independence used by an F[inancial]
                                M[arket] I[nfrastructure (FMI)] should
                                be specified and publicly disclosed, and
                                should exclude parties with significant
                                business relationships with the FMI,
                                cross-directorships, or controlling
                                shareholdings, as well as employees of
                                the organization'' (PFMI, Sec.   3.2.10,
                                footnotes omitted).
------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

(c) Incentives of Clearing Agency Stakeholders Could Diverge From the
Interest of the Broader Financial Markets
    Clearing agency stakeholders, such as owners and direct and
indirect participants, also have incentives that may not be in
alignment with the interests of the broader financial markets.\176\ Any
such misalignment, if left unmitigated, could limit the benefits of
central clearing and hinder the resilience of other financial market
intermediaries and the broader financial market.\177\ For example, in
securities markets where all or part of a transaction may not be
subject to a central clearing requirement, a single participant or a
small group of participants may have a profit incentive to select bi-
lateral clearing over central clearing \178\ or seek to influence a
clearing agency to not clear a security that would profit the
participants more if the security were cleared bi-laterally. Not only
could such incentives limit the benefits of central clearing, but they
could also impede resilience in the broader financial market by
increasing systemic risk.\179\ In addition, indirect participants that
are not permitted to directly access clearing services have incentives
to ``avoid clearing and seek higher-margin trading activity through
faux customization.'' \180\ This, too, could hinder resilience in the
broader financial market by increasing systemic risk. Lastly, as
pointed out in a BIS and IOSCO report, ``. . . an FMI and its
participants may generate significant negative externalities for the
entire financial system and real economy if they do not adequately
manage their risks.'' \181\ To the extent these negative externalities
are not adequately internalized by the clearing agency or otherwise
mitigated, they could present systemic risks to the broader financial
markets.\182\
---------------------------------------------------------------------------

    \176\ Cf. Bank of England, The Bank of England's supervision of
financial market infrastructures--Annual Report (Mar. 2015), at
Chapter 2.1.4 (``Strong user and independent representation in [UK
CCPs] governance structures should help ensure that UK CCPs focus
not only on the management of microprudential risks to themselves
but also on systemic risks.'').
    \177\ See Griffith, supra note 173, at 1210 (``[T]he containment
of systemic risk [is] a public good. . . . Because no private party
can enjoy the full benefit of eliminating systemic risk, no private
party has an incentive to fully internalize the cost of doing so. As
a result, no private party can simply be entrusted with the means of
doing so because it is more likely to use those means to some other
ends. . . . In other words, none of the commercial parties has the
right incentives.'').
    \178\ Cf. Treasury Market Practices Group (TMPG), Best Practice
Guidance on Clearing and Settlement, at 3 (July 2019), https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_BestPractices_071119.pdf (in commenting on the ``potential role
for expanded central clearing'' in the secondary U.S. Treasuries
market, the TMPG noted that ``changes to market structure that have
occurred have also resulted in a substantial increase, in both
absolute and percentage terms, in the number of trades that clear
bilaterally rather than through a central counterparty. This
principally stems from the increased prevalence of P[rincipal]
T[rading] F[irm] activity on I[nter]D[ealer ]B[roker] platforms.'').
    \179\ See Griffith, supra note 173, at 1197 (``[D]ealers have a
clear incentive to protect the profits they receive from the
bilateral market . . . by keeping trades off of clearinghouses.
Keeping trades off of clearinghouses has obvious systemic risk
implications: a clearinghouse cannot contain the risk of trades that
it does not clear.''). Though bi-lateral clearing serves a well-
defined function in eliminating basis risk and allowing for more
precise hedging, its benefits in terms of systemic risk mitigation
are more limited relative to centralized clearing.
    \180\ See Griffith, supra note 173, at 1200.
    \181\ See PFMI, supra note 4, at 11.
    \182\ Cf. id. at 128 (Noting that regulators have a role in
addressing negative externalities. ``[R]egulation, supervision, and
oversight of an FMI are needed to . . . address negative
externalities that can be associated with the FMI, and to foster
financial stability generally.''); Menkveld & Vuillemey, supra note
158, at 22 (``Network externalities create a role for regulators to
coordinate investors on a socially desirable equilibrium.'').
---------------------------------------------------------------------------

4. Current Governance Practices
    Registered clearing agencies must operate in compliance with Rule
17Ad-22, though they may vary in the particular ways they achieve such
compliance. Some variation in practices across registered clearing
agencies derives from the products they clear and the markets they
serve.
    An overview of current practices at the seven operating clearing
agencies is set forth below and includes discussion of clearing agency
boards' policies and procedures related to the composition of the board
and board committees,

conflicts of interests involving directors and senior managers, the
obligations of the board regarding overseeing relationships with
service providers for critical services, and consideration of
stakeholders' views. This discussion is based on the Commission's
general understanding of current practices as of the date of this
proposal and reflects the Commission's experience supervising
registered clearing agencies.
(a) Current Practices Regarding Board Composition
    Each registered clearing agency has a board that governs its
operations and supervises senior management. Section 17A(b)(3)(C) of
the Exchange Act prohibits a clearing agency from registering unless
the Commission finds that ``the rules of the clearing agency assure a
fair representation of its shareholders (or members) and participants
in the selection of its directors and administration of its affairs.
(The Commission may determine that the representation of participants
is fair if they are afforded a reasonable opportunity to acquire voting
stock of the clearing agency, directly or indirectly, in reasonable
proportion to their use of such clearing agency.).'' \183\ In addition,
Rule 17Ad-22(e)(2) requires governance arrangements that support the
objectives of owners and participants and consider the interests of
other relevant stakeholders.
---------------------------------------------------------------------------

    \183\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

(1) Independent Directors
    Clearing agencies currently use various definitions of independence
and independent director. In addition, current practices vary widely
regarding the board and board committee requirements for independent
directors (as the term is currently used by clearing agencies). For
example, clearing agencies' existing requirements for the minimum
percentage of independent directors on the board ranges from 0% to 55%.
Table 3 summarizes the general board composition and independent
director requirements of each operating clearing agency.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

C. Consideration of Benefits and Costs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

D. Reasonable Alternatives to the Proposed Rule

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

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

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

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

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

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

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

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

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

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

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

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

E. Request for Comment

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

V. Paperwork Reduction Act

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

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

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

A. Rule 17Ad-25(b)

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

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

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

B. Rule 17Ad-25(c)

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

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

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

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

C. Rule 17Ad-25(d)

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

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

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

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

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

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

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

D. Rule 17Ad-25(g)

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

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

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

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

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

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

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

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

E. Rule 17Ad-25(h)

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

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

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

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

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

F. Rule 17Ad-25(i)

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

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

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

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

G. Rule 17Ad-25(j)

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

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

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

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

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

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

H. Chart of Total PRA Burdens

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

I. Request for Comment

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

VI. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of
1996, a rule is considered ``major'' where, if adopted, it results or
is likely to result in (i) an annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (ii)
a major increase in costs or prices for consumers or individual
industries; or (iii) significant adverse effect on competition,
investment, or innovation.\270\ The Commission requests comment on the
potential impact of proposed Rule 17Ad-25 on the economy on an annual
basis, any potential increase in costs or prices for consumers or
individual industries, and any potential effect on competition,
investment, or innovation. Commenters are requested to provide
empirical data and other factual support for their views to the extent
possible.
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    \270\ Public Law 104-121, 110 Stat. 857 (1996) (codified in
various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C.
601).
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VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\271\ Section 603(a) of the Administrative Procedure Act,\272\
as amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules to determine the
impact of such rulemaking on ``small entities.'' \273\ Section 605(b)
of the RFA states that this requirement shall not apply to any proposed
rule which, if adopted, would not have a significant impact on a
substantial number of small entities.\274\
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    \271\ See 5 U.S.C. 601 et seq.
    \272\ 5 U.S.C. 603(a).
    \273\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this proposed rulemaking, are set forth
in Rule 0-10, 17 CFR 240.0-10.
    \274\ See 5 U.S.C. 605(b).
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A. Registered Clearing Agencies

    Proposed Rule 17Ad-25 would apply to all registered clearing
agencies. For the purposes of Commission rulemaking and as applicable
to proposed Rule 17Ad-25, a small entity includes, when used with
reference to a clearing agency, a clearing agency that (i) compared,
cleared, and settled less than $500 million in securities transactions
during the preceding fiscal year, (ii) had less than $200 million of
funds and securities in its custody or control at all times during the
preceding fiscal year (or at any time that it has been in business, if
shorter), and (iii) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\275\
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    \275\ See 17 CFR 240.0-10(d).
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    Based on the Commission's existing information about the clearing
agencies currently registered with the Commission,\276\ the Commission
believes that all such registered clearing agencies exceed the
thresholds defining ``small entities'' set out above. While other
clearing agencies may emerge and seek to register as clearing agencies
with the Commission, the Commission believes that no such entities
would be ``small entities'' as defined in Exchange Act Rule 0-10.\277\
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    \276\ In 2021, DTCC processed $2.37 quadrillion in financial
transactions. Within DTCC, DTC settled $152 trillion of securities
and held securities valued at $87.1 trillion, NSCC processed an
average daily value of $2.029 trillion in equity securities, and
FICC cleared $1.4 quadrillion of transactions in government
securities and $69 trillion of transactions in agency mortgage-
backed securities. See DTCC, 2021 Annual Report, https://www.dtcc.com/annuals/2021/. ICE averaged daily trade volume of 5.97
million contracts and total revenues of $7.1 billion in 2021. See
ICE, 2021 Annual Report, https://s2.q4cdn.com/154085107/files/doc_financials/2021/ar/250217_009_Web_BMK-(1).pdf. In addition, OCC
cleared more than 7.5 billion contracts and held margin of $180
billion at the end of 2020. See OCC, 2020 Annual Report, https://annualreport.theocc.com/. These trade volumes exceed the $500
million threshold for small entities.
    \277\ See 17 CFR 240.0-10(d). The Commission based this
determination on its review of public sources of financial
information about registered clearing agencies.
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B. Certification

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

VIII. Statutory Authority and Text of Proposed Rule

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

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

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

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

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

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

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

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