represent the clearing agency's participant-owners would mitigate
against the possibility of a divergence of interests. Accordingly, the
Commission is proposing a lower requirement for independent directors
of at least 34 percent of directors when the registered clearing agency
has a majority of its voting interests directly or indirectly held by
participants; indirectly held by participants refers to participant
ownership of a parent company. For example, if a registered clearing
agency is wholly-owned by a holding company, and the holding company is
majority owned by the participants of the registered clearing agency,
then a 34 percent threshold would apply. Alternatively, if a registered
clearing agency was 51 percent owned by a holding company, and that
holding company was 100 percent owned by the participants of the
registered clearing agency, then that would also amount to a majority
ownerships of participants, which would cause the 34 percent
independent director provision to apply. The Commission proposes to
require 34 percent, or greater than one-third of directors, to
encourage a significant portion of directors to meet the independence
requirement but to provide a comparatively higher level of discretion
to the clearing agency to select non-independent directors. A
requirement for greater than one-third independent directors would
align with the requirement for independence in other jurisdictions for
clearing agencies.\105\ In addition, if 34 percent of directors are
independent directors, and participants and owners of the registered
clearing agency are predominantly the same entity (i.e., participant-
owners), then it remains less likely that any one of the three distinct
groups seeking to influence the registered clearing agency--owners,
management, and participants--will establish an outsized influence over
the remaining non-independent directors.
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    \105\ See EMIR at art. 27(2), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32012R0648&from=EN (stating that ``[a]
CCP shall have a board. At least one third, but no less than two, of
the members of that board shall be independent''); see also id. at
art. 2(28) (defining independent member of the board to mean a
member of the board who has no business, family or other
relationship that raises a conflict of interests regarding the CCP
concerned or its controlling shareholders, its management or its
clearing members, and who has had no such relationship during the
five years preceding his membership of the board).
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    Finally, the proposed rule defines the 34 percent requirement using
the term ``holders of voting interests'' rather than simply ``owners''
so that the lower threshold only applies when participant-owners are
entitled to vote to elect a director, irrespective of whether someone
is otherwise entitled to the financial attributes of such ownership.
The Commission is not using the term owner as the equivalent concept of
holder of a voting interest, because the financial attributes of a
security can be separated from the voting rights of a security. The
Commission is focused on who has the ability to influence who is voted
onto the board--which accompanies voting rights, not financial
attributes--as the relevant factor in deciding whether

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

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

B. Nominating Committee

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

    \107\ Section 3(a)(39) of the Exchange Act lists the particular
events that would subject a person to ``statutory disqualification''
with respect to membership or participation in, or association with
a member of, a self-regulatory organization, such as a registered
clearing agency. 15 U.S.C. 78q-1(a)(3)(C).
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2. Discussion
    In Part III.A.2, the Commission discussed the importance of
requiring independent directors on the board of a registered clearing
agency to help manage the dynamics that exist between owners and
participants. To help ensure that the nomination process for the
selection of independent directors is thoughtful and transparent,
promote the integrity of determinations that a nominee is independent
and is qualified to serve, and also promote more effective governance,
the Commission is proposing to require a nominating committee that is
composed of a majority of independent directors and chaired by an
independent director. The Commission is proposing to require that the
nominating committee be composed of a majority of independent directors
in all cases, even where a clearing agency is majority-owned by
participants, to help ensure that the evaluation of director nominees
by the nominating committee reflects independent judgment.\108\
---------------------------------------------------------------------------

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

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

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

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

(b) Role of Independent Directors
    Not all registered clearing agencies require that the nominating
committee be chaired by an independent director or composed of a
majority of independent directors. As discussed above, however,
independent directors are well-suited to help manage the divergent
interests that exist among management, owners, and participants,\111\
and are also best incentivized to help ensure that nominees do not have
conflicts of interest that would preclude independent decision-making
or otherwise undermine the decisions of the board.\112\ Because a
majority of independent directors can help provide perspectives broader
than owners and participants, constituting the nominating committee
with a majority of independent directors would help promote the fair
representation of owners and participants in the selection of
directors. In addition, independent directors would facilitate a fair
evaluation of a nominee's qualifications, including whether such
individual would meet the Commission's proposed criteria for being an
independent director, as such an evaluation would be conducted by a
body that is free from influence in the performance of its duties and
whose majority would itself satisfy the proposed criteria for being
independent directors. By contrast, when evaluating nominees, directors
serving on the nominating committee who are not independent directors
may be more likely to favor board candidates whose views align with
those persons with whom the director has a material relationship,
reducing the likelihood that the nominating committee will consider a
set of director nominees that represent the different stakeholders in a
clearing agency. Thus, having a nominating committee that is composed
of majority independent directors should help to address and facilitate
both the selection of independent directors, as well as the selection
of a broad range of directors that reflect the different stakeholder
groups in a fair and more representative way.
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    \111\ See supra Part III.A.2 (discussing independent directors
as a governance tool to address such divergent interests).
    \112\ See supra Part III.A.2 (discussing independent directors
as a governance tool to address such conflicts).
---------------------------------------------------------------------------

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

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

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

    While proposed Rule 17Ad-25(c)(4)(iii) does not require a
registered clearing agency to include other types of stakeholders in
the selection of directors, the Commission understands that other
stakeholders--including transfer agents, settlement banks, nostro
agents, liquidity providers, technology or other service providers--may
be impacted by board decisions concerning risk management and other
significant operational issues. Therefore, the Commission believes that
board governance may benefit in some instances from considering such
stakeholders' perspectives in the evaluation process for director
nominees. Accordingly, proposed Rule 17Ad-25(c)(4)(iii) would help
ensure that the nominating committee considers the views of other
stakeholders who may be impacted by the decisions of the clearing
agency into the evaluation process for director nominees. In this
regard, the Commission believes that proposed Rule 17Ad-25(c)(4)(iii)
would facilitate a process that considers the wide variety of
perspectives that may have an interest in the risk management purpose
of the clearing agency.
    Proposed Rule 17Ad-25(c)(4)(iii) would give the nominating
committee discretion to determine how to consider the views of other
stakeholders, in part based on the markets served by the clearing
agency and the relevant interested stakeholders. In the Commission's
view, relevant stakeholders generally would include persons and
entities that access the national system for clearance and settlement
indirectly (e.g., institutional and retail investors), entities that
rely on the national system for clearance and settlement to more
effectively provide services to investors and market participants, and
other market infrastructures.\114\ The Commission believes that
considering the views of such persons and entities in particular would
support the Exchange Act requirements that clearing agencies be able to
facilitate prompt and accurate clearance and settlement, protect
investors and the public interest, and ensure the safeguarding of
securities and funds in the custody or control of the clearing agency
or for which the clearing agency is responsible.\115\ The Commission
understands that the scope of relevant stakeholders who may be impacted
by the decisions of the registered clearing agency will vary for each
registered clearing agency and could include direct participants,
indirect participants, and other stakeholders described in proposed
Rule 17Ad-25(c)(4)(iii).
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    \114\ See CCA Standards Adopting Release, supra note 13, at
70803 (``Other relevant stakeholders currently include, for example,
transfer agents, liquidity providers, and other linked market
infrastructures, including exchanges, matching service providers,
and payment systems.'').
    \115\ See supra Part I and Part II.A; see also 15 U.S.C 78q-
1(b)(3)(A).
---------------------------------------------------------------------------

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

C. Risk Management Committee

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

D. Conflicts of Interest

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

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

    \126\ See CCA Standards Adopting Release, supra note 13, at
70804 (stating that ``[o]ne commenter stated that proposed Rule
17Ad-22(e)(2) does not require covered clearing agencies to resolve
conflicts of interests among board members and management and urged
the Commission explicitly to require covered clearing agencies to
document and maintain policies and procedures governing the
resolution of conflicts of interests that may impact certain
decisions by the board of directors. The Commission notes . . . that
the commenter's concern is addressed by Section 17A(b)(3)(F) of the
Exchange Act, which requires that the rules of a clearing agency be
designed, in general, to protect investors and the public
interest'').
    \127\ See 15 U.S.C. 78q-1(b)(3)(C).
    \128\ See CCA Standards Adopting Release, supra note 13, at
70793 (stating that ``the Commission has considered the level of
concentration in the provision of clearing agency services'' and
acknowledging concerns ``that at present the clearance and
settlement industry, like much of the financial sector, can be
described as highly concentrated, and . . . that it is paramount . .
. [to] promote the proliferation of viable new clearing agencies,
given that existing clearing agencies typically serve as
intermediaries for trillions of dollars in trading volumes'').
    \129\ See Staff Report on Clearing Agencies, supra note 27, at
21.
---------------------------------------------------------------------------

    With the above in mind, requirements on registered clearing
agencies to address conflicts of interest would strengthen the
integrity of a registered clearing agency's governance arrangements,
including those regarding director independence, the fitness standards
applied and nominations made by the nominating committee, and the
independent opinions and recommendations made by the risk management
committee previously discussed. Proposed Rules 17Ad-25(g) and (h) help
promote the integrity of these governance arrangements by helping
ensure that a registered clearing agency is capable of both identifying
potential conflicts when they arise and subjecting conflicts to a
transparent and uniform process of review, mitigation or elimination,
and documentation. Specifically, the proposed rules would help ensure
that potential conflicts of interest are identified and documented,
that policies and procedures for their management have been established
ex ante to help ensure a consistent approach over time, and that cases
are subject to established processes for review and mitigation or
elimination. In some cases, for example, a conflicts of interest policy
may simply require that a director or senior manager recuse herself
from a particular decision to mitigate or eliminate the conflict of
interest. At the same time, the Commission believes that disclosure,
while an effective tool for the clearing agency to identify and
recognize a conflict of interest, is insufficient by itself to reduce
the potential harm a conflict of interest may have on the clearing
agency. Instead, the Commission believes that as the clearing agency is
best positioned to identify and address conflicts of interest that may
arise in its operations and risk management and decision-making, the
clearing agency is best positioned through reasonable policies and
procedures to mitigate--namely, reduce--or eliminate these conflicts of
interest so that such conflicts do not undermine the integrity of
decisions made in the governance of the clearing agency. In addition,
the policies and procedures approach helps ensure the documentation of
conflicts of interest and their mitigation or elimination, helping the
Commission to assess and compare the types of conflicts that arise
across clearing agencies to help promote more effective oversight and
regulation of clearing agencies.
    In the absence of policies and procedures to address conflicts of
interest, directors and senior managers of a registered clearing agency
could undermine the purpose of requiring independent directors and
centralizing the nominating process for new directors in a nominating
committee composed of a majority of independent directors. More
broadly, the proposed rules help to ensure that when directors and
senior managers develop relationships that create potential conflicts
of interest, the clearing agency has a process to manage those
relationships to mitigate or eliminate conflicts so that they do not
undermine the integrity of decisions made in the governance of the
clearing agency.
(a) Potential Conflicts
    Under proposed Rule 17Ad-25(g), the registered clearing agency must
be able to identify and document both existing and potential conflicts
of interest involving directors or senior managers of the registered
clearing agency. The rule is intended to address the conflicts of
interests of directors and senior managers that could undermine the
decision-making process within a registered clearing agency or
interfere with fair representation and equitable treatment of clearing
members or other market participants by a registered clearing agency.
Being able to identify potential conflicts of interest is critical to
ensuring the effective identification and management of actual
conflicts of interest. In other words, a clearing agency must be able
to spot close cases, where another director, manager, employee, or
observer might perceive a conflict of interest, in order to more
effectively manage actual conflicts and help ensure the integrity of
decisions made in the governance of the clearing agency.
    As previously discussed in Part II.A, it is important for the
registered clearing agency to consider the differing incentives and
interests of individual directors, once they are on the board, when
they are governing the registered clearing agency. The board as a whole
is ultimately responsible for overseeing the clearing agency's
compliance with the regulatory obligations under the Dodd-Frank Act and
the Exchange Act, including the open and fair access requirements.\130\
Yet, depending on their affiliation with owners, large participants,
small participants, or indirect participants, individual directors may
be subject to different perspectives and motivations when fulfilling
these duties and roles. Like participants themselves, direct
participant directors may on balance be more likely to favor reducing
or minimizing the risk exposure of the clearing agency, potentially at
the expense of more open access; in contrast, indirect participant
directors may be inclined to favor expanded access to products and
services, which may increase the amount of risk that the clearing
agency must successfully manage.\131\
---------------------------------------------------------------------------

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

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

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

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

(c) Policies and Procedures Approach
    Because organizational structures vary across clearing agencies, as
do the products, markets, and market participants served by the
clearing agency, the Commission has taken a policies and procedures
approach in the proposed rule to manage conflicts. This provides
registered clearing agencies with discretion to design policies that
fit their particular structure and circumstances, and help ensure that
policies and procedures remain effective over time as circumstances
change. While the Commission has identified some specific circumstances
in proposed Rules 17Ad-25(f) that preclude a director from being an
independent director because they present a clear conflict of interest,
as a general matter the Commission believes that a clearing agency
should have discretion to assess conflicts and determine how to
mitigate or eliminate them.
3. Request for Comment
    The Commission generally requests comments on all aspects of
proposed Rules 17Ad-25(g) and (h). In addition, the Commission requests
comments on the following specific issues:
    32. Are proposed Rules 17Ad-25(g) and (h) sufficient to have
registered clearing agencies address conflicts of interest within their
governance arrangements? Why or why not? Please provide specific
examples to illustrate your points, if possible.
    33. Do commenters agree with the potential conflict concerns that
the Commission has identified? What effect would the identified
conflicts of interest likely have? Should the Commission focus on any
of these conflicts more than others? Are there other existing conflicts
concerns that commenters believe warrant scrutiny? If so, what are they
and how are they likely to affect registered clearing agencies? Which
conflicts of interest could potentially cause the greatest harm to a
registered clearing agency? Please explain.
    34. What potential new conflicts of interest could arise that the
Commission should consider? What other parties may have conflicts of
interest that would affect whether they should control or participate
in the governance of a registered clearing agency? In what
circumstances do these conflicts of interest arise?
    35. Are there any additional requirements and/or guidance that the
Commission could provide to help registered clearing agencies evaluate
the relationships of their directors and senior managers to identify
potential sources of conflicts? Please explain with specifics in terms
of processes that would help identify both existing and potential
conflicts of interest involving directors or senior managers of the
registered clearing agency.
    36. In requiring registered clearing agencies to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to require a director to document and inform the
registered clearing agency promptly of the existence of any
relationship or interest that reasonably could affect the independent
judgment or decision-making of the director, does proposed Rule 17Ad-
25(h) provide sufficient requirements to have directors document and
inform the registered clearing agency promptly of potential conflicts
of interest? Why or why not?
    37. Is the ``reasonably could affect'' standard proposed in Rule
17Ad-25(h) sufficient? Why or why not?
---------------------------------------------------------------------------

    \133\ The proposed rule would not apply to utility companies,
such as a power company providing general power services for the
registered clearing agency, although general power services are
necessary to allow a registered clearing agency to function and
operate, as a general matter. The Commission believes that such
services neither support the core clearance and settlement
functionality of the registered clearing agency nor are material to
the clearing agency's business, in that the power company does not
perform the core clearance and settlement functionality or material
clearing agency business functions itself. At the same time, the
registered clearing agency should be aware of how issues relating to
such services may impact its obligations under the Exchange Act.
This is consistent with Commission staff's views. See, e.g.,
Division of Trading and Markets: Responses to Frequently Asked
Questions Concerning Regulation SCI (rev. Aug. 21, 2019), https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml (stating
that ``an issue at a power utility may interrupt the electric power
supplied to an SCI entity's SCI systems. Even if the outage at the
power utility's system would not itself be an SCI event, there is a
significant likelihood that an SCI entity would nonetheless
experience an SCI event following such an outage'').
---------------------------------------------------------------------------

E. Board Obligation To Oversee Service Providers for Critical Services

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

F. Obligation to Formally Consider Stakeholder Viewpoints

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

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

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

G. Considerations Related to Implementation and Compliance

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

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

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

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

H. General Request for Comment

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

IV. Economic Analysis

A. Introduction

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

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

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

B. Economic Baseline

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

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

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

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

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

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

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

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

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

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

    \157\ See Darrell Duffie, Still the World's Safe Haven?
Redesigning the U.S. Treasury Market After the COVID-19 Crisis,
Hutchins Center Working Paper No. 62 (June 2020), at 15, https://www.brookings.edu/wp-content/uploads/2020/05/wp62_duffie_v2.pdf
(``Central clearing increases the transparency of settlement risk to
regulators and market participants, and in particular allows the CCP
to identify concentrated positions and crowded trades, adjusting
margin requirements accordingly. Central clearing also improves
market safety by lowering exposure to settlement failures. . . . As
depicted, settlement failures rose less in March [2020] for [U.S.
Treasury] trades that were centrally cleared by FICC than for all
trades involving primary dealers. A possible explanation is that
central clearing reduces `daisy-chain' failures, which occur when
firm A fails to deliver a security to firm B, causing firm B to fail
to firm C, and so on.'').
    \158\ See generally Albert J. Menkveld & Guillaume Vuillemey,
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153
(2021).
    \159\ See generally Dietrich Domanski, Leonardo Gambacorta &
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS
Q. Rev. (Dec. 2015), https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf
(describing links between CCP financial risk management and systemic
risk); Darrell Duffie, Ada Li & Theo Lubke, Policy Perspectives on
OTC Derivatives Market Infrastructure, Fed. Res. Bank N.Y. Staff
Rep. No. 424, at 9 (Mar. 2010), http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is successful in clearing a
large quantity of derivatives trades, the CCP is itself a
systemically important financial institution. The failure of a CCP
could suddenly expose many major market participants to losses. Any
such failure, moreover, is likely to have been triggered by the
failure of one or more large clearing agency participants, and
therefore to occur during a period of extreme market fragility.'');
Craig Pirrong, The Inefficiency of Clearing Mandates, Policy
Analysis No. 655, at 11-14, 16-17, 24-26 (July 2010), http://www.cato.org/pubs/pas/PA665.pdf (stating, among other things, that
``CCPs are concentrated points of potential failure that can create
their own systemic risks,'' that ``[a]t most, creation of CCPs
changes the topology of the network of connections among firms, but
it does not eliminate these connections,'' that clearing may lead
speculators and hedgers to take larger positions, that a CCP's
failure to effectively price counterparty risks may lead to moral
hazard and adverse selection problems, that the main effect of
clearing would be to ``redistribute losses consequent to a
bankruptcy or run,'' and that clearing entities have failed or come
under stress in the past, including in connection with the 1987
market break); Hubbard supra note 57, at 96 (``In short, the
systemic consequences from a failure of a major CCP, or worse,
multiple CCPs, would be severe. Pervasive reforms of derivatives
markets following 2008 are, in effect, unfinished business; the
systemic risk of CCPs has been exacerbated and left unaddressed.'');
Froukelien Wendt, Central Counterparties: Addressing their Too
Important to Fail Nature, IMF Working Paper No. 15/21 (Jan. 2015),
http://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf (assessing the
potential channels for contagion arising from CCP
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A
Fresh Look, IMF Working Paper No. 11/66 (Mar. 2011), at 5-11, http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing factors
that could lead central counterparties to be ``risk nodes'' that may
threaten systemic disruption).
    \160\ See Paolo Saguato, Financial Regulation, Corporate
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J.
1071, 1074-75 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3269060 (``[T]he decision to centralize risk
in clearinghouses made them critical for the stability of the
financial system, to the point that they are considered not only
too-big-to-fail, but also too-important-to-fail institutions.'').
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2. Overview of the Existing Regulatory Framework
    The existing regulatory framework for clearing agencies registered
with the Commission includes Section 17A of the Exchange Act and the
Dodd-Frank Act, and the related rules adopted by the Commission. The
current regulatory system is discussed in Parts I, II and III of this
proposal.
    The Commission is aware that clearing agencies registered in the
U.S. may also be subject to other domestic or foreign regulators.
Specifically, clearing agencies operating in the U.S. may also be
subject to regulation by the CFTC (as clearing agencies for futures or
swaps) and the Board of Governors of the Federal Reserve System (as
systemically important financial market utilities or state member
banks).\161\ In addition, clearing agencies operating in the U.S. may
be subject to foreign clearing agency regulators. For example, LCH SA
is regulated by l'Autorit[eacute] des march[eacute]s financiers,
l'Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution,
and the Banque de France, and is subject to EMIR.\162\ ICEEU is
regulated by the Bank of England and is subject to EMIR.\163\
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    \161\ Currently, ICC, ICEEU, LCH SA, and OCC are regulated by
the CFTC. DTC, FICC, NSCC, ICC, and OCC have been designated
systemically important financial market utilities. DTC is also a
state member bank of the Federal Reserve System.
    \162\ See LCH, Company Structure, https://www.lch.com/about-us/structure-and-governance/company-structure.
    \163\ See ICE, ICEEU Regulation, https://www.theice.com/clear-europe/regulation.
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    The Commission also considers relevant international standards when
engaged in rulemaking for clearing agencies. For example, in 2012, the
Committee on Payments and Market Infrastructure (CPMI) and the
International Organization of Securities Commissions (IOSCO) issued the
PFMI, a set of international standards for financial market
infrastructures.\164\ In connection with rulemaking required by Section
805(a)(2)(A) of the Clearing Supervision Act, 12 U.S.C. 5464(a)(2)(A),
the Commission considered the principles and responsibilities in the
PFMI when adopting Rule 17Ad-22(e).\165\
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    \164\ See PFMI, supra note 4.
    \165\ CCA Standards Adopting Release, supra note 13, at 70789,
70796-97. A CPMI-IOSCO assessment report also has assessed that the
Commission's rules are consistent with the PFMI principles. See
CPMI-IOSCO, Implementation monitoring of PFMI: Assessment report for
the United States--Payment systems, central securities depositories
and securities settlement systems (May 31, 2019), at 2, https://www.bis.org/cpmi/publ/d184.pdf (presenting the conclusions drawn by
the CPMI and IOSCO from a Level 2 assessment).
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    Table 2 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.

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