SIFMA Asset Management Group (Oct. 13, 2022) (``SIFMA 
AMG'') at 8.
    \27\ Ulrich Karl, Head of Clearing, International Swaps and 
Derivatives Association, Inc. (Oct. 28, 2022) (``ISDA'') at 6.
    \28\ Paolo Saguato, Assistant Professor of Law, George Mason 
University Antonin Scalia Law School (Oct. 6, 2022) (``Saguato'') at 
3.
    \29\ Kara Dutta, Assistant General Counsel, Intercontinental 
Exchange, Inc. (Nov. 11, 2022) (``ICE'') at 2.
    \30\ See Frank Baldi, Managing Director, Head of Financial 
Institutions and Emerging Markets Credit Risk, Barclays, et al. 
(Oct. 18, 2022) (``Barclays et al.'') at 1.
---------------------------------------------------------------------------

    One commenter cautioned against ``completely'' independent 
directors (i.e., independent from owners and participants, such as 
academics) creating a situation where clearing agency participants 
could be under-represented.\31\ As discussed further below, the 
Exchange Act requires that the rules of the clearing agency assure a 
fair representation of its shareholders and participants in the 
selection of its directors and administration of its affairs. Another 
commenter that supported the proposed requirements cautioned against 
going any further than the proposal--such as by requiring certain types 
of stakeholders to be represented--stating that a board's effectiveness 
comes from the skills, personal attributes (including leadership and 
integrity), and relevant business and risk management experience of its 
directors, and not simply by drawing directors from various stakeholder 
groups.\32\ As discussed further below, Rules 17Ad-25(b) and (e) 
address the composition of the board and board committees, and does not 
go further to address the composition of an advisory group (the 
constitution of which can serve a wider set of stakeholders because its 
members need not already be serving on the board to serve on such an 
advisory group). Exchange Act section 17A(b)(3)(c) directs the 
Commission to only register clearing agencies whose rules assure a fair 
representation of participants in, among other things, the selection of 
directors.\33\ In terms of the skills and effectiveness of a board, 
other requirements of Rule 17Ad-25 help promote highly qualified and 
effective candidates serving as independent directors. For example, as 
discussed in Part II.B below, Rule 17Ad-25(c) as adopted requires 
policies and procedures for a registered clearing agency's nominating 
committee to have a written process for evaluating directors and 
nominees for director, including taking into account each nominee's 
expertise, availability, and integrity, and demonstrating that the 
board of directors, taken as a whole, has a diversity of skills, 
knowledge, experience, and perspectives.
---------------------------------------------------------------------------

    \31\ ISDA at 6.
    \32\ ICE at 2-3.
    \33\ See 15 U.S.C. 78q-1(b)(3)(c).
---------------------------------------------------------------------------

    Another commenter did not see the problem that the proposed rules 
would solve, indicating the group's belief that the approach to board 
composition and board independence was too prescriptive, which could 
prevent a registered clearing agency from having governance measures 
that are uniquely suited to manage risks particular to the registered 
clearing agency.\34\ As stated in the Governance Proposing Release, the 
requirements regarding the representation of independent directors are 
appropriate to facilitate the consideration and management of diverse 
stakeholder interests by the board in the overall decision-making 
process of the registered clearing agency.\35\ Regarding the level of 
prescriptiveness, Rule 17Ad-25(f) identifies situations that, in the 
Commission's judgment, create material relationships with the 
registered clearing agency that are incompatible with being an 
independent director but, other than these specific exclusions, 
registered clearing agencies would have discretion to evaluate whether 
a director's relationships to the registered clearing agency are 
material. Because Rule 17Ad-25 provides registered clearing agencies 
with such discretion, the Commission set forth the list of specific 
exclusions in Rule 17Ad-25(f) to ensure a consistent, minimum standard 
for independent directors across registered clearing agencies.\36\ 
Therefore, the Commission disagrees that the rules are overly 
prescriptive because of the levels of discretion that are allowed, and 
disagrees that unique governance measures could not be adopted by 
registered clearing agencies.
---------------------------------------------------------------------------

    \34\ Global Association of Central Counterparties (Oct. 7, 2022) 
(``CCP12'') at 1; see also SIFMA at 3; ICE at 3.
    \35\ See Governance Proposing Release, supra note 2, at 51821.
    \36\ See id. at 51824 (``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.'').
---------------------------------------------------------------------------

3. Criteria for Independence
    One commenter supported the requirement for establishing an overall 
level of independent directors at 34 percent for participant-owned 
registered clearing agencies as being sufficient and without the 
drawbacks of too many independent directors.\37\ Another commenter 
disagreed with the proposal, stating that the Commission should not 
impose any percentage of independent directors given the differences in 
organizational structure, markets, and products cleared, among other 
things, across registered clearing agencies.\38\ A separate commenter 
supported the requirement for independent directors because it would 
mitigate potential conflicts and also provide better board oversight of 
the registered clearing agency's risk management and other 
functions.\39\ The proposed requirements for the percentage of 
independent directors strike a reasonable balance between the competing 
interests of management, owners, participants, and any parties falling 
into more than one of those categories. In the Governance Proposing 
Release, the Commission considered whether a clearing agency's 
particular organizational structures, markets served, or products 
cleared support differing minimum levels of independence, and stated 
that the percentage of participant ownership of the clearing agency is 
an important factor against which to set the minimum standard for 
director independence. Commenters have not identified another specific 
factor that would support modifying the proposed threshold. Further, 
Rule 17Ad-25 does not impede registered clearing agencies from 
considering a broad pool of potential candidates to serve as 
independent directors, to appropriately reflect their different 
organizational structures, markets served, and products cleared. 
Therefore, the Commission is adopting the percentages as proposed.
---------------------------------------------------------------------------

    \37\ Joseph P. Kamnik, Senior Special Advisor and Regulatory 
Counsel, Options Clearing Corporation (Oct. 7, 2022) (``OCC'') at 
23.
    \38\ CCP12 at 3.
    \39\ SIFMA AMG at 8.
---------------------------------------------------------------------------

    One commenter supported aspects of the ``independent director'' 
definition but stated that the proposed requirement that a majority of 
directors be independent is unlikely to resolve all conflicts of 
interest because registered clearing agency owners will still have 
ultimate approval of, and influence over, independent directors. The 
commenter also explained that independent directors still have 
fiduciary duties to the registered clearing agency and are constrained 
to act in service of shareholder value when reviewing risk 
priorities.\40\ The value of a particular element of Rule 17Ad-25 is 
not diminished even though it does not address all potential conflicts 
of interest. Rule 17Ad-25 is intended to

[[Page 84459]]

bolster the overall quality of governance (and therefore risk 
management) at a registered clearing agency. The same commenter also 
requested clarification that material relationship would include 
director compensation that is tied to registered clearing agency 
equity, revenue, volume, or scope of products.\41\ While Rule 17Ad-
25(f) identifies specific circumstances that establish a material 
relationship, the definition of ``material relationship'' in Rule 17Ad-
25(a) is broad. Circumstances where director compensation includes 
elements that generate potential conflicts of interest, such as those 
tying monetary compensation to equity, revenue, volume of activity, or 
scope of products, generally could create a material relationship under 
Rule 17Ad-25(a).
---------------------------------------------------------------------------

    \40\ Better Markets at 13.
    \41\ Id. at 12.
---------------------------------------------------------------------------

    The same commenter also suggested that the definition of ``material 
relationship'' be modified to include any interests that create a 
reasonable appearance of clouding the judgment of a director, on the 
basis that even the appearance of a bias erodes trust.\42\ Trust is 
important, especially during times of market stress, but the proposed 
definition does not need to be modified to address this concern. The 
definition of ``material relationship'' already contains a 
``reasonableness'' element, requiring that such relationships be 
assessed as they would be perceived by a reasonable person, which would 
allow a clearing agency to consider and address relationships that 
create the appearance of a conflict. This reasonableness requirement 
applies even to relationships or situations that are otherwise not 
among the exclusions in Rule 17Ad-25(f), because Rule 17Ad-25(f) 
applies in addition to how the definition of independent director is 
applied by a registered clearing agency. In this regard, clearing 
agencies generally should consider this reasonableness element in the 
context of participants, vendors, or non-controlling shareholders of 
the clearing agency or its affiliates. Employees of participants may be 
subject to disqualification under this reasonableness requirement, even 
if they are not subject to disqualification under Rule 17Ad-25(f). The 
reasonableness element would apply to an evaluation of the 
qualifications necessary for being an independent director, which will 
be contingent on the broad set of facts and circumstances under 
consideration. The definition also includes relationships that 
reasonably could affect the independent judgment or decision-making of 
the director, which seeks to address outcomes that reasonably could 
happen, even if they have not yet in fact happened. Therefore, the 
Commission is not modifying the rule in response to this comment.\43\
---------------------------------------------------------------------------

    \42\ Id. at 18-19.
    \43\ See infra Part II.D.2 (similarly addressing comments with 
respect to the ``reasonableness'' requirement in Rule 17Ad-25(g)).
---------------------------------------------------------------------------

    The commenter further suggested expanding the definition of 
``family member'' to include first cousins.\44\ The Commission 
considered this expansion, and also reviewed prior Commission 
rationales on the appropriate scope of ``family member'' definitions 
under other Commission rules.\45\ In those prior rulemakings, the 
Commission concluded that the scope of family members included there 
(which is identical to the scope proposed in the Governance Proposing 
Release) provides adequate coverage to address regulatory interests 
because any close ties between a director and a relative that are not 
already within the definition of ``family member'' (such as cousins of 
various degrees) can be addressed by using the other provision that 
applies to all persons who share a household with the director, as a 
proxy for such close ties rather than serving as a generalized proxy 
for a particular category of relatives. Moreover, the exclusions that 
relate to family member activities in Rule 17Ad-25(f) are designed to 
be a floor, not a ceiling, meaning that other fact patterns may 
preclude a director from meeting the independence requirement pursuant 
to the general requirements in Rule 17Ad-25(b) instead of a specific 
exclusion in Rule 17Ad-25(f).
---------------------------------------------------------------------------

    \44\ Better Markets at 20.
    \45\ See, e.g., Disclosure of Certain Relationships and 
Transactions Involving Management, Securities Act Release No. 6441, 
Exchange Act Release No.19290, Investment Company Act No. 12865 
(Dec. 2, 1982), 47 FR 55661, 55663 (Dec. 14, 1982) (discussing 
whether to apply a rule to a class of relatives that is broader than 
those who live in a household with a reporting person, because there 
is not complete overlap between the two categories. The Commission 
considered whether to apply the rule to relatives who could take 
advantage of financial transactions with a reporting person without 
living in that reporting person's household. As a corollary, some 
members of a household may not be relatives either, but both 
categories were contemplated as a proxy for the existence of close 
ties between two people).
---------------------------------------------------------------------------

    One commenter stated that many of the prohibitions in Rule 17Ad-
25(f)(4) were ``overbroad'' and that not all payments from participants 
should preclude an independence determination; rather, in the 
commenter's view, Rule 17Ad-25(f)(4) should include a de minimis 
threshold and an exemption for the payment of clearing fees.\46\ The 
commenter stated that, in the absence of a de minimis threshold, the 
rule could exclude registered clearing agency participants that are 
only receiving a nominal sum for a small service provided to the 
registered clearing agency. The commenter further stated that clearing 
fees are a relatively inconsequential component of market participants' 
cost of business, and it is unlikely that a director could reduce 
clearing fees without oversight because clearing fee changes must be 
filed with the Commission. In particular, the commenter stated that its 
fee refunds should not be covered by this exclusion (which the 
Commission understands to apply when accrued clearing fees exceed the 
registered clearing agency's targeted capital amount, so refunding an 
overpayment does not implicate the same potential conflict as does 
receiving a payment). Another commenter stated that, in the absence of 
a de minimis threshold, the rule could exclude candidates for 
independent director who are only receiving de minimis payments or 
remuneration or clearing fees.\47\
---------------------------------------------------------------------------

    \46\ OCC at 6.
    \47\ CCP12 at 3.
---------------------------------------------------------------------------

    The exclusion in Rule 17Ad-25(f)(4) would apply to directors who 
are partners or controlling shareholders of a registered clearing 
agency participant.\48\ The scope of this exclusion is narrow, however; 
employees, managers, and non-controlling shareholders of a participant 
could still qualify, allowing for a broad range of potential candidates 
who have experience with the participant's business. Additionally, 
although the payments received or made between, for example, a 
participant and a registered clearing agency may be inconsequentially 
small from the perspective of the registered clearing agency or the 
participant as a business entity, that same payment may be meaningful 
to an individual who is a director and who is a controlling shareholder 
of the participant. For example, that individual's equity stake in the 
participant may result in extra personal income for every dollar saved 
or earned. Due to the potential for personal enrichment, the Commission 
is not adopting a de minimis amount of payments that would allow a 
participant's controlling shareholder to serve as an independent 
director. Because the Commission is not incorporating any de minimis 
carve out,

[[Page 84460]]

it is not addressing how to calculate such de minimis amount. 
Accordingly, the Commission also is not addressing whether fee refunds 
should be included in calculations to establish a de minimis amount of 
such payments. Nonetheless, and regardless of the circumstances, such 
controlling shareholder of a participant could still serve on the board 
as a non-independent director.
---------------------------------------------------------------------------

    \48\ Specifically, Rule 17Ad-25(f)(4) applies to directors who 
are partners or controlling shareholders of any organization to or 
from which the registered clearing agency is making or receiving 
payments, which would include clearing fee payments made by a 
participant as a clearing member.
---------------------------------------------------------------------------

    A commenter also suggested, as an alternative to explicitly carving 
out payments for clearing fees from the exclusion in Rule 17Ad-
25(f)(4), that the Commission specify that the term ``partner'' therein 
only refers to someone who has an equity ownership stake in the 
organization.\49\ The term ``partner,'' as used in Rule 17Ad-25(f)(4) 
as adopted, refers to those with an equity ownership stake in an 
organization such as an limited partnership or limited liability 
partnership and does not include any person who simply has the term 
``partner'' in her job title without also holding an equity ownership 
stake in the organization that is sending or receiving payments to or 
from a registered clearing agency, an affiliate thereof, or a holder of 
a controlling voting interest of the registered clearing agency.
---------------------------------------------------------------------------

    \49\ OCC at 7.
---------------------------------------------------------------------------

    One commenter suggested that the Commission require board 
representation by customers of registered clearing agency participants 
because such customers are bound to registered clearing agency 
obligations that are theoretically uncapped, bear mutualized risk, and 
could provide unique perspectives on risk management issues.\50\ 
Another commenter requested that the Commission add a requirement for 
registered clearing agency boards to have representatives from 
customers of registered clearing agency participants, such as buy-side 
market participants, due to their understanding of the risks and 
impacts of registered clearing agency decisions on a wide variety of 
such market participants and their clients.\51\
---------------------------------------------------------------------------

    \50\ SIFMA AMG at 8.
    \51\ Sarah A. Bessin, Associate General Counsel, and Nhan 
Nguyen, Assistant General Counsel, Investment Company Institute 
(Oct. 7, 2022) (``ICI'') at 7.
---------------------------------------------------------------------------

    In considering the application of the rule, it is important to 
distinguish the contractual obligations and liabilities that exist 
between registered clearing agency participants and the registered 
clearing agency itself on the one hand, and between registered clearing 
agency participants and their own customers on the other. The 
Commission does not agree that customers of registered clearing agency 
participants are bound to the clearing agency for uncapped obligations. 
Customers of registered clearing agency participants do face 
contractual performance risk vis-[agrave]-vis their counterparty to a 
given transaction when they rely on a registered clearing agency 
participant to facilitate the clearing of such transaction on the 
customer's behalf, but the risk of non-performance in this case differs 
from the risk that parties to contracts generally assume. Notably, 
because the registered clearing agency may guarantee the transaction, 
the risk to the customer may be lower than other types of contractual 
relationships due to this extra layer of protection (notwithstanding 
the particular arrangements that may exist between the participant and 
its customer in the event of a default). The risk exposure between a 
participant and its customer is thus different in nature and scope than 
the risk exposure between a registered clearing agency and its 
participant. Consequently, the nature of these contractual obligations 
does not support extending by Commission rule representation on the 
board of a registered clearing agency to the customers of registered 
clearing agency participants. However, the Commission recognizes the 
importance of the board considering the views of stakeholders, 
including customers of registered clearing agency participants, and the 
Commission has provided opportunities for such views to be considered 
under Rule 17Ad-25(c) when nominating directors, and when soliciting 
viewpoints and feedback consistent with Rule 17Ad-25(j).\52\
---------------------------------------------------------------------------

    \52\ See infra Parts II.B.3 (discussing the requirements in Rule 
17Ad-25(c)(4)(ii) for the nominating committee to demonstrate that 
it has considered whether a particular nominee would complement the 
other board members, such that, if elected, the board, 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) and II.F (discussing the requirements in Rule 
17Ad-25(j) to solicit, consider, and document stakeholder 
viewpoints).
---------------------------------------------------------------------------

    One commenter agreed with the Commission's approach to allow 
registered clearing agencies (and in particular, nominating committees 
thereof) to exercise judgment to determine what constitutes materiality 
under the ``material relationship'' definition, rather than have it 
further defined, such as by numerical thresholds of financial 
compensation.\53\ The commenter stated that such numerical thresholds 
would not be useful if established in advance. Likewise, the commenter 
stated that the concept of ``control'' should be left to the 
determination of the nominating committee of the registered clearing 
agency, as long as the analysis is documented and auditable.\54\ The 
Commission agrees that numerical thresholds may not reflect the 
potential intersection of a director's personal finances and the 
``material relationship'' definition, particularly when such thresholds 
have been formulated ex ante, and that, more generally, it is 
appropriate for the nominating committee to determine whether a 
director qualifies as an independent director, as further discussed in 
Part II.B.2 below.\55\
---------------------------------------------------------------------------

    \53\ Claire O'Dea, Director, Government Relations and Regulatory 
Strategy, Americas, London Stock Exchange Group (Oct. 7, 2022) 
(``LSEG'') at 3-4.
    \54\ Id. at 4.
    \55\ See infra Part II.B.2 (further discussing the purview of 
the nominating committee and the comment regarding ``control'').
---------------------------------------------------------------------------

    One commenter drew a comparison between the Commission's required 
levels of independent directors and the levels of a related category 
under the European Market Infrastructure Regulation (``EMIR'') \56\ 
called Independent Non-Executive Directors (``INEDs'').\57\ The 
commenter stated that currently EMIR requires at least one-third (and 
no fewer than two) of clearing agency board members to be INEDs. The 
commenter stated that requiring more INEDs would not result in greater 
transparency or objective governance, and that requiring a majority of 
the board to be INEDs would result in large boards that are 
``functionally inefficient.'' \58\ The commenter also pointed out that 
the INED definition excluded representatives of clearing agency 
participants, regardless of whether those clearing agency participants 
were shareholders or not. Consequently, the commenter requested greater 
alignment between EMIR and the Commission's proposal. The Commission 
supports alignment where practicable and concludes that the two 
provisions are not in conflict with one another as currently structured 
based on the following: although the EMIR standard has a lower 
percentage requirement, it also defines independence more strictly than 
the Commission's proposal, and so the pool of eligible directors under 
EMIR is smaller than under Rule 17Ad-25. For example, if a clearing 
agency dually

[[Page 84461]]

registered under EMIR and with the Commission had a board with six 
persons, with two persons representing a controlling shareholder, two 
persons who were risk management professionals at two participants, and 
two persons who were independent academics, then that board could (with 
all other factors being met) comply with both the Commission's 
requirement of a majority of independent directors (four out of six), 
and the EMIR requirement of one-third INEDs (two out of six). 
Therefore, the requirements for INEDs under EMIR and for independent 
directors under the Commission's proposal do not conflict with each 
other.
---------------------------------------------------------------------------

    \56\ See Regulation (EU) No 648/2012 of the European Parliament 
and of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade repositories, as amended, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02012R0648-20200101.
    \57\ LSEG at 3.
    \58\ Id.
---------------------------------------------------------------------------

    The commenter also stated that operating under two definitions of 
``independent director'' would require a dual registrant to undertake 
two sets of analyses because a director could qualify as independent 
under one standard but not the other, though the commenter also stated 
that the Commission's approach would not raise any compliance issues by 
itself.\59\ The commenter encouraged alignment where possible. In this 
situation, the additional burden of conducting evaluations under these 
two standards is insignificant, because the evaluation process of a 
director's material relationships is highly fact-specific. The 
evaluation of whether a director meets the standard for independence 
generally should be broad and thorough, and it generally should turn on 
the specific facts of each director's individual circumstances. A broad 
inquiry that satisfies the requirement to determine whether material 
relationships exist will likely already reveal whether a candidate 
meets the criteria set forth in each respective jurisdiction, so it is 
unlikely that fully aligning the Commission's rules with the EMIR 
standard will result in cost or time savings.
---------------------------------------------------------------------------

    \59\ Id. at 6.
---------------------------------------------------------------------------

    In connection with the request for harmonization, the commenter 
stated that EMIR's limited INED requirement helps ensure that the board 
retains expertise sufficient to make decisions about budget, 
investments, and commercial strategy.\60\ As discussed above, the 
Commission's definition of ``independent director'' would allow 
participants with experience on these strategic matters to also qualify 
as an independent director, so the concern from the commenter that a 
majority of the board being independent directors would result in 
inexperienced decision makers is misplaced, due to the differences in 
the scope of the respective definitions of INED and the Commission's 
proposal.
---------------------------------------------------------------------------

    \60\ Id. at 4.
---------------------------------------------------------------------------

    With respect to the inclusion of affiliates of the registered 
clearing agency in the definition of ``material relationship'' and in 
Rule 17Ad-25(f), the commenter expressed preference for consistency 
with how EMIR handles affiliates.\61\ The commenter stated that under 
the EMIR regulatory framework, a clearing agency that is part of a 
group must evaluate 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. Therefore, under EMIR, if a clearing agency has the 
necessary level of independence to meet its regulatory requirements, a 
director could be considered independent even if she held a non-
executive role at another clearing agency within the same group, which 
allows for consistency in risk management and cross-fertilization of 
ideas within a group.
---------------------------------------------------------------------------

    \61\ Id. at 5.
---------------------------------------------------------------------------

    The Commission used the term ``affiliates'' in the definition of 
``independent director'' with respect to material relationships, and 
the exclusions in Rule 17Ad-25(f), to ensure an appropriate minimum 
standard across clearing agencies with respect to the board composition 
requirements in the rule. If affiliate relationships were excluded from 
the definition of ``independent director'' with respect to material 
relationships, a registered clearing agency could create an 
organizational structure where a majority of the board is aligned--such 
as through compensation--with an affiliate of the clearing agency. 
Benefits associated with the exchange of ideas can be obtained in other 
manners, such as information sharing agreements among affiliated 
companies. At the clearing agency, risk management should be tailored 
to the specific risks facing a particular registrant consistent with 
the statutory requirements for registration as a clearing agency, not 
with respect to its overall corporate group or affiliates. While 
affiliate relationships may, in some instances, enable a clearing 
agency to see risks outside of its own particular clearing agency 
function or services, consistency across affiliates is not per se an 
important risk management goal. A registered clearing agency generally 
should focus on identifying and managing the risks that it faces, 
rather than risks to its affiliates. Therefore, the Commission is 
adopting the definition of ``material relationship'' and the exclusions 
in Rule 17Ad-25(f) to include affiliates of a clearing agency as 
proposed.
    As to the adequacy of the Commission's use of one-year lookback 
periods in Rule 17Ad-25(f), one commenter recommended a longer period 
of three to five years as an adequate lookback period.\62\ The 
commenter stated that there is a five-year requirement under EMIR, and 
that a one-year requirement could be considered too short because some 
payments may not be received by a director for a while (e.g., some 
payments may be deferred for up to four years), some projects to which 
a person has played a key role may not yet be delivered, and informal 
relationships may continue. The obligation not to have a material 
relationship applies in an ongoing manner, not simply to a moment in 
time. Although the lookback period that applies to the ``material 
relationship'' definition and to the list of exclusions in Rule 17Ad-
25(f) covers the one-year period prior to the date that a determination 
of independence is made, delayed payments that a director might receive 
while serving as an independent director would be addressed due to the 
ongoing application of Rule 17Ad-25(f). For instance, if an independent 
director received payments in the third year of his or her term, such 
payments were related to relationships that existed two years prior to 
the start of that term, and such payments precluded a director from 
being independent under Rule 17Ad-25(f), then the director would cease 
to qualify as an independent director at the time of the payment--
irrespective of the lookback period. Consequently, extending the 
lookback period is not necessary to address any delayed or deferred 
activity because a director must meet the standard for an ``independent 
director'' on an ongoing basis under the requirements of Rule 17Ad-
25(b).
---------------------------------------------------------------------------

    \62\ LSEG at 5.
---------------------------------------------------------------------------

    Several commenters stated that the possible inclusion of employees 
of clearing agency participants as independent directors on registered 
clearing agency boards would bring several benefits, including 
increasing the candidate pool, providing industry expertise, promoting 
a strong alignment between the risk management and operational 
integrity of the registered clearing agency, and bringing diverse

[[Page 84462]]

perspectives.\63\ One commenter disagreed, stating that the definition 
of ``material relationship'' should be expanded to ensure that 
employees or other representatives of participants be excluded from 
qualifying as independent,\64\ while another commenter stated that the 
candidate pool from among employees of clearing agency participants 
would shrink under the proposed rules.\65\ Having qualified, 
experienced persons serving in these director roles promotes sound risk 
management practices at the registered clearing agency because such 
persons bring necessary technical experience in clearing agency risk 
management. The Commission supports the inclusion of employees of 
participants in the potential pool of candidates for independent 
director in order to make such experienced personnel available for 
consideration as candidates, provided that such personnel do not have 
relationships that would preclude them from being independent 
directors. The Commission acknowledges that the candidate pool would 
shrink to the extent that experienced employees of participants also 
have material relationships that pose a conflict of interest (for 
example, if such employees' judgment or independent decision-making 
could be affected by their relationships with a participant), other 
than being an employee of a participant.
---------------------------------------------------------------------------

    \63\ See DTCC at 4; Saguato at 3 (supporting the inclusion of 
employees of participants because they have substantial financial 
exposure and a commitment to the resilience of the participant).
    \64\ James Tabacchi, Chairman, Independent Dealer and Trader 
Association (Oct. 7, 2022) (``IDTA'') at 1; see also Zimmerman 
(expressing general concerns about potential conflicts of interest 
among directors and senior managers).
    \65\ CCP12 at 3.
---------------------------------------------------------------------------

    Additionally, a separate commenter requested that the independent 
director definition explicitly require independence from dominant 
market participants.\66\ The commenter stated that the derivatives 
markets, within which the Commission regulates clearing agencies for 
security-based swaps, continue to be dominated by a few market 
participants, thereby concentrating risk and skewing incentives towards 
the largest clearing agency participants, at the expense of appropriate 
risk management and competition.\67\ The commenter suggested that the 
lowering of the majority requirement to 34 percent of independent 
directors when participants are a majority of owners should have 
restrictions as to the size of the clearing agency participants that 
can qualify, to exclude dominant market participants.\68\ The commenter 
disagreed with the Commission that existing regulations, such as Rule 
17Ad-22, have adequately addressed market dominance by certain 
participants, and stated that anecdotal evidence from abroad suggests 
that clearing agencies hold such dominant participants to less scrutiny 
with respect to risk management requirements, while small and medium-
sized entities struggle to maintain access to central clearing.\69\
---------------------------------------------------------------------------

    \66\ Better Markets at 16.
    \67\ Id. at 10.
    \68\ Id. at 17.
    \69\ Id. at 16-17.
---------------------------------------------------------------------------

    The liability inherent to being a clearing agency participant, to 
which participants of all sizes subject themselves, aligns their 
interests with the goal of a well-managed registered clearing agency, 
even if incentives to free-ride, and thereby have the costs of managing 
the clearing agency borne by other participants, remain. Because 
Exchange Act section 17A(b)(3)(C) states 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,'' \70\ it remains appropriate to not 
summarily restrict representation based on volume of use, which is what 
the commenter is requesting. Therefore, the Commission is not removing 
the ability of employees or other representatives of certain sizes of 
clearing agency participants to qualify as independent directors, 
provided all other requirements of Rule 17Ad-25 are met.
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

4. Incentive Structures
    One commenter requested that the Commission undertake a 
comprehensive study of how various ownership models allocated 
incentives among owners and participants of registered clearing 
agencies, stating that different ownership models might each require a 
special regulatory approach to ensure a full alignment of incentives 
among stakeholders.\71\ In particular, the commenter stated that 
conflicts of interest arise in the investor-owned model, where some 
participants are not owners but still face mutualized risk at the 
clearing agency, as compared to a participant-owned model. The rule 
already addresses the distinction between clearing agencies that are 
majority-owned by participants and other types of clearing agencies by 
applying a 34 percent independent director requirement to the former 
category. The commenter expressed the view that applying a different 
standard for independent directors between participant-owned and 
investor-owned clearing agencies is unnecessary, in part, because the 
commenter read the economic analysis in the Governance Proposing 
Release to state that all participant-owned clearing agencies already 
have boards with a majority of independent directors.\72\ However, 
Table 3 in the Governance Proposing Release discussed different 
criteria that applied to certain directors,\73\ and the Governance 
Proposing Release did not discuss the extent to which these criteria 
may differ from the proposed definition of and proposed requirements 
for independent directors. Importantly, although registered clearing 
agencies may currently label some directors as ``independent,'' such 
directors may not meet the requirements for an ``independent director'' 
under Rule 17Ad-25. Application of Rule 17Ad-25 to existing registered 
clearing agencies will impose composition standards that better serve 
the goals of Exchange Act section 17A than current practice. 
Additionally, Rule 17Ad-25 will apply to prospective applicants that 
may seek to be registered clearing agencies in the future--not only the 
current set--and so establishing a standard that existing registered 
clearing agencies may already satisfy can nonetheless still ensure a 
certain minimum standard across potential future applicants and 
registrants. Therefore, the Commission is not modifying the application 
of the 34 percent independent directors versus a majority of 
independent directors in the final rule.
---------------------------------------------------------------------------

    \71\ Saguato at 2.
    \72\ Id. at 3.
    \73\ See Governance Proposing Release, supra note 2, at 51844.
---------------------------------------------------------------------------

    The same commenter also stated that, if a requirement for a 
majority of independent directors leads to effective board oversight of 
management, then all registered clearing agencies--not just those that 
are investor-owned--should be subject to that standard.\74\ However, 
the ``independent director'' requirement in Rule 17Ad-25 considers, in 
addition to a director's independence from management, a director's 
material relationships with a registered clearing agency's affiliates, 
owners, vendors, customers, and controlling interests of participants. 
Because the requirements in Rule 17Ad-25 preclude an individual from 
serving as an independent director when such material relationships 
reasonably could affect the independent judgment or decision-making of 
the director, a registered clearing agency that is majority-owned by 
participants

[[Page 84463]]

could determine that an employee of an owner-participant has 
relationships that preclude the employee from serving as an independent 
director--not on the basis of her employment relationship to the 
participant but rather other potential entanglements that may emerge 
from the employee's other material relationships with the clearing 
agency. For example, if an employee of an owner of a clearing agency 
received stock options as part of a compensation package, that employee 
has interests tied to the profits of the clearing agency distinct from 
an employee who receives stock options of a clearing agency participant 
that is not also an owner of a clearing agency. The existence of such 
interests tied to profit that carry through ownership structures back 
to the clearing agency poses a potential conflict of interest for a 
director of that clearing agency. In this way, a registered clearing 
agency may determine that employees of owners are less likely than 
employees of participants to satisfy the independent director 
requirement. Applying a 51 percent requirement to registered clearing 
agencies that are majority-owned by their participants could, in the 
view of a registered clearing agency evaluating the material 
relationships of its nominees for independent directors, result in 
minority representation of owners and participants. Therefore, the rule 
applies a lower threshold to participant-owned clearing agencies to 
provide the shareholders of such a registered clearing agency greater 
discretion to nominate, as independent directors, candidates from 
among, for example, the employees of participant-owners. Applying the 
higher standard to all clearing agencies, solely to insulate the board 
from influence by management, could restrict access to representatives 
of participant-owners in a way that may impair the board's ability to 
oversee the clearing agency's risk management function effectively.
---------------------------------------------------------------------------

    \74\ Saguato at 3.
---------------------------------------------------------------------------

    One commenter agreed that the proposed requirements for independent 
directors address conflicts of interest, but the commenter also stated 
that the solution was incomplete to address the problem and so 
recommended that the Commission also adopt a ``skin-in-the-game'' 
requirement.\75\ Specifically, this commenter stated its belief that it 
is necessary to align the incentives between a clearing agency and its 
participants by requiring the clearing agency to subject a meaningful 
amount of its own capital to potential loss after a default of a 
participant, in particular after the defaulting participant's margin 
and guaranty fund contributions are used to satisfy its obligations, 
but before any margin or guaranty fund contributions of other non-
defaulting participants are used to satisfy the obligations of the 
defaulting participant. This idea seeks to encourage a clearing agency 
to manage risks well, to prevent its own capital from being lost during 
a default. This commenter's suggestion is beyond the scope of the 
present rulemaking.
---------------------------------------------------------------------------

    \75\ Better Markets at 5-6, 12-14.
---------------------------------------------------------------------------

    One commenter expressed concern that employees of participants who 
are acting as independent directors and representing the interests of 
the clearing agency could have conflicts of interest between these two 
roles.\76\ The commenter recommended that the Commission impose a 
requirement for such persons to have due regard to market stability in 
their role at the clearing agency. Directors do not need to have a 
specific obligation applied to them in their individual capacity to 
consider market stability. Rules 17Ad-22(e)(2)(ii) and (iii) require 
covered clearing agencies to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that clearly prioritize the safety and 
efficiency of the covered clearing agency and support the public 
interest requirements in Exchange Act section 17A.\77\ These existing 
requirements are sufficient to ensure a registered clearing agency has 
due regard for financial stability.
---------------------------------------------------------------------------

    \76\ See ISDA at 6.
    \77\ See 17 CFR 240.17Ad-22(e)(2)(ii), (iii); see also 17 CFR 
240.17Ad-22(d)(8) (requiring registered clearing agencies that are 
not covered clearing agencies to establish, implement, maintain and 
enforce governance arrangements that are clear and transparent to 
fulfill the public interest requirements in Exchange Act section 
17A).
---------------------------------------------------------------------------

    One commenter agreed with the Commission's concerns that a small 
number of participants--if allowed to exercise control over a clearing 
agency--can promote margin or other requirements that are not 
commensurate with the risks of a participant's specific products, 
portfolio market, business model, and size, which could lead to a 
concentration of risk in a few dominant market participants who 
benefit.\78\ The commenter suggested that the Commission adopt rules 
that would address non-independent directors and would require 
diversity among participant representation on the board, based on size 
and level of specialization by said participants. Otherwise, the 
commenter suggested, the representation among participants will be 
lopsided, leading to greater concentration of risk among the clearing 
agency's largest participants. The Commission agrees that the interests 
of participants are not always homogenous or aligned, and therefore, 
the interests of smaller participants can diverge from those of the 
largest. However, the Exchange Act requirement for fair representation 
allows for the consideration of proportionality as an element.\79\ 
Although all participants are equally exposed to default risk, larger 
firms may be more impacted by policies that apply based on transaction 
volume. Thus, it can be appropriate to apportion representation 
according to use of the clearing agency, even if an effect of this 
approach is to be disproportionate as to the number of small, medium, 
or large participants represented on the board relative to the total 
number of small, medium, or large participants in a clearing agency's 
customer base at any particular time. Further, there could be arguments 
that reducing the degree of proportionality of representation relative 
to use of the clearing agency could lead to negative externalities that 
disproportionately impact larger participants. Accordingly, the 
Commission is declining to expand the scope of this rule to develop 
participant categories and to require certain level of participant 
representation on the board as non-independent directors among those 
categories.
---------------------------------------------------------------------------

    \78\ IDTA at 2-3.
    \79\ See 15 U.S.C. 78q-1(b)(3)(C) (``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.'').
---------------------------------------------------------------------------

5. Ownership Structures
    One commenter stated that the largest clearing agency participants 
do not necessarily need personal influence over a director because they 
possess economic leverage over the clearing agency.\80\ Additionally, 
the commenter requested that special attention be paid towards 
participants at registered clearing agencies that clear derivatives 
products because of the risk posed to effective governance by an 
``oligopoly'' of market power exercised by certain derivatives 
dealers.\81\ Instead of relying on independent directors as a bulwark 
against conflicts of interest, the commenter suggested restoration of 
the ownership limits that were previously proposed in Regulation MC to 
address market concentration.\82\ The commenter further suggested that 
the Commission go beyond what was originally proposed in Regulation MC 
and add restrictions

[[Page 84464]]

on commercial arrangements for volume, such as volumetric discounts, 
rebates, or revenue sharing. This suggestion goes beyond the scope of 
this rulemaking because they concern restrictions on commercial 
arrangements rather than requirements for board composition and 
governance.
---------------------------------------------------------------------------

    \80\ Better Markets at 14.
    \81\ Id. at 10.
    \82\ Id. at 15; see also Exchange Act Release No. 63107 (Oct. 
14, 2010), 75 FR 65882 (Oct. 26, 2010) (proposing Regulation MC).
---------------------------------------------------------------------------

    The commenter also suggested expanding the definition of 
``affiliate'' to deem all owners and shareholders as affiliates, under 
the reasoning that a handful of dominant shareholders could ``collude'' 
among one another to exercise constructive control over a clearing 
agency, even if each individual shareholder did not meet the definition 
for control itself.\83\ Many participants are also shareholders of a 
clearing agency, and so if the affiliate definition were to be 
expanded, it would restrict employees of many participants from meeting 
the independent director definition as a result of the exclusion in 
Rule 17Ad-25(f)(2). The Commission is concerned that such an expanded 
definition could interfere with the ability of a clearing agency to 
afford fair representation to participants, as contemplated by Exchange 
Act section 17A(b)(3)(C), which discusses the ability of participants 
to participate in board governance. In addition, Rule 17Ad-25 includes 
elements directed at the problems of ``collusion'' in multiple ways, 
and Rules 17Ad-25(g) and (h), and the associated requirements to 
address and disclose conflicts of interest, are better suited to 
address such potential ``collusion'' among certain shareholders because 
they are broad-based and not restricted to one potential source of 
conflicts (i.e., affiliates).\84\
---------------------------------------------------------------------------

    \83\ Better Markets at 19.
    \84\ See infra Part II.D (further discussing final Rules 17Ad-
25(g) and (h)).
---------------------------------------------------------------------------

6. Circumvention
    One commenter expressed concern that the proposal did not specify 
who at the clearing agency should determine whether a fact pattern 
meets the definition of ``material relationship,'' reasoning that if 
the board can make that determination, there could be an incentive on 
the board of directors to give each other a ``free pass'' as to their 
potentially objectionable relationships.\85\ Instead, the commenter 
suggested an explicit requirement for disinterested compliance officers 
or qualified outside professionals to determine whether material 
relationships exist. The proposed rules did not specify who at the 
clearing agency should evaluate relationships under this definition, 
and the Commission has modified the final rules to specify that the 
nominating committee is required to evaluate all board members under 
the independent director standard, as discussed further in Part II.B.2.
---------------------------------------------------------------------------

    \85\ Better Markets at 19.
---------------------------------------------------------------------------

    Some commenters provided recommendations that went beyond the 
composition of the board and instead addressed the authority of a board 
more generally. Specifically, some commenters requested that the 
Commission apply more rigorous governance procedures to clearing 
agencies with respect to their emergency powers as set forth in their 
rulebooks, which the commenters stated were broad and vaguely 
defined.\86\ But emergency powers exist at two levels for many clearing 
agencies: those provisions that impact the rights and obligations of 
the board, as set forth in the organizational documents of the legal 
entity itself (such as the ability of the board to act without a quorum 
in the event of an emergency, such as a terrorist attack),\87\ and 
those provisions that impact the clearing agencies' rights and 
obligations with respect to the clearing members.\88\ Although the 
Commission's rules do not directly impact the parameters around which 
emergency powers can be exercised, either at the board level or under 
the rules of the clearing agency, they do address who will make 
decisions when exercising such emergency powers. Ensuring that 
decision-making processes are clear, transparent, and fair, and that 
market participants have confidence in those processes in an 
emergency--including that neither clearing agency owners nor 
participants will dominate the decision-making process to achieve their 
own ends--can help reassure those who may be significantly impacted by 
such decisions. Rule 17Ad-25 meaningfully addresses such generalized 
concerns about the fair and even-handed use of emergency powers by 
establishing new standards for board governance applicable to 
registered clearing agencies.
---------------------------------------------------------------------------

    \86\ Barclays et al. at 3; see also SIFMA at 4 (stating that 
``greater transparency and a more rigorous governance process, 
including consultation with primary regulators, regarding the use of 
emergency powers should help further confidence in the overall 
financial system and ensure that affected stakeholders are aware and 
have buy-in when such powers are used.''); ISDA at 2.
    \87\ See, e.g., Bylaws, The Option Clearing Corporation, at 
Article II, Section 15 (stating, ``During any emergency which 
results, directly or indirectly, from an attack (including a 
terrorist attack) on the United States or on a locality in which the 
Corporation maintains an office or customarily holds meetings of the 
Board of Directors, or from a war, armed hostilities, insurrection 
or other calamity involving the United States or any such locality, 
or from any nuclear or atomic disaster, or from any other 
catastrophe, disaster, (including any environmental or natural 
disaster), communications systems failure, or other similar 
condition, in which a quorum (as specified in Article III of the By-
Laws) of the Board of Directors or a standing committee thereof 
cannot readily be convened for action (an ``Emergency''), the 
following provisions of this Section 15 shall be operative 
notwithstanding any other provision in any of the sections (other 
than Section 110) of the Delaware Corporation Law or in the 
Certificate of Incorporation, By-Laws or Rules of the Corporation. 
The Chairman, Chief Executive Officer, Chief Operating Officer or, 
if it is not feasible for the Chairman, Chief Executive Officer, or 
Chief Operating Officer to take such action, then another officer 
who is a Designated Officer is authorized to declare the existence 
of such Emergency and to declare this By-Law to be in effect.''), 
https://www.theocc.com/company-information/documents-and-archives/by-laws-and-rules.
    \88\ See, e.g., ``Rule 38: Market Disruption and Force 
Majeure,'' DTC Rulebook, https://www.dtcc.com/-/media/Files/Downloads/legal/rules/dtc_rules.pdf.
---------------------------------------------------------------------------

    Finally, one commenter suggested that the majority independent 
director requirement could be evaded by any supermajority requirement 
for voting or quorums of the board.\89\ The Commission is aware that 
some registered clearing agencies currently apply supermajority 
requirements in certain scenarios, such as a requirement that three-
fourths of an entire board shall constitute a quorum for purposes of 
electing the board chair.\90\ Policies and procedures to identify, 
mitigate, or eliminate existing or potential conflicts of interest 
required under Rule 17Ad-25(g) generally should provide for the 
clearing agency to evaluate whether any supermajority requirements in 
any of the registered clearing agency's rules, policies, and procedures 
would allow directors with potential conflicts of interest to steer the 
clearing agency in service of those personal interests by avoiding any 
mechanisms that might require mitigation or elimination (e.g., recusal 
by the director on the matter at hand) of the conflict of interest. A 
registered clearing agency generally should consider whether its 
policies and procedures under Rule 17Ad-25(g) are ``reasonably 
designed'' if provisions of its rules, policies or procedures would 
allow non-independent directors to exercise disproportionately greater 
control of certain board decisions beyond what their numbers would 
otherwise allow.\91\
---------------------------------------------------------------------------

    \89\ Better Markets at 18.
    \90\ See Organizational Certificate of the Depository Trust 
Corporation, https://www.dtcc.com/legal/rules-and-procedures.
    \91\ See infra Part II.D.2 (further discussing the ``reasonably 
designed'' and ``reasonableness'' elements of Rules 17Ad-25(g) and 
(h)).

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

[[Page 84465]]

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 compose 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, which 
must be 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.\92\ 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 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, 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 affected 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.
---------------------------------------------------------------------------

    \92\ As explained in the Governance Proposing Release, supra 
note 2, at 51828 & n.107, 15 U.S.C. 78q-1(a)(3)(C) identifies the 
circumstances that 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.
---------------------------------------------------------------------------

    In the Governance Proposing Release, the Commission explained that 
some registered clearing agencies currently use governance arrangements 
other than a nominating committee to select certain directors.\93\ It 
also explained that, 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 boardpursuant to a written evaluation process established by the 
registered clearing agency.\94\
---------------------------------------------------------------------------

    \93\ Governance Proposing Release, supra note 2, at 51829 
(describing these arrangements other than a nominating committee as 
``other governing bodies and/or constituents of their organizational 
structure'').
    \94\ Id.
---------------------------------------------------------------------------

    With respect to proposed Rule 17Ad-25(c)(4)(iii), which would give 
the nominating committee discretion to determine how to consider the 
views of other stakeholders, the Commission stated that 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.\95\
---------------------------------------------------------------------------

    \95\ Id. at 51830.
---------------------------------------------------------------------------

    Commenters generally supported the proposed rules addressing the 
nominating committee.\96\ As discussed in more detail below, commenters 
sought clarity regarding discussion in the Governance Proposing Release 
stating that the nominating committee would be the ``exclusive venue'' 
for considering director nominees, as discussed further below. In 
addition, some commenters recommended modifying the proposed approach 
to participation by small and medium-sized firms on the board, and 
regarding the percent of directors that are independent directors 
serving on the nominating committees. The Commission addresses each of 
these topics in Parts II.B.2 through II.B.4.
---------------------------------------------------------------------------

    \96\ See, e.g., Better Markets at 4; DTCC at 5; IDTA at 4; ISDA 
at 6; LSEG at 8; OCC at 3; Saguato at 3. But see ICE at 3 
(describing the proposed approach as ``too prescriptive'').
---------------------------------------------------------------------------

2. As ``Exclusive Venue'' for Considering Nominees
    Several commenters sought clarity regarding statements in the 
Governance Proposing Release that the nominating committee be the 
``exclusive'' venue for considering nominees.\97\ As discussed further 
below, the Commission is modifying the rule being adopted to address 
more clearly scenarios in which directors may be nominated or appointed 
directly by shareholders pursuant to the organizational documents of 
the registered clearing agency outside of the process established by 
the nominating committee.
---------------------------------------------------------------------------

    \97\ DTCC at 5; LSEG at 8; OCC at 7; Saguato at 4; see also 
Governance Proposing Release, supra note 2, at 51830 (requesting 
comment on the following: ``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?'').
---------------------------------------------------------------------------

    First, one commenter recommended that the Commission modify the 
rule so that the nominating committee only conduct written evaluation 
of nominees and not appointees that may be selected via other 
mechanisms in the governance structure.\98\ For example, OCC allows 
certain participant exchanges to select ``Exchange Director'' nominees 
for election to OCC's board. The proposed rule text does not address 
this specific type of selection process, but as discussed in the 
Governance Proposing Release,\99\ proposed Rule 17Ad-25(c) would not 
prohibit the selection of such directors appointed pursuant to such a 
process. Nonetheless, as previously discussed in the Governance 
Proposing Release, 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.\100\ 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.
---------------------------------------------------------------------------

    \98\ OCC at 7-8.
    \99\ See Governance Proposing Release, supra note 2, at 51829.
    \100\ See id.
---------------------------------------------------------------------------

    Accordingly, as proposed, Rule 17Ad-25(c) was intended to ensure 
that, with respect to all nominees and appointed directors, the 
nominating committee would evaluate each nominee or appointee for 
director, no matter the source of her nomination or equivalent 
selection as director, against the standards for fitness and

[[Page 84466]]

independence established by Rule 17Ad-25.\101\ This ensures that the 
board, the participants of the registered clearing agency, and 
ultimately other stakeholders and the public, have confidence in the 
fitness of directors generally and in the independence standard applied 
to directors to qualify as independent directors. The commenter's 
recommended approach would be inconsistent with the purpose and intent 
of proposed Rule 17Ad-25 because proposed Rule 17Ad-25(c) was intended 
to ensure that, with respect to all directors, the nominating committee 
would evaluate each nominee, no matter the source of their nomination, 
against the standards for fitness and independence established by Rule 
17Ad-25. To the extent that any directors are ``appointed,'' it is 
appropriate to subject such ``appointees'' to the same standards as 
other nominees for director. Doing so would not slow or otherwise 
stymie the appointment of such directors because, regardless of how 
they are selected to serve on the board, all directors are subject to 
the same fitness standards and also would be subject to disclosure 
requirements regarding the reporting of potential conflicts of interest 
and material relationships.\102\ Specifically, Rule 17Ad-25(c)(4)(ii) 
requires the nominating committee to demonstrate that it 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. Because this 
requirement is focused on board composition, excluding any directors 
from the requirement would undermine the purpose of the rule and the 
ability of the nominating committee to evaluate board composition as a 
whole.
---------------------------------------------------------------------------

    \101\ See Governance Proposing Release, supra note 2, at 51829 
n.110 (providing the same example).
    \102\ See infra Part II.D (further discussing both a clearing 
agency's entity-wide obligations and a director's specific 
obligations relating to potential conflicts of interest and the 
evaluation of material relationships).
---------------------------------------------------------------------------

    Similarly, proposed Rule 17Ad-25(c)(4)(iv) requires the nominating 
committee to identify whether each 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. Because this requirement 
establishes a baseline against which the registered clearing agency 
will need to evaluate potential conflicts of interest, regardless of 
whether a director is intended to be independent, the nominating 
committee should evaluate appointed directors as well. Such requirement 
helps ensure that the clearing agency can evaluate potential conflicts 
of interest that may require a director to recuse as to certain matters 
before the board. The Commission therefore is not modifying the rule to 
exclude from evaluation by the nominating committee nominees or 
directors who are appointed by other means pursuant to the organizing 
documents of the registered clearing agency.
    Notwithstanding the above, the Commission is modifying Rule 17Ad-
25(c) in two ways: (a) the Commission is modifying paragraph (1) to add 
that the nominating committee shall also ``evaluate the independence of 
nominees and directors,'' in addition to evaluating nominees for 
serving as directors, and (b) the Commission is modifying paragraph 
(4)(iv) in two places to specify that the evaluation process applies to 
nominees as well as directors. Pursuant to the latter modification, the 
written evaluation process required by the rule shall identify whether 
each nominee ``or director'' would meet the definition of independent 
director and whether each ``such nominee or director'' has a known 
material relationship with the registered clearing agency (or an 
affiliate thereof).\103\ These changes ensure that the final rule 
addresses the role of the nominating committee in evaluating directors 
which it did not itself nominate because their nominations came through 
different processes specified in the organizing documents of the 
registered clearing agency. Separately, the Commission is also 
modifying paragraph (4)(iii) to replace the term ``impacted'' with 
``affected.'' This is a technical correction to avoid the use of 
informal language in the rule text.
---------------------------------------------------------------------------

    \103\ See Rule 17Ad-25(b)(2) (requiring, among other things, 
that the registered clearing agency broadly consider all the 
relevant facts and circumstances 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).
---------------------------------------------------------------------------

    Second, as previously discussed in Part II.A.3, one commenter 
stated that the concept of ``control'' as used in certain definitions 
in and requirements of Rule 17Ad-25, should be left to the 
determination of the nominating committee of the registered clearing 
agency, as long as the analysis is documented and auditable.\104\ The 
Commission agrees and Rule 17Ad-25(c)(1) accordingly includes a 
requirement for a written evaluation process, so that the clearing 
agency has documentation as to its determinations of control.
---------------------------------------------------------------------------

    \104\ LSEG at 4.
---------------------------------------------------------------------------

    Third, one commenter sought clarity as to whether the nominating 
committee can perform other functions.\105\ Specifically, the commenter 
explained that a registered clearing agency might establish one 
committee that performs the entire function and role of the nominating 
committee but also consider other governance functions more broadly. 
Such an approach can be appropriate and consistent with the adopted 
rule. Rule 17Ad-25(c), as discussed above and modified, requires that 
the nominating committee evaluate each nominee for serving as a 
director and evaluate the independence of nominees and directors. A 
committee that performs these functions would satisfy the requirements 
of the rule, even if it also performed additional functions as 
specified in the organizing documents of the registered clearing 
agency. A registered clearing agency, however, generally should take 
account of the overall workload imposed on the nominating committee in 
the organizing documents and ensure that the nominating committee has 
sufficient time and resources to fulfill the functions required by Rule 
17Ad-25(c), which include evaluating nominees and directors as 
explained above and establishing the fitness standards for serving on 
the board.
---------------------------------------------------------------------------

    \105\ DTCC at 5.
---------------------------------------------------------------------------

    Fourth, one commenter asked whether the board could take on the 
functions of the nominating committee if it met all requirements 
applicable to the nominating committee.\106\ Such an approach can be 
appropriate and consistent with the rule. Consistent with the 
requirements in Rule 17Ad-25(c)(2), such an approach would require that 
a majority of the directors serving on the board be independent 
directors--regardless of the ownership structure of the clearing 
agency--and that the chair of the board be an independent director.
---------------------------------------------------------------------------

    \106\ ICE at 3.
---------------------------------------------------------------------------

3. Approach to Representation of Small and Medium-Sized Firms
    In addition to comments discussed in Part II.A.4 regarding 
establishing a ``right of participation'' generally on the board by 
small and medium-sized participants of the registered clearing agency, 
commenters also expressed similar views specific to participation

[[Page 84467]]

on the nominating committee. Two commenters recommended that the 
Commission specifically authorize such a right of participation on the 
nominating committee.\107\
---------------------------------------------------------------------------

    \107\ Better Markets at 20 (recommending that the Commission 
mandate participation from smaller clearing members to guard against 
a board that finds diversity within the ``oligopoly of large 
dealers''); IDTA at 4 (recommending that the Commission be more 
prescriptive in requiring that certain types of stakeholders, such 
as ``not FSOC designated SIFIs'' be afforded a right to 
participate).
---------------------------------------------------------------------------

    Exchange Act section 17A(b)(3)(C) directs the Commission to ensure 
the fair representation of owners and participants in the selection of 
directors and the administration of affairs. As previously discussed in 
Part II.A.4, it can be appropriate to apportion representation 
according to use of the clearing agency, even if an effect of this 
approach is to be disproportionate as to the number of small, medium, 
or large participants represented on the board relative to the total 
number of small, medium, or large participants that use the clearing 
agency. In addition, reducing the degree of proportionality of 
representation relative to use of the clearing agency could lead to 
negative externalities. For these same reasons, the Commission is not 
modifying the proposed rule to require a ``right of participation'' on 
the nominating committee specific to small and medium-sized 
participants.\108\ In proposing Rule 17Ad-25(c), the Commission stated 
its belief that smaller participants and clients of participants 
generally should be represented on clearing agency boards and board 
committees, such that their views and perspectives are formally 
considered in board decisions that may impact them.\109\ In particular, 
the Commission explained that 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. Consistent with these 
views, board governance, and through it the risk management function of 
the clearing agency, benefits from diverse perspectives on risk 
management issues from across the range of stakeholders--owners, direct 
participants, and indirect participants--in a registered clearing 
agency. Accordingly, proposed Rules 17Ad-25(c)(4)(i), (ii), and (iii) 
require that clearing agencies take steps to facilitate diverse 
perspectives and expertise on the board, including a requirement in 
Rule 17Ad-25(c)(4)(ii) for the nominating committee to demonstrate that 
it 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--among other things--the range of 
different business strategies, models, and sizes across participants, 
as well as the range of customers and clients the participants serve. 
These requirements ensure that the nominating committee considers a 
diverse set of backgrounds, experience, and skills in selecting and 
evaluating nominees for the board.\110\ In this regard, a registered 
clearing agency generally should provide in its governance arrangements 
that the nominating committee explicitly consider some nominees that 
represent the views of medium and small participants, but, in the 
Commission's view, it is appropriate to leave discretion to the 
clearing agency and its board to evaluate and select the appropriate 
mix of nominees and directors mindful of its organizational documents, 
markets served, and products cleared.
---------------------------------------------------------------------------

    \108\ See supra notes 76-78 and accompanying text (not modifying 
the rule to designate certain seats on the board for specific types 
of clearing agency participants or their customers).
    \109\ Governance Proposing Release, supra note 2, at 51829.
    \110\ See infra Part II.F (further discussing Rule 17Ad-25(j), 
which imposes an obligation on the board to formally consider 
stakeholder viewpoints, also helps ensure that the board is actively 
soliciting the views of those stakeholders who do not participate in 
the board directly so that the views of such stakeholders can be 
considered and incorporated into the board's risk management and 
operations).
---------------------------------------------------------------------------

    For the above reasons, the Commission is not modifying Rule 17Ad-
25(c) in response to these comments.
4. Percent of Directors That Are Independent Directors
    Some commenters expressed support for the proposed approach to 
require that the chair of the nominating committee be an independent 
director and that a majority of the directors serving on the nominating 
committee be independent directors.\111\ One commenter recommended that 
the Commission modify the proposal to require that all directors 
serving on the nominating committee be independent directors.\112\ The 
commenter stated that such an approach would help maintain the standard 
for director independence and improve the overall quality of nominees.
---------------------------------------------------------------------------

    \111\ DTCC at 5; ISDA at 6; LSEG at 9; Saguato at 3; see also 
ICE at 3 (observing that, in its view, requiring written evaluations 
of nominees is unnecessary if the committee is also composed of a 
majority of independent directors).
    \112\ IDTA at 4.
---------------------------------------------------------------------------

    The Commission is not requiring all directors serving on the 
nominating committee be independent directors for two reasons. First, 
as a general matter, the proposal sought to ensure an approach to board 
governance that facilitates fair representation of both owners and 
participants in the selection of directors and the administration of a 
clearing agency's affairs.\113\ The proposed approach is consistent 
with this requirement in part because it enables any individual 
director, whether independent or not, to serve on the nominating 
committee. Second, and mindful of the concern raised by the commenter, 
the proposed rule would require that a majority of the directors 
serving on the nominating committee be independent directors regardless 
of the ownership structure of the registered clearing agency.\114\ A 
majority of independent directors and a chair of the nominating 
committee that is also an independent director is sufficient to ensure 
the thoughtful consideration, evaluation, and selection of nominees, 
particularly for nominees to serve as independent directors on the 
board of a registered clearing agency. Given the definition of 
``independent director'' used in Rule 17Ad-25, modifying the rule 
further to require that only independent directors can serve on the 
nominating committee would not clearly improve the functioning of the 
nominating committee. Independent directors would already be a majority 
of the nominating committee when making determinations, and as such, 
directors intended to represent owners of the clearing agency cannot 
comprise a majority of the nominating committee without also obtaining 
support from independent directors as to particular decisions. Because 
clearing agencies perform a unique and often systemically important 
function that facilitates effective risk management in the U.S. 
securities markets, enabling a wide range of stakeholders in the 
registered clearing agency to serve on the nominating committee, 
including directors who are not independent directors, can provide 
expertise,

[[Page 84468]]

experience, and skills useful to the nominating committee's overall 
purpose.
---------------------------------------------------------------------------

    \113\ Governance Proposing Release, supra note 2 at 51818 
(``Specifically, 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.'').
    \114\ See supra Part II.A (further discussing Rule 17Ad-25(b), 
which sets the general requirement for the number of independent 
directors required to serve on the board based on the percentage of 
ownership held by participants in the registered clearing agency).
---------------------------------------------------------------------------

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) 
(``RMC'') to assist the board in overseeing the risk management of the 
registered clearing agency. Proposed Rule 17Ad-25(d)(1) would also 
require each RMC 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 the RMC, 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.
    In the Governance Proposing Release, the Commission explained that 
because all registered clearing agencies are currently covered clearing 
agencies and, as such, are required to have RMCs as a part of their 
governance arrangements under Rule 17Ad-22(e)(3)(iv),\115\ no parallel 
requirement exists for registered clearing agencies that are subject to 
Rule 17Ad-22(d).\116\ The Commission stated that because future 
registered clearing agencies that are not covered clearing agencies 
and, as a result, are subject to Rule 17Ad-22(d), will also likely face 
risk management issues related to their activities, any clearing agency 
subject to Rule 17Ad-22(d) will likely benefit from having a RMC.\117\ 
Accordingly, the Commission proposed Rule 17Ad-25(d) so that clearing 
agencies subject to Rule 17Ad-22(d) will also be required to have RMCs 
as a part of their governance arrangements.\118\ Additionally, the 
Commission stated that proposed Rule 17Ad-25(d) would establish more 
defined requirements related to the purpose and function of RMCs that 
Rule 17Ad-22(e)(3)(iv) does not and that specific requirements imposed 
by proposed Rule 17Ad-25(d) would help enhance risk management 
governance across all registered clearing agencies.\119\
---------------------------------------------------------------------------

    \115\ See 17 CFR 240.17Ad-22(e)(3)(iv); see also CCA Standards 
Adopting Release, supra note 4, 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 RMC of the board of 
directors).
    \116\ See Governance Proposing Release, supra note 2, at 51831.
    \117\ See id.
    \118\ See id.
    \119\ See id.
---------------------------------------------------------------------------

    In the Governance Proposing Release, the Commission also stated 
that it recognizes the importance of enabling the board to assign 
certain tasks to a board committee to assist the board in discharging 
its ultimate responsibility of ensuring the sound risk management of 
the clearing agency.\120\ The Commission stated that for the RMC itself 
to be effective, it must have a clearly defined purpose and obligations 
to the board; therefore, the proposed rule would require the RMC 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.\121\
---------------------------------------------------------------------------

    \120\ See id.
    \121\ See id.
---------------------------------------------------------------------------

    Commenters generally supported the proposed approach to Rule 17Ad-
25(d).\122\ However, some commenters requested clarifications \123\ or 
modifications to the rule.\124\ Other commenters disagreed with certain 
aspects of the rule.\125\ Proposed Rule 17Ad-25(d) balances more 
defined requirements with principles-based requirements relating to a 
registered clearing agency's RMC. In keeping with this approach and to 
address requests for clarifications and revisions to the rule, the 
Commission adopts Rule 17Ad-25(d) as proposed, with certain 
modifications. Specifically, Rule 17Ad-25(d)(1) has been modified to 
reflect that: (1) the RMC is ``of the board'' of the registered 
clearing agency; and (2) the RMC's membership must be ``re-evaluated 
annually.'' Additionally, Rule 17Ad-25(d)(2) has been modified to 
reflect that the RMC's work must support the ``overall risk management, 
safety and efficiency of the registered clearing agency.'' Rule 17Ad-
25(d) establishes specific requirements as a minimum bar for RMCs 
across all registered clearing agencies while also providing registered 
clearing agencies with discretion to consider when and how to re-
evaluate the RMC membership annually and regarding the choice of the 
RMC chair.
---------------------------------------------------------------------------

    \122\ See, e.g., SIFMA at 3 (stating that it ``supports this 
part of the rule and urges the Commission to adopt it . . .''); 
Barclays et al. at 2 (stating that ``[w]hile it is reassuring that 
all seven of the current clearing agencies include participant 
representatives on their RMCs, we believe that the codification of 
this practice into a requirement will be beneficial''); DTCC at 5 
(stating that ``DTCC generally supports the requirements set forth 
in proposed Rule 17Ad-25(d) regarding the establishment and function 
of a board risk committee . . .''); ICI at 2 (stating that ``[w]hile 
RMCs currently exist at some clearing entities, the proposed 
requirements would promote greater consistency and a defined role 
for these committees.'').
    \123\ See, e.g., DTCC at 5-6; OCC at 8-9.
    \124\ See, e.g., SIFMA AMG at 4-6; Barclays et al. at 2.
    \125\ See, e.g., OCC at 8-9 (stating that ``[a] requirement that 
forces a registered clearing agency to replace well-informed risk 
management experts with directors relatively unfamiliar with a 
particular matter or the broader risk management framework would rob 
the registered clearing agency of critical risk management 
continuity.''); CCP12 at 4-5 (stating that ``[w]hile we agree that 
it can be beneficial for a risk management committee to be a board 
committee . . . we do not support making this a requirement . . 
.''); ICE at 4 (stating that ``ICE supports the Commission's 
proposal to require a SEC Registered CA to establish a risk 
management committee but disagrees with the requirement that a risk 
management committee be a committee of the board.'').
---------------------------------------------------------------------------

2. RMC of the Board
    Many commenters had understood the proposed rule to require a 
board-level RMC, as the Commission had intended the rule to require, 
and supported the Commission's approach.\126\ A commenter requested 
that the Commission clarify in a final rule that the board-level RMC is 
``not merely an advisory body that only develops opinions or 
recommendations for full board consideration and action.'' \127\ 
Another commenter stated that because risk management should be a 
critical focus of the RMC, the RMC should have adequate representation 
by clearing agency participants, and the proposed requirement would 
help formalize such a structure and foster further consistency across 
clearing agencies.\128\
---------------------------------------------------------------------------

    \126\ See, e.g., LSEG at 10 (stating that ``this would be an 
effective way to structure the committee. As a board sub-committee, 
the RMC can be formally delegated certain authorities and would be 
subject to the same corporate governance regime of the company.''); 
Saguato at 4 (stating that ``[a] [c]learing agency should have one 
or more risk committee to support the board in its operation.'').
    \127\ DTCC at 6.
    \128\ See SIFMA at 3 (stating that ``the Commission's specific 
proposal in this regard will help formalize this structure and 
further foster consistent practices across such clearing 
agencies.'').
---------------------------------------------------------------------------

    Two commenters, however, objected to the Commission's approach that 
would require the RMC to be a board-level committee.\129\ For example, 
one commenter stated that registered clearing agencies should be given 
the discretion to structure their RMCs as they see fit, whether as a 
board committee or an advisory group with a broader membership than the 
board and

[[Page 84469]]

with requisite expertise in risk management matters, stating it does 
not view that ``a board level risk management committee . . . 
improve[s] the board's engagement with clearing agency risk management, 
nor is there any evidence that it makes a board's oversight of 
management's decisions more effective.'' \130\
---------------------------------------------------------------------------

    \129\ See ICE at 4 (stating that it ``supports the Commission's 
proposal to require a SEC Registered CA to establish a risk 
management committee but disagrees with the requirement that a risk 
management committee be a committee of the board.''); CCP12 at 4 
(stating that ``we do not support making this a requirement for all 
clearing agencies, as there are other models that clearing agencies 
use that are also effective.'').
    \130\ ICE at 4 (also stating that ``[a] risk committee that is 
not board level can benefit from the expertise of a wider range of 
individuals and thus better inform the board than a board level risk 
committee would.'').
---------------------------------------------------------------------------

    In response to commenters, the Commission is modifying Rule 17Ad-
25(d)(1) to specify that the RMC is ``of the board'' to make clear that 
the RMC is not merely an advisory board. The Commission is modifying 
Rule 17Ad-25(d)(2) to specify that the RMC's work supports the 
``overall risk management, safety and efficiency of the clearing 
agency.'' \131\ The Commission disagrees with the commenter's 
suggestion that requiring registered clearing agencies to structure 
their RMCs as board-level committees would not make a board's oversight 
of management's decisions more effective. As stated in the Governance 
Proposing Release, a RMC 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, because a dedicated committee of the 
board remains focused exclusively on matters related to risk 
management.\132\ One reason that a board-level RMC is a more effective 
structure for the registered clearing agency's risk management 
decisions lies in the fact that such RMC is directly answerable to the 
board; requiring registered clearing agencies to establish a RMC 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.\133\ As one commenter stated, board-level RMCs of 
registered clearing agencies ``do not function in such a passive 
manner, but instead act pursuant to delegated authority from the full 
board to evaluate and take risk management decisions directly . . . . 
allowing for this balancing of roles and responsibilities between the 
two bodies [of the RMC and the board] enhances the clearing agency's 
ability to evaluate and respond in a timely manner to evolving risks 
and other changes in the relevant cleared market.'' \134\ While the 
board may or may not take the recommendations of an advisory group, 
RMCs generally have delegated authority from the board to conduct 
oversight and make decisions regarding risk management, as most 
commenters have observed,\135\ pursuant to a charter or other governing 
document specifying its purpose and its delegation of authority from 
the board. Notwithstanding the above, the requirement for a board-level 
RMC in no way precludes the establishment or use of an advisory 
committee composed of non-board members, as the commenter has 
suggested.\136\
---------------------------------------------------------------------------

    \131\ To address the concern that the board can also benefit 
from input and expertise reflecting a broader set of potential 
stakeholders in the registered clearing agency, the Commission is 
separately adopting Rule 17Ad-25(j), as discussed in Part II.F, 
which requires a registered clearing agency to seek input from other 
relevant stakeholders, such as the customers of clearing agency 
participants, regarding its risk management and operations.
    \132\ See Governance Proposing Release, supra note 2, at 51831.
    \133\ See id.
    \134\ DTCC at 6.
    \135\ See LSEG at 10 (stating that ``. . . this would be an 
effective way to structure the committee. As a board sub-committee, 
the RMC can be formally delegated certain authorities . . .''); 
CCP12 at 5 (stating that ``[o]ur view is that board-level RMCs may 
be delegated authority by the board to proactively address certain 
aspects of risk management. This is in line with generally accepted 
corporate governance principles.'').
    \136\ See ICE at 4.
---------------------------------------------------------------------------

    In addition, Rule 17Ad-25(d) specifies that, in the performance of 
its duties, the RMC must be able to provide a risk-based, independent, 
and informed opinion on all matters presented to it in a manner that 
supports the overall risk management, safety and efficiency of the 
registered clearing agency. As discussed in the Governance Proposing 
Release,\137\ this requirement helps ensure that the RMC has a clear 
scope and sufficient direction to effectively address risk management-
related matters and not merely serve as a ``rubber stamp'' for 
recommendations presented to it by management.\138\ In this sense, it 
is neither advisory in its review of management's decisions nor 
advisory in its recommendations provided to the board. As a general 
matter, based on its supervisory experience, the Commission has 
observed that the boards of registered clearing agencies often give 
considerable deference to the recommendations, advice, and opinions of 
their RMCs. The Commission continues to believe that it is appropriate 
for the board, while retaining ultimate responsibility over risk 
management, to assign certain tasks to the RMC (and other committees) 
to assist the board in discharging its ultimate responsibility.\139\
---------------------------------------------------------------------------

    \137\ See Governance Proposing Release, supra note 2, at 51831.
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

3. Annual Requirement To Re-Evaluate RMC Membership
    Several commenters disagreed with the Commission's approach to 
require RMC membership reconstitution on a regular basis, as proposed 
in Rule 17Ad-25(d)(1), because doing so could remove individuals with 
useful subject matter expertise and institutional knowledge required 
for the RMC to be effective.\140\ One commenter suggested alternative 
language for a different approach, requesting that the Commission 
modify the proposed rule to require the registered clearing agency to 
``reevaluate'' the composition of the RMC rather than ``reconstitute,'' 
as proposed.\141\ Some commenters proposed a staggered rotation system 
with term limits, as well as fitness standards.\142\ Another 
alternative suggested by a commenter is to have the clearing agency use 
an outcomes-based approach to review the work of the RMC and prevent it 
from becoming non-representative or entrenched.\143\ Another commenter 
suggested annual review of the membership is sufficient and also 
requested that the Commission clarify whether membership refers to

[[Page 84470]]

participant firms or individuals representing them.\144\
---------------------------------------------------------------------------

    \140\ See, e.g., OCC at 8 (stating that ``[w]e believe a forced 
reconstitution on a regular basis would frustrate the Commission's 
goal . . . as registered clearing agencies may be required to remove 
directors from the risk management committee(s) with deep industry 
and subject matter experience to meet this requirement.''); ISDA at 
3-4 (stating that ``a situation where the CCP spends a considerable 
part of RMC meetings on educating new RMC members should be 
avoided.''); CCP12 at 6 (stating that ``RMC members often serve 
because they have specialized expertise or a familiarity with the 
intricacies of a clearing agency's risk management framework that 
would merit a longer term.''); ICE at 4-5 (stating that 
``reconstitution requirements must consider the value an experienced 
and knowledgeable risk management committee member provides to a 
clearing agencies' risk management function.'').
    \141\ See DTCC at 6 (stating that ``[i]nstead, we would suggest 
that that the Commission consider alternative terms such as 
`reevaluate' '').
    \142\ See, e.g., ISDA at 3-4 (stating that ``staggered rotation 
system . . . allows to have new members on while still retaining 
institutional knowledge.''); SIFMA AMG at 5-6 (stating that ``[i]t 
will be important that the requirement is principles-based, is 
subject to the requirement for the inclusion of clearing members and 
clearing member customers, applies the recommended fitness 
standards, and requires a staggered rotation . . .'').
    \143\ See DTCC at 6 (requesting that the Commission consider 
registered clearing agencies to ``periodically evaluate whether the 
risk committee membership and structure continues to provide 
current, diverse and expert risk management oversight that supports 
the safety and efficiency of the clearing agency'').
    \144\ See LSEG at 12 (stating that ``it should be sufficient for 
a clearing agency to regularly (e.g., annually) review the 
membership of its RMC to ensure there is sufficient representation 
of its participants.'').
---------------------------------------------------------------------------

    The Commission is modifying Rule 17Ad-25(d)(1) to require an annual 
re-evaluation of the RMC. Having considered the comments received, the 
Commission agrees that a required reconstitution of the RMC on a 
regular basis could lead to the undesired outcome of turnover in the 
committee membership before members are able to contribute optimally, 
with a loss of continuity and expertise. In this way, the modification 
to Rule 17Ad-25(d)(1) reflects an outcomes-based approach. As 
registered clearing agencies may have different methods of term limits, 
including staggered rotation, the Commission leaves the frequency and 
type of reconstitution to the discretion of the registered clearing 
agency, while at the same time requiring a re-evaluation to be 
conducted annually. Rule 17Ad-25(d), as modified, will preserve the 
initial intent of the rule--to prevent stagnation of the RMC 
membership, while also allowing registered clearing agencies 
flexibility and discretion in the composition of the RMC. As stated in 
the Governance Proposing Release, 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 RMC through the use of RMC membership changes.\145\ 
The Commission continues to believe that codifying this practice will 
set a minimum standard for re-evaluation of the RMC membership.\146\ 
Requiring the registered clearing agency to re-evaluate the RMC 
membership annually 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 RMC over time.\147\ As 
stated in the Governance Proposing Release, the Commission continues to 
believe that Rule 17Ad-25(d)(1) achieves the above objective of 
ensuring a broad range of participation on the RMC without imposing 
specific obligations related to owners, participants, or independent 
directors that may be suitable in some, but not necessarily all, cases, 
and because the RMC is broadly responsible for providing 
recommendations to the board on all risk management related matters, it 
is important that the RMC's membership reflects a wide range of owners 
and participants with relevant experience and expertise on a variety of 
risk management issues.\148\ By requiring the RMC to re-evaluate its 
membership annually, Rule 17Ad-25(d)(1), as modified, helps ensure 
ongoing diversity of perspectives across owners and participants and 
expertise on the RMC, while better ensuring that the RMC is not subject 
to stagnation of views that neither serves the safety and efficiency of 
the registered clearing agency in its risk management decision-making 
nor promotes effective and reliable risk management practices at a 
registered clearing agency.\149\ As stated in the Governance Proposing 
Release, the charter that defines the terms of the RMC could also 
establish that RMC members serve for a specified term, or that the RMC 
would rotate or replace directors on the RMC at certain intervals 
absent a specified turnover threshold among directors, or that their 
terms could be staggered to have regular turnover of participants and 
other RMC members.\150\
---------------------------------------------------------------------------

    \145\ See Governance Proposing Release, supra note 2, at 51832-
33.
    \146\ See id.
    \147\ See id.
    \148\ See id.
    \149\ See id.
    \150\ See Governance Proposing Release, supra note 2, at 51833.
---------------------------------------------------------------------------

    Although some commenters recommend against the Commission requiring 
a certain percentage or number of small participant representatives on 
the RMC,\151\ a few commenters requested substantive modifications to 
the rule that would address RMC composition requirements.\152\ One 
commenter suggested requiring directors serving on the RMC be 
individuals selected from smaller clearing agency participants,\153\ 
although another commenter stated that obtaining a broad range of 
perspectives is not necessary.\154\ This commenter suggested that the 
Commission go further and that the RMC of the board ``should be 
structured to represent more participants than the board . . . [and] 
neither clearing members or clients of clearing members should 
represent a majority.'' \155\ One commenter suggested that ``a majority 
of the [RMC] should be composed of independent directors,'' and that 
``a dual-level [RMC] structure would be theoretically ideal.'' \156\ 
With regard to this comment, requiring a board-level RMC pursuant to 
Rule 17Ad-25(d) in conjunction with requiring the registered clearing 
agency to solicit and document stakeholder viewpoints pursuant to Rule 
17Ad-25(j) is fully consistent with the commenter's recommendation of a 
``dual-level'' structure, in which the board-level RMC acts with 
delegated authority from the board on risk management issues while the 
registered clearing agency is required to solicit stakeholder views 
from representatives of clearing agency participants, their customers, 
other end users, and any other relevant stakeholders.\157\ Another 
commenter requested clarification from the Commission on RMC 
composition requirements and the reference to ``independent'' opinion 
in Rule 17Ad-25(d)(2).\158\
---------------------------------------------------------------------------

    \151\ See, e.g., CCP12 at 5 (stating that ``additional 
requirements may make the governance of RMCs more burdensome and 
inefficient, which could potentially have a negative impact on the 
functioning of the committee.''); ICE at 5 (advising ``against 
mandating specific risk management committee composition 
requirements, such as a specific percentage or number of 
representatives from small participants.'').
    \152\ See, e.g., Better Markets at 21 (stating that ``diversity 
needs to be genuine and can only be strengthened by guaranteeing 
enough representation for smaller entities to check the largest 
players.''); IDTA at 4-5 (recommending that ``that the rule include 
a requirement to ensure sufficient representation on the risk 
committees of non-SIFI entities (smaller and middle-market 
firms).'').
    \153\ See IDTA at 5.
    \154\ See LSEG at 11 (stating that ``[w]e do not believe that 
small participants should be systematically represented since very 
small participants may not have this expertise, nor the required 
involvement'').
    \155\ LSEG at 10.
    \156\ Saguato at 4 (stating that ``[i]n actuality a dual level 
risk committee structure would be theoretically ideal as it would 
better incorporate inputs from the many constituencies of a clearing 
agency'').
    \157\ See infra Part II.F (further discussing the requirements 
of Rule 17Ad-25(j)).
    \158\ See OCC at 9 (requesting the Commission ``clarify that one 
representative from each of the owners and the participants of the 
registered clearing agency would satisfy the requirement of Proposed 
Rule 17Ad-25(d)(1) . . . . [and] that a risk management committee(s) 
may provide such an independent opinion so long as a majority of 
participating directors on the committee(s) are themselves 
independent.'').
---------------------------------------------------------------------------

    With regard to other comments on specifying RMC membership 
composition, the Commission is not modifying Rule 17Ad-25(d) to require 
that the RMC be composed of majority independent directors because such 
requirement may exclude too many directors with specialized technical 
expertise from the pool of directors eligible to serve on the RMC, as 
previously considered and discussed in the Governance Proposing 
Release.\159\ However, pursuant to the requirements

[[Page 84471]]

of Rule 17Ad-25(e), if the RMC 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 for 
the board of directors. The Commission continues to believe that, by 
requiring the RMC to provide an independent opinion, irrespective of 
its composition, Rule 17Ad-25(d) helps ensure that the RMC is free from 
influence in the performance of its duties.\160\ In response to 
commenters' request to clarify the reference to ``independent'' 
opinion, ``independent'' here refers to the nature of the opinion and 
does not mean independent in the same context as the requirements 
discussed in Part II.A for ``independent'' directors; when making 
recommendations to the board, the RMC's decisions or opinions must be 
its own--not a rubber stamp of management's decisions or opinions--so 
that the RMC is free from influence in the performance of its duties to 
reflect how its decisions support the safety and efficiency of the 
clearing agency and represent the best interests of the clearing 
agency.\161\ The requirement to include directors on the committee 
representative of both owners and participants, without also providing 
further specificity as to the size (or market power) of the 
participants so included, is consistent with the requirements set forth 
in Rule 17Ad-25(c)(4) regarding the nomination of directors by the 
nominating committee more generally. Specifically, those requirements 
establish that the nominating committee shall consider, when selecting 
nominees for director, representation on the board as a whole that 
reflects a range of participants with different business strategies, 
models, and sizes, as further discussed in Part II.B.3.
---------------------------------------------------------------------------

    \159\ See, e.g., Governance Proposing Release, supra note 2, at 
51831; see also id. at 58132 (``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.'').
    \160\ See id. at 51831 (emphasis added).
    \161\ See id.
---------------------------------------------------------------------------

    The Governance Proposing Release also stated 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, and so 
Rule 17Ad-25(d) requires that RMCs at all times include representatives 
from the owners and participants of the registered clearing 
agency.\162\ As discussed in the Governance Proposing Release, 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.\163\ Based on its supervisory experience, the 
Commission continues to believe that, because 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, requiring the RMC to include representatives from 
the clearing agency's owners and participants helps ensure that the 
RMC's recommendations to the board reflect these stakeholders' unique 
perspectives and expertise on risk management issues.\164\
---------------------------------------------------------------------------

    \162\ See id.
    \163\ See id.
    \164\ See id.
---------------------------------------------------------------------------

    Accordingly, the rule provides a registered clearing agency with 
some discretion to determine the appropriate composition for the RMC 
with respect to representation from its owners and participants. The 
RMC generally should include representation reflective of both small 
and large participants, and the affirmative Commission requirements 
reflected in the selection process for directors generally under Rule 
17Ad-25(c) would better ensure appropriate representation of a diverse 
set of stakeholder viewpoints.\165\ Therefore, the Commission is not 
modifying the proposed rule in response to these commenters.
---------------------------------------------------------------------------

    \165\ See id.
---------------------------------------------------------------------------

4. Harmonization With CFTC and EMIR Requirements
    Some commenters recommended that the Commission harmonize Rule 
17Ad-25(d) with CFTC requirements for the RMCs of DCOs,\166\ 
particularly for entities dually registered as DCOs with the CFTC and 
registered clearing agencies with the Commission.\167\ Specifically, 
some commenters suggested the Commission clarify the expected 
perspective to be applied by RMC members to support not just the safety 
and efficiency of the clearing agency, as required in Rule 17Ad-
25(d)(2), but also the stability of the broader financial system.\168\
---------------------------------------------------------------------------

    \166\ See 17 CFR part 39; see also CFTC Final Rule: Governance 
Requirements for Derivatives Clearing Organizations, 88 FR 44675 
(July 13, 2023) (CFTC adopting amendments to its rules to require 
DCOs to establish and consult with one or more RMCs composed of 
clearing members and customers of clearing members on matters that 
could materially affect the DCO's risk profile, minimum requirements 
for RMC composition and rotation, and requiring DCOs to establish 
and enforce fitness standards for RMC members; also adopting 
requirements for DCOs to maintain written policies and procedures 
governing the RMC consultation process and the role of RMC members; 
also adopting requirements for DCOs to establish one or more market 
participant risk advisory working groups (RWGs) that must convene at 
least two times per year, and adopt written policies and procedures 
related to the formation and role of the RWG).
    \167\ See, e.g., ICI at 5 (stating that ``[h]armonization would 
promote consistency, certainty, and efficiency in how clearing 
entities--especially CFTC and SEC dual-registrants--manage risk by 
detailing the process by which the board consults and obtains an 
RMC's input.''); CCP12 at 6 (encouraging the Commission and the CFTC 
``to coordinate . . . . [by] adopt[ing] a flexible outcomes-based 
approach in which the clearing agency would periodically evaluate 
whether the RMC membership is appropriately expert, diverse and 
current in terms of tenure.''); ICE at 5 (urging ``coordination and 
harmonization'').
    \168\ See Barclays et al. at 2 (recommending ``[o]ne approach to 
addressing this conflict would be to require RMC members to also 
consider the safety and efficiency of the broader financial markets, 
rather than solely the registered clearing agency.''); SIFMA AMG at 
5 (recommending the Commission ``explicitly state that in addition 
to supporting the safety and efficiency of the RCA, RMC and RWG 
members should also support the stability of the broader financial 
system''); see also 17 CFR 39.24(c)(1)(iv)(3) (``A derivatives 
clearing organization shall maintain policies designed to enable 
members of risk management committee(s) to provide informed opinions 
in the form of risk-based input on all matters presented to the risk 
management committee for consideration, and perform their duties in 
a manner that supports the safety and efficiency of the derivatives 
clearing organization and the stability of the broader financial 
system.'').
---------------------------------------------------------------------------

    The Commission is adopting the proposed rule without modification 
because the goal of safety and efficiency of the clearing agency is not 
mutually exclusive with that of overall financial stability. As stated 
in the Governance Proposing Release, in providing risk-based opinions, 
the RMC must focus on both the risks that the clearing agency faces and 
the tools at its disposal to mitigate and address such risks in its aim 
toward the goal of supporting the safety and efficiency of the clearing 
agency itself.\169\ The stability of clearing agencies is an essential 
part of the stability of the overall financial system and the markets 
that clearing agencies serve.\170\ Therefore, the Commission is not 
modifying Rule 17Ad-25(d)(2) as suggested by commenters.
---------------------------------------------------------------------------

    \169\ See Governance Proposing Release, supra note 2, at 51831.
    \170\ See Committee on Payment and Settlement Systems (``CPSS'') 
and Technical Committee of the International Organization of 
Securities Commissions (``IOSCO''), Principles for financial market 
infrastructures (Apr. 16, 2012), at 5, available at http://www.bis.org/publ/cpss101a.pdf (``PFMI'') (stating that ``[f]inancial 
market infrastructures that facilitate the clearing, settlement, and 
recording of monetary and other financial transactions can 
strengthen the markets they serve and play a critical role in 
fostering financial stability.''). In 2014, the CPSS became the 
Committee on Payments and Market Infrastructures (``CPMI'').
---------------------------------------------------------------------------

    Additionally, one commenter requested that the Commission adopt the 
list of factors specified in CFTC requirements for DCO RMCs by 
explicitly requiring a registered clearing

[[Page 84472]]

agency to present to the RMC and any advisory committee or RWG all 
matters regarding, and proposed changes to, the registered clearing 
agency's rules, procedures, or operations that could materially affect 
the risk profile of the registered clearing agency, including, but not 
limited to, any material change to the registered clearing agency's 
risk model, default procedures, participation requirements, and risk 
management practices, as well as the clearing of new products that 
could significantly impact the clearing agency's risk profile.\171\ 
According to the commenter, ``the greater detail we have recommended is 
important to ensure the requirements are clear, that the views of 
clearing member customers are included, that the board must engage with 
the RMC, and that issues of material risk must be brought to the RMC 
and RWG for consideration.'' \172\ Additionally, another commenter 
suggested that ``the requirements for the function, composition, and 
reconstitution should specifically include considerations of 
concentration of risk in the markets, competitiveness of the markets, 
and the impact of policies on competitiveness.'' \173\ However, one 
commenter stated that listing factors for RMC consideration would be 
overly prescriptive,\174\ while another commenter stated that listing 
all matters for RMC consideration would be difficult.\175\
---------------------------------------------------------------------------

    \171\ See SIFMA AMG at 5-7 (requesting the Commission 
``explicitly require that the RCA [registered clearing agency] 
present to the RMC and RWG all matters and proposed changes to the 
RCA's rules, procedures, or operations that could materially affect 
the risk profile of the RCA, including, but not limited to, any 
material change to the RCA's risk model, default procedures, 
participation requirements, and risk management practices, as well 
as the clearing of new products that could significantly impact the 
RCA's risk profile'').
    \172\ See id.
    \173\ IDTA at 4-5.
    \174\ See LSEG at 11 (stating that ``[i]t is not necessary for 
the SEC to define the matters to be presented to the RMC and be 
overly prescriptive. Requiring that clearing agencies are explicit 
in the committee Terms of Reference (`TOR') would meet the SEC's 
objective . . .'').
    \175\ See ISDA at 4 (stating that ``[i]t will be difficult to 
clearly specify in detail all matters that have to be presented to 
the RMC.'').
---------------------------------------------------------------------------

    The Commission is not modifying the proposed rule by adopting the 
CFTC DCO list of factors for RMC consideration into Rule 17Ad-25(d). In 
the Governance Proposing Release, the Commission explained that the 
purpose of the RMC is to ``provide 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''--matters that implicate the clearing agency's risk 
management, including its policies, procedures, and tools for 
mitigating risk.\176\ The Commission further stated that Rule 17Ad-
25(d) ``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.'' \177\ Explicitly enumerating the 
matters presented to the RMC, as suggested by commenters, would be 
unnecessarily prescriptive, and that the individual clearing agencies 
are best qualified to determine the matters presented to the board 
based on the specifics of their participants, markets and products. 
Additionally, whereas the CFTC considers DCO policies and procedures 
under a self-certification process, the SEC requires that registered 
clearing agencies submit to the Commission for approval, after a public 
comment period, certain policies and procedures--including policies and 
procedures related to the level of risks faced by the registered 
clearing agency--under the SRO rule filing process for registered 
clearing agencies, except for certain rule changes that are immediately 
effective upon filing as set forth in Exchange Act section 19(b)(3)(A) 
\178\ and 17 CFR 240.19b-4(f).\179\ Not only are the financial risk 
management matters referred to by the commenters subject to the SRO 
rule filing process, registered clearing agencies designated as 
systemically important financial market utilities (``SIFMUs'') are 
required to file 60-days advance notice of changes to rules, 
procedures, and operations that could materially affect the nature or 
level of risk presented by the SIFMU.
---------------------------------------------------------------------------

    \176\ See Governance Proposing Release, supra note 2, at 51831 
(stating that ``[t]he 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.'').
    \177\ Id.
    \178\ 15 U.S.C. 78s(b)(3)(A).
    \179\ See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    In a similar vein, a commenter suggested that the Commission assess 
how greater predictability and transparency can be provided to market 
participants regarding margin methodologies as part of a clearing 
agency's governance process to assist market participants in managing 
their liquidity needs and minimize the risk of market disruptions.\180\ 
The Commission agrees that predictability and transparency of margin 
requirements can help clearing members better manage their liquidity 
and other market risks. The focus of this rulemaking regarding 
transparency is to ``increase transparency into board governance,'' 
rather than into the specific margin methodologies. In fact, improved 
governance could generally lead to more transparent margin 
methodologies. Accordingly, the Commission is not modifying the rule in 
response to this comment.\181\
---------------------------------------------------------------------------

    \180\ See Stephen John Berger, Managing Director, Global Head of 
Government & Regulatory Policy, Citadel (Oct. 7, 2022) (``Citadel'') 
at 1.
    \181\ See Governance Proposing Release, supra note 2, at 51812 
(stating that ``[t]he 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'').
---------------------------------------------------------------------------

    One commenter urged the Commission to harmonize Rule 17Ad-25(d) 
with EMIR, which requires that an RMC be chaired by an independent 
director.\182\ Another commenter requested clarification that a risk 
committee with some non-independent members can still provide overall 
independent opinions to the board.\183\ The Commission is not modifying 
the rule as suggested by commenters. Rule 17Ad-25(d)(2) requires that 
the RMC ``be able to provide a risk-based, independent, and informed 
opinion on all matters presented to the committee for consideration.'' 
This opinion on risk matters brought before the RMC can be independent 
without an explicit prescriptive requirement that the RMC is chaired by 
an independent director.\184\ The rule's focus is on RMC decisions and 
opinions being free of influence from management by virtue of being a 
board-level committee, not the chair's independence in the context of 
the requirements in Rule 17Ad-25(b), because at the heart of the rule 
is the safety and efficiency of the registered clearing agency, and 
critical to the effective functioning of a registered 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.\185\ With respect to registered 
clearing agencies, it

[[Page 84473]]

is critically important that the chair of the RMC, which generally sets 
the agenda for and prioritizes the work of the RMC, has a high level of 
expertise in, and familiarity with, the risk management topics likely 
to come before the RMC for its review and opinion. In this regard, the 
expertise required to chair the RMC of a registered clearing agency to 
ensure that the RMC provides risk-based, independent, and informed 
opinions for the proper functioning and effectiveness of the RMC is 
more important than requiring that the chair of the RMC be independent 
subject to the requirements of Rules 17Ad-25(b), (e), and (f) because 
clearing agencies perform a unique and often systemically important 
function that facilitates effective risk management in the U.S. 
securities markets.\186\ As stated in the Governance Proposing Release, 
by requiring the RMC to provide an independent opinion, ``irrespective 
of its composition,'' the rule would help ensure that the RMC is free 
from influence in the performance of its duties.\187\
---------------------------------------------------------------------------

    \182\ See LSEG at 10 (stating that ``independent directors are 
required under EMIR, hence LCH SA does not rely solely on experts 
from the participants and owners of the clearing agency. The INEDs 
selected for the Risk Management Committee (`RMC') must have good 
risk knowledge, and we support the RMC being chaired by an INED.'').
    \183\ See OCC at 9 (requesting clarification that an RMC ``may 
provide such an independent opinion so long as a majority of 
participating directors on the committee(s) are themselves 
independent.'').
    \184\ See Governance Proposing Release, supra note 2, at 51831 
(stating that ``the proposed rule helps ensure that the committee is 
free from influence in the performance of its duties.'').
    \185\ See id.
    \186\ Cf. Governance Proposing Release, supra note 2, at 51830-
31.
    \187\ See id. at 51831.
---------------------------------------------------------------------------

    One commenter stated that the RMC composition requirements in Rule 
17Ad-25(d) conflict with the composition requirements for the RMC set 
forth in EMIR.\188\ Contrary to the commenter's view, Rule 17Ad-25(d) 
can be read consistently with EMIR. Article 28 of EMIR states, ``A CCP 
shall establish a risk committee, which shall be composed of 
representatives of its clearing members, independent members of the 
board and representatives of its clients.'' It further states that, 
``The advice of the risk committee shall be independent of any direct 
influence by the management of the CCP.'' \189\ By comparison, Rule 
17Ad-25(d) requires that the RMC be a board-level committee and that it 
at all times include representatives from the owners and participants 
of the registered clearing agency. The commenter indicated that 
``owners are not permitted to be on the RMC under EMIR,'' but Article 
28 of EMIR as described here suggests that only management is barred 
from direct representation on the RMC.\190\ Even if the commenter is 
correct that owners are not permitted to be on the RMC under EMIR, Rule 
17Ad-25(d) does not require that management serve on the RMC; nor does 
it require that owners serve as directors on the RMC. Rather, Rule 
17Ad-25(d) requires that the composition of the RMC include 
representatives of owners (and participants). A non-independent 
director may serve as a representative of owners without being part of 
management or an owner of the clearing agency; for example, such a 
director could be non-management and a non-owner who nonetheless 
maintains a material relationship with the registered clearing agency, 
or that falls within a specific exclusion set forth in Rule 17Ad-25(f). 
For this reason, the Commission is not modifying Rule 17Ad-25(d) to 
address the comment. Nonetheless, to the extent that a registered 
clearing agency identifies facts or circumstances that clearly 
demonstrate a requirement under Rule 17Ad-25 is in direct conflict with 
a requirement of EMIR, the Commission has previously provided guidance 
as to how such a registered clearing agency can request an exemption 
from said requirement.\191\
---------------------------------------------------------------------------

    \188\ See LSEG at 11 (stating that ``it is important that 
members of the RMC have necessary levels of expertise to make 
effective risk decisions and provide sound advice. Further, owners 
are not permitted to be on the RMC under EMIR, which will create a 
conflict for dually registered clearing agencies.'').
    \189\ See EMIR, supra note 56.
    \190\ EMIR Article 28(1) provides: ``A CCP shall establish a 
risk committee, which shall be composed of representatives of its 
clearing members, independent members of the board and 
representatives of its clients . . . The advice of the risk 
committee shall be independent of any direct influence by the 
management of the CCP. None of the groups of representatives shall 
have a majority in the risk committee.''
    \191\ See Release No. 34-90492 (Nov. 23, 2020), 85 FR 76635 
(Nov. 30, 2020) (``CCP Statement''). In the CCP Statement, the 
Commission explained (i) that it would take substantially the same 
approach for other jurisdictions that have adopted a regulatory 
framework substantially similar to EMIR, and (ii) that the policy 
and guidance provided also would apply to CCPs for securities 
products other than security-based swaps. See id. at nn.1 & 23.
---------------------------------------------------------------------------

5. Other Comments
    One commenter requested that Rule 17Ad-25(d) include an explicit 
provision that allows directors on the RMC to obtain feedback from 
experts within their ``member firms,'' to enhance the quality of input 
the registered clearing agencies receive from directors on the 
committee.\192\ As a general matter, directors on the RMC should be 
fully qualified to serve without having to rely on expertise from 
others, such as other personnel at their employer firm (i.e., a 
clearing agency participant), to provide input on risk management 
decisions before the RMC. The more appropriate venue for providing the 
input described by the commenter is via the structure established in 
Rule 17Ad-25(j), as discussed in Part II.F, pursuant to which a 
relevant stakeholder would provide such input in response to 
solicitations of stakeholder viewpoints by the registered clearing 
agency. Ultimately, the ability of directors to consult with their 
primary employers on risk management matters will be governed by the 
specific governing documents of the clearing agency, its board, and any 
obligations as to confidentiality or information sharing that the 
registered clearing agency imposes through those documents on 
directors. Accordingly, the Commission is not modifying Rule 17Ad-25(d) 
to specifically permit directors on the RMC to consult with a clearing 
agency participant.
---------------------------------------------------------------------------

    \192\ See Barclays et al. at 3 (stating that ``[w]e believe that 
the proposed rules should include explicit provisions that allow RMC 
members to obtain feedback from experts within their member firms 
which will enhance the quality of input the registered clearing 
agencies receive from RMC members'').
---------------------------------------------------------------------------

    Additionally, one commenter requested that Rule 17Ad-25(d) go 
further by detailing additional RMC requirements, including 
requirements that: (1) registered clearing agencies create and maintain 
minutes or other documentation of RMC meetings that should be made 
available to the Commission and a summary of which that is made public; 
(2) the RMC document and share with regulators any dissenting RMC views 
with regard to the clearing agency's material risk decisions or the 
clearing agency not following the advice of the RMC, as well as the 
accompanying rationale for not accommodating dissenting views; and (3) 
the RMC meet on a regular basis and at least quarterly.\193\ The 
Commission is not modifying Rule 17Ad-25(d) as suggested by the 
commenter in recognition that each entity has particular policies and 
needs, and that there could be different ways to accomplish the rule's 
objectives. The Commission designed Rule 17Ad-25(d) to balance 
establishing a common set of minimum standards on RMCs across 
registered clearing agencies while still providing registered clearing 
agencies with discretion to design the RMC to be most effective at 
conducting its risk management function. The Commission believes that 
registered clearing agencies currently are capable of determining how 
to apply these factors for the operation of their respective RMCs, and 
will continue to consider whether the Commission's objectives are being 
met and whether further rulemaking in this area is appropriate.
---------------------------------------------------------------------------

    \193\ See ISDA at 4.

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

[[Page 84474]]

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.
    In the Governance Proposing Release, the Commission explained that 
proposed Rules 17Ad-25(g) and (h) help promote the integrity of 
governance arrangements of registered clearing agencies 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.\194\ 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.\195\ By requiring the registered clearing agency to 
identify and document both existing and potential conflicts of interest 
involving directors or senior managers of the registered clearing 
agency, proposed Rule 17Ad-25(g) was 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.\196\ The Commission stated that the ability to identify 
potential conflicts of interest is critical to ensuring the effective 
identification and management of actual conflicts of interest.\197\ In 
the Governance Proposing Release, the Commission specifically explained 
that 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.\198\
---------------------------------------------------------------------------

    \194\ Governance Proposing Release, supra note 2, at 51834.
    \195\ Id.
    \196\ Id.
    \197\ Id.
    \198\ Id.
---------------------------------------------------------------------------

    With regard to proposed Rule 17Ad-25(h), the Commission explained 
in the Governance Proposing Release that because a registered clearing 
agency may not have access to information necessary to identify a 
potential conflict of interest, the proposed rule 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.\199\ The Commission explained that it 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.\200\ The Commission stated that this approach would help ensure 
that the registered clearing agency has sufficient information to 
investigate, identify and address potential conflicts.\201\
---------------------------------------------------------------------------

    \199\ Id. at 51835.
    \200\ Id.
    \201\ Id.
---------------------------------------------------------------------------

    Commenters generally supported proposed Rules 17Ad-25(g) and 
(h),\202\ notably the principles-based approach to the rules.\203\ Two 
commenters urged the Commission to consider modifications to the 
rules.\204\
---------------------------------------------------------------------------

    \202\ See, e.g., Better Markets at 22 (stating that ``[w]e 
commend the Proposal for requiring written policies to identify, 
document, disclose, and mitigate conflicts of interest''); DTCC at 
3-4 (stating that it ``generally finds that the requirements laid 
out in proposed Rules 17Ad-25(g) and (h) regarding conflicts of 
interest also are appropriately designed, and therefore recommends 
that they be adopted without further modification''); Chris Barnard 
at 2 (stating that ``[p]roposed Rule 17Ad-25(g) . . . I agree with 
this. . . . I also agree with proposed Rule 17Ad-25(h)''); ICE at 5 
(stating that it ``welcomes such approach and believes it would 
provide SEC Registered CAs with the flexibility necessary for 
effective governance by allowing such clearing agencies the 
discretion to design policies that fit their particular structure 
and characteristics''); LSEG at 13 (stating that ``[t]he clearing 
agency should have policies and procedures in place to address 
conflicts of interest. . . . [and] should leverage the conflicts 
identified by the SEC to build its own policy''); IDTA at 5 (stating 
that ``[r]equiring clearing agencies to adopt policies and 
procedures with respect to the management of conflicts is 
instrumental to maintaining a sound regulatory framework'').
    \203\ See DTCC at 3-4; ICE at 5; LSEG at 13.
    \204\ See, e.g., Better Markets at 22; IDTA at 5.
---------------------------------------------------------------------------

1. Mitigation or Elimination of Conflicts
    While generally supportive of the proposed rules, one commenter 
urged the Commission to strengthen the rule, stating that proposed Rule 
17Ad-25(g) is vague on exactly how a registered clearing agency should 
``mitigate or eliminate'' conflicts.\205\ The commenter suggested that 
the proposed rule should instead specify that agency policies should 
require recusal unless or until a conflict has been fully 
eliminated.\206\
---------------------------------------------------------------------------

    \205\ See Better Markets at 22 (stating that ``[f]irst, the 
Proposal is vague on exactly how a clearing agency should `mitigate 
or eliminate' conflicts. It should instead specify that agency 
policies should require recusal unless or until a conflict has been 
fully eliminated. Second, the . . . double layer of reasonableness 
review seems unnecessary and likely to be too generous towards 
clearing agencies and their boards. The Proposal should instead 
require clearing agencies to affirmatively oblige directors to 
disclose any material relationships'').
    \206\ See id.
---------------------------------------------------------------------------

    The Commission is not modifying Rule 17Ad-25(g) in the ways 
suggested by the commenter. The Commission disagrees that ``mitigate or 
eliminate'' conflicts is vague and therefore, should be replaced by an 
outright requirement to recuse. As stated in the Governance Proposing 
Release, the registered clearing agency is best positioned to identify 
and address conflicts of interest that may arise in its operations and 
risk management and decision-making.\207\ Specifically, given the array 
of potential conflicts of interest scenarios that a registered clearing 
agency may need to address, the registered clearing agency is best 
positioned through reasonable policies and procedures to mitigate--
namely, reduce the harm--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.\208\ This rule is principles-
based to provide flexibility, for example, to dictate the disposition 
or resolution of private interests that may be unworkable or discourage 
qualified, experienced individuals from performing their duties to the 
registered clearing agency. Therefore, the rule focuses on the process 
to identify and

[[Page 84475]]

document existing or potential conflicts of interest in the clearing 
agency decision-making involving directors or senior managers. 
Mitigation of the harm of such conflicts may include raising awareness 
of the circumstances in which conflicts can arise for the purpose of 
preventing conflicts of interest and providing training on how to 
identify and report such conflicts. In the Governance Proposing 
Release, the Commission explained that in some cases 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; \209\ whether recusal is necessary depends on the 
conflict at hand. The Commission emphasizes that pursuant to the 
overarching obligation of this rule, elimination of conflicts of 
interest is one method of addressing the conflict. Depending on the 
circumstances, it may be appropriate to mitigate a conflict through 
other methods.\210\
---------------------------------------------------------------------------

    \207\ Governance Proposing Release, supra note 2, at 51834.
    \208\ See id.
    \209\ See id.
    \210\ See id. (stating 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.'').
---------------------------------------------------------------------------

    Additionally, another commenter encouraged the Commission to have 
the rules consider the impact on institutions that are not designated 
systemically important financial institutions (``SIFIs'') by the 
Financial Stability Oversight Council (``FSOC''), as small and middle-
market participants would be able to provide ongoing feedback on how 
policies are impacting the markets to minimize conflicts of interest 
and ensure competition among institutions of all sizes.\211\
---------------------------------------------------------------------------

    \211\ See IDTA at 5 (stating that ``[t]o ensure all voices are 
heard, the policies and procedures should mandate that the reviewing 
and mitigation of conflicts are conducted by a diverse group, and, 
most particularly, not only large institutions. . . . the IDTA 
recommends the consideration of the impact on institutions that are 
not FSOC designated SIFIs. Small and middle-market participants 
would be able to provide ongoing feedback on how policies are 
impacting the markets in order to minimize conflicts of interest and 
ensure competition among institutions of all sizes'').
---------------------------------------------------------------------------

    The Commission is not modifying Rule 17Ad-25(d) in response to the 
comment. Because the types and sizes of participants vary significantly 
across different registered clearing agencies depending on the markets 
they serve, registered clearing agencies could determine the impact on 
non-SIFIs by requiring the consideration of viewpoints of small 
participants and a range of participants pursuant to Rule 17Ad-25(j). 
The Commission understands the overarching concerns that the commenter 
highlights about the need to have a process to include a wider array of 
stakeholder viewpoints in the registered clearing agency's decision-
making. In this regard, Rules 17Ad-25(c) and (j) (rather than Rules 
17Ad-25(g) and (h)) are designed to address concerns about a process to 
include stakeholder viewpoints in the registered clearing agency's 
decision-making, including the context that the commenter 
describes.\212\
---------------------------------------------------------------------------

    \212\ See supra Part II.B.3 (discussing the approach to 
participation by small and medium-sized participants); infra Part 
II.F (discussing requirements for considering stakeholder 
viewpoints, including the views of small and medium-sized 
participants).
---------------------------------------------------------------------------

2. Use of ``Reasonably Designed'' Policies and Procedures Approach
    Some commenters supported the principles-based approach of proposed 
Rules 17Ad-25(g) and (h).\213\ However, one commenter found the 
language of proposed Rule 17Ad-25(h) ``unnecessary and likely . . . too 
generous towards clearing agencies and their boards,'' specifically, 
the ``double layer of reasonableness review'' that the clearing agency 
must have policies ``reasonably designed'' to prompt disclosure of 
relationships that ``reasonably could affect the independent judgment 
of . . . the director.'' \214\ The commenter suggests that the rule 
``should instead require clearing agencies to affirmatively oblige 
directors to disclose any material relationships.'' \215\
---------------------------------------------------------------------------

    \213\ See DTCC at 3-4, ICE at 5, LSEG at 13.
    \214\ Better Markets at 22.
    \215\ Id.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that disclosure of 
material relationships is an important consideration, but the overall 
structure of the rule already requires evaluation of certain 
relationships of a director from an objective perspective, and that 
additional modifications to the rule are therefore not necessary. The 
Commission proposed rules in the context of the overlay of ``written 
policies and procedures reasonably designed.'' \216\ The ``reasonably 
designed'' component, consistent with other Commission rules for 
clearing agencies, helps ensure that policies and procedures are 
thoughtfully tailored to the specific governance and organizational 
structure of each individual clearing agency. The commenter suggests 
that the construction of the proposed requirement for this policies and 
procedures rule is ``generous'' to the registered clearing agencies and 
the boards. Policies and procedures are subject to the SRO rule filing 
process for registered clearing agencies. Except for certain rule 
changes that do not need approval, set forth in Exchange Act section 
19(b)(3)(A) \217\ and 17 CFR 240.19b-4(f), an SRO must submit proposed 
rule changes to the Commission for review (after a public comment 
period) pursuant to Rule 19b-4 under the Exchange Act.\218\ This 
established process, as required by statute and implemented through a 
regulatory framework, is not designed to be ``generous'' to the 
registered clearing agency and its board. An impact of having the rule 
as a policies and procedures requirement is to subject such policies 
and procedures to the rigorous SRO rule filing process.
---------------------------------------------------------------------------

    \216\ See, e.g., 17 CFR 240.17Ad-22(d), (e); 17 CFR 240.17Ad-27; 
see also Exchange Act Release No. 96930 (Feb. 15, 2023), 88 FR 
13872, 13905 (Mar. 6, 2023) (explaining that a ``reasonably 
designed'' requirement enables the clearing agency to tailor 
policies and procedures to accommodate its individualized internal 
operations, systems, business models and users as it determines how 
best to achieve compliance with the rule).
    \217\ 15 U.S.C. 78s(b)(3)(A).
    \218\ See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Additionally, the ``reasonableness'' standard embedded in the 
policies and procedures requirement that is meant to be applied to the 
independent judgment of the director imposes an objective standard on 
what would otherwise be the subjective judgment of the director. Such a 
reasonableness standard helps ensure that analysis under the rule 
occurs from an objective, rather than subjective perspective. The 
reasonableness standard better ensures that the director and the 
registered clearing agency could not simply assume that the director's 
judgment would not be impaired by a relationship when it would be 
favorable for the director to avoid a conflict in a particular 
circumstance. Based on the requirements of the rule, registered 
clearing agencies generally should evaluate whether certain 
relationships might affect the judgment of a director.

E. Management of Risks From Relationships With Service Providers for 
Core 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. Proposed 
Rule 17Ad-25(i)(1) would require each registered clearing agency to 
establish, implement, maintain, and enforce

[[Page 84476]]

written policies and procedures reasonably designed to enable the board 
to confirm and document that risks related to relationships with 
service providers for critical services 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.
    In the Governance Proposing Release, the Commission explained that 
it proposed a companion governance requirement to existing rules to 
make explicit the registered clearing agency's board obligation to 
oversee the range of its service providers for critical services, 
particularly as registered clearing agencies explore and use new 
technologies to facilitate prompt and accurate clearance and settlement 
in new and innovative ways and may increasingly determine that service 
providers will offer the most effective technology to perform key 
functions.\219\ The Commission provided many examples of service 
provider relationships meant to be scoped into the proposal to capture 
the range of relationships and wide variety of functions that service 
providers perform on behalf of the registered clearing agency.\220\ For 
example, a clearing agency may contract with its parent company to 
staff the registered clearing agency; \221\ a clearing agency may 
contract with one or more investment advisers to help facilitate the 
closing out of a defaulting participant's portfolio; \222\ a clearing 
agency may use one or more data service providers to help calculate 
pricing information for securities; \223\ a clearing agency may also 
purchase technology services from service providers that may help to 
facilitate clearance and settlement in a number of ways.\224\ As the 
Commission stated in the Governance Proposing Release, 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.\225\ Additionally, 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.\226\ In this regard, the Commission emphasized that 
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.\227\ It was against this backdrop and 
as part of the evolution of the registered clearing agency regulatory 
framework that the Commission proposed these requirements.\228\
---------------------------------------------------------------------------

    \219\ See Governance Proposing Release, supra note 2, at 51836-
37.
    \220\ See id. at 51836.
    \221\ See, e.g., DTCC, Businesses and Subsidiaries, https://www.dtcc.com/about/businesses-and-subsidiaries; see also Governance 
Proposing Release, supra note 2, at 51836 n.137 (providing the same 
example and also explaining that three registered clearing agencies, 
DTC, FICC, and NSCC, are subsidiaries of DTCC).
    \222\ 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.''); see also Governance Proposing Release, 
supra note 2, at 51836 n.138 (providing the same example).
    \223\ 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.''); see also Governance Proposing Release, supra note 
2, at 51836 n.139 (providing the same example).
    \224\ See Governance Proposing Release, supra note 2, at 51836.
    \225\ See id.
    \226\ See id. at 51837.
    \227\ See id. at 51836.
    \228\ See id.
---------------------------------------------------------------------------

    Commenters generally supported the proposed rule and the 
Commission's policy objectives.\229\ However, some commenters objected 
to the definition of ``service provider for critical services'' as 
unclear and overbroad and to proposed Rule 17Ad-25(i) as confusing the 
roles of senior management and the board.\230\ Some commenters also 
believed that the Commission underestimated the burdens and costs of 
proposed Rule 17Ad-25(i).\231\
---------------------------------------------------------------------------

    \229\ See Barclays et al. at 3; ISDA at 6; DTCC at 7.
    \230\ See OCC at 10 (stating that the Commission approach is 
``overbroad, unnecessarily prescriptive, and duplicative of long-
standing director obligations extant in general corporate law and 
reinforced by current Commission regulation and OCC rules.''); DTCC 
at 3 (stating that ``[w]hile we support the Commission's overall 
policy objectives . . . the proposed requirements and definition are 
overly broad, could conflict with existing requirements and 
standards other regulators have applied in respect of CSPs, confuse 
the distinction between the roles of the board and management, and 
will deter otherwise qualified individuals from serving as 
registered clearing agency board directors'').
    \231\ See OCC at 10 (stating that ``though more time and clarity 
regarding the scope and application of the Proposed Rule 17Ad-25(i) 
are required to conduct a deeper analysis into the potential 
cumulative costs of compliance with it, we preliminarily believe 
such costs could be considerable''); DTCC at 3 (stating that ``[w]e 
also believe the Proposal significantly underestimates the burdens 
and costs of these requirements''); CCP12 at 7.
---------------------------------------------------------------------------

    The proposed definition and requirements on service provider 
oversight were: (i) meant to capture outsourced services \232\ directly 
applicable to core clearance and settlement functionality; (ii) not 
meant to impose duplicative responsibility to manage service provider 
relationships on the board when these are already within the remit of 
senior management to manage service provider relationships,\233\ and, 
so, in this regard, (iii) the proposed requirements would

[[Page 84477]]

not double or multiply the costs and burdens required of the registered 
clearing agencies. Nonetheless, as discussed below, to ensure the 
Commission has fully addressed the concerns raised by commenters, and 
to specify the intended scope of proposed Rule 17Ad-25(i) and the roles 
of the board and senior management in the oversight of service 
providers, the Commission is modifying at adoption (1) the definition 
of ``service provider for critical services'' \234\ and (2) Rule 17Ad-
25(i).
---------------------------------------------------------------------------

    \232\ See Governance Proposing Release, supra note 2, at 51836, 
51846 n.195.
    \233\ See id. at 51837 (explaining that ``the board should be 
aware of the risks flowing into the registered clearing agency . . . 
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.'').
    \234\ As discussed further below, Rule 17Ad-25(a) now uses the 
term ``service providers for core services,'' not ``critical 
services.''
---------------------------------------------------------------------------

    Specifically, the Commission is modifying the definition to refer 
to: (a) ``a written services provider agreement for services provided 
to or on behalf of the registered clearing agency, on an ongoing 
basis'' to replace the proposed definition's reference to 
``contractually obligated to the registered clearing agency''; and (b) 
``directly supports the delivery of clearance or settlement 
functionality'' to replace the proposed definition's reference to 
``supporting clearance and settlement functionality.'' The Commission 
also provides guidance below that the scope of the definition of 
``service providers for core services'' generally should include cloud 
services, pricing services, model services, matching services, any 
services related to straight-through processing, and collateral 
management services.
    Additionally, the Commission is modifying Rule 17Ad-25(i) to more 
clearly delineate the roles of senior management and the board, in 
response to commenters. First, under Rule 17Ad-25(i)(1), the Commission 
is preserving the proposed Rule 17Ad-25(i)(1) policies and procedures 
requirement to document service provider risks but is modifying the 
final rule to make clear that senior management must evaluate and 
document risks related to the service provider agreement, including 
under changes to circumstances and potential disruptions, and whether 
the risks can be managed consistent with the clearing agency's risk 
management framework. Second, under Rule 17Ad-25(i)(2), the Commission 
is requiring a companion policies and procedures requirement found in 
Rule 17Ad-25(i)(1) by requiring in Rule 17Ad-25(i)(2) that senior 
management submit to the board for review and approval the service 
provider agreement and senior management's evaluation that is required 
in Rule 17Ad-25(i)(1). Third, the Commission is moving the policies and 
procedures requirement originally in proposed Rule 17Ad-25(i)(2) to 
Rule 17Ad-25(i)(3), now modified to make clear that senior management 
has the responsibility to establish policies and procedures that govern 
relationships and manage risks related to service provider agreements, 
while also making clear that the board is responsible for reviewing and 
approving such policies and procedures.
    Fourth, under Rule 17Ad-25(i)(4), the Commission is preserving the 
proposed policies and procedures requirement originally contained in 
proposed Rule 17Ad-25(i)(4) to have ongoing monitoring to remedy 
significant deterioration in performance or address changing risks or 
material issues identified through ongoing monitoring. But the 
Commission is now modifying Rule 17Ad-25(i)(4) to clearly delineate the 
roles of senior management and the board. Specifically, Rule 17Ad-
25(i)(4) is modified to require through policies and procedures that 
senior management performs the ongoing monitoring and report to the 
board any action senior management takes to remedy significant 
deterioration in performance or address changing risks or material 
issues identified. Rule 17Ad-25(i)(4) is also modified to have policies 
and procedures to require senior management to assess and document 
weaknesses or deficiencies in the relationship with the service 
provider in circumstances where the risks or issues cannot be remedied, 
which senior management must submit to the board. Rule 17Ad-25(i)(4) is 
also being modified to clearly delineate that the board is to evaluate 
any senior management action taken to remedy significant deterioration 
in performance or address changing risks or materials identified.
    The modifications are meant to address commenters' concerns 
regarding the potential that the board is being required to undertake 
responsibilities reserved for senior management, as well as other 
elements of the proposed rule. In this regard, the modifications 
differentiate more clearly the roles of senior management and the board 
in the context of Rule 17Ad-25(i) while preserving the intended impact 
of the proposed rule. While the words and phrases in the proposed rule 
have changed and moved, the thematic elements in the requirements for 
the board and senior management remain unchanged.
2. Definition of Service Provider for Core Services
    Although a commenter stated that the definition of ``service 
provider for critical services'' is sufficiently clear and scoped,\235\ 
other commenters stated that it is unclear and overbroad.\236\ One 
suggested amending the definition to: (1) cover any mutual 
understanding or agreement between a registered clearing agency and 
third-party entity by which the third-party entity is required or 
commits to provide ongoing goods or services to the registered clearing 
agency pursuant to a written contract; \237\ (2) establish a clear 
definition of what makes a service provider ``critical,'' including 
providing a non-exhaustive list of relationships and service providers 
that registered clearing agencies should consider, as well as guidance 
on how to interpret materiality in this context; \238\ and (3) to 
include only a service provider that ``directly supports the delivery 
of clearing and settlement functionality or any other purpose material 
to the business of the registered clearing agency.'' \239\ Another 
commenter objected to the definition, stating that its scope is broader 
than the definition of ``SCI System'' under Regulation SCI \240\ and 
also stated that the text ``supporting clearance and settlement 
functionality'' without modification could ``potentially capture 
virtually all non-trivial service providers to registered clearing 
agencies, particularly if clearance and settlement services is the only 
or primary service offering of the registered clearing agency.'' \241\ 
Another commenter stated that this proposed requirement would 
potentially capture a large number of non-trivial service providers to 
registered clearing

[[Page 84478]]

agencies, particularly in cases where clearance and settlement services 
are the only or the primary service offering of the registered clearing 
agency, and therefore, suggested that the definition be changed to 
``any person that is contractually obligated to the registered clearing 
agency for the purpose of providing critical services that directly 
support clearance and settlement functionality.'' \242\
---------------------------------------------------------------------------

    \235\ See ISDA at 7.
    \236\ See, e.g., DTCC at 21; OCC at 10; ICE at 6; CCP12 at 6-7.
    \237\ See DTCC at 7 (``[T]he written contract would make clear 
that local police, fire, and other municipal services are explicitly 
out of scope. The proposed definition of service provider should 
also include an `ongoing basis' element. Without this element, a 
one-off or single service may be included within the scope of the 
Proposal and trigger application of the full risk management 
lifecycle in the same way that a recurring arrangement does.'').
    \238\ See id. at 8 (stating that ``[w]ith respect to the 
question of clarifying which service providers are in fact 
`critical' for the purposes of ensuring effective board oversight, 
we respectfully ask that the Commission first consider more fully 
how its approach to CSPs in the Proposal interacts, and potentially 
creates redundancy or misalignment, with existing similar concepts 
that apply to registered clearing agencies, whether under existing 
Commission requirements (such as Regulation Systems Compliance and 
Integrity or `Regulation SCI') or under applicable international 
standards.'').
    \239\ Id. at 8.
    \240\ See OCC at 12-13 (stating that ``the proposed definition 
is significantly broader than the definition used to define SCI 
Systems.' . . . If the Commission adopts a rule regarding the 
oversight of relationships with service providers for critical 
services, OCC requests the Commission revise the definition of 
`service providers for critical services' to align it with the 
definition of SCI Systems.'').
    \241\ Id. at 27.
    \242\ See CCP12 at 7.
---------------------------------------------------------------------------

    To address the concerns raised above, the Commission is modifying 
the definition in Rule 17Ad-25(a) at adoption to contain three key 
elements to specify its scope: (i) ``a written services provider 
agreement for services provided to or on behalf of the registered 
clearing agency'' to replace the proposed definition's reference to 
``contractually obligated to the registered clearing agency''; (ii) 
``on an ongoing basis'' nature of the services provided; and (iii) 
``directly supports the delivery of clearance or settlement 
functionality'' to replace the proposed definition's reference to 
``supporting clearance and settlement functionality.'' The changes to 
the definition better ensure that the final definition of ``service 
providers for core services'' is clear and properly scoped. The 
Commission discusses each of these modifications in turn below.
    First, the Commission is modifying the defined term at adoption to 
refer to ``core services,'' rather than ``critical services'' as 
proposed.\243\ To provide further clarity and to address comments 
requesting a non-exhaustive list of service provider relationships 
under Rule 17Ad-25(i),\244\ the Commission provides guidance that 
``core services'' generally should include cloud services, pricing 
services, model services, matching services, any services related to 
straight-through processing, and collateral management services. This 
list is not meant to be an exhaustive list of ``core services'' but is 
being provided to give examples of the services that generally should 
be in scope of the definition while allowing clearing agencies some 
discretion to apply the definition to their specific markets and 
participants served and products cleared. The services in this list 
reflect services that registered clearing agencies are seeking from 
service providers, based on the Commission's supervisory experience. 
For example, a registered clearing agency may consider the use of cloud 
services to modernize and further develop the systems that underpin its 
core clearance and settlement functionality, facilitating, among other 
things, the calculation of its margin requirements, the modeling of 
financial risk, and communication with clearing agency participants. 
Similarly, pricing and model services directly support core clearance 
and settlement functionality when they are used by a registered 
clearing agency to calculate end-of-day settlement obligations and 
margin requirements for clearing agency participants. In addition, 
clearing agency technologies that facilitate matching services, 
straight-through processing, and collateral management are themselves 
the functions of a clearing agency and facilitate core clearance and 
settlement of securities transactions, and so such technologies 
generally should be within the scope of the modified ``core services'' 
definition.
---------------------------------------------------------------------------

    \243\ See Governance Proposing Release, supra note 2, at 51836.
    \244\ See DTCC at 8.
---------------------------------------------------------------------------

    Second, the Commission is modifying the definition of ``service 
provider for core services'' in adopting Rule 17Ad-25(a) to mean ``any 
person that, through a written services provider agreement for services 
provided to or on behalf of the registered clearing agency, on an 
ongoing basis, directly supports the delivery of clearance or 
settlement functionality or any other purposes material to the business 
of the registered clearing agency.'' Rule 17Ad-25(a) now uses the term 
``service providers for core services,'' not ``critical services,'' as 
the Commission observes that some commenters requested that the 
Commission scope the definition of service providers to overlap with 
the definition of ``SCI system'' in Regulation SCI.\245\ The Commission 
recognizes that the use of the word ``critical'' could evoke Regulation 
SCI considerations for some commenters. However, as explained in the 
Governance Proposing Release, the definition in proposed Rule 17Ad-
25(a) is not the same as used in Regulation SCI--in scope or subject 
matter.\246\ The Commission is not conforming the scope of the defined 
term to Regulation SCI because the definition of ``service provider for 
critical services'' in proposed Rule 17Ad-25(a) is, as suggested by a 
commenter, purposefully wider in scope than the definition of ``SCI 
system'' in Regulation SCI because the definition of ``service provider 
for critical services'' addresses relationships beyond those concerning 
only technology or systems, as explained in the Governance Proposing 
Release.\247\
---------------------------------------------------------------------------

    \245\ See OCC at 12, 27; DTCC at 8.
    \246\ See Governance Proposing Release, supra note 2, at 51836 
(providing examples of a wide variety of functions that service 
providers perform on behalf of the registered clearing agency, 
including its parent company providing staff, investment advisers 
facilitating the closing out of a defaulting participant's 
portfolio, data service providers helping calculate pricing 
information for securities, technology service providers 
facilitating clearance and settlement).
    \247\ See id.
---------------------------------------------------------------------------

    The definition is modified to include the components of ``a written 
services agreement for services provided to or on behalf of the 
registered clearing agency, on an ongoing basis'' because in the 
Commission's view, core services supporting clearance or settlement 
functionality should be clearly memorialized in a written agreement 
that specifies the key elements of any core services being provided. 
Specifically, cloud services, pricing services, model services, 
matching services, any services related to straight-through processing, 
and collateral management services are examples of ongoing services 
often provided to a registered clearing agency that would be subject to 
a written services agreement and therefore within scope of the final 
rule. Such written services agreements may not necessarily be entered 
into by the registered clearing agency with a service provider for core 
services; rather, and consistent with the final rule, such written 
services agreement could be entered into by the parent or an affiliate 
of the registered clearing agency for services provided to or on behalf 
of the registered clearing agency. In modifying this element of the 
definition, the Commission recognizes that the written agreement 
provides the foundation upon which a registered clearing agency can 
assess, manage, and monitor the performance of a service provider, as 
well as assess, manage, and monitor the risks of the core service--and 
outsourced clearance or settlement functionality. In this regard, the 
Commission agrees with the commenter that the written agreement 
provides the registered clearing agency with the legal authority to 
direct the service provider to comply with the obligations in the 
agreement,\248\ which is important as the registered clearing agency 
still bears the responsibility for compliance with any statutory or 
regulatory obligation when it chooses to rely on such a service 
provider.\249\
---------------------------------------------------------------------------

    \248\ See DTCC at 7.
    \249\ Cf. Governance Proposing Release, supra note 2, at 51836 
(stating that ``[u]ltimately, 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.'').
---------------------------------------------------------------------------

    Additionally, the modifications to the definition are intended to 
make clearer that municipal service providers (which are not generally 
subject to written

[[Page 84479]]

service agreements for ongoing services to the registered clearing 
agency) are not captured in the definition, as commenters have 
suggested.\250\ The Commission previously addressed this scoping 
concern in the Governance Proposing Release,\251\ and such services 
neither support the core clearance or 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 
or settlement functionality or material clearing agency business 
functions itself.
---------------------------------------------------------------------------

    \250\ See DTCC at 7 (suggesting a modification to the definition 
to include a ``written contract [which] would make clear that local 
police, fire, and other municipal services are explicitly out of 
scope. The proposed definition of service provider should also 
include an `ongoing basis' element. Without this element, a one-off 
or single service may be included within the scope of the Proposal 
and trigger application of the full risk management lifecycle in the 
same way that a recurring arrangement does.'').
    \251\ See Governance Proposing Release, supra note 2, at 51835, 
n.133 (explaining that 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).
---------------------------------------------------------------------------

    In addition, the Commission is modifying the definition to capture 
service providers that provide services on an ongoing basis that 
directly support the delivery of clearance or settlement functionality 
or any other purposes material to the business of the registered 
clearing agency. The modifications change the scope of the proposed 
definition to capture ongoing services and not limit capture of 
services to a single instance. The defined term also captures those 
services that directly support the core functionality of a clearing 
agency. In this regard, service providers retained for administrative 
tasks or a limited, one-time provision of services would not be covered 
by this definition. These changes respond to commenters' concerns and 
also reflect current practices in which registered clearing agencies 
have cloud services, pricing services, model services, matching 
services, services related to straight-through processing, and 
collateral management services provided by service providers to 
directly support the registered clearing agency's clearance or 
settlement functionality on an ongoing basis. Finally, the Commission 
is modifying the definition to refer to ``clearance or settlement'' 
functionality (emphasis added), rather than ``clearance and settlement 
functionality'' as proposed, to ensure that the definition is 
consistent with the generalized way in which the Commission often 
refers to ``clearance and settlement.'' That is, the definition was 
intended to address both functions in an ``either/or'' sense, as not 
all registered clearing agencies provide both functions and the 
Commission often speaks to the collective set of functions without 
specifying whether one is ``clearance'' or ``settlement.''
3. Roles of Senior Management and the Board
    While at least two commenters acknowledged the corporate governance 
principle that the board conducts oversight of management,\252\ several 
commenters objected to the approach in proposed Rule 17Ad-25(i), 
stating that the rule confused the distinction between the roles of the 
board and management, thereby contravening this corporate governance 
principle and potentially deterring otherwise qualified individuals 
from serving as directors.\253\ Specifically, some commenters 
understood the proposed rule to shift the responsibility for oversight 
of service providers from management to the board.\254\ One commenter 
urged a more principles-based approach and also sought clarity as to 
the scope of proposed Rule 17Ad-25(i)(4), which in the commenter's view 
did not appear to be limited to ``service providers for critical 
services'' and so could apply to ``significant deterioration in 
performance,'' ``changing risks,'' or ``material issues'' regarding the 
business of the registered clearing agency. This commenter recommended 
adding a materiality threshold to proposed Rule 17Ad-25(i)(4) to focus 
the board on ensuring that management has appropriate processes in 
place to identify and elevate material changing risks.\255\ One 
commenter recommended flexibility in allowing the board to determine 
``the process and materiality'' of service providers of critical 
services.\256\ Another commenter urged the Commission to take an 
alternative approach to differentiate the board and management roles in 
oversight of service provider relationships.\257\
---------------------------------------------------------------------------

    \252\ See, e.g., CCP12 at 7; LSEG at 14 (``We agree that it is a 
specific responsibility of the board to have oversight.'').
    \253\ See, e.g., CCP12 at 7 (stating that the ``enhanced board 
oversight would duplicate the work that is currently performed by 
staff and management at considerable additional cost, compromising 
the careful check and balance relationship of the board and 
management.''); OCC at 10-11 (stating that the proposed rule's 
oversight dynamic ``would impose responsibilities on the Board akin 
to those that are squarely within the purview of management by 
effectively requiring the Board to manage the relationship with 
service providers for critical services''); ICE at 6 (stating that 
the proposal ``would require the board to go beyond its oversight 
responsibilities and tasks the board with a role in managing such 
relationships.'').
    \254\ See, e.g., DTCC at 8-10, 14 (stating that ``[w]e believe 
that such a shift in responsibility is inappropriate insofar as what 
the Proposal effectively requires is not board oversight of CSP 
relationships but instead direct board management of such 
relationships.''); OCC at 10-11; CCP12 at 7.
    \255\ See OCC at 13.
    \256\ See LSEG at 14 (``[T]here should be flexibility to allow 
the board to determine the process and materiality of service 
providers of critical services. For example, allowing the board to 
specifically delegate to a qualified sub-committee of the board, 
with appropriate escalation and reporting to the board.'').
    \257\ See DTCC at 8-10, 14 (stating that ``[a]s an alternative 
approach, we recommend that the Commission not impose the 
obligations set forth in sub-parts (1) and (3) of proposed Rule 17 
Ad-25(i) directly on the board. . . . [and] follow the approach it 
and other global regulators have applied in similar contexts and 
with the positive outcome of helping ensure resiliency and 
management of CSP risk,'' citing to Rule 1003(b)(l) of Regulation 
SCI and Annex F of the PFMI as precedent).
---------------------------------------------------------------------------

    Additionally, some commenters expressed concern regarding the 
proposed requirement for the board to ``confirm'' risks posed by a 
service provider. According to one commenter, because proposed Rule 
17Ad-25(i)(4) includes a requirement for the board to ``confirm that 
senior management takes appropriate actions to remedy significant 
deterioration in performance or address changing risks or material 
issues,'' which is ``not consistent with a board's oversight role[, ] 
[i]t is unclear how, in practice, a board could satisfy this 
`confirmation' function without engaging in a management function, 
which would conflict with and distract from the board's oversight 
functions.'' \258\ With regard to statements in the Governance 
Proposing Release that registered clearing agencies could confirm and 
document the risks posed by a service provider for critical services by 
completing a self-assessment based on the format and substance of Annex 
F to the PFMI,\259\ two commenters expressed concern. One stated that 
``the board itself should not conduct such an assessment, as such tasks 
should be performed by an internal corporate function such as third-
party risk management, internal audit, or a similar function and then 
reported to the board (or board-level committee).'' \260\ Another 
commenter stated that although it ``does not believe that the 
Commission should require that the board confirm and document through a 
self-assessment that risks related to relationships with service 
providers for critical services are managed in a manner consistent with 
its risk management framework. . . . [it] does believe that the 
Commission

[[Page 84480]]

should state explicitly that a properly executed self-assessment 
similar to the Annex F described in the Proposed Rule is evidence of 
compliance with Proposed Rule 17Ad-25(i).'' \261\
---------------------------------------------------------------------------

    \258\ ICE at 6.
    \259\ See Governance Proposing Release, supra note 2, at 51837.
    \260\ CCP12 at 8.
    \261\ OCC at 27.
---------------------------------------------------------------------------

    It was not the Commission's intent to merge, adjust, or duplicate 
management functions with those of the board in contravention of 
traditional corporate governance principles with the board directly 
managing the service provider relationships, as commenters have 
suggested.\262\ In the Governance Proposing Release, the Commission 
acknowledged the differentiated roles and traditional functions \263\ 
of senior management and the board.\264\ To improve clarity in response 
to commenters concerns,\265\ the Commission is modifying the rule at 
adoption to specify and differentiate the roles and responsibilities of 
the board and senior management of the registered clearing agency in 
the oversight of service providers. These changes in the final rule 
better ensure that risks posed by service providers for core services 
are properly monitored and managed and better delineate the board 
oversight function in line with corporate governance principles. 
Because the modifications are meant to more clearly differentiate the 
roles of senior management and the board in the context of Rule 17Ad-
25(i) while preserving the intended impact of the proposed rule, the 
words and phrases in the proposed rule have changed and moved in Rule 
17Ad-25(i), but the requirements for the board and senior management 
remain unchanged. Each requirement of Rule 17Ad-25(i) is further 
explained below.
---------------------------------------------------------------------------

    \262\ For this reason, the Commission also believes that the 
proposed costs and burdens for Rule 17Ad-25(i) were generally 
accurate, as further discussed in Part V.F.
    \263\ See, e.g., Governance Proposing Release, supra note 2, at 
51837 (stating that ``[i]n 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.'').
    \264\ See, e.g., Governance Proposing Release, supra note 2, at 
51836 (recognizing that ``the board . . . oversee[s] 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.'').
    \265\ See DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC at 10-
11; ICE at 6.
---------------------------------------------------------------------------

    First, under Rule 17Ad-25(i)(1) as adopted, a registered clearing 
agency must establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to require senior 
management to evaluate and document the risks related to an agreement 
with a service provider for core services, including under changes to 
circumstances and potential disruptions, and whether the risks can be 
managed in a manner consistent with the clearing agency's risk 
management framework.\266\ In the Governance Proposing Release, the 
Commission discussed the role of senior management to monitor 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.\267\ The Commission agrees with the commenter's 
concern with regard to the term ``confirm.'' \268\ Under Rule 17Ad-
25(i)(1), while preserving proposed Rule 17Ad-25(i)(1)'s policies and 
procedures requirement to document service provider risks, the 
Commission is modifying the final rule to specify that senior 
management must evaluate--rather than requiring that the board must 
``confirm''--and document risks related to the service provider 
agreement, including under changes to circumstances and potential 
disruptions, and whether the risks can be managed in a manner 
consistent with the clearing agency's risk management framework. If 
changes to circumstances (e.g., a need to expand or scale up the scope 
or breadth of services of the service provider beyond what was 
initially agreed to or envisioned) and potential disruptions (e.g., 
disruptions caused by natural disasters or systems outages) occur, 
senior management must evaluate and document risks related to such 
changes and disruptions. The added language of ``changes to 
circumstances and potential disruptions'' is meant to reflect the 
parallel elements in Rule 17Ad-25(i)(4) regarding ``changing risks or 
material issues identified.'' These modifications to Rule 17Ad-25(i)(1) 
require the policies and procedures to clearly delineate the role 
senior management must undertake to evaluate risks posed by service 
providers for core services to the registered clearing agency, as 
requested by commenters. For the same reason to address commenters' 
concerns \269\ regarding a board self-assessment under Annex F of the 
PFMI, the Commission is not requiring the board to conduct a self-
assessment of such risks.
---------------------------------------------------------------------------

    \266\ In the Governance Proposing Release, the Commission had 
suggested that 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, which 
highlights oversight expectations applicable to critical service 
providers. Given that commenters expressed concerns about 
duplicating management functions at the board level, the Commission 
is not adopting this guidance. See DTCC at 3; CCP12 at 7.
    \267\ See Governance Proposing Release, supra note 2, at 51837.
    \268\ See ICE at 6.
    \269\ CCP12 at 8; OCC at 27; DTCC at 8-10, 14 (stating that 
``[a]s an alternative approach, we recommend that the Commission not 
impose the obligations set forth in sub-parts (1) and (3) of 
proposed Rule 17 Ad-25(i) directly on the board'').
---------------------------------------------------------------------------

    Second, under Rule 17Ad-25(i)(2) as adopted, a registered clearing 
agency must establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to require senior 
management to submit to the board for review and approval any agreement 
that would establish a relationship with a service provider for core 
services, along with the risk evaluation required in Rule 17Ad-
25(i)(1). As a companion policies and procedures requirement to Rule 
17Ad-25(i)(1), Rule 17Ad-25(i)(2) captures the intent of proposed Rule 
17Ad-25(i)(3)'s requirement for policies and procedures to require the 
board to ``review and approve plans for entering into third-party 
relationships where the engagement entails being a service provider for 
critical services.''
    Rule 17Ad-25(i)(1) requires policies and procedures to have senior 
management evaluate service provider relationship risks posed to the 
registered clearing agency, while Rule 17Ad-25(i)(2) requires policies 
and procedures to have senior management submit to the board its risk 
evaluation and any agreements for board review and approval. In 
response to commenters' concerns,\270\ the modifications are designed 
to clearly differentiate the responsibilities the board and senior 
management have in this regard in line with corporate governance 
principles, which was the Commission's intent at proposal. In the 
Governance Proposing Release, the Commission explained that Proposed 
Rule 17Ad-25(i)(1) would also require review of senior management's 
oversight of a service provider relationship.\271\ The Commission 
stated its belief 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

[[Page 84481]]

the relationship. In the Governance Proposing Release, the Commission 
explained that, under Proposed Rule 17Ad-25(i)(3), the board would 
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.\272\ The Commission stated 
its belief such board participation is necessary to ensure the 
maintenance of sound risk management principles as the clearing agency 
enters into contractual relationships with third parties.\273\ Board 
involvement helps ensure that management has sufficiently established 
terms of performance by the service provider that can support the needs 
of the registered clearing agency and that management also has 
evaluated, assessed, and accounted for any increased level of risk to 
the registered clearing agency.\274\ As stated in the Governance 
Proposing Release, the board generally should monitor such matters as 
part of its oversight responsibilities.\275\ In this regard, Rule 17Ad-
25(i)(2), modified as adopted, is substantively consistent with the 
discussion of this element of the proposed rule in the Governance 
Proposing Release.
---------------------------------------------------------------------------

    \270\ See, e.g., DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC 
at 10-11; ICE at 6.
    \271\ See Governance Proposing Release, supra note 2, at 51837.
    \272\ See id.
    \273\ See id.
    \274\ See id.
    \275\ See id.
---------------------------------------------------------------------------

    Third, under Rule 17Ad-25(i)(3) as adopted, a registered clearing 
agency must establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to require senior 
management to be responsible for establishing the policies and 
procedures that govern relationships and manage risks related to such 
agreements with service providers for core services and require the 
board to be responsible for reviewing and approving such policies and 
procedures. In modifying Rule 17Ad-25(i)(3), the Commission is moving 
the policies and procedures responsibility originally in proposed Rule 
17Ad-25(i)(2) to Rule 17Ad-25(i)(3). These modifications are being made 
to address commenters' concerns about the rule not being clear about 
differentiated senior management and board responsibilities under 
corporate governance principles.\276\ As a general matter, proposed 
changes to a registered clearing agency's policies and procedures must 
be approved by board action or under authority delegated by the 
board.\277\ As adopted, Rule 17Ad-25(i)(3) is written to explicitly 
require that senior management--as the group responsible for evaluating 
the risks of service provider relationships pursuant to Rule 17Ad-
25(i)(1)--establish policies and procedures to manage the risks posed 
by and relationships with the service providers for core services, and 
that such policies and procedures are reviewed and approved by the 
board. In this regard, Rule 17Ad-25(i)(3), as adopted, is substantively 
consistent with established practices of registered clearing agencies 
with regard to board review and approval of registered clearing agency 
policies and procedures.
---------------------------------------------------------------------------

    \276\ See, e.g., DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC 
at 10-11; ICE at 6.
    \277\ See CCA Standards Adopting Release, supra note 4, at 
70805.
---------------------------------------------------------------------------

    Fourth, under Rule 17Ad-25(i)(4) as adopted, a registered clearing 
agency must establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to require senior 
management to perform ongoing monitoring of the relationship, and 
report to the board for its evaluation of any action taken by senior 
management to remedy significant deterioration in performance or 
address changing risks or material issues identified through such 
monitoring; or if the risks or issues cannot be remedied, require 
senior management to assess and document weaknesses or deficiencies in 
the relationship with the service provider for submission to the board. 
Under Rule 17Ad-25(i)(4) at adoption, the Commission is preserving 
proposed Rule 17Ad-25(i)(4)'s policies and procedures requirement to 
have ongoing monitoring to remedy significant deterioration in 
performance or address changing risks or material issues identified 
through ongoing monitoring. But the Commission is now modifying Rule 
17Ad-25(i)(4) to clearly delineate the roles of senior management and 
the board in this context, as a response to commenters' corporate 
governance concerns.\278\ Specifically, Rule 17Ad-25(i)(4) is modified 
to require policies and procedures that senior management perform the 
ongoing monitoring and report to the board any action senior management 
takes to remedy significant deterioration in performance or address 
changing risks or material issues identified. Rule 17Ad-25(i)(4) is 
also modified to require policies and procedures that has senior 
management assess and document weaknesses or deficiencies in the 
relationship with the service provider in circumstances where the risks 
or issues cannot be remedied, which senior management must submit to 
the board. Elements of ``remedy significant deterioration in 
performance or address changing risks or material issues'' were 
contained in Proposed Rule 17Ad-25(i)(4). The modifications in the 
adopted rule are meant to frame the responsibilities more clearly to 
senior management, as requested by commenters. Rule 17Ad-25(i)(4) is 
also being modified to clearly delineate that the board is to evaluate 
any senior management action taken to remedy significant deterioration 
in performance or address changing risks or materials identified.
---------------------------------------------------------------------------

    \278\ See, e.g., DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC 
at 10-11; ICE at 6.
---------------------------------------------------------------------------

    In its traditional function as a check on management based on 
corporate governance principles, the board can better ensure that 
products or other deliverables are provided timely and consistent with 
the terms of a service provider agreement, if the board evaluates 
senior management action to address service provider performance 
issues.\279\ In the Governance Proposing Release, the Commission 
explained that under Proposed Rule 17Ad-25(i)(4), the board would have 
responsibility for overseeing the extent to which senior management 
remedies performance issues under a service provider contract.\280\ The 
changes to Rule 17Ad-25(i)(4) make clear that while senior management 
is responsible for ongoing monitoring of the service provider 
relationship and its attendant risks, it is the board that is 
responsible for overseeing senior management's response to those risks. 
This layered oversight responsibility in the context of service 
providers is important because 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.\281\ 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.\282\ Accordingly, the Commission continues to believe that 
policies and procedures should specifically provide for reporting to 
the board by senior management regarding the service provider 
relationship and associated risks, as well as the board oversight and 
evaluation of senior management's ongoing monitoring of

[[Page 84482]]

and response to the service provider relationship and risks.\283\
---------------------------------------------------------------------------

    \279\ See CCA Standards Adopting Release, supra note 4, at 
70805.
    \280\ See Governance Proposing Release, supra note 2, at 51837.
    \281\ See id.
    \282\ See id.
    \283\ See id.
---------------------------------------------------------------------------

    The Commission is not modifying Rule 17Ad-25(i)(4) to be more 
flexible and principles-based, as two commenters requested.\284\ Rule 
17Ad-25(i)(4) provides the general parameters for registered clearing 
agencies to establish policies and procedures to meet the requirements 
of the rule without prescribing the manner and content of the ongoing 
monitoring of the service provider relationship and the manner and 
content of the board's evaluation of senior management action taken to 
remedy significant deterioration in performance or address changing 
risks or material issues identified through such monitoring. In 
response to one commenter's request to have the flexibility for the 
board to delegate its responsibilities under Rule 17Ad-25(i) to a 
qualified board sub-committee,\285\ the board may choose to do so under 
Rule 17Ad-25(e), which provides that if any committee has the authority 
to act on behalf of the board, the composition of that committee must 
have at least the same percentage of independent directors as is 
required for the board of directors.
---------------------------------------------------------------------------

    \284\ See OCC at 13; LSEG at 14.
    \285\ See LSEG at 14 (``[T]here should be flexibility to allow 
the board to determine the process and materiality of service 
providers of critical services. For example, allowing the board to 
specifically delegate to a qualified sub-committee of the board, 
with appropriate escalation and reporting to the board.'').
---------------------------------------------------------------------------

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.
    In the Governance Proposing Release, the Commission explained that 
such ``other relevant stakeholders'' generally would include investors, 
customers of clearing agency participants, and securities issuers.\286\ 
The Commission also explained 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 
registered clearing agency's governance and operations by requiring the 
registered clearing agency to document that it had received such 
viewpoints and evaluated their merits.\287\
---------------------------------------------------------------------------

    \286\ See Governance Proposing Release, supra note 2, at 51838 
(``The Commission believes that other relevant stakeholders 
generally would include investors, customers of participants, as 
well as securities issuers.'').
    \287\ See id. (``[T]he 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.'').
---------------------------------------------------------------------------

    Many commenters supported the proposed approach to addressing 
stakeholder viewpoints.\288\ Some commenters sought clarity regarding 
whether existing registered clearing agency rules are sufficient to 
comply with the proposed rule or whether they need to introduce or 
modify any existing processes.\289\ Furthermore, some commenters 
recommended limiting the scope of the rule to material developments 
which affect clearing agencies' risk management or risk profile.\290\ 
Other commenters sought clarity on the frequency of outreach with 
relevant stakeholders, as well as the design and approach to fora 
formation.\291\ Finally, some commenters recommended that the 
Commission harmonize proposed Rule 17Ad-255(j) with CFTC regulations at 
17 CFR 39.24(b)(12) requiring the establishment of an RWG to obtain 
input from stakeholders.\292\ The Commission addresses each of these 
topics in Parts II.F.2 through II.F.7.
---------------------------------------------------------------------------

    \288\ See ISDA at 5; SIFMA at 3; Citadel at 1; Barclays et al. 
at 2.
    \289\ See OCC at 14; DTCC at 12-13; CCP12 at 9.
    \290\ See OCC at 15, CCP12 at 9; DTCC at 13-14.
    \291\ See CCP12 at 8,10; ISDA at 5; SIFMA AMG at 5-7; Barclays 
et al. at 2; ICI at 5; Better Markets at21.
    \292\ See ICI at 4; SIFMA AMG at 5; SIFMA at 3-4.
---------------------------------------------------------------------------

2. Concern Regarding Duplicative Requirements
    Several commenters suggested that existing rules at the registered 
clearing agencies already consider views of clearing agency 
participants and other stakeholders, stating that Rule 17Ad-255(j) may 
be duplicative, redundant, or unnecessary.\293\ As discussed further 
below, the Commission is adopting Rule 17Ad-255(j) to supplement 
existing Commission requirements and to help formalize processes and 
structures at the registered clearing agencies.
---------------------------------------------------------------------------

    \293\ See OCC at 14; DTCC at 12-13; CCP12 at 9; ICE at 6.
---------------------------------------------------------------------------

    First, one registered clearing agency commenter explained that its 
existing governance framework, which includes the composition of its 
board and reliance on an advisory group it titles the ``Financial Risk 
Advisory Council'' (FRAC), affords relevant stakeholders the 
opportunity to provide their viewpoints on relevant risk management 
issues.\294\ Another registered clearing agency commenter similarly 
stated that its existing governance framework captures clearing 
participant and other stakeholder views through its board composition 
as well as through its diverse array of clearing agency participant and 
stakeholder working groups.\295\ Given its current structure, the 
commenter sought clarity on whether a covered clearing agency, subject 
to requirements in 17 CFR 240.17Ad-252(e)(2)(iii) and (vi) (``Rule 
17Ad-252(e)(2)''),\296\ is likely already observing the requirements 
set forth in proposed Rule 17Ad-255(j), or whether there is something 
more a covered clearing agency should do to satisfy the proposed 
requirements. If the latter, the commenter stated its belief that such 
an approach would be redundant, overly prescriptive, and likely reduce 
the ability of each unique covered clearing agency to develop the 
necessary stakeholder inputs.\297\ If the former, the

[[Page 84483]]

commenter recommended that the Commission clarify this point 
further.\298\ The commenter also inquired whether the proposed rule was 
intended for covered clearing agencies to document how they currently 
comply with Rules 17Ad-252(e)(2)(iii) and (vi), recommending that the 
Commission modify the proposed rule to more specifically consider how 
it would apply to covered clearing agencies versus other registered 
clearing agencies.\299\
---------------------------------------------------------------------------

    \294\ See OCC at 14-15 (explaining various initiatives as part 
of a ``multi-pronged'' governance framework that furthers ``the goal 
of considering the viewpoints of relevant stakeholders in corporate 
initiatives,'' including elements of its bylaws and committee 
structure, use of public directors on its board, and the FRAC).
    \295\ See DTCC at 12 (explaining its view that ``DTCC's 
participant-owned governance structure results in a board and board 
committee composition that is strongly aligned and widely diverse in 
representing the various participant types that benefit from the 
services of the registered clearing agencies'' and that the DTCC 
clearing agencies ``maintain a diverse array of participant and 
stakeholder working groups that are designed to solicit input from 
constituencies beyond those immediately represented on the boards of 
the registered clearing agencies'' including its ``Systemic Risk 
Roundtable, Risk Advisory Council, Clearing Agency Liquidity 
Council, Client Risk Forum, and FMI Forum'').
    \296\ See 17 CFR 240.17Ad-252(e)(2)(iii) (requiring a covered 
clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to support the 
public interest requirements in Exchange Act section 17A, and the 
objectives of owners and participants); 17 CFR 240.17Ad-
252(e)(2)(vi) (requiring a covered clearing agency to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to consider the interests of participants' 
customers, securities issuers and holders, and other relevant 
stakeholders of the covered clearing agency).
    \297\ See DTCC at 13 (stating that further prescribing and 
standardizing the current approach in existing Rules 17Ad-
252(e)(2)(iii) and (vi) is redundant, overly prescriptive, and will 
likely reduce the ability of each unique covered clearing agency to 
develop the necessary stakeholder inputs unique to the cleared 
markets that they serve).
    \298\ See id.
    \299\ See id.
---------------------------------------------------------------------------

    With respect to the first two comments stating that the registered 
clearing agencies' existing governance framework already captures 
clearing participant and other stakeholder views, the Governance 
Proposing Release explained that many 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 clearing agency participants, and 
other stakeholders regarding changes to risk management and other 
services offered by the registered clearing agency.\300\ The Commission 
proposed Rule 17Ad-255(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.\301\ Registered clearing agencies that have already 
established such structures generally should evaluate their own 
internal processes, including their approach to observing Rules 17Ad-
252(e)(2)(iii) and (vi) if applicable, and determine to what extent any 
additional steps need to be defined, formalized, or otherwise 
undertaken to ensure compliance with Rule 17Ad-255(j). In contrast to 
existing rules for covered clearing agencies, Rule 17Ad-255(j) 
establishes new requirements for written policies and procedures 
reasonably designed to require the solicitation, consideration, and 
documentation of the consideration of the view of stakeholders 
regarding certain material developments. The specific requirements with 
respect to solicitation and documentation do not exist in Rule 17Ad-
252(e)(2) and therefore the new requirements are not redundant. The 
requirements are also not overly prescriptive or likely to reduce the 
ability of each unique covered clearing agency to develop the necessary 
stakeholder inputs because the registered clearing agencies would have 
the discretion to determine the appropriate approach to solicitation 
and documentation relating to stakeholder views. Because Rule 17Ad-
255(j) is not duplicative of requirements in Rule 17Ad-252(e)(2), the 
Commission is also not modifying Rule 17Ad-255(j) for covered clearing 
agencies in response to these comments.
---------------------------------------------------------------------------

    \300\ See Governance Proposing Release, supra note 2, at 51838.
    \301\ See id.
---------------------------------------------------------------------------

    In asserting that proposed Rule 17Ad-255(j) is duplicative of 
existing requirements, several commenters cited Exchange Act Rule 19b-
4, which generally requires a registered clearing agency, as an SRO, to 
submit proposed changes to its rules, policies, and procedures to the 
Commission for review, a process which includes publication and a 
solicitation of public comments.\302\ In addition, commenters also 
cited requirements under the Dodd-Frank Act for registered clearing 
agencies that are SIFMUs to file an advance notice of certain material 
changes, which are also subject to public comment.\303\ Another 
commenter stated its belief that, with respect to the solicitation of 
risk-based viewpoints, these existing requirements for SROs and SIFMUs 
are sufficient.\304\ Finally, one commenter explained that clearing 
agencies dually registered as DCOs with the CFTC are subject to 
requirements for CFTC approval under CFTC regulations at 17 CFR 40.5 
and 17 CFR 40.6 that provide market participants with opportunities to 
review and comment on modifications to rules, procedures, or 
operations.\305\ The commenters believe that, because the above-
described filing processes for proposed changes already solicit 
feedback from the public regarding material issues that affect a 
registered clearing agency, Rule 17Ad-255(j) would be duplicative of 
these existing requirements.\306\
---------------------------------------------------------------------------

    \302\ See OCC at 15; CCP12 at 9; ICE at 6-7. See generally 15 
U.S.C. 78s; 17 CFR 240.19b-4 (setting forth requirements for the 
filing with the Commission of proposed changes to SRO rules).
    \303\ See ICE at 6-7; OCC at 15. See generally 12 U.S.C. 
5465(e)(1)(A); 17 CFR 240.19b-4(n) (setting forth the requirement 
for a SIFMU to file advance notice of material changes with its 
designated supervisory authority under the Dodd-Frank Act).
    \304\ See CCP12 at 9 (also explaining that clearing agencies 
disclose extensive information in their public quantitative and 
qualitative disclosures under the PFMIs and operate under publicly 
available rulebooks).
    \305\ See ICE at 7.
    \306\ See ICE at 6; CCP12 at 9; OCC at 15.
---------------------------------------------------------------------------

    The Commission is not modifying Rule 17Ad-255(j) in response to the 
commenters because soliciting public comments relating to a registered 
clearing agency's rule filings and advance notices, and the clearing 
agencies' consideration of stakeholder views as proposed in Rule 17Ad-
255(j), are two different processes with wholly separate and distinct 
purposes. The Commission explained in the Governance Proposing Release 
that clear and transparent governance arrangements help optimize the 
registered clearing agency's decisions, rules, and procedures because 
transparency in the registered clearing agency's internal governance 
process improves the quality of information shared with its 
participants and stakeholders, thereby improving the ability of public 
commenters to provide meaningful comments on proposed rule changes 
submitted to the Commission or CFTC in one of the above-described 
filing processes.\307\ In particular, it is beneficial for registered 
clearing agencies to exchange information and consider stakeholder 
views at any appropriate time to enhance transparency and the quality 
of the proposed rule, and not only after the proposed rule has been 
published for public comments. Because these represent two distinct 
steps to enhance transparency, as well as two distinct processes with 
different objectives, soliciting and considering stakeholder viewpoints 
is not duplicative of existing requirements. For the reasons stated 
above, the Commission is not modifying Rule 17Ad-255(j) in response to 
these comments because the proposed requirements are not duplicative or 
redundant of the existing filing processes cited by commenters.
---------------------------------------------------------------------------

    \307\ See Governance Proposing Release, supra note 2, at 51813 
(``[C]lear 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.'').
---------------------------------------------------------------------------

3. Proposed Scope of ``Governance and Operations''
    Several commenters explained that the scope of the proposed rule 
should focus on material developments which may impact a registered 
clearing agency's risk profile or risk management, and not ``governance 
and operations.'' \308\ First, one commenter stated that the reference 
to ``governance and operations'' is overly broad and vague.\309\ 
Additionally, the commenter explained that it was unclear whether a 
registered clearing agency would be required to solicit, consider, and 
document views from participants and relevant stakeholders before 
executing

[[Page 84484]]

on certain measures,\310\ which according to the commenter represent 
core functions for which the board is required to exercise its 
considered discretion in the interests of the registered clearing 
agency.\311\ Instead, the commenter explained that such a requirement 
should be tailored to address those changes that represent a risk to 
the registered clearing agency's core clearance and settlement 
operations, and the commenter recommended that the Commission 
accomplish that goal by modifying the language of the proposed rule to 
narrow the scope of changes from those that represent ``material 
developments'' in ``governance or operations'' to those that ``could 
materially affect the level or nature of risk presented by the 
registered clearing agency.'' \312\ In the commenter's view, this would 
be consistent with existing requirements for registered clearing 
agencies that are SIFMUs to submit to the Commission for public notice 
and comment any changes to operations or procedures that could 
materially affect the level or nature of risk presented by the 
registered clearing agency.\313\
---------------------------------------------------------------------------

    \308\ See OCC at 15; CCP12 at 9; DTCC at 13-14.
    \309\ See OCC at 15.
    \310\ The commenter identified the following measures: hiring a 
new member of the senior management team, hiring a new management 
level committee with authority to make recommendations to the board, 
selecting a new director, selecting a new outside auditor, or 
determining the scope of its internal audit plan. See id.
    \311\ See id.
    \312\ See id.
    \313\ See supra Part II.F.2 and note 303 (also discussing the 
requirements in the Dodd-Frank Act for SIFMUs to submit advance 
notices to their designated supervisory authority).
---------------------------------------------------------------------------

    Second, another commenter recommended that the registered clearing 
agency focus on the solicitation of risk-based viewpoints on matters 
that would materially affect a registered clearing agency's risk 
profile and related risk management and to not solicit input on every 
topic on which stakeholders wish to have input (e.g., participation 
requirements, fees, new technologies, and services).\314\ The commenter 
further stated that governance of a registered clearing agency should 
be within the sole purview of the registered clearing agency itself, as 
long as the registered clearing agency complies with regulatory 
requirements and applicable laws and appropriately considers the 
interests of customers of clearing agency participants and objectives 
of owners and participants on matters that materially impact a 
registered clearing agency's risk profile.\315\ Regarding governance, 
this commenter also stated that it is imperative to ensure that market 
participants' involvement in clearing agency governance, including 
through the RMC, is limited to risk-based viewpoints (as opposed to, 
for example, commercially-driven viewpoints), due to the differing 
objectives between a registered clearing agency and its participants in 
their respective day-to-day operations.\316\
---------------------------------------------------------------------------

    \314\ See CCP12 at 9.
    \315\ See id.
    \316\ See CCP12 at 9-10 (explaining that a ``clearing agency's 
first priority is to contribute to the stability of the broader 
financial markets, that ``a clearing agency is a risk-manager--not a 
risk-taker--and supports financial stability by effectively managing 
the risks of its market participants'' and that ``[m]arket 
participants, on the other hand, do not have the same regulatory 
objective of prioritizing financial stability in their day-to-day 
operations'').
---------------------------------------------------------------------------

    The third commenter stated that whereas it is common practice for 
clearing agencies to solicit feedback on operational matters such as 
rule changes, prospective enhancement to services or risk management, 
and fee changes, the governance structure of the clearing agency, where 
they meet regulatory requirements, is a matter for the board, 
executives and majority shareholders where such clearing agency forms 
part of a wider group.\317\ The fourth commenter stated that scoping 
the requirements to material changes in the ``governance and 
operations'' of a registered clearing agency is overly broad with the 
likely result that registered clearing agency governance will become 
less dynamic and responsive to changes and risks in the markets they 
serve.\318\ Therefore, the commenter's recommendation is that the 
Commission modify the scope of the proposed requirements to ``risk 
management,'' instead of ``governance and operations.'' The commenter 
further elaborated that referencing ``risk management'' should be 
effective in capturing the broad swathe of issues and topics described 
by the Commission in the proposing release as being of interest to the 
broader universe of participants and stakeholders in a registered 
clearing agency.\319\ Regarding whether gaps may persist in stakeholder 
input related to governance, this commenter also recommended that the 
Commission consider all of the various channels that currently exist 
for such input (citing, for example, the various filing processes for 
proposed rule changes previously described in Part II.F.2).\320\ 
Finally, two commenters recommended modifying the rule to specifically 
require risk-based input via RWGs to ensure input from a broad range of 
market participants and other stakeholders.\321\
---------------------------------------------------------------------------

    \317\ See LSEG at 15.
    \318\ See DTCC at 3.
    \319\ See DTCC at 14 (stating that ``risk management'' would 
also capture the broad swathe of issues and topics noted by the 
Commission in the Governance Proposing Release as being of interest 
to the broader universe of participants and stakeholders in a 
registered clearing agency, including financial risk management, 
cyber and operational resiliency, default management, and the 
potential introduction of new cleared products or services).
    \320\ See DTCC at 13 (stating that ``we also believe, in 
considering the question of what gaps persist in stakeholder input 
to governance, that the Commission should more purposefully consider 
all of the various existing channels that currently exist for such 
input: namely, the self-regulatory organization proposed rule change 
notice and SIFMU advance notice requirements.'').
    \321\ See Barclays et al. at 2 (recommending a requirement to 
establish risk working groups as a forum to seek risk-based input 
from a broad array of market participants); SIFMA at 3-4 (suggesting 
a requirement that registered clearing agencies formally establish 
one or more risk working groups to provide a forum for them to seek 
risk-based input from a broad array of market participants, 
including participant members and their clients).
---------------------------------------------------------------------------

    In proposing Rule 17Ad-255(j), the Commission described the scope 
of the rule as ``governance and operations'' because these categories 
would address, in a comprehensive way, the clearance and settlement 
operations of registered clearing agencies without being overly 
prescriptive. However, permitting input into governance matters may, 
for example, require the board to disclose to participants and other 
relevant stakeholders sensitive or non-public information that impacts 
only the registered clearing agency. The Commission also agrees that 
the broad scope of ``governance'' may burden the registered clearing 
agency unnecessarily with the consideration of proposals and concerns 
that impede the ability of the board or the registered clearing agency 
to prioritize effectively its risk management function.
    Accordingly, in adopting Rule 17Ad-255(j), the Commission is 
modifying the rule to specify viewpoints as to ``risk management and 
operations'' rather than ``governance and operations.'' Although some 
commenters recommended that the Commission replace both terms 
``governance and operations'' with ``risk management,'' it is 
appropriate to retain ``operations,'' because not all operational 
functions that directly affect participants and other stakeholders 
clearly fall within the concept of ``risk management.'' Specifically, 
although topics associated with operational risk management would fall 
within the scope of ``risk management'' more generally, the basic 
operations of the registered clearing agencies relating to functions of 
the clearing agency (e.g., the design and functioning of the processes 
and technology systems that support the infrastructure of the 
registered clearing

[[Page 84485]]

agency itself, and the way that participants and other stakeholders 
connect to such systems) may not. It is appropriate to enable 
participants and other stakeholders to have input into matters that may 
be purely operational relating to functions of the clearing agency, 
including how to access systems.
    One commenter stated that clearing agencies should widely consult 
on any material changes to their risk profile and, in addition, 
recommended that all relevant topics relating to clearing agency risk 
management be discussed with an RWG or similar fora.\322\ Similarly, 
another commenter stated that all matters and proposed changes related 
to the registered clearing agency's rules, procedures, and operations 
that could materially affect the risk profile of the clearing agency 
including, but not limited to, any material changes to the risk model, 
default procedures, participation requirements, and risk management 
practices, as well as the clearing of new products that could 
significantly impact the clearing agency's risk profile, should be 
presented to the RWG for consideration.\323\ Regarding these comments, 
the Commission is not limiting the scope of Rule 17Ad-25(j) to defined 
risk management categories such as default management, new products or 
margin methodologies. Rather, the clearing agencies should have the 
discretion to determine the appropriate topics within risk management 
and operations relating to the functions of the clearing agencies and 
determine whether these changes are material developments under the 
broader direction of soliciting feedback regarding ``operations and 
risk management.'' In the Commission's view, the topics identified by 
commenters generally should be the types of topics relating to the 
functions of the clearing agency on which a registered clearing agency 
solicits feedback.
---------------------------------------------------------------------------

    \322\ See ISDA at 5 (``These groups should discuss all relevant 
topics to CCP risk management that impact on their participants' own 
risk management, including, but not limited to: New Products, 
Operational Changes, Membership criteria, Default Management, Risk 
Framework, including margin models and stress testing scenarios, 
non-default loss mitigation and provisions, and recovery.'').
    \323\ See SIFMA AMG at 6 (recommending that matters required to 
be brought to the RMC and RWG include all matters and proposed 
changes to rules, procedures, or operations that could materially 
affect the risk profile of the clearing agency, including, but not 
limited to, any material change to its risk model, default 
procedures, participation requirements, and risk management 
practices, as well as the clearing of new products that could 
significantly impact its risk profile).
---------------------------------------------------------------------------

    Another commenter stated that, to better clarify the expected 
perspective to be applied by RMC and RWG members, the Commission should 
explicitly state that in addition to supporting the safety and 
efficiency of the registered clearing agency, RMC and RWG members 
should also support the stability of the broader financial system.\324\ 
The Commission is not modifying, in connection with the comment, that 
the proposed rule on stakeholder viewpoints should include a provision 
which requires RWGs to consider the safety and efficiency of the 
registered clearing agency as well as the stability of the broader 
financial system. The purpose of the proposed rule, as stated above, is 
for registered clearing agencies to solicit, consider, and document 
their consideration of the views of participants and other relevant 
stakeholders regarding material developments in their risk management 
and operations. Given the varied composition of the fora or RWG, which 
may include clearing agency participants and other stakeholders 
including customers of clearing agency participants and other industry 
participants, the interests of each of these groups may not be 
perfectly aligned with the registered clearing agency relating to the 
safety and efficiency of the registered clearing agency or even with 
broader financial stability measures. In this sense, the commenter may 
be seeking to better align disparate interests between stakeholders and 
the registered clearing agencies in connection with supporting the 
safety and efficiency of the registered clearing agency as well as the 
stability of the broader financial system; however, pursuant to 
Commission rules, registered clearing agencies already have obligations 
to support safety and efficiency, as well as the public interest 
requirements in section 17A of the Act, throughout their governance 
processes and not only with respect to soliciting feedback.\325\ Given 
their relatively wider view of market practices and market dynamics, 
registered clearing agencies may be better positioned to assess safety, 
soundness, and financial stability than their participants or other 
stakeholders, and so adding such a requirement applicable to 
stakeholder viewpoints as a whole may dampen interest in or 
participation in such stakeholder outreach, limiting the registered 
clearing agency's ability to continue to collect and consider the wide 
range of information that is uniquely available to it. Instead, 
registered clearing agencies should structure and design the fora to 
address the markets and products they serve so that they can gather 
useful information effectively. As a result, the Commission is not 
modifying the scope of the proposed rule to include more granular 
elements or a reference to the stability of the broader financial 
system.
---------------------------------------------------------------------------

    \324\ See SIFMA AMG at 5.
    \325\ See, e.g., 17 CFR 240.17Ad-22(e)(2)(ii), (iii) (requiring 
a covered clearing agency to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to 
provide for governance arrangements that clearly prioritize the 
safety and efficiency of the covered clearing agency and support the 
public interest requirements in section 17A of the Exchange Act, 
applicable to clearing agencies).
---------------------------------------------------------------------------

    One commenter sought clarity on ``material'' changes that require 
stakeholder viewpoints and recommended that the Commission provide more 
guidance on what changes would be material.\326\ Given materiality may 
differ across clearing agencies as well as the products cleared, 
clearing agencies should have the discretion and responsibility to 
determine whether a development in their risk management and operations 
is material in the context of their own operations. Pursuant to Rule 
17Ad-25(j), a registered clearing agency would be required to establish 
written policies and procedures in compliance with the rule, and those 
policies and procedures therefore would also need to clearly define 
material developments. Given this policies and procedures requirement, 
a registered clearing agency could make clear in any outreach to 
participants and other stakeholders how it has defined such material 
developments. The Commission is not modifying Rule 17Ad-255(j) to 
provide more specificity as to what constitutes materiality.
---------------------------------------------------------------------------

    \326\ See ISDA at 6 (``[A]s it is very difficult to define what 
material changes are, we support principle-based rules and see a 
strong role of supervision. The Commission could also define 
examples of what changes would be material to provide more guidance 
to the clearing agency.'').
---------------------------------------------------------------------------

    Finally, one commenter expressed the view that the board's 
fiduciary duty to the clearing agency would not conflict with the 
proposed requirements in Rule 17Ad-255(j) but that it may need to 
conduct further legal analysis on this point under the relevant local 
requirements in its jurisdiction.\327\ In the Commission's view, 
soliciting and considering stakeholder views relating to operations and 
risk management helps the board to fulfill its fiduciary duty to the 
registered clearing agency because it helps the board to collect 
information from affected stakeholders regarding the clearing agency's 
core risk management function.
---------------------------------------------------------------------------

    \327\ See LSEG at 15.

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

[[Page 84486]]

4. Frequency and Method of Outreach
    Several commenters stated that the Commission should not specify 
the frequency with which clearing agencies solicit viewpoints from 
participants and other stakeholders.\328\ One commenter specifically 
stated that the frequency should depend on the topic and its 
materiality to the clearing agency, clearing agency participants, and 
relevant stakeholders.\329\ Another commenter stated that RWGs should 
be deployed only on an as-needed basis to assess the same issues as 
those considered by the RMC.\330\ A third commenter stated that a more 
prescriptive requirement for the frequency of obtaining feedback could 
force registered clearing agencies to solicit stakeholder viewpoints 
even when there are no material matters to discuss, solely to satisfy a 
regulatory requirement.\331\ From the commenter's perspective, the 
frequency of solicitation should be determined based on when topics 
arise that could have a material impact on the risk profile of the 
clearing agency, which will inherently vary across clearing agencies. 
This commenter also stated that not requiring a minimum frequency for 
soliciting viewpoints is more efficient and could lead to more active 
participation when viewpoints are solicited.\332\
---------------------------------------------------------------------------

    \328\ See, e.g., LSEG at 15 (``This should be determined on a 
case-by-case basis depending on the topic and materiality to the 
clearing agency and to its members/relevant stakeholders.''); CCP12 
at 10 (stating that the rule should not specify how often the 
clearing agency needs to solicit viewpoints or how consideration of 
these viewpoints needs to be documented).
    \329\ See LSEG at 15.
    \330\ See SIFMA AMG at 5.
    \331\ See CCP12 at 10.
    \332\ See id.
---------------------------------------------------------------------------

    The Commission agrees that clearing agencies should retain 
discretion when considering how frequently and via what mechanism to 
engage with participants and other stakeholders, as the most 
appropriate timing and mechanism are likely to vary by topic, informed 
in part by the markets served and products cleared. Therefore, the 
Commission is retaining in final Rule 17Ad-255(j) the reference to 
``recurring,'' and is not modifying the proposed rule by specifying the 
frequency of any solicitations or outreach.
    One commenter specifically recommended that consultation with 
market participants should be required prior to a clearing agency 
filing rules with the Commission.\333\ Similarly, another commenter 
suggested that the Commission encourage registered clearing agencies to 
publicly consult on any proposals affecting their risk management 
practices before filing them as proposed rule changes with the 
Commission.\334\ As an example, the commenter cited current practice at 
the Financial Industry Regulatory Authority (``FINRA'') to consult on 
significant changes to its own SRO rules when those rules would change 
the compliance obligations of its members, suggesting that the 
Commission and registered clearing agencies consider FINRA's model as a 
potentially workable approach.\335\ Finally, one commenter also 
recommended that the clearing agencies consult with a ``broad 
spectrum'' of market participants prior to submitting a rule 
change.\336\ Although the Commission recognizes the benefits of 
consulting with participants and other stakeholders prior to proposed 
changes that concern key elements of risk management functions or 
operations, registered clearing agencies are best positioned to assess 
when to conduct such outreach and accordingly, the rule should not 
mandate such consultations. Rather, clearing agencies would be required 
to consult with participants and other stakeholders regarding material 
developments in its risk management and operations on a recurring 
basis. Depending on the scope and materiality of the proposed rule 
change, the registered clearing agency can ultimately determine whether 
to consult with participants and other stakeholders. As a result, the 
Commission is not modifying the proposed rule to provide more 
specificity regarding the timing of the outreach with stakeholders in 
response to these comments.
---------------------------------------------------------------------------

    \333\ See ISDA at 5.
    \334\ See SIFMA at 4.
    \335\ Id.
    \336\ See ICI at 5.
---------------------------------------------------------------------------

    One commenter asked the Commission to clarify expectations 
regarding the method of communication with participants and other 
stakeholders and, specifically, whether written consultation conducted 
pursuant to Rule 17Ad-255(j) would need to be disclosed pursuant to 
Form 19b-4.\337\ If the latter, the commenter stated that this would 
adversely impact communications between the clearing agency and 
stakeholders and increase costs and burdens relating to the SRO rule 
filing process for registered clearing agencies.\338\
---------------------------------------------------------------------------

    \337\ See DTCC at 13 (seeking to understand whether the 
Commission expects registered clearing agencies to treat stakeholder 
engagements under proposed Rule 17Ad-255(j) as ``any correspondence 
or other communications reduced to writing (including comment 
letters) to and from such [registered clearing agency] concerning 
the proposed rule change'' as required by the General Instructions 
to Form 19b-4 and expressing concern that applying such an 
interpretation ``would likely chill open and frank discussions 
between the clearing agency and the stakeholder groups,'' as well as 
``increase the costs and burdens to the SRO rule filing process for 
registered clearing agencies'').
    \338\ See id.
---------------------------------------------------------------------------

    As previously discussed, proposed Rule 17Ad-255(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.\339\ Therefore, registered clearing 
agencies would have discretion in the design and structure of 
stakeholder outreach including the method of communication (e.g., use 
of an advisory group or council, other types of in-person meetings, and 
written correspondence). Additionally, although a clearing agency must 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to require the board of directors to 
solicit and consider viewpoints of participants and other relevant 
stakeholders, nothing in the rule prohibits the board of directors from 
obtaining assistance in soliciting viewpoints of participants and other 
relevant stakeholders from staff of the registered clearing agencies. 
Although registered clearing agencies may determine the appropriate 
method of communication under Rule 17Ad-255(j), whether such 
discussions must ultimately be disclosed pursuant to Form 19b-4 would 
turn on the specific facts and circumstances of any such written 
correspondence. As previously discussed in Part II.F.2, Rule 17Ad-
255(j) and the process for filing by SROs of proposed rule changes 
serve distinctly different purposes and so engagement under Rule 17Ad-
255(j) may (or may not) implicate corresponding obligations regarding 
disclosure on Form 19b-4. Accordingly, Rule 17Ad-255(j) need not be 
modified at adoption to include more specific requirements on the 
method of communication with stakeholders.
---------------------------------------------------------------------------

    \339\ See supra Part II.F.1.
---------------------------------------------------------------------------

5. Use of Fora To Satisfy the Rule
    As stated in the Governance Proposing Release, the Commission 
recognized 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 clearing 
agency participants, the customers of clearing agency participants, and 
other stakeholders regarding changes to risk management

[[Page 84487]]

and other services offered by the registered clearing agency.\340\ 
These fora are useful tools for information sharing and help to promote 
an open dialogue between various stakeholders.
---------------------------------------------------------------------------

    \340\ See Governance Proposing Release, supra note 2, at 51838.
---------------------------------------------------------------------------

    The Commission received several comments relating to the formation 
of fora (or RWGs) in connection with stakeholder viewpoints. First, one 
commenter explained that registered clearing agencies must have the 
flexibility to determine the appropriate structure and use of these 
groups in a way that best serves their risk management needs and the 
markets that they serve.\341\ From the commenter's perspective, 
prescribing granular requirements would reflect a shift away from 
principles-based rules and would be highly concerning given the 
diversity in number and types of fora that registered clearing agencies 
already use to solicit stakeholder input. The commenter stated that the 
Commission should defer to the registered clearing agency's discretion 
to determine how best to obtain and consider stakeholder input and not 
include in the rule granular requirements for the committees, working 
groups, and other fora.\342\ The Commission agrees with the comment 
that clearing agencies should have the flexibility to determine the 
most appropriate structure for the use of fora or RWGs to ensure that 
these fora are effectively designed to address the risk management 
needs of the registered clearing agency, and therefore the Commission 
is not modifying the proposed rule to include specific requirements.
---------------------------------------------------------------------------

    \341\ See CCP12 at 8.
    \342\ See id.
---------------------------------------------------------------------------

    One commenter stated that the clearing agency should not select the 
participants of the fora, but allow representatives of the clearing 
agency participants and, depending on the topic, also customers of 
clearing agency participants and other stakeholders, to freely join 
these fora.\343\ Some commenters indicated that these fora should 
include representatives from both clearing agency participants and 
their customers.\344\ Another commenter recommended that the RWGs be 
composed of experts with knowledge of specific risk issues.\345\ 
Finally, one commenter recommended that the Commission require the 
establishment of RWGs to seek input from a broad array of market 
participants so all market participants can freely represent the view 
of their firms and other similarly situated market participants.\346\ 
In response to these comments, although stakeholders may include a wide 
range of clearing agency participants, customers of clearing agency 
participants, and other stakeholders, as discussed in the Governance 
Proposing Release, the proposed rule would require each registered 
clearing agency to establish and enforce written policies and 
procedures reasonably designed to solicit, consider, and document its 
consideration of the views of participants and other relevant 
stakeholders. Depending on the topic and issue or scope of issues under 
discussion, the registered clearing agency may occasionally need to 
reach out to a select group to obtain the appropriate amount of 
stakeholder input. As such, the Commission did not require specific 
fora participation in the proposed rule because the process for 
clearing agencies to effectively collect and consider stakeholder views 
could be adversely impacted. For those same reasons, the Commission is 
not modifying the rule to specify the composition of or qualifications 
for participation in such fora.
---------------------------------------------------------------------------

    \343\ See ISDA at 5.
    \344\ See SIFMA AMG at 5 (``To better clarify the requirement 
for `participant' membership, the Commission should explicitly 
require that RMCs and RWGs include the independent views of 
representatives of clearing members and clearing member customers . 
. .''); Citadel at 1 (supporting the proposed requirement for 
registered clearing agencies to implement written policies and 
procedures to solicit and consider the views of participants 
(including customers of direct members) regarding material 
developments in governance and operations because there may be 
circumstances where the interests of the clearing agency, its direct 
members, and customers are not fully aligned, and explaining that 
such a requirement will result in fairer and more informed decision-
making, and ultimately more confidence in the clearing 
infrastructure).
    \345\ See SIFMA AMG at 5.
    \346\ See Barclays et al. at 2 (recommending a requirement for 
risk working groups as a forum to seek risk-based input from a broad 
array of market participants to ensure that all market participants 
can freely represent the views of their firms and other similarly 
situated market participants).
---------------------------------------------------------------------------

    Several commenters expressed the view that the rule should specify 
the composition of fora to ensure participation by customers of 
clearing agency participants and other end users. One commenter 
recommended that the RWG's membership include a meaningful proportion 
of customers of clearing agency participants to promote broad and fair 
representation of end users' risk-based views and input vis-a-vis other 
market participants.\347\ Specifically, to obtain a ``meaningful 
proportion,'' the commenter recommended that the Commission adopt 
selection parameters that would ensure a cross-section of customers 
representing a meaningful level of customer risks are included. As 
previously discussed,\348\ the Commission's view is that other relevant 
stakeholders generally would include investors, customers of clearing 
agency participants, and securities issuers. However, registered 
clearing agencies should have the discretion to determine the 
appropriate design and structure of the fora to address any material 
developments relating to risk management and operations, including the 
appropriate proportion of customers of clearing agency participants, 
because not all topics relating to risk management and operations will 
necessarily impact customers of clearing agency participants and other 
types of stakeholders. The Commission therefore is not modifying the 
rule to provide additional specification that a meaningful proportion 
of customers of clearing agency participants be represented within 
stakeholder views. Nonetheless, a registered clearing agency generally 
should endeavor to solicit viewpoints from a representative cross-
section of affected parties.
---------------------------------------------------------------------------

    \347\ See ICI at 5.
    \348\ See supra Part II.F.1; see also Governance Proposing 
Release, supra note 2, at 51838.
---------------------------------------------------------------------------

    Another commenter stated that the proposed rule did not specify the 
consideration of views held by small participants, or even a certain 
range of participants, and that mere ``consideration'' requirements 
would be subject to influence by boards, which the commenter explained 
would be beholden to large broker-dealers that serve increasingly 
concentrated markets.\349\ From this commenter's perspective, the 
requirement to consider stakeholder views does nothing to remedy 
potential vulnerabilities in the nomination process or the broader 
independence requirement. The commenter stated that only more 
prescriptive interventions can remedy the underlying problem of 
director independence.\350\ Because the types of participants, as well 
as their comparative sizes, vary significantly across the markets 
served by the different registered clearing agencies, registered 
clearing agencies should have the discretion to determine the 
appropriate design and structure of the fora including the 
consideration of small participants and a range of participants. 
Therefore, the Commission is not modifying Rule 17Ad-255(j) in response 
to the comment regarding the inclusion of small participants and range 
of participants. As to the commenters' concerns regarding the role

[[Page 84488]]

of large and small participants in the context of board composition and 
the nominating committee, the Commission previously addressed these 
concerns in Part II.B.3.
---------------------------------------------------------------------------

    \349\ Better Markets at 21.
    \350\ See id.
---------------------------------------------------------------------------

    One commenter stated its support for contributions by RWGs that 
reflect a risk-based, independent, and informed opinion; requested that 
the Commission be explicit that the clearing agency participants and 
customers of clearing agency participants are representing the 
perspectives of their employers; and expressed support for the 
Commission requiring a principles-based approach whereby a registered 
clearing agency shall employ proportionate measures to mitigate the 
potential risk of a misuse of confidential information.\351\ Although 
the Commission generally agrees that contributions should be risk-
based, independent, and informed, when providing such risk-based input, 
the Commission is not revising the rule to prescribe that fora be used 
or how such fora ought to be structured to give registered clearing 
agencies discretion in how they treat sensitive or confidential 
information to avoid hampering or discouraging participant or other 
stakeholder participation in such fora. As a result, the Commission is 
not modifying Rule 17Ad-255(j) to include more prescriptive 
requirements regarding how to participate in fora established to 
achieve compliance with the rule. By comparison, the Commission has 
considered, and in some cases included, such requirements in the 
context of the board RMC under Rule 17Ad-255(d), as discussed in Part 
II.C.
---------------------------------------------------------------------------

    \351\ See SIFMA AMG at 6.
---------------------------------------------------------------------------

    One commenter specified that the Commission should explicitly 
require registered clearing agencies to establish one or more risk 
advisory groups, which would have a larger membership than the RMCs and 
could meet as needed for specific issues to advise the RMCs.\352\ 
Moreover, the commenter stated that the Commission should explicitly 
require RWG membership be subject to fitness standards and that the 
membership within each constituency rotate on a three-year basis to 
welcome diverse views while preserving continuity of expertise.\353\ 
The commenter acknowledges that fitness standards may vary across the 
registered clearing agencies due to business models or otherwise, but 
stated that a foundational level of risk management expertise must be a 
consistent requirement. As stated above,\354\ the design and structure 
of the fora including but not limited to composition, fora count, fora 
rotation, and fitness standards specifying the level of risk management 
expertise are best determined by the clearing agencies themselves 
because they have unique insight into how issues or emerging topics 
might impact their participants and other stakeholders. Therefore, the 
Commission is not modifying the proposed rule to add specific 
requirements with respect to fora formation.
---------------------------------------------------------------------------

    \352\ See SIFMA AMG at 4.
    \353\ See id. at 4-5.
    \354\ See supra notes 342-346 and accompanying text.
---------------------------------------------------------------------------

6. Documentation of Stakeholder Views
    One commenter stated that although a clearing agency generally 
should document its consideration of stakeholder viewpoints, each 
clearing agency should have the discretion to determine the appropriate 
level of documentation.\355\ Two commenters also stated that requiring 
clearing agencies to document their consideration of participant 
viewpoints, and thereby ensure that a record of such viewpoints exists 
and has been evaluated as to their merits would be beneficial.\356\ The 
Commission agrees that documenting the consideration of stakeholder 
viewpoints helps build a record of the reasons certain actions have 
been taken over time by the registered clearing agency and therefore 
helps promote thoughtful and consistent decision-making over time. 
While each registered clearing agency will be required to document its 
consideration of the views of participants and other relevant 
stakeholders, each registered clearing agency may determine the 
appropriate level of details relating to the documentation of its 
consideration of stakeholder viewpoints to ensure that the potential 
burdens associated with the documentation process, and the resulting 
time it adds to the decision-making process, do not undermine the 
benefits of soliciting viewpoints from relevant stakeholders.\357\ As a 
result, no modifications are necessary to the proposed documentation 
requirement.
---------------------------------------------------------------------------

    \355\ See CCP12 at 10 (stating that a clearing agency should 
document its consideration of viewpoints received, but that each 
clearing agency should have the discretion to determine the 
appropriate level of documentation to balance the need for 
efficiency with the need to document and disseminate its 
consideration of these viewpoints, and that this is currently a 
standard practice).
    \356\ See ISDA at 5; Barclays et al. at 2.
    \357\ See infra Part IV.C.6 (discussing the economic effects of 
the rule) and V.G (discussing the PRA burdens estimated for the 
rule).
---------------------------------------------------------------------------

    Another commenter stated that there should be minutes of each 
meeting relating to RWG or similar fora, which ideally could be made 
public, or at least be shared with all interested clearing agency 
participants and customers of clearing agency participants.\358\ 
Furthermore, the commenter recommended that any dissenting views be 
documented and shared with regulators, including the clearing agency's 
rationale for not accommodating such views.\359\ Similarly, another 
commenter recommended that clearing agency participants' and end users' 
feedback be disclosed to regulators.\360\ Finally, another commenter 
recommended that registered clearing agencies be required to respond to 
market participant feedback, specifically in scenarios where the 
feedback has not been incorporated into the registered clearing 
agency's decision.\361\
---------------------------------------------------------------------------

    \358\ See ISDA at 5.
    \359\ See id. at 6 (``To the degree that the RWG (or a similar 
forum) expresses dissenting views with regard to a clearing agency's 
material risk decisions, or the clearing agency is not following 
advice of the RWG, those dissenting views should be documented and 
shared with regulators, including the CCP's rationale for not 
accommodating them.'').
    \360\ See Barclays et al. at 2 (stating that ``as the proposal 
rightly observes, such a requirement would help promote confidence 
in the use of participant forums, promote an open dialogue and 
greater understanding between the clearing agencies and participants 
and also help the Commission evaluate the ways in which clearing 
agencies consider stakeholder viewpoints and balance potentially 
competing viewpoints'').
    \361\ See ICI at 5.
---------------------------------------------------------------------------

    Documenting the consideration of viewpoints from stakeholders 
(including minutes) ensures that a record exists of the viewpoints 
provided by relevant stakeholders. However, the requirement for the 
board to ``consider'' the views of participants and other relevant 
stakeholders may not in all cases result in action by the registered 
clearing agency. A registered clearing agency generally should endeavor 
to ensure that it has a complete and accurate record of input received, 
particularly when the registered clearing agency determines that the 
most appropriate action is action with which some participants or other 
key stakeholders disagree. However, in the context of soliciting 
viewpoints, each registered clearing agency should have discretion to 
determine, in its policies and procedures, the appropriate level of 
detail relating to documentation across the different mechanisms used 
to solicit viewpoints, whether through an advisory group or other fora, 
survey, or other written correspondence, while generally endeavoring to 
ensure that it has a complete and accurate record of input received. 
Documentation of stakeholder viewpoints under Rule 17Ad-255(j) would 
constitute records of

[[Page 84489]]

the registered clearing agency, and therefore be subject to review and 
examination by representatives of the Commission upon request.
    With respect to meeting minutes, a registered clearing agency 
generally should endeavor to disclose their contents as fully as 
possible, though the Commission acknowledges that, due to the 
confidential nature of some of the topics discussed regarding risk 
management and operations, it may not always be appropriate to share 
such documents in full with the public. Furthermore, some stakeholders 
may not be as forthcoming in their feedback to registered clearing 
agencies if all such views would be shared automatically with the 
public, such as through posting on a public website.
    With respect to responding to feedback not taken, it is 
inappropriate to require in Rule 17Ad-255(j) a response from the 
registered clearing agency to feedback in cases where the registered 
clearing agency has not incorporated the feedback into its final 
decision. The clearing agency may have declined to incorporate the 
feedback for a variety of reasons. As a general matter, clearing 
agencies generally should endeavor to provide timely feedback and 
explanation in response to stakeholder viewpoints, but also retain 
discretion in determining whether and when to respond to such views or 
feedback. The Commission therefore is not modifying the rule to require 
documentation relating to stakeholder views to be disseminated to all 
registered clearing agency participants or the general public.
7. Harmonization With CFTC Requirements for RWG
    One commenter recommended that the Commission harmonize proposed 
Rule 17Ad-255(j) with the CFTC's more prescriptive approach relating to 
RMCs \362\ and RWGs, including by adding a requirement to establish 
RWGs.\363\ Another commenter also recommended that the Commission adopt 
requirements for registered clearing agencies to establish RWGs in a 
manner similar to CFTC requirements, with a corresponding requirement 
that the RWG include representatives from both clearing agency 
participants and customers of clearing agency participants.\364\ The 
commenter also recommended that the Commission adopt the list of 
factors that were specified in CFTC requirements as significantly 
impacting the registered clearing agency's risk profile, including if a 
new product has different margining, liquidity, default management, 
pricing, or other risk characteristics from those applicable to 
products already cleared. Finally, one commenter, consistent with a 
recommendation by the CFTC's Market Risk Advisory Committee, suggested 
that the Commission include in any final rulemaking a requirement that 
registered clearing agencies formally establish one or more RWGs to 
provide a forum to seek risk-based input from a broad array of market 
participants, including clearing agency participants and the customers 
of clearing agency participants.\365\
---------------------------------------------------------------------------

    \362\ The Commission notes that Rule 17Ad-255(d), as discussed 
in Part II.C, would require the establishment of a board-level RMC, 
whereas CFTC regulations do not specifically require that the RMC be 
a board-level committee.
    \363\ See ICI at 4 (stating that ``First, we recommend that the 
SEC harmonize its proposal with the CFTC's more prescriptive 
approach to RMCs and RWGs.'').
    \364\ See SIFMA AMG at 5 (stating that, given the relative 
infrequency of the board's meetings with the more senior members of 
the RMC, the Commission should adopt the requirement to also 
establish RWGs in a manner similar to the CFTC, including 
representatives from both clearing members and clearing member 
customers, explaining that the RWGs could be composed of experts 
with knowledge of specific risk issues and be able to be deployed on 
an as-needed basis to assess the same issues assigned to RMCs, but 
on a deeper basis).
    \365\ See SIFMA at 3-4.
---------------------------------------------------------------------------

    In the Commission's view, the differences between the CFTC's final 
rules at 17 CFR 39.24(b)(12) requiring creation of an RWG and proposed 
Rule 17Ad-255(j) are appropriate within the context of the full set of 
requirements contained in Rule 17Ad-255 and considering the different 
products and markets served by registered clearing agencies. As a 
general matter, Rule 17Ad-255 imposes specific requirements onto the 
board-level RMC similar to those contemplated by the CFTC but does not 
specifically require creation of an RWG when soliciting stakeholder 
viewpoints.\366\ Rule 17Ad-255(j) also does not require a minimum 
number of meetings or solicitations of feedback, though it does 
similarly require documentation of feedback and specify the range of 
parties from whom a registered clearing agency must solicit feedback, 
including participants, customers of participants, and other 
stakeholders such as securities issuers. Despite these differences, the 
objectives of Rule 17Ad-255(j) and the CFTC's rules are the same, and 
the approaches are consistent considering the discretion afforded in 
Rule 17Ad-255(j) for developing written policies and procedures. For 
example, in the Commission's view, a registered clearing agency 
generally could demonstrate compliance with Rule 17Ad-255(j) by 
codifying the creation of an RWG under CFTC requirements in its written 
policies and procedures, assuming that in so doing it addressed the 
requirements in Rule 17Ad-255(j) to solicit, consider, and document its 
consideration of stakeholder viewpoints consistent with the rule.
---------------------------------------------------------------------------

    \366\ In addressing the relationship between the CFTC's 
requirements for the RMC and the Commission's own Rule 17Ad-255, 
Part II.C discusses in more detail how Rule 17Ad-255 is intended to 
bolster the overall quality of governance (and therefore risk 
management) at a registered clearing agency to achieve substantially 
similar outcomes to the CFTC requirements.
---------------------------------------------------------------------------

    With respect to the list of factors specified in CFTC requirements, 
the approach in Rule 17Ad-255(j) is more general, focused on soliciting 
viewpoints regarding ``operations and risk management'' rather than 
identifying more specifically the discrete topics that should be 
considered. The two approaches are consistent and Rule 17Ad-255(j) is 
appropriately targeted given the range of clearing agency functions 
performed by registered clearing agencies, not all of which are central 
counterparties,\367\ and therefore may not be able to meaningfully 
solicit feedback on topics like margin or liquidity.
---------------------------------------------------------------------------

    \367\ For example, registered clearing agencies may instead be 
central securities depositories, which perform different functions 
from CCPs and do not collect margin.
---------------------------------------------------------------------------

    In connection with the third commenter's request to include 
representatives from both clearing agency participants and customers of 
clearing agency participants as well as explicitly require that the 
clearing agencies establish one or more RWGs, as previously discussed 
in Part II.F.5 above,\368\ the rule considers stakeholder feedback from 
a wide range of participants and other stakeholders, including 
customers. However, clearing agencies should have the discretion to 
determine the structure and design of the fora including the 
composition and the number of fora.
---------------------------------------------------------------------------

    \368\ See supra notes 342-346 and accompanying text.
---------------------------------------------------------------------------

    In consideration of the above, 17Ad-255(j) is broadly consistent 
with the CFTC requirements to establish an RWG and therefore the 
Commission believes it is unnecessary to modify Rule 17Ad-255(j) in 
adopting the rule to achieve harmonization with CFTC rules for RWGs.

III. Compliance Dates

    As proposed, the compliance date for Rule 17Ad-255 would be 180 
days after publication in the Federal Register except that the 
compliance date for proposed Rules 17Ad-255(b)(1), (c)(2),

[[Page 84490]]

and (e) would be 24 months after publication in the Federal Register. 
The Commission is modifying these compliance dates so that the 
compliance date for Rule 17Ad-255 is 12 months after publication in the 
Federal Register, except that the compliance date for Rules 17Ad-
255(b)(1), (c)(2), and (e) is 24 months after publication in the 
Federal Register, for the reasons discussed below.
    First, one commenter recommended that the Commission consider a 
later compliance date for Rules 17Ad-255(b)(1), (c)(2), and (e) to 
ensure that registered clearing agencies had sufficient time to replace 
any directors to meet requirements related to independence.\369\ In 
particular, the commenter explained that some directors serve terms 
longer than two years, and so a later compliance date could help ensure 
an orderly transition.\370\ An orderly transition of directors is 
important, but a later compliance date is unnecessary to achieve an 
orderly transition of directors, to the extent such transition is 
necessary. Even in a case where directors serve three-year terms, the 
implementation period need not accommodate the expiration of all terms 
of currently serving directors because the rules do not require the 
turnover of all directors. To the extent that a clearing agency 
determines that either its overall board composition or its current set 
of independent and non-independent directors must change to achieve 
compliance with the final rules, 24 months provides sufficient time to 
develop and apply new standards for independent directors in an orderly 
manner and, as a general matter, to conduct nominations, elections, and 
appointments of new directors within the clearing agency's established 
processes for nominations, elections, and appointments. As an example, 
most clearing agencies would complete two cycles of annual nominations, 
elections, and appointments before the compliance date. Even for a 
clearing agency that has directors serving longer terms that are not 
staggered, the governance arrangements would still provide mechanisms 
to replace directors in an orderly manner. Such mechanisms include, for 
example, those that a clearing agency would use to fill a vacancy that 
occurs when a director vacates her position prior to the end of her 
term. In addition, even for a clearing agency that does not conduct 
annual elections of directors, it would still conduct an annual meeting 
of shareholders, at which off-calendar director elections could be 
scheduled as needed. In the Commission's view, two years provides 
sufficient time to ensure an orderly transition of directors, to the 
extent a registered clearing agency determines that its current board 
composition should change to meet the requirements in Rule 17Ad-255 for 
independent directors.
---------------------------------------------------------------------------

    \369\ LSEG at 15.
    \370\ Id. (explaining that its directors serve three-year terms, 
suggesting that a longer implementation period of three years would 
provide time for complete turnover of the board).
---------------------------------------------------------------------------

    Second, one commenter recommended more generally that the 
Commission consider a later compliance date because, in the commenter's 
view, the proposed rules are more burdensome than described by the 
Commission as proposed.\371\ For the reasons discussed in Part II 
above, and particularly in Part II.E, the proposed rules are not more 
burdensome than originally described, and in the final rules the 
Commission has modified the text of the rules to ensure that the 
obligations under the rule are clear and consistent with the discussion 
in the Governance Proposing Release. Nevertheless, to ensure that 
registered clearing agencies have time to consider and develop changes 
to rules, policies, and procedures to ensure compliance with Rule 17Ad-
255, and to submit those changes to the Commission for review when 
required by section 19 of the Exchange Act and Rule 19b-4, the 
Commission is adopting a compliance date of 12 months after publication 
in the Federal Register for Rule 17Ad-255, except that the compliance 
date for Rules 17Ad-255(b)(1), (c)(2), and (e) is 24 months after 
publication in the Federal Register.
---------------------------------------------------------------------------

    \371\ See DTCC at 22.
---------------------------------------------------------------------------

IV. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic consequences and 
effects of the final rules, including their benefits and costs.\372\ 
The Commission acknowledges that, since many of these rules could 
require a registered 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, Exchange Act section 
17A 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.\373\
---------------------------------------------------------------------------

    \372\ Under Exchange Act section 3(f), 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).
    \373\ See 15 U.S.C. 78q-1(a)(2)(A).
---------------------------------------------------------------------------

    This economic analysis addresses the likely economic effects of the 
final 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 divergent incentives is a core economic 
matter that is persistent across many different types of economic 
interactions among registered clearing agency stakeholders. Incentives 
affect the economic outcome of a transaction, but there is no reliable 
or comparable data across different organizations 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 registered clearing agencies will respond to the final 
rules, and how those responses will, in turn, affect the broader market 
for cleared securities. While the Commission has attempted to quantify 
economic effects where possible, much of the discussion of economic 
effects is qualitative in nature. However, the inability to quantify 
benefits and costs does not mean that the benefits and costs of the 
final rules are any less significant. The Commission sought comment on 
all aspects of the economic analysis, especially any data or 
information that would enable a quantification of economic effects, and 
the analysis below takes into consideration relevant comments received. 
The Commission also discusses the potential economic effects of certain 
alternatives to the final rules.

[[Page 84491]]

B. Economic Baseline

    To consider the effect of the final rules, the Commission first 
explains the current state of affairs in the market (i.e., the economic 
baseline). All the benefits and costs from adopting the final rules are 
changes relative to the economic baseline. The economic baseline in 
this release 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 scope of trading activity 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 final rules.
1. Description of Market
    Clearing agencies are financial markets infrastructures, which 
include central securities depositories and central counterparties, and 
each clearing agency plays an important role in the financial system. 
In the United States, there are currently six active registered 
clearing agencies (NSCC, DTC, FICC, ICC, LCH SA, and OCC), and two 
registered clearing agencies that are inactive (BSECC and SCCP).\374\
---------------------------------------------------------------------------

    \374\ Neither BSECC nor SCCP has provided clearing services in 
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 
Part V.
---------------------------------------------------------------------------

    DTC provides central securities depository (CSD) services; the 
other five active registered clearing agencies provide central clearing 
counterparty (CCP) services. NSCC offers clearance services for 
equities, corporate and municipal bonds, derivatives, money market 
instruments, syndicated loans, mutual funds, and alternative investment 
products in the United States. FICC provides clearance services for 
government and mortgage-backed securities. ICC and LCH SA are both 
registered clearing agencies for credit default swaps (``CDS''). OCC 
offers clearing services for exchange-traded U.S. equity options.
    Registered clearing agencies broadly operate under two 
organizational models. Specifically, the registered clearing agency may 
be organized so that the participants are owners of the clearing 
agency,\375\ or so that participants are not owners of the clearing 
agency.\376\
---------------------------------------------------------------------------

    \375\ For example, DTC, NSCC, and FICC are subsidiaries of DTCC. 
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. See, e.g., 
Exchange Act Release No. 52922 (Dec. 7, 2005), 70 FR 74070 (Dec. 14, 
2005).
    \376\ For example, OCC is owned by certain options exchanges; 
ICC is a subsidiary of ICE, which is listed on the New York Stock 
Exchange; and 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 operate specialized clearing 
services and face limited competition in their markets. 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 agencies' participants include 
securities brokers and dealers, custodian and clearing banks, and 
certain other investment institutions. Table 1 summarizes the most 
recent data on the number of participants at each registered clearing 
agency.
    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,\377\ informs the Commission's examination 
of the effects of the final rules on competition, efficiency, and 
capital formation, as discussed below.
---------------------------------------------------------------------------

    \377\ See DTCC at 4 (``it is true as the Proposing Release 
suggests that concentration of clearing and settlement services has 
occurred over time'').

                     Table 1--Active Registered Clearing Agencies and Number of Participants
----------------------------------------------------------------------------------------------------------------
                                                                                                    Number of
      Registered clearing agency             Abbreviated name                 Function             participants
                                                                                                       \a\
----------------------------------------------------------------------------------------------------------------
Subsidiaries of The Depository Trust &
 Clearing Corporation (DTCC):
    --National Securities Clearing      NSCC......................  CCP........................            4,090
     Corporation \b\.
    --The Depository Trust Company \c\  DTC.......................  CSD........................              860
    --Fixed Income Clearing             FICC......................  CCP........................              214
     Corporation (Government
     Securities Division) \d\.
    --Fixed Income Clearing             FICC......................  CCP........................              139
     Corporation (Mortgage Backed
     Securities Division) \e\.
Subsidiaries of Intercontinental
 Exchange (ICE):
    --ICE Clear Credit \f\............  ICC.......................  CCP........................               30
Subsidiaries of LCH Group Holdings Ltd
 (LCH):
    --LCH SA (CDS Clear Participants    LCH SA....................  CCP........................               25
     Only) \g\.
The Options Clearing Corporation \h\..  OCC.......................  CCP........................              187
----------------------------------------------------------------------------------------------------------------
\a\ Participant statistics were taken from the websites of each of the listed clearing agencies in July 2023.
\b\ NSCC Member Directories, available at http://www.dtcc.com/client-center/nscc-directories.
\c\ DTC Member Directories, available at http://www.dtcc.com/client-center/dtc-directories.
\d\  FICC-GOV Member Directories, available at http://www.dtcc.com/client-center/ficc-gov-directories.
\e\ FICC-MBS Member Directories, available at http://www.dtcc.com/client-center/ficc-mbs-directories.
\f\ ICE Clear Credit Participants, available at https://www.theice.com/client-center/clear-credit/participants.
\g\ LCH SA Membership, available at https://www.lch.com/membership/member-search.
\h\ Member Directory, available at http://www.theocc.com/Company-Information/Member-Directory.

    Registered clearing agencies in the U.S. are an essential part of 
the infrastructure of the U.S. securities markets due to their role as 
intermediaries for clearing and settling securities transactions.\378\ 
In the 12-month period from October 2021 to September 2022, 
approximately $1,270 billion (65 percent) of the notional

[[Page 84492]]

amount of all single-name CDS transactions in the United States were 
centrally cleared.\379\ In 2022, DTCC processed $2.5 quadrillion in 
securities transactions, and OCC cleared 10.38 billion individual 
options contracts.\380\
---------------------------------------------------------------------------

    \378\ See Governance Proposing Release. supra note 2, at 51813.
    \379\ Data from DTCC's Trade Information Warehouse, compiled by 
Commission staff.
    \380\ See OCC, Annual Report (2022), available at https://annualreport.theocc.com; DTCC, Annual Report (2022), available at 
https://www.dtcc.com/about/annual-report. Within DTCC, NSCC cleared 
$2.1 trillion of equity trades every day on average, FICC cleared a 
total of $1,512 trillion of government securities transactions and 
$61 trillion of agency mortgage-backed securities transactions, and 
DTC settled a total of $462 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.\381\ Notwithstanding the benefits, central clearing concentrates 
risk in the registered clearing agency.\382\ Disruption to a registered 
clearing agency's operations, or failure on the part of a registered 
clearing agency to meet its obligations, could serve as a source of 
contagion across U.S. securities markets, resulting in significant 
costs not only to the registered clearing agency itself or its 
participants but also to other market participants and the broader U.S. 
financial system.\383\ 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.\384\
---------------------------------------------------------------------------

    \381\ 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, available 
at 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.'').
    \382\ See generally Albert J. Menkveld & Guillaume Vuillemey, 
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153 
(2021).
    \383\ See generally Dietrich Domanski, Leonardo Gambacorta & 
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS 
Q. Rev. (Dec. 2015), available at 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), available at 
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), available at 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); Glenn Hubbard 
et al., Report of the Task Force on Financial Stability, Brookings 
Institution (June 2021), available athttps://www.brookings.edu/wp-content/uploads/2021/06/financial-stability_report.pdf, 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), available at 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, available at 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).
    \384\ See Paolo Saguato, Financial Regulation, Corporate 
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J. 
1071, 1074-75 (2022), available at 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 Exchange Act section 17A and the Dodd-
Frank Act, and the related rules adopted by the Commission. The current 
regulatory system is discussed in the Governance Proposing 
Release.\385\
---------------------------------------------------------------------------

    \385\ Governance Proposing Release, supra note 2, at various 
places in Parts I, II, and III (51813-51839).
---------------------------------------------------------------------------

    The Commission is aware that clearing agencies registered with the 
Commission may also be subject to other domestic or foreign regulators. 
Specifically, registered clearing agencies operating in the United 
States may also be subject to regulation by the CFTC (as derivatives 
clearing organizations for futures or swaps) and the Board of Governors 
of the Federal Reserve System (as systemically important financial 
market utilities or state member banks).\386\ In addition, clearing 
agencies registered with the Commission may be subject to foreign 
clearing agency regulators. For example, LCH SA is subject to EMIR and 
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.\387\
---------------------------------------------------------------------------

    \386\ Currently, ICC, 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.
    \387\ See LCH, Company Structure, available at https://www.lch.com/about-us/structure-and-governance/company-structure.
---------------------------------------------------------------------------

    The Commission also considers relevant international standards when 
engaging in rulemaking for registered clearing agencies. For example, 
in 2012, CPMI and IOSCO issued the PFMI, a set of international 
standards for financial market infrastructures.\388\ 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).\389\ 
Further, registered clearing agencies must follow state laws applicable 
to their choice of business structure, such as limited liability 
companies, corporations, or trusts.\390\ 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.\391\
---------------------------------------------------------------------------

    \388\ See Committee on Payment and Settlement Systems and 
Technical Committee of the International Organization of Securities 
Commissions, PFMI (Apr. 16, 2012), available athttp://www.bis.org/publ/cpss101a.pdf.
    \389\ CCA Standards Adopting Release, supra note 4, 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, available at 
https://www.bis.org/cpmi/publ/d184.pdf (presenting the conclusions 
drawn by the CPMI and IOSCO from a Level 2 assessment).
    \390\ For example, the OCC is a Delaware corporation. See OCC, 
Certificate of Incorporation, available at https://www.theocc.com/Company-Information/Documents-and-Archives/OCC-Certificate-of-Incorporation.
    \391\ PFMI is an international standard, and as such does not 
have the force of law.

[[Page 84493]]



   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 Federal   ``. . . the designated financial
 Reserve System.                     market utility has governance
                                     arrangements that are designed to
                                     ensure . . . [t]he board of
                                     directors includes a majority of
                                     individuals who are not executives,
                                     officers, or employees of the
                                     designated financial market utility
                                     or an affiliate of the designated
                                     financial market utility'' (12 CFR
                                     234.3(a)(2)(iv)(D)).\a\
European Market Infrastructure      ``A CCP shall have a board. At least
 Regulation (EMIR).                  one third, but no less than two, of
                                     the members of that board shall be
                                     independent. Representatives of the
                                     clients of clearing members shall
                                     be invited to board meetings for
                                     matters relevant to Articles 38 and
                                     39. The compensation of the
                                     independent and other non-
                                     executive members of the board
                                     shall not be linked to the business
                                     performance of the CCP''
                                     (Regulation (EU) No 648/2012 of the
                                     European Parliament and of the
                                     Council of 4 July 2012, Title IV,
                                     Article 27).
                                    `` `[I]ndependent 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
                                     organisation'' (PFMI, Sec.
                                     3.2.10, footnotes omitted).
------------------------------------------------------------------------
\a \ ``The risk management standards [12 CFR 234] do not apply, however,
  to . . . a clearing agency registered with the Securities and Exchange
  Commission . . .'' (12 CFR 234.1(b)).

3. Divergent Incentives of Registered Clearing Agency Stakeholders
    Registered clearing agency stakeholders, such as owners and direct 
and indirect participants, have incentives that may not be in alignment 
with the interests of the broader financial markets.\392\ 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.\393\ 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 
bilateral clearing over central clearing \394\ or seek to influence a 
registered clearing agency to not clear a security that would profit 
the participants more if the security were cleared bilaterally. Not 
only could such incentives limit the benefits of central clearing, but 
they could also reduce resilience in the broader financial market by 
increasing overall counterparty risk.\395\ 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.'' \396\ This, too, could 
hinder resilience in the broader financial market by increasing overall 
counterparty 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.'' \397\ To the extent these 
negative externalities are not adequately internalized by the 
registered clearing agency or otherwise mitigated, they could present 
systemic risks to the broader financial markets.\398\ Multiple 
commenters agreed that the incentives of registered clearing

[[Page 84494]]

agencies and their stakeholders can diverge from the interest of the 
broader financial markets.\399\
---------------------------------------------------------------------------

    \392\ 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.'').
    \393\ See Sean Griffith, Governing Systemic Risk: Towards a 
Governance Structure for Derivatives Clearinghouses, 61 Emory L. J. 
1153, 1197 (2012), available at https://scholarlycommons.law.emory.edu/elj/vol61/iss5/3, 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.'').
    \394\ Cf. Treasury Market Practices Group (TMPG), Best Practice 
Guidance on Clearing and Settlement, at 3 (July 2019), available at 
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 stated 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.'').
    \395\ See Griffith, supra note 393, 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.
    \396\ See Griffith, supra note 393, at 1200.
    \397\ See PFMI, supra note 388, at 11.
    \398\ 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 
382, at 22 (``Network externalities create a role for regulators to 
coordinate investors on a socially desirable equilibrium.'').
    \399\ See, e.g., comments by Ian Marshall (Aug. 17, 2022) (``. . 
. very rarely do individuals operate outside their own interests 
which in the case of powerful far reaching institutions such as 
clearing agencies, produces the potential to risk the well being of 
members, affiliated parties, and market stability. . . ''); Chris 
Barnard (Sept. 9, 2022) (``. . . conflicts of interest inherent in 
clearing agency relationships could substantially harm the security-
based swaps or wider financial market.'').
---------------------------------------------------------------------------

    Several researchers have commented that the misalignment of 
interests between registered clearing agency stakeholders (owners and 
non-owner participants, for example) weakens the effectiveness of 
registered clearing agencies' risk management under the existing 
regulatory framework.\400\ Less effective risk management, in turn, 
hinders the resilience of individual registered 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 theoretical best way to 
mitigate divergent incentives.\401\
---------------------------------------------------------------------------

    \400\ See Saguato, supra note 384, 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), available at 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, available at 
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.'').
    \401\ See Menkveld & Vuillemey, supra note 382, 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 registered 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.'' \402\
---------------------------------------------------------------------------

    \402\ 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''), available athttps://www.sec.gov/files/regulation-clearing-agencies-100120.pdf, at 25.
---------------------------------------------------------------------------

(a) Divergent Incentives of Owners and Non-Owner Participants
    Because registered clearing agencies mutualize risk among 
participants but not all participants necessarily hold an equity 
interest in the registered clearing agencies,\403\ the incentives of 
clearing agency owners can differ from the incentives of clearing 
agency participants.\404\ 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.\405\ In such 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.
---------------------------------------------------------------------------

    \403\ For example, OCC, ICC, and LCH SA are not owned by 
participants.
    \404\ See Saguato, supra note 384, 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.
    \405\ See Menkveld & Vuillemey, supra note 382, at 20 (noting 
that because participants are a ``captive clientele,'' clearing 
agencies could be incentivized to relax risk management standards); 
Saguato, supra note 384, 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.
---------------------------------------------------------------------------

    One commenter encouraged the Commission to further study ``how 
different clearing agencies ownership models and organizational 
arrangements allocate incentives among owners and participants'' and to 
go further in aligning the interests of owners and non-owner 
participants.\406\ This adopting release incorporates a comprehensive 
review of academic, business, and regulatory studies on clearing agency 
ownership models and organizational arrangements. The Commission 
evaluated certain clearing agency ownership alternatives in the Part 
IV.D. The Commission will continue to monitor the incentives of 
registered clearing agency owners and participants and their effects on 
the agencies' decision-making processes.
---------------------------------------------------------------------------

    \406\ See Saguato at 2.
---------------------------------------------------------------------------

(b) Divergent Incentives Among Participants
    In addition, different types of participants (direct versus 
indirect participants or large versus small participants, for example) 
have divergent incentives. For example, large direct participants have 
incentives to influence the registered clearing agency to adopt 
policies that would exclude smaller dealers from participating directly 
in the registered clearing agency.\407\ Because there is only one 
registered clearing agency serving as a central counterparty for some 
asset classes, such policies could negatively affect competition among 
registered clearing agency participants. The diverging incentives of 
large direct participants compared to smaller indirect participants are 
mitigated by Rule 17Ad-22, which in part requires a registered clearing 
agency to admit participants who meet minimum standards.\408\
---------------------------------------------------------------------------

    \407\ See Kristin N. Johnson, Commentary on the Abraham L. 
Pomerantz Lecture: Clearinghouse Governance: Moving Beyond Cosmetic 
Reform, 77 Brook. L. Rev. 2, 698 (2012), available at 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.''); Griffith, supra note 393, at 1197 (``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.''). 
Multiple commenters agreed that large participants stand to gain 
from anti-competitive conduct against smaller participants (See 
Better Markets at 9-10; IDTA at 3).
    \408\ See 17 CFR 240.17Ad-22(b)(5) through (b)(7), and (e)(18).
---------------------------------------------------------------------------

    Large participants also have incentives to influence the registered 
clearing agency to adopt policies that could disproportionately 
allocate a risk of loss to smaller participants, such as 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

[[Page 84495]]

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 requires 
a registered clearing agency to establish minimum margin and liquidity 
requirements.\409\ 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.
---------------------------------------------------------------------------

    \409\ See 17 CFR 240.17Ad-22(e)(5) and (e)(6). One commenter 
disagreed that Rule 17Ad-22 has ``solved the problem of market 
dominance'' (Better Markets, at 16). The Commission agrees with the 
commenter that although Rule 17Ad-22 mitigated the problem of market 
dominance, it did not eliminate the problem.
---------------------------------------------------------------------------

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 six operating registered 
clearing agencies is set forth below and includes discussion of 
registered clearing agency boards' policies and procedures related to 
the composition of the board and board committees, conflicts of 
interests involving directors and senior managers, the obligations of 
the board regarding overseeing relationships with service providers for 
core 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 release 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. Exchange Act section 
17A(b)(3)(C) 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.).'' \410\ In addition, 
Rule 17Ad-252(e)(2) requires governance arrangements that support the 
objectives of owners and participants and consider the interests of 
other relevant stakeholders.
---------------------------------------------------------------------------

    \410\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

(1) Independent Directors
    Registered clearing agencies currently use various definitions of 
independence and independent director. Some clearing agencies do not 
use the term independent to classify their board members; the closest 
equivalent to independent directors at these agencies is non-
participant directors at the three DTCC agencies and public directors 
at OCC. In addition, current practices vary widely regarding the board 
and board committee requirements for independent directors (as the term 
is currently used by registered clearing agencies). For example, 
registered clearing agencies' existing requirements for the minimum 
percentage of independent directors on the board ranges from 11 percent 
at LCH SA \411\ to 25 percent at OCC \412\ to 56 percent at ICC.\413\ 
The three DTCC clearing agencies require some non-participant 
directors, but do not specify a required minimum number or percentage. 
Table 3 summarizes the general board composition and independent 
director requirements of each operating registered clearing agency.
---------------------------------------------------------------------------

    \411\ LCH's requirement for the board of director is to have 
between 3 to 18 members. The board composition rules state that ``at 
least two of the Independent Directors shall . . .'', suggesting 
that there must be at least 2 independent directors, which 
represents 11% of an 18-member board.
    \412\ OCC's requirement for the board of directors is to have 20 
members, 5 of whom (25%) should be ``public directors.''
    \413\ ICC's requirement for the board of directors is to have 9 
members, 5 of whom (55.6%) must be independent.

   Table 3--Board Composition and Independent Director Requirements of Operating Registered Clearing Agencies
----------------------------------------------------------------------------------------------------------------
          Clearing agency                Board composition requirements      Definition of independent director
----------------------------------------------------------------------------------------------------------------
DTC, FICC, and NSCC (all use the     23 directors: 1 non-executive Chair,   A non-participant director is ``an
 same board as DTCC).                 1 DTCC executive (DTCC's Pres. &       individual who is not an officer,
                                      CEO), 13 participant-owner             employee, or member of the Board of
                                      directors, 6 non-participant           Directors of a DTC participant or
                                      directors, 1 director designated by    FICC/NSCC member, including
                                      DTCC preferred stock shareholder       Sponsored Members, but excluding
                                      ICE, 1 director designated by DTCC     Limited Members, as those terms are
                                      preferred stock shareholder FINRA.     defined in the relevant
                                      (See https://www.dtcc.com/about/       Rulebooks.'' (See DTCC Board of
                                      leadership.).                          Directors Charter.\a\)
OCC................................  20 directors: 1 management director    A public director ``lacks material
                                      (Chair), 5 public directors, 9         relationships to OCC, OCC's
                                      participant directors, 5 exchange      Management Committee, and other
                                      directors. (See https://               directors'' and is ``not affiliated
                                      www.theocc.com/Company-Information/    with any national securities
                                      Board-of-Directors; OCC Board          exchange, national securities
                                      Charter.\b\).                          association, designated contract
                                                                             market, futures commission
                                                                             merchant, or 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
                                                                             5).

[[Page 84496]]

 
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             the NYSE Listed Company Manual.\d\
                                      directors. 5 directors elected by      An independent director also may
                                      ICE US Holding Company L.P. (3 of 5    not (among other things):
                                      are independent and the remaining 2    ``have any material
                                      are from ICE management). The Risk     relationships with the Company and
                                      Committee designates four nominees     its subsidiaries.''
                                      (two must be independent and two may   be affiliated with a Member
                                      be non-independent). (See ICC          Organization or, within the last
                                      Regulation and Governance Fact Sheet   year, (a) be employed by a Member
                                      \c\ at 2.).                            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\)
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 \f\ at 3.).
----------------------------------------------------------------------------------------------------------------
\a\ DTCC, Board of Directors Charter (June 2023), available at https://www.dtcc.com/~/media/Files/Downloads/
  legal/policy-and-compliance/DTCC-BOD-Mission-and-Charter.pdf. DTCC stated that ``a definition [of what
  currently constitutes an independent director] may in fact be found under the definition of a `non-participant
  director' '' DTCC at 4.
\b\ OCC, Board of Directors Charter and Corporate Governance Principles (May 26, 2022), available at https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf.
\c\ ICE, ICC Regulation and Governance Fact Sheet, available at 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, available at 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., available athttps://
  s2.q4cdn.com/154085107/files/doc_downloads/governance_docs/ICE-Independence-Policy.pdf.
\f\ LCH SA, Terms of Reference of the Board (Sept. 9, 2020), available at https://www.lch.com/system/files/media_root/LCH%20SA%20Boards%20Terms%20of%20Reference.pdf.

(2) Nominating Committee
    Five of the six operating registered 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. DTC, NSCC, and FICC require 
that the nominating committee be composed entirely of ``non-
management'' directors; 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 that the 
committee be chaired by a ``public director'' and include at least one 
exchange director and at least one member director.\414\ As stated 
previously, the definition of independent director varies across 
registered clearing agencies.\415\
---------------------------------------------------------------------------

    \414\ See DTCC Governance Committee Charter 1 (Feb. 2020), 
available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/Governance-Committee-Charter.pdf (``All 
members of the Committee shall be members of the Board who are not 
employed by DTCC (`non-management' directors).''); LCH SA Terms of 
Reference of the Nomination Committee of the Board of Directors 
(Sept. 9, 2020), available at 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), 
available at 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.'').
    \415\ See supra Table 3 and accompanying text.
---------------------------------------------------------------------------

    All six registered clearing agency boards have fitness standards 
for directors, processes for evaluating directors, and processes for 
evaluating director independence. The fitness standards and processes 
for evaluating directors vary across registered 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,'' \416\ 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.'' \417\ ICC, which does not have a nominating committee, 
uses its risk committee to nominate four directors. ICC's direct parent 
company, ICE US Holding Company L.P., decides whether to elect the four 
nominees from the risk committee, and then appoints another five 
directors on their own.\418\
---------------------------------------------------------------------------

    \416\ OCC Governance and Nominating Committee Charter, supra 
note 414, at 3.
    \417\ DTCC, Procedure for the Annual Nomination and Election of 
the Board of Directors (Feb. 11, 2021), at 2, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Election-Procedure.pdf.
    \418\ ICC, ICE Clear Credit Regulation and Governance (Apr. 
2022), at 2, available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.

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

[[Page 84497]]

(3) Risk Management Committee
    Five of the six operating registered clearing agencies have RMCs of 
the board.\419\ The sixth registered clearing agency, ICC, has an RMC 
but has not identified it as a board committee. All six registered 
clearing agencies include representatives from clearing participants on 
the RMC, though only three registered clearing agencies require 
it.\420\ Three of the six operating registered clearing agencies 
require the membership of the RMC to be re-evaluated annually.\421\
---------------------------------------------------------------------------

    \419\ DTC, NSC, FICC, OCC, and LCH SA.
    \420\ OCC, ICC, 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 56, at 
art. 28(1).
    \421\ OCC, ICC, and LCH SA.
---------------------------------------------------------------------------

(b) Current Practices Regarding Conflicts of Interest Involving 
Directors or Senior Managers
    The boards of all six operating registered clearing agencies have 
policies and procedures in place to identify and mitigate conflicts of 
interest involving directors or senior managers. All six boards also 
require directors to notify the clearing agency if a conflict of 
interest arises.
(c) Current Practices Regarding Management of Risks From Relationships 
With Service Providers for Core Services
    The Commission already requires registered clearing agencies to 
manage risks from operations,\422\ which can include risks associated 
with relationships with service providers.\423\ The Commission is aware 
that at least some registered clearing agencies periodically inform 
their boards regarding risk management associated with service 
providers for core services.
---------------------------------------------------------------------------

    \422\ See 17 CFR 240.17Ad-22(d)(4) and (e)(17).
    \423\ 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, adopted updated guidance for banking organizations in 
2023 regarding the management of risks arising from third-party 
relationships. See 88 FR 37920 (June 9, 2023).
---------------------------------------------------------------------------

    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 
directors.\424\ Insofar as service providers for core services are the 
providers of SCI systems, each registered clearing agency board likely 
already has written policies and procedures reasonably designed to, 
among other things, require senior management to: (1) evaluate and 
document the risks related to service provider relationships and 
whether the risks can be managed in a manner consistent with the 
registered clearing agency's risk management framework, (2) establish 
policies and procedures that govern service provider relationships, (3) 
monitor service provider relationships on an ongoing basis for 
deterioration in performance, change in risks, or other material 
issues, and (4) report all new service provider relationships, related 
policies and procedures, and ongoing monitoring to the board of 
directors.\425\
---------------------------------------------------------------------------

    \424\ See 17 CFR 242.1000 through 1007.
    \425\ See Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR 
72251 (Dec. 5, 2014) (``Regulation SCI Adopting Release''), 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.\426\ The Commission understands that registered clearing agency 
boards currently use both formal and informal channels to solicit, 
receive, and consider the viewpoints of participants and other relevant 
stakeholders.\427\ Multiple commenters confirmed, for example, that 
registered clearing agencies are already required to solicit 
stakeholder viewpoints every time they propose a rule change as a self-
regulatory organization (i.e., pursuant to Rule 19b-4) or an advance 
notice requirement as a SIFMU.\428\ Registered clearing agency 
participants acknowledge that their ability to offer viewpoints has 
yielded positive but mixed results.\429\
---------------------------------------------------------------------------

    \426\ See 17 CFR 240.17Ad-22(e)(2)(vi).
    \427\ See, e.g., CCP12, at 9; DTCC, at 12; LSEG, at 15; OCC, at 
14; 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), available at 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.'').
    \428\ See, e.g., CCP12 at 9; DTCC at 13; ICE at 6-7; OCC at 15.
    \429\ See, e.g., J.P. Morgan et al., supra note 427, 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).
---------------------------------------------------------------------------

    Regarding the proposed requirement that registered clearing 
agencies document the consideration of stakeholder views, one commenter 
stated that ``it is already standard practice for clearing agencies to 
create and maintain documentation of their consideration of market 
participants' viewpoints.'' \430\
---------------------------------------------------------------------------

    \430\ CCP12 at 10.
---------------------------------------------------------------------------

C. Consideration of Benefits and Costs as Well as the Effects on 
Efficiency, Competition, and Capital Formation

    The final rules are designed to facilitate the primary goal the 
Commission sought to achieve as articulated in the proposing release, 
namely: improving governance of registered clearing agencies by 
addressing the divergent incentives among the agencies' owners and 
participants, thereby improving the efficiency and effectiveness of the 
agencies' risk management and efforts to maintain fair, orderly, and 
efficient securities markets.
    The discussion below sets forth the potential economic effects 
stemming from the final rules, including the effects on efficiency, 
competition, and capital formation.
    The benefits and costs discussed in this part are relative to the 
economic baseline discussed earlier, which includes registered clearing 
agencies' current practices. In some instances, the final rules reflect 
what the Commission

[[Page 84498]]

understands to be current practices at many registered clearing 
agencies. To the extent that a registered clearing agency's current 
practices could reasonably be considered in compliance with part of a 
final rule, the registered clearing agency, its participants, and the 
broader market will have already absorbed some of the benefits of the 
final rule. The final rules codify the current best practices and 
ensure that every registered clearing agency is required to continue 
including these elements in its governance standards.\431\ By promoting 
better governance and enhanced risk management across all registered 
clearing agencies, the final rules will lead to efficiency improvements 
in the clearing agency market and the broader financial market. More 
resilient clearing agencies could ultimately contribute to the 
stability of the U.S. financial system.
---------------------------------------------------------------------------

    \431\ One commenter stated, ``. . . the codification of 
[including participant representatives on the risk management 
committee] into a requirement will be beneficial, as it will ensure 
that registered clearing agencies will be obligated to meet what is 
currently akin to a `best practice' '' (Barclays et al. at 2).
---------------------------------------------------------------------------

    The final rules will lead to certain additional costs for 
registered clearing agencies. These costs will vary depending on the 
scope of a registered clearing agency's current practices as it 
compares to the final rule's requirements and the size of the clearing 
agency, among other factors. For example, we anticipate minimal 
compliance costs to the registered clearing agencies where current 
practices could reasonably be considered in compliance with the final 
rules.\432\ In these cases, registered clearing agencies could still 
potentially face indirect costs associated with the limitations on 
discretion that would result from the rules, including costs related to 
limiting a registered clearing agency's flexibility to choose different 
governance arrangements.\433\
---------------------------------------------------------------------------

    \432\ For these registered clearing agencies, the compliance 
costs would require a small amount of resources, which would be used 
to review the clearing agency's policies and procedures in response 
to the adoption.
    \433\ For example, to the extent that registered clearing 
agencies have boards with a majority of independent directors and 
value their current ability to have less than a majority of 
independent directors on the board of directors, they may incur 
additional costs because they will lose the option to do so.
---------------------------------------------------------------------------

    The compliance costs will be higher for the registered clearing 
agencies where their current practices differ from the final rules' 
requirements. In these cases, many of the final rules could result in a 
registered clearing agency needing to amend its bylaws, rulebook, or 
other governance documents. Because registered clearing agencies are 
SROs, any such amendments that constitute rule changes would be subject 
to Commission review pursuant to Rule 19b-4. The final rules could also 
cause a registered clearing agency to make different business 
decisions, such as hiring and capital expenditure decisions, which 
would not be subject to the same Commission review process. These 
behavioral changes are difficult to predict and therefore hard to 
quantify, in part because of the number of assumptions that would be 
needed to forecast how registered clearing agencies will respond to the 
final rules.
    The costs discussed in this part will be borne by registered 
clearing agencies and their participants. For registered clearing 
agencies owned by participants, all the costs will ultimately be passed 
on to these participants because they are residual beneficiaries of the 
clearing agency. For registered clearing agencies not owned by 
participants, the level of pass-through will depend upon a number of 
factors, including the lack of competition among clearing agencies. In 
both cases, the participants will likely pass through some of those 
costs to their customers, depending on factors such as the customers' 
sensitivities to costs, the amount of competition between participants 
for customers, and regulatory requirements.
    The expected costs to implement the final rules are anticipated to 
be sufficiently small relative to the size of each registered clearing 
agency that the costs will not have a material effect on: (1) 
competition among the existing registered clearing agencies or on a new 
entrant's ability to enter the market; (2) capital formation, including 
registered clearing agencies' ability to raise capital; and (3) the 
efficiency of registered clearing agencies or their participants.
1. Economic Considerations for Final Rule Regarding Board Composition
    As discussed in more detail above, final Rules 17Ad-25(b), (e), and 
(f) require that a majority of the board (or 34 percent, if a majority 
of the voting interests are directly or indirectly held by 
participants) be independent directors (as determined by the nominating 
committee and precluding certain circumstances that affect 
independence), establish minimum independent director requirements for 
the composition of certain board committees, and identify circumstances 
that would exclude a director from being an independent director.\434\
---------------------------------------------------------------------------

    \434\ See supra Part II.A.1 (discussing Rules 17Ad-25(b), (e), 
and (f)).
---------------------------------------------------------------------------

    To the extent an operating registered clearing agency determines 
that its current board meets the minimum requirements for independent 
directors on the board and board committees, the final rule will not 
directly affect the effectiveness of the registered clearing agency's 
governance. To the same extent, the final rules will also have no 
direct effect on the management of divergent interests between owners 
and participants, among various types of participants, and between 
registered clearing agency stakeholders and the broader financial 
markets.
    To the extent operating registered clearing agencies need to change 
the composition of their boards or board committees to meet the minimum 
requirements, the final rule will help promote more effective 
governance by providing impartial perspectives and helping mitigate the 
effect of the divergent interests between owners and participants, 
among various types of participants, and between registered clearing 
agency stakeholders and the broader financial markets. More effective 
governance will improve the effectiveness of a registered clearing 
agency's risk management practices, which will promote resilience at 
individual registered clearing agencies and in the broader financial 
markets.\435\ For example, more effectively managing divergent 
interests will help the registered clearing agency better internalize 
the costs of participant defaults and non-default losses which will 
mitigate a registered clearing agency's incentive to underinvest in 
risk management services such as liquidity arrangements and risk 
modeling. The final rules will also help registered clearing agencies 
ensure that an appropriate risk-based margin system is in place.
---------------------------------------------------------------------------

    \435\ See Paolo Saguato, The Unfinished Business of Regulating 
Clearinghouses, 2020 Colum. Bus. L. Rev. 449, 488 (2020), available 
at 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 384.
---------------------------------------------------------------------------

    One commenter stated that ``lopsided representation'' by larger 
participants on a governing body will ``enhance the market strength of 
the largest firms at the expense of a more competitive and diverse 
market environment.'' \436\ Given that the cleared derivatives market 
is an imperfect substitute for uncleared derivatives, some commentators 
also stated that large dealers may have an incentive to protect 
economic rents and therefore may urge boards to adopt policies that 
restrict the classes or

[[Page 84499]]

volume of transactions that may use clearinghouse platforms.\437\ 
Better management of divergent interests under the final rules will 
improve the ability of indirect participants to compete with direct 
participants of the registered clearing agency by, for example, 
providing indirect participants with enhanced access to registered 
clearing agency boards.
---------------------------------------------------------------------------

    \436\ IDTA at 3.
    \437\ See Johnson, supra note 407, at 698-700.
---------------------------------------------------------------------------

    Some academic literature on corporate governance could be 
interpreted to suggest that, under the final definition of independent 
director and the minimum requirements for independent directors on the 
board and board committees, divergent interests \438\ may continue to 
adversely affect governance, because independent directors in closely 
held companies may cede to the interests of controlling shareholders 
unless they are affirmatively incentivized to protect the interests of 
one or more stakeholder groups.\439\ In this context, one paper 
suggests that although independent directors may not be an ultimate 
solution to the agency problem for all companies (especially when there 
is concentrated ownership), independent directors can contribute to 
effective corporate governance 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.\440\ Another author argues that 
including independent directors in the governance process provides a 
roadmap for effective corporate governance, but does not guarantee 
results in terms of favoritism and objectivity.\441\ While these 
studies on the benefits of independent directors offer mixed results 
and note that independence alone is unlikely to be sufficient to 
further motivate a director to act solely in the public interest,\442\ 
the studies also note that director independence, particularly when 
complemented with other governance requirements, may help mitigate 
divergent incentives.
---------------------------------------------------------------------------

    \438\ The divergent interests referred to here are those between 
owners and participants, among various types of participants, and 
between registered clearing agency stakeholders and the broader 
financial markets.
    \439\ See, e.g., Lucian A. Bebchuk & Assaf Hamdani, Independent 
Directors and Controlling Shareholders, 165 Univ. Pa. L. Rev. 1271, 
1274 (2017), available at https://scholarship.law.upenn.edu/penn_law_review/vol165/iss6/1/ (taking the position that independent 
directors have incentives to go along with controlling shareholders' 
wishes because the directors depend on the controlling shareholders 
for election and retention, and 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); Donald C. Clarke, Three Concepts of the 
Independent Director, 32 Del. J. Corp. L. 73 (2007), available at 
https://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=1045&context=faculty_publications, at 83 
(``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.''). See also id. at 85 (explaining 
that even if directors were independent of shareholders, ``[T]he 
role of the independent direct [as] one who is independent of 
profit-seeking shareholders as well as independent of management has 
not, however, found fertile soil in American corporate law 
scholarship or practice. The dominant view has been that directors 
who are responsible to many constituencies are in effect responsible 
to none . . .'').
    \440\ See Maria Gutierrez & Maribel Saez, Deconstructing 
Independent Directors, 13 J. Corp. L. Stud. 63, 90 (2013).
    \441\ See Bruce Dravis, Director Independence and the Governance 
Process (Aug. 14, 2018), available at https://www.americanbar.org/groups/business_law/publications/blt/2018/08/05_dravis/.
    \442\ See Clarke, supra note 439, 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.'').
---------------------------------------------------------------------------

    Accordingly, the Commission anticipates that the final independence 
rules will help mitigate divergent incentives when complemented with, 
among other things: (1) existing governance rules that emphasize the 
registered clearing agency's responsibility to owners, participants and 
other stakeholders,\443\ and (2) Commission enforcement of securities 
regulations.
---------------------------------------------------------------------------

    \443\ See, e.g., Rule 17Ad-22(e)(2).
---------------------------------------------------------------------------

    In addition, standardizing the definition of independent director 
will improve efficiency by reducing economic frictions and search costs 
related to monitoring by stakeholders.
    The Commission is aware of three primary costs associated with the 
final rules regarding the composition of the board. First, the final 
rules will cause registered clearing agency boards to expend resources 
memorializing information that has been gathered for consideration in 
determining each director's independence, and preserving the records of 
the determination. The Commission estimates that each operating 
registered clearing agency will incur a one-time burden of 
approximately $22,403 \444\ to comply with Rules 17Ad-25(b), (e), and 
(f). Registered clearing agencies will also expend future resources to 
repeat the above process of memorializing information and documenting a 
determination, possibly twice a year. The Commission estimates that 
each operating registered clearing agency will incur an annual, 
recurring burden of approximately $44,806 \445\ to comply with Rules 
17Ad-25(b), (e), and (f).
---------------------------------------------------------------------------

    \444\ This figure is based on the analysis in infra Part V.A. 
The per-hour costs are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, modified by Commission 
staff to account for an 1,800-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).
    \445\ This figure is based on the analysis in infra Part V.A. 
The per-hour costs are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
---------------------------------------------------------------------------

    Second, registered clearing agencies may need to add independent 
directors to the board, either by replacing directors or increasing the 
board size.\446\ As mentioned earlier, approaches to defining 
independence for directors vary across registered clearing agencies. 
Thus, to the extent that a registered clearing agency's definition of 
an ``independent director'' conflicts with the final rules, including 
the prohibitions in Rule 17Ad-25(f), a registered clearing agency 
currently reporting a majority of its directors as independent (or 34 
percent, if a majority of the voting interests are directly or 
indirectly held by participants) on its board may need to replace 
directors to comply with the rule requirements.\447\
---------------------------------------------------------------------------

    \446\ Alternatively, registered clearing agencies might achieve 
compliance by reducing the board size and eliminating a sufficient 
number of non-independent directors.
    \447\ On the other hand, a registered clearing agency that does 
not report a majority independent board (or 34 percent, if a 
majority of the voting interests are directly or indirectly held by 
participants) could determine that its current slate of directors 
already satisfies the independence requirements in the adopted 
rules.
---------------------------------------------------------------------------

    Adding independent directors would require a registered clearing 
agency to expend resources conducting a search for new directors. The 
costs incurred by the registered clearing agency may vary based on 
whether it conducts its own search or retains an outside consultant.

[[Page 84500]]

The Commission estimates that retaining a recruitment specialist to 
secure an independent director could cost approximately $100,000 per 
director.\448\
---------------------------------------------------------------------------

    \448\ The Commission is basing this estimate on a report by The 
Good Search, which explains that their average retainer for an 
executive search is between $85,000 and $100,000, and the fee 
charged by large retained executive search firms usually starts at 
$100,000. See The Good Search, Retained Search Fees, available at 
https://tgsus.com/executive-search-blog/executive-search-fees-search-firm-pricing. The $100,000 estimate serves as a reasonable 
proxy for the amount a recruitment firm might charge to conduct a 
national search for an independent director. The Commission did not 
receive any comments providing an estimated cost of finding 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 interests are directly or indirectly held by participants) 
be independent could reduce the depth or breadth of relevant expertise 
that can be brought to registered clearing agency boards. A reduced 
level of combined experience on a registered clearing agency board 
might impair registered clearing agency efficiency in the near term. 
However, this potential cost is mitigated under the final rules by 
allowing eligible participant employees to serve as independent 
directors.\449\ One commenter stated that allowing for the potential 
inclusion of participant employees as independent directors had several 
benefits, including industry expertise, strong alignment with the risk 
management and operational integrity of the registered clearing agency, 
and diverse perspectives.\450\
---------------------------------------------------------------------------

    \449\ To be considered independent directors, participant 
employees must satisfy the requirements of Rule 17Ad-25, as 
explained in supra Part II.A.
    \450\ See DTCC at 4. See also Saguato at 3.
---------------------------------------------------------------------------

    One commenter stated that adopting the proposed definition of 
independent director would impose costs on registered clearing agencies 
that are dual registered with other regulatory bodies because other 
regulatory bodies have different definitions of independence and it 
would require extra resources to evaluate a nominee's independence 
under different standards from multiple regulatory entities. As 
explained in Part II.A.3, any additional costs from evaluating 
independence under multiple regulatory regimes are insignificant.
2. Economic Considerations for Final Rules Regarding the Nominating 
Committee
    As discussed in more detail above, Rule 17Ad-25(c) establishes 
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 independence criteria.\451\
---------------------------------------------------------------------------

    \451\ See supra Part II.B.1 (discussing Rule 17Ad-25(c)).
---------------------------------------------------------------------------

    Given that five of the six operating registered clearing agencies 
already have nominating committees (or a committee that serves a 
similar function), the primary benefit of Rule 17Ad-25(c) is to 
increase the number of independent directors on existing nominating 
committees. Insofar as a lack of independent directors on a registered 
clearing agency's nominating committee has prevented the registered 
clearing agency from having a fairer representation of its shareholders 
and participants in the selection of its directors and the 
administration of its affairs, Rule 17Ad-25(c) will help the registered 
clearing agency better meet section 17A's fair representation 
requirements.
    One commenter expressed concern that the additional burdens Rule 
17Ad-25(c) placed on independent directors could discourage qualified 
individuals from being willing to serve on registered clearing agency 
boards.\452\ The Commission does not think such a potential cost is 
significant, because several registered clearing agencies already have 
nominating committees that have a majority of independent directors, 
meaning that they have been able to find qualified directors. In 
addition, to the extent the new rules increase the amount of work done 
by independent directors, the burden on each independent director can 
be reduced by, for example, including more independent directors on the 
board to handle the increased workload.
---------------------------------------------------------------------------

    \452\ See ICE at 3.
---------------------------------------------------------------------------

    Rule 17Ad-25(c) will cause registered clearing agency boards to 
expend resources reviewing, revising, and possibly creating governance 
documents and related policies and procedures. The Commission estimates 
that each operating registered clearing agency will incur a one-time 
burden of approximately $38,590 \453\ to comply with Rule 17Ad-25(c). 
Registered clearing agencies will 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 operating registered clearing agency will incur an annual, 
recurring burden of approximately $13,110 \454\ to comply with Rule 
17Ad-25(c).
---------------------------------------------------------------------------

    \453\ This figure is based on the analysis in infra Part V.B. 
The per-hour costs are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
    \454\ This figure is based on the analysis in infra Part V.B. 
The per hour cost is from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
---------------------------------------------------------------------------

3. Economic Considerations for Final Rules Regarding the Risk 
Management Committee
    As discussed in more detail above, Rule 17Ad-25(d) requires each 
registered clearing agency to establish a RMC (or committees) of the 
board and establish minimum requirements for the composition, 
reconstitution, and function of such RMCs.\455\ 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 RMCs in Rule 17Ad-25(d). Those registered clearing 
agencies' governance documents and related policies and procedures will 
likely need minimal modifications. To the extent that a registered 
clearing agency's existing governance documents and related policies 
and procedures are already in compliance with the final rules, the 
incremental compliance costs associated with the rule will be minimal 
and the benefits of the rule will already be incorporated by market 
participants.
---------------------------------------------------------------------------

    \455\ See supra Part II.C.1 (discussing Rule 17Ad-25(d)).
---------------------------------------------------------------------------

    To the extent that a registered clearing agency's existing 
governance documents and related policies and procedures do not meet 
the requirements set out in the final rules, requiring that the RMC be 
a board committee will help make the board's oversight of risk 
management more effective by helping to ensure that a board committee 
is focused on risk management and by allowing the RMC to have delegated 
authority from the board. In addition, requiring that registered 
clearing agencies re-evaluate the RMC's membership annually will help 
prevent stagnation of RMC membership and stagnant viewpoints about risk 
management, while maintaining the registered clearing agency's 
discretion to preserve expertise on the RMC. Giving risk management a 
consistently higher priority and annually re-evaluating the RMC's

[[Page 84501]]

membership will help registered clearing agencies act to limit their 
risk of failure.
    Rule 17Ad-25(d) will cause registered clearing agency boards to 
expend resources reviewing, revising, and possibly creating governance 
documents and related policies and procedures. The Commission estimates 
that each operating registered clearing agency will incur a one-time 
burden of approximately $3,859 \456\ to comply with Rule 17Ad-25(d). 
The Commission acknowledges that the cost may be higher for registered 
clearing agencies whose risk committees are not currently board 
committees. Registered clearing agencies will 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 
operating registered clearing agency will incur an annual, recurring 
burden of approximately $1,311 \457\ to comply with Rule 17Ad-25(d).
---------------------------------------------------------------------------

    \456\ This figure is based on the analysis in infra Part V.C. 
The per-hour costs are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
    \457\ This figure is based on the analysis in infra Part V.C. 
The per-hour cost is from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
---------------------------------------------------------------------------

    Multiple commenters expressed concern that rotating risk committee 
members on a regular basis could reduce expertise and institutional 
knowledge on the committee because members would be rotated out too 
frequently.\458\ The Commission has addressed this potential economic 
cost by modifying the proposed rule so that registered clearing 
agencies are required to re-evaluate, but not necessarily rotate, the 
membership of the risk committee annually.\459\
---------------------------------------------------------------------------

    \458\ See, e.g., CCP12 at 6; DTCC at 6; LSEG at 12; ICE at 4-5; 
OCC at 26-27.
    \459\ See supra Part II.C.3.
---------------------------------------------------------------------------

4. Economic Considerations for Final Rules Regarding Conflicts of 
Interest Involving Directors or Senior Managers
    As discussed in more detail above, Rules 17Ad-25(g) and (h) require 
policies and procedures that: (1) identify and document existing or 
potential conflicts of interest, mitigate or eliminate the conflicts of 
interest and document the actions taken,\460\ and (2) obligate 
directors to report potential conflicts.\461\
---------------------------------------------------------------------------

    \460\ See supra Part II.D.1 (discussing Rule 17Ad-25(g)).
    \461\ See supra Part II.D.1 (discussing Rule 17Ad-25(h)).
---------------------------------------------------------------------------

    Each registered clearing agency's existing policies and procedures 
for identifying, reporting, and mitigating conflicts of interest 
involving directors or senior managers will likely need minimal 
modifications. To the extent a registered clearing agency's existing 
policies and procedures are already in compliance with the final rules, 
the benefits discussed below will already be incorporated by market 
participants.
    The final rules regarding managing conflicts of interest will 
benefit all clearing agencies by codifying current best practices, thus 
helping to ensure the continuity of these robust practices across all 
clearing agencies. This will benefit all clearing agencies and the 
broader financial markets by increasing the efficiency and resilience 
of the clearing market.
    In addition, to the extent that the final rules require registered 
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 registered clearing agency 
stakeholders.
    Finally, to the extent a previously undisclosed conflict of 
interest resulted in less favorable outcomes for the registered 
clearing agency--such as higher expenses with service providers or the 
loss of business from smaller participants--the final rule will improve 
the registered clearing agency's profitability, operating efficiency, 
and effectiveness.
    The final rules regarding conflicts of interest will cause 
registered clearing agency boards to expend resources reviewing, 
revising, and possibly creating governance documents and related 
policies and procedures. The Commission estimates that each operating 
registered clearing agency will incur a one-time burden of 
approximately $7,644 \462\ to comply with Rules 17Ad-25(g) and (h). 
Registered clearing agencies will 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 operating registered clearing agency will incur an annual, 
recurring burden of approximately $2,622 \463\ to comply with Rules 
17Ad-25(g) and (h).
---------------------------------------------------------------------------

    \462\ This figure is based on the analysis in infra Part V.D and 
Part V.E. The per-hour costs are from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, supra note 
444.
    \463\ This figure is based on the analysis in infra Part V.D and 
Part V.E. The per-hour cost is from SIFMA's Management and 
Professional Earnings in the Securities Industry--2013, supra note 
444.
---------------------------------------------------------------------------

5. Economic Considerations for Final Rules Regarding Management of 
Risks From Relationships With Service Providers for Core Services
    As discussed in Part II.E.1 above, Rule 17Ad-25(i) requires 
registered clearing agencies to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to require 
senior management to identify, manage, and report the risks related to 
agreements with service providers for core services; provide ongoing 
monitoring of the service provider relationships; obtain evaluation, 
review, and approval of the service provider relationship from the 
board; and govern relationships with those service providers.\464\
---------------------------------------------------------------------------

    \464\ See supra Part II.E.1 (discussing Rule 17Ad-25(i)).
---------------------------------------------------------------------------

    To the extent a registered clearing agency does not currently have 
policies and procedures in place that could reasonably be considered in 
compliance with the final rule, the final rule will enhance the 
clearing agency's ability to assess potential risks presented by 
agreements with service providers of core services, including the 
potential for disruptions to the agency's operations. The ongoing 
monitoring requirement will enable the clearing agency to identify 
changes to, or increases in, the risks associated with agreements with 
service providers of core services and frame a timely response to these 
risks. The final rule will also assist the clearing agency in 
developing and pursuing policies and procedures for minimizing 
disruptions and harm to the agency's operations and customers should a 
risk associated with agreements with service providers be realized. 
Ultimately, the final rules will improve the resilience of registered 
clearing agencies and the stability of the broader financial system in 
the U.S.
    Multiple commenters understood proposed Rule 17Ad-25(i) to 
duplicate the work already done by management or to shift the 
responsibility for oversight of service providers from senior 
management to the board, increasing board members' expertise or work 
requirements.\465\ Some commenters explained that the additional work 
requirements associated with Rule 17Ad-25(i) might disincentivize 
potential candidates from serving on a registered clearing agency's 
board of directors.\466\ The Commission has modified the proposed rule 
text to specify and delineate specific responsibilities of senior 
management and the board in the risk management

[[Page 84502]]

of service provider relationships.\467\ Given the defined scope of the 
board's role, the Commission does not expect the rule will materially 
disincentivize potential candidates from serving on the board.
---------------------------------------------------------------------------

    \465\ See supra note 254 and related text.
    \466\ See, e.g., CCP12 at 7; DTCC at 8-9; OCC at 2.
    \467\ See supra Part II.E.3.
---------------------------------------------------------------------------

    The final rules regarding the board's ultimate responsibility for 
the oversight of relationships with service providers for core services 
will cause registered clearing agencies to expend resources reviewing, 
revising, and possibly creating governance documents and related 
policies and procedures. For example, clearing agencies might need to 
create or revise policies for overseeing relationships with service 
providers for core services. The Commission estimates that each 
operating registered clearing agency will incur a one-time burden of 
approximately $38,590 \468\ to comply with Rule 17Ad-25(i). Registered 
clearing agencies will 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 
operating registered clearing agency will incur an annual, recurring 
burden of approximately $13,110 \469\ to comply with Rule 17Ad-25(i).
---------------------------------------------------------------------------

    \468\ This figure is based on the analysis in infra Part V.F. 
The per-hour costs are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
    \469\ This figure is based on the analysis in infra Part V.F. 
The per-hour cost is from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
---------------------------------------------------------------------------

    Multiple commenters expressed concern that, in addition to the 
Commission's estimates of the initial and recurring costs to comply 
with Rule 17Ad-25(i), some registered clearing agencies may incur one-
time costs to ``perform various policy and procedures reviews,'' 
provide a ``gap analysis and training on all updated policies and 
procedures to all relevant stakeholders,'' and to ``have the boards 
conduct their own review of CSP third-party plans.'' \470\ One 
commenter estimated that, for its three participant-owned clearing 
agency subsidiaries, the additional initial cost per agency would be 
317 hours.\471\ Commenters also stated that some agencies may incur 
additional recurring costs related to ``monitoring compliance and 
documentation activities'' and ``preparing and presenting to the boards 
for review and approval plans for entering into third-party 
relationships with CSPs.'' \472\ One commenter estimated that, for the 
three participant-owned clearing agencies, the additional recurring 
annual cost per agency would be 220 hours.\473\ The Commission 
estimates that a monetary equivalent of these additional costs 
suggested by commenters would be an additional one-time cost of up to 
$157,707 \474\ and an annual, recurring cost of up to approximately 
$96,140 \475\ to comply with Rule 17Ad-25(i). The Commission 
anticipates that the additional costs discussed by the commenter would 
vary with the size of the registered clearing agency. Therefore, it is 
likely that each operating registered clearing agency will incur a one-
time burden of between $38,590 and $196,297 \476\ and an annual, 
recurring burden of between $13,110 and $109,250 \477\ to comply with 
Rule 17Ad-25(i).
---------------------------------------------------------------------------

    \470\ See, DTCC at 10-11. See also CCP12 at 7.
    \471\ See DTCC at 10-11. DTCC estimated that its three 
subsidiary registered clearing agencies would have a combined 
additional initial burden of 950 hours.
    \472\ See, e.g., DTCC at 11-12.
    \473\ See DTCC at 11-12. DTCC estimated that its three 
subsidiary registered clearing agencies would have a combined 
additional recurring burden of 660 hours.
    \474\ The calculation assumes that the additional hours of work 
would be equally split between an assistant general counsel and a 
compliance attorney. The per-hour costs are from SIFMA's Management 
and Professional Earnings in the Securities Industry--2013, supra 
note 444.
    \475\ The calculation assumes that all the additional work would 
be done by a compliance attorney. The per-hour cost is from SIFMA's 
Management and Professional Earnings in the Securities Industry--
2013, supra note 444.
    \476\ $38,590 + $157,707 = $196,297.
    \477\ $13,110 + $96,140 = $109,250.
---------------------------------------------------------------------------

6. Economic Considerations for Final Rules Regarding Formalized 
Solicitation, Consideration, and Documentation of Stakeholders' 
Viewpoints
    As discussed in more detail above, Rule 17Ad-25(j) requires 
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.\478\
---------------------------------------------------------------------------

    \478\ See supra Part II.F.1 (discussing Rule 17Ad-25(j)).
---------------------------------------------------------------------------

    To the extent registered clearing agency boards' inadequate 
solicitation of stakeholder viewpoints has caused some stakeholder 
views not to be considered, the final rules regarding the solicitation, 
consideration, and documentation of stakeholders' views will improve 
boards' consideration of different stakeholder views. The improved 
consideration of different views is expected to help persuade 
stakeholders with divergent interests to assert their needs more 
vigorously, which will encourage debate among actors with different 
goals. More informed debates will, in turn, help to foster consensus 
with mandates and other decisions that are supported by a broader 
spectrum of stakeholders. Consequently, registered clearing agencies 
will identify and develop rule proposals that (to the extent the 
Commission considers them) will be more likely to meet the public 
interest requirements under section 17A of the Exchange Act.\479\
---------------------------------------------------------------------------

    \479\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Some commenters pointed out additional potential benefits of the 
rule. One commenter stated that adopting the rule would ensure that all 
current and future registered clearing agencies are compliant with the 
current industry best practices.\480\ Another commenter provided a 
specific use case for the rule, stating that requiring the 
consideration of stakeholder views could help registered clearing 
agencies facilitate the transition to clearing Treasury 
securities.\481\
---------------------------------------------------------------------------

    \480\ See Barclays et al. at 2.
    \481\ See Citadel at 1.
---------------------------------------------------------------------------

    One commenter stated that requiring registered clearing agencies to 
solicit and consider stakeholder viewpoints for all material changes in 
governance and operations would likely result in registered clearing 
agency governance becoming ``less dynamic and responsive to changes and 
risks in the markets they serve.'' \482\ The Commission has modified 
the requirements for considering stakeholder viewpoints so that they 
only pertain to risk management and operations, as opposed to all 
governance and operations. Given that registered clearing agencies 
already solicit stakeholder viewpoints, the reduced scope of the rule 
is sufficiently focused that the requirement will not cause clearing 
agencies to be significantly less dynamic or responsive to changes and 
risks.
---------------------------------------------------------------------------

    \482\ DTCC at 3.
---------------------------------------------------------------------------

    The final rules regarding obligations of the board will cause 
registered clearing agency boards to 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 operating 
registered clearing agency will incur a one-time burden of 
approximately $7,086 \483\ to comply with Rule 17Ad-25(j).

[[Page 84503]]

Registered clearing agency boards will 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 operating registered clearing agency will incur an 
annual, recurring burden of approximately $1,748 \484\ to comply with 
Rule 17Ad-25(j).
---------------------------------------------------------------------------

    \483\ This figure is based on the analysis in infra Part V.G. 
The per-hour costs are from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
    \484\ This figure is based on the analysis in infra Part V.G. 
The per-hour cost is from SIFMA's Management and Professional 
Earnings in the Securities Industry--2013, supra note 444.
---------------------------------------------------------------------------

D. Reasonable Alternatives to the Final Rules

1. Allow More Flexibility in Governance, Operations, and Risk 
Management
    When determining the content of its policies and procedures, each 
registered 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.\485\
---------------------------------------------------------------------------

    \485\ See CCA Standards Adopting Release, supra note 4, 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 could 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.\486\
---------------------------------------------------------------------------

    \486\ See CCA Standards Adopting Release, supra note 4, at 
70801; see also Randall S. Kroszner, Central Counterparty Clearing: 
History, Innovation, and Regulation, 30 Econ. Persp. 37, 41 (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.'').
---------------------------------------------------------------------------

    Many commenters discussed the balance of allowing governance 
flexibility while still improving registered clearing agency corporate 
governance and stability in the broader financial markets.\487\ Some 
commenters thought the proposed rules were too prescriptive.\488\
---------------------------------------------------------------------------

    \487\ See, e.g., DTCC at 3 (``We appreciate those aspects of the 
Proposal that balance effective governance with general principles 
of dynamism and flexibility, and any concerns or critiques we raise 
herein with respect to other aspects of the Proposal are informed by 
this same perspective.'').
    \488\ See, e.g., CCP12 at 1 (``. . . some of the Proposed Rule 
regarding the governance and conflicts of interest of clearing 
agencies may be too prescriptive, given the diversity among clearing 
agencies and the need for these organizations to tailor their 
structures and governance for the markets and products they 
clear.'').
---------------------------------------------------------------------------

    However, registered clearing agencies may not fully internalize the 
social costs of differing incentives between owners and participants, 
among various types of participants, and between registered clearing 
agency stakeholders and the broader financial markets. Thus, allowing 
too much flexibility in clearing agency governance may not 
appropriately address the needs and incentives of the direct or 
indirect participants or the broader financial market.
    The Commission believes that the final rules appropriately balance 
the effects and burdens of imposing more prescriptive governance 
requirements on registered clearing agencies while also enhancing the 
resilience of clearing markets and U.S. financial system.
2. Adopt More Prescriptive Governance Requirements
    Several commenters thought the final rules should be more 
prescriptive than the proposed rules. For example, commenters 
recommended requiring that all registered clearing agency boards have a 
majority of independent directors,\489\ preventing persons affiliated 
with participants from being considered independent,\490\ using a five-
year lookback period (instead of a one-year lookback period) when 
determining independence,\491\ requiring that smaller participants be 
on the board and on board committees,\492\ requiring that the chair of 
all board committees be independent,\493\ requiring fitness standards 
for RMC members,\494\ requiring term limits for RMC members,\495\ 
requiring a registered clearing agency to promptly report to the 
Commission whenever the board does not follow the recommendation of the 
risk committee,\496\ and requiring board members recuse themselves when 
they have a conflict of interest.\497\ However, as discussed in the 
previous reasonable alternative, other commenters supported less 
prescriptive governance regulations for registered clearing agencies.
---------------------------------------------------------------------------

    \489\ See Better Markets, at 17. Cf. Saguato, at 2 (``the 
distinction in board composition between participant-owned . . . 
versus investor-owned clearing agencies . . . is [neither] necessary 
[nor] justified'').
    \490\ See Better Markets at 16; ISDA at 6; IDTA at 1.
    \491\ See LSEG at 5.
    \492\ See IDTA at 4.
    \493\ See LSEG at 13.
    \494\ See SIFMA AMG at 5.
    \495\ See ISDA at 3 (recommending risk committee members serve 
for at least two years and no more than five years); SIFMA AMG, at 5 
(recommending a three-year term).
    \496\ See Saguato at 4; ISDA at 4.
    \497\ See Better Markets at 22.
---------------------------------------------------------------------------

    As discussed in the previous reasonable alternative, the Commission 
believes that the final rules appropriately balance the benefits and 
burdens of more prescriptive governance requirements against the 
benefits and risks of flexibility in governance and risk management. On 
the one hand, a more prescriptive governance approach could help ensure 
that registered clearing agencies internalize the social costs of 
differing incentives between owners and participants, among various 
types of participants, and between registered clearing agency 
stakeholders and the broader financial markets. On the other hand, 
adopting more prescriptive governance requirements could limit clearing 
agencies' flexibility to implement policies and procedures that are 
equally effective but also take into account the agency's unique 
characteristics and circumstances . The final rules strike a reasonable 
balance between these two considerations by codifying the current 
governance best practices to enhance registered clearing agency 
governance while still allowing registered clearing agencies to tailor 
governance structures, policies, and procedures to their specific 
needs.
3. Establish Limits on Participant Voting Interests
    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.'' \498\ Regulation MC proposed mitigating divergent 
incentives, especially between larger and smaller participant-owners, 
by imposing maximum voting interest limits on participants. 
Specifically, Regulation MC proposed that security-based swap clearing 
agencies be required to choose one of two governance alternatives: the 
Voting Interest Alternative and the Governance Interest Alternative. 
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

[[Page 84504]]

participant ownership or voting interests to no more than 40 percent. 
The Voting Interest Alternative also required that at least 35 percent 
of the board be independent directors. The Governance Interest 
Alternative in part limited any participant to no more than 5 percent 
ownership or voting interests in the clearing agency, and required that 
at least 51 percent of the board be independent directors.
---------------------------------------------------------------------------

    \498\ See Regulation MC Proposing Release, supra note 82, at 
65882.
---------------------------------------------------------------------------

    One commenter proposed adopting rules similar to those proposed in 
Regulation MC and further supplementing it ``with more direct actions 
against the market power of large participants.'' \499\ The same 
commenter stated that the reasons the Commission provided for not 
adopting the bright-line rules in Regulation MC were not 
sufficient.\500\
---------------------------------------------------------------------------

    \499\ Better Markets at 2,10.
    \500\ See Better Markets at 15.
---------------------------------------------------------------------------

    The Commission has not adopted ownership limits in the current 
rules because rules during the intervening time have significantly 
altered how registered clearing agencies must treat smaller 
participants.\501\ In addition, while reduced participants' ownership 
in registered clearing agencies can potentially reduce the conflicts of 
interest between large and small and medium participants, it could also 
reduce incentives for participants to be actively involved in the 
agency's governance. This could also increase voting power of non-
participant shareholders, thereby aggravating the conflict of interest 
between participants and non-participant owners. Given these 
considerations, the net benefit of limiting the voting interests of 
participants could be less than that under the final rules.
---------------------------------------------------------------------------

    \501\ The Commission previously adopted rules to promote access 
to registered clearing agencies, including access for smaller 
participants. See generally Governance Proposing Release, supra note 
2, at 51816-51817 (discussing, among other rules, 17 CFR 240.17Ad-
22(b)(5) through (7)).
---------------------------------------------------------------------------

4. Increase Shareholders' At-Risk Capital (``Skin in the Game'')
    The final rules are intended, in part, to better manage divergent 
incentives of registered 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'').\502\ Under the 
existing regulatory structure, for-profit registered 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).\503\ In the Governance Proposing Release, the Commission 
also expressed its belief that the proposed rules would help facilitate 
registered clearing agencies' ability and motivation to adopt policies 
to further mitigate incentive misalignment, including a skin in the 
game requirement.
---------------------------------------------------------------------------

    \502\ See, e.g., Saguato, supra note 435, 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.'').
    \503\ 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.'').
---------------------------------------------------------------------------

    Multiple commenters voiced support for a skin in the game 
requirement.\504\ One commenter disagreed with the Commission's belief 
expressed in the Governance Proposing Release that the proposed rules 
would help facilitate registered clearing agencies' ability to adopt 
policies such as skin in the game requirements and recommended that the 
Commission consider several risk management and resiliency initiatives, 
such as skin in the game, that were not within the scope of the rules 
encompassed in the proposal.\505\
---------------------------------------------------------------------------

    \504\ See, e.g., Better Markets at 5, 13-14; Barclays et al. at 
4.
    \505\ ICI at 7 and n. 30. See also the discussion in Part II.A.4 
accompanying note 75.
---------------------------------------------------------------------------

    For the reasons discussed in Part IV.B.3, the Commission continues 
to believe that the governance requirements in the final rules will 
help a registered clearing agency successfully manage the divergent 
incentives of its owners and participants. However, giving 
consideration to risk management and resiliency initiatives, such as 
skin in the game, could be appropriate in the future.\506\
---------------------------------------------------------------------------

    \506\ Governance Proposing Release, supra note 2, at n.232 and 
accompanying text.
---------------------------------------------------------------------------

5. Increase Public Disclosure
    One of the purposes of the final rules is to increase transparency 
into board governance. Increased transparency could also be achieved by 
requiring registered clearing agencies to enhance their governance 
disclosures. For example, the Commission could require registered 
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 registered 
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.
    Transparency into board governance is beneficial for the clearing 
agency's investors, regulators, and market participants, as it would 
provide a more complete picture of the corporate governance in the 
clearing agencies industry and allow better assessment of risks and 
investor protection issues as it relates to each registered clearing 
agency. Increased public disclosure could be an effective alternative 
governance mechanism for clearing agencies if clearing agencies were 
subject to active market discipline by customers and investors. 
However, registered clearing agency currently have attenuated exposure 
to such market governance mechanisms because of limited competition 
among clearing agencies and the closely held nature of registered 
clearing agencies' ownership structures. Therefore, absent the final 
rules, it is possible that registered clearing agencies would not make 
any significant changes to their governance, operations, or risk 
management solely as a result of the increased public governance 
disclosure.
    In addition, to the extent a registered clearing agency modified 
its governance, operations, or risk management in response to the 
increased public disclosure, absent the final rules, the clearing 
agency would be incentivized to enact policies that are beneficial to 
the clearing agency without necessarily considering the effects of 
those policies on the resilience and efficiency of the clearing market 
as a whole.
    The final rules do not include increased public disclosure 
requirements because the current structure of the clearing agency 
market significantly limits the possible benefits.
6. Require Risk Working Group in Addition To Risk Committee
    Multiple commenters recommended that the Commission require each 
registered clearing agency to have a risk working group, in addition to 
the RMC.\507\ The risk working group would be one of the fora through 
which the registered clearing agency could solicit and consider 
stakeholders viewpoints regarding material developments in the

[[Page 84505]]

registered clearing agency's risk management, in accordance with Rule 
17Ad-25(j).\508\ Unlike the RMC, the risk working group would be an 
advisory group. To harmonize with the existing CFTC and EMIR 
requirements for a risk working group,\509\ the Commission could 
require that the risk working group be chaired by an independent member 
of the board,\510\ include indirect participants \511\ and customers of 
participants (i.e., end users),\512\ not include owners,\513\ and have 
its membership rotated on a regular basis.\514\ The Commission could 
also require representatives from direct participants of varying 
sizes.\515\
---------------------------------------------------------------------------

    \507\ See, e.g., Barclays et al. at 2; ICI at 3; ISDA at 3; 
Saguato at 4; SIFMA AMG at 4; SIFMA at 3-4.
    \508\ See ISDA at 5 (suggesting a risk working group as a forum 
for soliciting and considering stakeholder viewpoints).
    \509\ The CFTC requirements for risk working groups are in 17 
CFR 39.24(b). The EMIR requirements for risk working groups are in 
EMIR, supra note 56, Article 28. Multiple commenters encouraged 
harmonization with the CFTC's risk committee rule. See, e.g., ICE at 
5; ICI at 3; SIFMA AMG at 1.
    \510\ See EMIR, supra note 56, Article 28 (requiring that the 
risk committee be ``chaired by an independent member of the 
board.'').
    \511\ See EMIR, supra note 56, Article 28 (requiring that the 
risk committee ``shall be composed of representatives of its 
clearing members, independent members of the board and 
representatives of its clients.'').
    \512\ See 17 CFR 39.24(b)(11)(ii) (The CFTC requires that ``A 
risk management committee includes at least two clearing member 
representatives, and, if applicable, at least two representatives of 
customers of clearing members.'').
    \513\ See LSEG at 11 (``owners are not permitted to be on the 
RMC under EMIR'').
    \514\ See 17 CFR 39.24(b)(11)(iii) (The CFTC requires that 
``membership of a risk management committee is rotated on a regular 
basis.'').
    \515\ Several commenters recommended requiring diverse 
representation from among participants (See, e.g., IDTA at 3; CCP12 
at 6).
---------------------------------------------------------------------------

    Requiring a risk working group would benefit registered clearing 
agencies by clearly harmonizing with CTFC and EMIR requirements. On the 
other hand, requiring a risk working group could impose costs on a 
registered clearing agency if the registered clearing agency is not 
regulated by the CFTC or subject to EMIR and prefers to use a different 
forum to solicit and consider stakeholders viewpoints regarding 
material developments in the registered clearing agency's risk 
management. The Commission is not adopting a rule to require risk 
working groups because the benefits of doing so do not justify the 
potential costs of a clearing agency's reduced flexibility in how it 
structures its governance arrangements. The Commission's decision to 
not require a risk working group does not impose any additional costs 
on clearing agencies. Clearing agencies that are also regulated by the 
CFTC or subject to EMIR can use the requisite risk working group as a 
forum for satisfying the requirements of Rule 17Ad-25(j).

V. Paperwork Reduction Act

    As discussed in the Governance Proposing Release, Rule 17Ad-25 
contains ``collection of information'' requirements within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\516\ The Commission 
submitted the proposed collections of information to the Office of 
Management and Budget (``OMB'') for review in accordance with the PRA. 
The title of the information collection is ``Rule 17Ad-25--Clearing 
Agency Governance and Conflicts of Interest'' (OMB Control No. 3235-
0800). 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.
---------------------------------------------------------------------------

    \516\ See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    As discussed further below and previously in the Governance 
Proposing Release,\517\ Rules 17Ad-25(b) through (d) and (g) through 
(j) each contain collections of information. The collections in Rules 
17Ad-25(b) through (d) and (g) through (j) are mandatory.\518\ To the 
extent that the Commission receives confidential information pursuant 
to this collection of information, such information would be kept 
confidential subject to the provisions of applicable law.\519\
---------------------------------------------------------------------------

    \517\ See Governance Proposing Release, supra note 2, at 51851.
    \518\ The existing record maintenance and preservation 
requirements in Rule 17a-1 require a registered clearing agency to 
keep and preserve at least one copy of all documents, including all 
correspondence, memoranda, papers, books, notices, accounts, and 
other such records as shall be made or received by it in the course 
of its business as such and in the conduct of its self-regulatory 
activity. Accordingly, under the existing provisions of Rule 17a-1, 
registered clearing agencies are required to preserve at least one 
copy of records created for the purposes of complying with Rule 
17Ad-25 for at least five years, with the first two years in an 
easily accessible place.
    \519\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the Freedom 
of Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    Respondents under these rules are registered clearing agencies, of 
which there are currently eight.\520\ The Commission continues to 
estimate for purposes of this PRA that one additional entity may seek 
to register as a clearing agency in the next three years, and so for 
purposes of this release the Commission has assumed nine respondents.
---------------------------------------------------------------------------

    \520\ The Governance Proposing Release identified ten 
respondents, based on nine registered clearing agencies; however, on 
November 9, 2023, the Commission approved the withdrawal of one 
registered clearing agency, reducing the number of respondents. See 
Release No. 34-98902 (Nov. 9, 2023).
---------------------------------------------------------------------------

A. Rule 17Ad-25(b)

    The requirements and purpose of Rule 17Ad-25(b), as modified at 
adoption, have been discussed in Part II.A and also in the Governance 
Proposing Release.\521\ Specifically, the Commission is modifying Rule 
17Ad-25(b)(2)(iii) with a technical change to specify that the 
documentation requirement applies to both the clearing agency's 
evaluation of director independence and its ultimate determination 
(i.e., whether the director qualifies as an independent director or is 
not an independent director). Because the modification is consistent 
with the discussion of the proposed rule in the Governance Proposing 
Release, the burden is unchanged from the original proposal. 
Accordingly, the Commission continues to estimate that Rule 17Ad-
25(b)(2) will require respondent clearing agencies to incur a one-time 
burden of 44 hours to memorialize information that has been gathered 
for the person(s) making the determination to consider prior to making 
it,\522\ as well as 5 hours to document and preserve the records of the 
evaluation and determination.\523\ The Commission also continues to 
estimate that the initial activities required by Rule 17Ad-25(b)(2) 
will impose an aggregate initial burden on respondent clearing agencies 
of 441 hours.\524\ 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 continues to 
estimate that respondent clearing agencies will incur an ongoing annual 
burden of 98 hours to repeat the above process of memorializing 
information and documenting a determination twice a year.\525\ The 
Commission also continues to estimate that the ongoing activities 
required by Rule 17Ad-25(b)(2) impose an aggregate ongoing

[[Page 84506]]

burden on respondent clearing agencies of 882 hours.\526\
---------------------------------------------------------------------------

    \521\ See Governance Proposing Release, supra note 2, at 51820-
27.
    \522\ This figure is calculated as follows: ((Chief Compliance 
Officer for 4 hours) + (Compliance Attorney for 40 hours)) = 44 
hours.
    \523\ This figure is calculated as follows: ((Chief Compliance 
Officer for 1 hours) + (Compliance Attorney for 4 hours)) = 5 hours.
    \524\ This figure is calculated as follows: 49 hours x 9 
respondent clearing agencies = 441 hours.
    \525\ This figure is calculated as follows: ((Chief Compliance 
Officer for 10 hours) + (Compliance Attorney for 88 hours)) = 98 
hours.
    \526\ This figure is calculated as follows: 98 hours x 9 
respondent clearing agencies = 882 hours.
---------------------------------------------------------------------------

B. Rule 17Ad-25(c)

    The requirements and purpose of Rule 17Ad-25(c) have been discussed 
in Part II.B and also in the Governance Proposing Release.\527\ As 
discussed in the Governance Proposing Release,\528\ Rule 17Ad-25(c)(1) 
through (4) 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).\529\ Because the governance requirements in Rule 17Ad-25(c) 
are consistent with the discussion of the proposed rule in the 
Governance Proposing Release, the initial burden is unchanged from the 
original proposal. Therefore, the Commission continues to 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 rule. Accordingly, the Commission continues to estimate 
that respondent clearing agencies will incur an aggregate one-time 
burden of approximately 720 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.\530\
---------------------------------------------------------------------------

    \527\ See Governance Proposing Release, supra note 2, at 51828-
30.
    \528\ See id. at 51852.
    \529\ 17 CFR 240.17ad-22(d)(8), (e)(2).
    \530\ This figure is calculated as follows: ((Assistant General 
Counsel for 30 hours) + (Compliance Attorney for 50 hours)) = 80 
hours x 9 respondent clearing agencies = 720 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(c)(1) through (4) also impose ongoing burdens on a 
respondent clearing agency. As discussed in the Governance Proposing 
Release, the rule will require ongoing monitoring and compliance 
activities with respect to governance documents and related policies 
and procedures created in response to the rule, and ongoing 
documentation activities with respect to the implementation of a 
written process for a nominating committee to evaluate board nominees 
or directors, pursuant to the rule. In addition, as discussed in Part 
II.B.2, the Commission is modifying Rule 17Ad-25(c) in two ways: the 
Commission is modifying paragraph (1) to add that the nominating 
committee shall ``evaluate the independence of nominees and 
directors,'' in addition to nominees for serving as directors, and 
paragraph (4)(iv) in two places to specify that the evaluation process 
applies to nominees as well as directors. Because this modification is 
consistent with the discussion of the proposed rule in the Governance 
Proposing Release, the ongoing burden is unchanged from the original 
proposal. Accordingly, the Commission continues to estimate that the 
ongoing activities required by Rule 17Ad-25(c)(1) through (4) impose an 
aggregate annual burden on respondent clearing agencies of 270 
hours.\531\
---------------------------------------------------------------------------

    \531\ This figure is calculated as follows: (Compliance Attorney 
for 30 hours) x 9 respondent clearing agencies = 270 hours.
---------------------------------------------------------------------------

C. Rule 17Ad-25(d)

    The requirements and purpose of Rule 17Ad-25(d) have been discussed 
in Part II.C and also in the Governance Proposing Release.\532\ As 
discussed in the Governance Proposing Release,\533\ the Commission 
understands that many registered clearing agencies currently have 
written governance arrangements that largely conform to the 
requirements for RMCs in Rules 17Ad-25(d)(1) and (2). Therefore, the 
Commission continues to 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 rule.\534\ As discussed 
in Part II.C.3, the Commission is adopting Rule 17Ad-25(d) as proposed, 
with modifications. Specifically, Rule 17Ad-25(d)(1) has been modified 
to reflect that: (1) the RMC is ``of the board'' of the registered 
clearing agency; (2) the RMC's membership must be re-evaluated 
annually.'' Additionally, Rule 17Ad-25(d)(2) has been modified to 
reflect that the RMC's work must support the ``overall risk management, 
safety and efficiency of the registered clearing agency.'' However, 
these modifications would impose the same burden as the original 
proposal because, as discussed in the Governance Proposing Release, the 
proposed requirement to ``reconstitute'' the RMC provides each 
registered clearing agency with discretion to determine the appropriate 
timing for reconstitution, explaining that, for example, the charter 
for the RMC could establish that the committee will conduct a review of 
its members annually to assess whether the committee continues to be an 
accurate reflection of the clearing agency's owners and 
participants.\535\ Accordingly, the Commission continues to estimate 
that respondent clearing agencies will incur an aggregate one-time 
burden of approximately 72 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.\536\
---------------------------------------------------------------------------

    \532\ See Governance Proposing Release, supra note 2, at 51830-
33.
    \533\ See id. at 51852.
    \534\ Because the written governance arrangements at many 
registered clearing agencies already largely conform to the 
requirements for RMCs, 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 Rules 17Ad-
25(d)(1) and (2). See Governance Proposing Release, supra note 2, at 
51852.
    \535\ See id. at 51832-33.
    \536\ This figure is calculated as follows: ((Assistant General 
Counsel for 3 hours) + (Compliance Attorney for 5 hours)) = 8 hours 
x 9 respondent clearing agencies = 72 hours.
---------------------------------------------------------------------------

    Rules 17Ad-25(d)(1) and (2) also impose ongoing burdens on a 
respondent clearing agency, including ongoing monitoring and compliance 
activities with respect to the governance documents and related 
policies and procedures created in response to the rule. The rule also 
requires ongoing documentation activities with respect to the 
establishment of an RMC. Although the Commission has modified Rule 
17Ad-25(d)(1) and (2) for the same reasons as discussed above, the 
ongoing burden will be unchanged from the Governance Proposing Release. 
Accordingly, the Commission continues to estimate that the ongoing 
activities required by Rules 17Ad-25(d)(1) and (2) impose an aggregate 
annual burden on respondent clearing agencies of 27 hours.\537\
---------------------------------------------------------------------------

    \537\ This figure is calculated as follows: (Compliance Attorney 
for 3 hours) x 9 respondent clearing agencies = 27 hours.
---------------------------------------------------------------------------

D. Rule 17Ad-25(g)

    The requirements and purpose of Rule 17Ad-25(g) have been discussed 
in Part II.D and also in the Governance Proposing Release.\538\ As 
discussed in the Governance Proposing Release, Rule 17Ad-25(g)(1) 
contains similar provisions to Rules 17Ad-22(d)(8) and 17Ad-22(e)(2), 
in that it references clear and transparent governance arrangements but 
also adds additional requirements that do not appear in those existing 
rules. The Commission expects that a respondent clearing agency may 
have written rules, policies, and procedures similar to the 
requirements

[[Page 84507]]

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, the Commission continues to estimate that respondent 
clearing agencies will incur an aggregate one-time burden of 
approximately 72 hours to review and revise existing policies and 
procedures and to create new policies and procedures as necessary to 
ensure compliance with Rule 17Ad-25(g)(1).\539\
---------------------------------------------------------------------------

    \538\ See Governance Proposing Release, supra note 2, at 51833-
35.
    \539\ This figure is calculated as follows: ((Assistant General 
Counsel for 5 hours) + (Compliance Attorney for 3 hours)) = 8 hours 
x 9 respondent clearing agencies = 72 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(g)(1) also imposes ongoing burdens on a respondent 
clearing agency, including ongoing monitoring and compliance activities 
with respect to its policies and procedures under the rule. As 
discussed in the Governance Proposing Release, Rule 17Ad-25(g)(1) 
requires a registered clearing agency to update current policies and 
procedures or establish new policies and procedures to ensure 
compliance. The Commission continues to estimate that the ongoing 
activities required by Rule 17Ad-25(g)(1) impose an aggregate annual 
burden on respondent clearing agencies of 27 hours.\540\
---------------------------------------------------------------------------

    \540\ This figure is calculated as follows: (Compliance Attorney 
for 3 hours) x 9 respondent clearing agencies = 27 hours.
---------------------------------------------------------------------------

    Like paragraph (g)(1), paragraph (g)(2) also contains similar 
provisions to Rules 17Ad-22(d)(8) and 17Ad-22(e)(2), in that it 
references clear and transparent governance arrangements but also adds 
additional requirements that do not appear in those rules. As discussed 
in the Governance Proposing Release, the Commission continues to 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 Rule 17Ad-25(g)(1), they may not 
have current policies and procedures designed specifically to mitigate 
or eliminate and document how the conflict of interest was mitigated or 
eliminated, as required by Rule 17Ad-25(g)(2). Accordingly, the 
Commission continues to estimate that respondent clearing agencies will 
incur an aggregate one-time burden of approximately 45 hours to review 
and revise existing policies and procedures and to create new policies 
and procedures as necessary to help ensure compliance with Rule 17Ad-
25(g)(2).\541\
---------------------------------------------------------------------------

    \541\ This figure is calculated as follows: ((Assistant General 
Counsel for 3 hours) + (Compliance Attorney for 2 hours)) = 5 hours 
x 9 respondent clearing agencies = 45 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(g)(2) also imposes ongoing burdens on a respondent 
clearing agency, including ongoing monitoring and compliance activities 
with respect to its policies and procedures under the rule. As 
discussed in the Governance Proposing Release, Rule 17Ad-25(g)(2) 
requires updating current policies and procedures or establishing new 
policies and procedures to ensure compliance. The Commission continues 
to estimate that the ongoing activities required by Rule 17Ad-25(g)(2) 
impose an aggregate annual burden on respondent clearing agencies of 18 
hours.\542\
---------------------------------------------------------------------------

    \542\ This figure is calculated as follows: (Compliance Attorney 
for 2 hours) x 9 respondent clearing agencies = 18 hours.
---------------------------------------------------------------------------

E. Rule 17Ad-25(h)

    The requirements and purpose of Rule 17Ad-25(h) have been discussed 
in Part II.D and also in the Governance Proposing Release.\543\ As 
discussed in the Governance Proposing Release,\544\ Rule 17Ad-25(h) 
contains similar provisions to Rules 17Ad-22(d)(8) and 17Ad-22(e)(2), 
in that it references clear and transparent governance arrangements but 
also adds additional requirements that do not appear in those rules. 
The Commission continues to 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, the Commission continues to estimate 
that respondent clearing agencies would incur an aggregate one-time 
burden of approximately 18 hours to review and revise existing policies 
and procedures and to create new policies and procedures as necessary 
to ensure compliance with Rule 17Ad-25(h).\545\
---------------------------------------------------------------------------

    \543\ See Governance Proposing Release, supra note 2, at 51833, 
51835.
    \544\ See id. at 51853-54.
    \545\ This figure is calculated as follows: ((Assistant General 
Counsel for 1 hours) + (Compliance Attorney for 1 hours)) = 2 hours 
x 9 respondent clearing agencies = 18 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(h) also imposes ongoing burdens on a respondent 
clearing agency, including ongoing monitoring and compliance activities 
with respect to its policies and procedures under the rule. The 
Commission continues to estimate that the ongoing activities required 
by Rule 17Ad-25(h) impose an aggregate annual burden on respondent 
clearing agencies of 9 hours.\546\
---------------------------------------------------------------------------

    \546\ This figure is calculated as follows: (Compliance Attorney 
for 1 hours) x 9 respondent clearing agencies = 9 hours.
---------------------------------------------------------------------------

F. Rule 17Ad-25(i)

    The requirements and purpose of Rule 17Ad-25(i) have been discussed 
in Part II.E and also in the Governance Proposing Release.\547\ As 
discussed in the Governance Proposing Release,\548\ certain aspects of 
the rule may be addressed in existing requirements. For example, Rule 
17Ad-25(i)(1) references the existence of a risk management framework 
but does not itself require the creation of such framework, maintenance 
of which is instead required for covered clearing agencies under Rule 
17Ad-22(e)(3)(i).\549\ Additionally, as discussed above,\550\ there are 
existing requirements for managing operational risk under Rule 17Ad-
22(d)(4) and Rule 17Ad-22(e)(17).\551\ Therefore, the Commission 
expects 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 rule. However, as discussed further in Part 
II.E, the Commission is modifying the rule in several ways in response 
to comments regarding potential interpretations of the proposed rule 
text and the resulting burdens, which some commenters believe are 
substantially higher than the estimates in the Governance Proposing 
Release.\552\ Because these modifications in the final rule are 
intended to align the rule text with the Commission's expectations at 
proposal and generally accepted corporate governance principles, which 
are themselves generally aligned with the recommendations and analysis 
provided by commenters, the initial burden estimates in the original 
proposal remain accurate. The modifications are meant to clearly 
differentiate the roles of

[[Page 84508]]

senior management and the board in the context of Rule 17Ad-25(i) while 
preserving the intended impact of the proposed rule. In this regard, 
while the words and phrases in the proposed rule have changed and 
moved, the burdens remain unchanged. Accordingly, the Commission 
continues to estimate that respondent clearing agencies will incur an 
aggregate one-time burden of approximately 720 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.\553\
---------------------------------------------------------------------------

    \547\ See Governance Proposing Release, supra note 2, at 51835-
37.
    \548\ See id.
    \549\ See 17 CFR 240.17ad-22(e)(3)(i). In addition, the 
Commission notes that, currently, all registered clearing agencies 
are covered clearing agencies.
    \550\ See supra Part IV.B.4.c.
    \551\ 17 CFR 240.17ad-22(d)(4), (e)(17).
    \552\ See DTCC at 11 (stated that an additional 660 hours in 
annual burden would be required beyond the Commission's initial 
calculation).
    \553\ This figure is calculated as follows: ((Assistant General 
Counsel for 30 hours) + (Compliance Attorney for 50 hours)) = 80 
hours x 9 respondent clearing agencies = 720 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(i) also imposes ongoing burdens on a respondent 
clearing agency, including ongoing documentation, monitoring, and 
compliance activities with respect to the governance documents and 
related policies and procedures created in response to the rule. For 
the same reasons as those discussed above regarding the initial burdens 
of the final rule, the burdens in the original proposal remain an 
accurate assessment of the anticipated ongoing burdens. Accordingly, as 
discussed in the Governance Proposing Release,\554\ the Commission 
continues to estimate that the ongoing activities required by Rule 
17Ad-25(i) impose an aggregate annual burden on respondent clearing 
agencies of 270 hours.\555\
---------------------------------------------------------------------------

    \554\ See Governance Proposing Release, supra note 2, at 51854.
    \555\ This figure is calculated as follows: (Compliance Attorney 
for 30 hours) x 9 respondent clearing agencies = 270 hours.
---------------------------------------------------------------------------

G. Rule 17Ad-25(j)

    The requirements and purpose of Rule17Ad-25(j) have been discussed 
in Part II.F and also in the Governance Proposing Release.\556\ As 
discussed in the Governance Proposing Release,\557\ Rule 17Ad-25(j) 
contains similar provisions to Rules 17Ad-22(d)(8) and 17Ad-22(e)(2) 
but will also impose additional governance obligations that do not 
appear in existing requirements, such as obligations to solicit and 
document its consideration of input received from certain types of 
relevant stakeholders, including, for example, customers of clearing 
agency participants.\558\ As discussed in Part II.F.3, the Commission 
has modified the rule at adoption so that the scope of topics on which 
a registered clearing agency seeks input under the rule is ``risk 
management and operations'' rather than ``governance and operations.'' 
\559\ However, this modification specifies the scope that was 
originally intended and discussed in the Governance Proposing 
Release.\560\ Accordingly, the Commission continues to expect that a 
respondent clearing agency may have written rules, policies, and 
procedures similar to some of the requirements in the 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 rule. In addition, the 
Commission continues to estimate that respondent clearing agencies will 
incur an aggregate one-time burden of approximately 126 hours to review 
and revise existing policies and procedures and to create new policies 
and procedures, as necessary.\561\
---------------------------------------------------------------------------

    \556\ See Governance Proposing Release, supra note 2, at 51838.
    \557\ See id. at 51854.
    \558\ See 17 CFR 240.17ad-22(d)(8), (e)(2).
    \559\ See supra Part II.F.3 (discussing Rule 17Ad-25(j)).
    \560\ See id.
    \561\ This figure was calculated as follows: ((Assistant General 
Counsel for 8 hours) + (Compliance Attorney for 6 hours)) = 14 hours 
x 9 respondent clearing agencies = 126 hours.
---------------------------------------------------------------------------

    Rule 17Ad-25(j) also imposes ongoing burdens on a respondent 
clearing agency, including ongoing monitoring and compliance activities 
with respect to the written policies and procedures created in response 
to the rule. As discussed in the Governance Proposing Release, the rule 
will also require ongoing documentation activities with respect to the 
board's consideration of participants' and relevant stakeholders' views 
pursuant to the rule.\562\ The Commission continues to estimate that 
the ongoing activities required by Rule 17Ad-25(j) impose an aggregate 
annual burden on respondent clearing agencies of 36 hours.\563\
---------------------------------------------------------------------------

    \562\ See Governance Proposing Release, supra note 2, at 51854.
    \563\ This figure was calculated as follows: (Compliance 
Attorney for 4 hours) x 9 respondent clearing agencies = 36 hours.
---------------------------------------------------------------------------

H. Chart of Total PRA Burdens

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Total annual
                                                                             Number of    Initial burden  Ongoing burden    burden per    Total industry
      Name of information collection               Type of burden           respondents     per entity      per entity    (hours) entity  burden (hours)
                                                                                              (hours)         (hours)         (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
17Ad-25(b)................................  Recordkeeping...............               9              49              98             147           1,323
17Ad-25(c)................................  Recordkeeping...............               9              80              30             110             990
17Ad-25(d)................................  Recordkeeping...............               9               8               3              11              99
17Ad-25(g)................................  Recordkeeping...............               9              13               5              18             162
17Ad-25(h)................................  Recordkeeping...............               9               2               1               3              27
17Ad-25(i)................................  Recordkeeping...............               9              80              30             110             990
17Ad-25(j)................................  Recordkeeping...............               9              14               4              18             162
--------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\564\ Section 603(a) of the Administrative Procedure Act,\565\ 
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.'' \566\ 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 economic impact on 
a substantial number of small entities.\567\ The Commission certified 
in the Governance Proposing Release, pursuant to section 605(b) of the 
RFA, that the proposed rules would not, if adopted, have a significant 
impact on a substantial number of small entities. The Commission 
received no comments on this certification.
---------------------------------------------------------------------------

    \564\ See 5 U.S.C. 601 et seq.
    \565\ 5 U.S.C. 603(a).
    \566\ 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 rulemaking, are set forth in 17 CFR 
240.0-10.
    \567\ See 5 U.S.C. 605(b).

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

[[Page 84509]]

A. Registered Clearing Agencies

    Rule 17Ad-25 applies to all registered clearing agencies. For the 
purposes of Commission rulemaking and as applicable to 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.\568\
---------------------------------------------------------------------------

    \568\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission,\569\ 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, no such 
entities would be ``small entities'' as defined in Exchange Act Rule 0-
10.\570\
---------------------------------------------------------------------------

    \569\ See supra notes 379-380 and accompanying text (discussing 
volume of activity in the cleared SBS market and the value of 
transactions processed by DTCC and OCC). The notional value of CDS 
cleared by ICE was $23.8 trillion and $17.0 trillion in 2022 and 
2021, respectively. See ICE, 2022 Annual 
Report,450739CLEANLPDF_LAN_26Mar202318511551_013.PDF (q4cdn.com). 
The notional value of CDS cleared by LCH SA was [euro]3,367 billion 
and $2,283 billion in 2022 and 2021, respectively. See LCH Group 
Holdings Ltd., 2022 Annual Report, https://www.lch.com/system/files/media_root/lch-group-holdings-limited-financial-statements-2022.pdf. 
In each case, these volumes exceed the $500 million threshold for 
small entities.
    \570\ 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 Rule 
17Ad-25 does not have a significant economic impact on a substantial 
number of small entities for purposes of the RFA.

VII. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\571\ the Office of 
Information and Regulatory Affairs has designated these rules as not a 
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \571\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

Statutory Authority

    The Commission is adopting 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 amended as follows:

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, 78j-4, 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, 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; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Public 
Law 112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless 
otherwise noted.
* * * * *

0
2. Section 240.17ad-25 is added after Sec.  240.17Ad-24 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 50 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 50 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 exists or existed during a lookback period of one year 
from the initial determination in paragraph (b)(2) and that reasonably 
could affect the independent judgment or decision-making of the 
director.
    Service provider for core services means any person that, through a 
written services provider agreement for services provided to or on 
behalf of the registered clearing agency, on an ongoing basis, directly 
supports the delivery of clearance or 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 interests 
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 making such determination, a registered clearing 
agency must:
    (i) Identify the relationships between a director and the 
registered clearing agency or any affiliate thereof and any 
circumstances under paragraph (f) of this section;

[[Page 84510]]

    (ii) Evaluate whether any relationship is likely to impair the 
independence of the director in performing the duties of director; and
    (iii) Document the evaluation and 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 and evaluate the independence of nominees and 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 affected 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 nominee or director would meet the 
definition of independent director in paragraphs (a) and (f) of this 
section, and whether each such nominee or director 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) of the board 
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 re-evaluated annually 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 overall risk management, safety and efficiency of the 
registered clearing agency.
    (e) Committees generally. 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 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) Management of risks from relationships with service providers 
for core services. Each registered clearing agency must establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to:
    (1) Require senior management to evaluate and document the risks 
related to an agreement with a service provider

[[Page 84511]]

for core services, including under changes to circumstances and 
potential disruptions, and whether the risks can be managed in a manner 
consistent with the clearing agency's risk management framework;
    (2) Require senior management to submit to the board of directors 
for review and approval any agreement that would establish a 
relationship with a service provider for core services, along with the 
risk evaluation required in paragraph (i)(1) of this section;
    (3) Require senior management to be responsible for establishing 
the policies and procedures that govern relationships and manage risks 
related to such agreements with service providers for core services and 
require the board of directors to be responsible for reviewing and 
approving such policies and procedures; and
    (4) Require senior management to perform ongoing monitoring of the 
relationship, and report to the board of directors for its evaluation 
of any action taken by senior management to remedy significant 
deterioration in performance or address changing risks or material 
issues identified through such monitoring; or if the risks or issues 
cannot be remedied, require senior management to assess and document 
weaknesses or deficiencies in the relationship with the service 
provider for submission to the board of directors.
    (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 require 
the board of directors 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 risk management and operations on a recurring 
basis.

    By the Commission.

    Dated: November 16, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25807 Filed 12-4-23; 8:45 am]
BILLING CODE 8011-01-P