composition and duties of the ROC. Would the establishment of a fully
independent ROC help mitigate the identified conflicts of interest? Are
there particular circumstances under which a ROC should be permitted to
have non-independent directors? If so, please identify them.
    Separately, the Commission requests comment on whether it should
specify in the proposed rule the duties of the ROC. If so, what should
be the scope of the ROC's duties? For example, should a ROC be required
to oversee decisions as to which entities have access to the trading
facility and under what circumstances, or which products are made
available for trading? Is it appropriate to require that the Board
submit to the Commission any recommendation of the ROC that it does not
adopt or implement? Would this requirement help assure good governance
that may mitigate conflicts? Should such reports be required to be
submitted promptly to the Commission? Would a different time period be
more appropriate? For instance, should such reports instead be required
to be submitted semi-annually or, for SB SEFs, should they be
incorporated as part of the annual report of the Chief Compliance
Officer, which is required pursuant to core principle 14 under Section
763(c) of the Dodd-Frank Act? Are there reasons, consistent with
mitigation of conflicts, why SB SEFs and SBS exchanges should be
treated differently with respect to the proposal to require a fully
independent ROC? Are there other ways in which material information
pertaining to the ROC's ability to carry out its duties effectively can
be brought to the Commission's attention?
3. Other Board Committees
    The Commission is proposing compositional and other requirements
with respect to various other Board committees. In this regard,
proposed Rule 702(f)(1) under Regulation MC would require that the
nominating committee of a SB SEF, SBS exchange, or SBS exchange
facility be composed solely of independent directors. The proposed
requirement for the Board of the SB SEF, SBS exchange, or SBS exchange
facility to be composed of a majority of independent directors could be
undercut if the nominating committee were dominated by persons that had
an ownership interest in these entities, were affiliated with such
owners, or were selected by the owner-directors or their affiliates.
Further, the proposed rule would require that any committee of the
Board that is delegated the authority to act on the Board's behalf,
such as any executive committee, also must be composed of a majority of
independent directors.\178\ This proposed provision extends to Board
committees that are authorized to act on behalf of the Board the
compositional requirement proposed for the full Board and is designed
to assure that the SB SEF, SBS exchange or SBS exchange facility would
not subvert the proposed majority Board independence standard by
delegating the Board's duties to a committee that does not have the
same majority independence standard.
---------------------------------------------------------------------------

    \178\ See proposed Rule 702(f) under Regulation MC. This
proposed provision would not apply to the ROC or the nominating
committee since the proposals would require the ROC and the
nominating committee to be composed solely of independent directors.
---------------------------------------------------------------------------

    With respect to a wholly independent nominating committee, the
Commission recognizes that the proposal may not sufficiently mitigate
concerns that certain shareholders may be able to influence or control
the director nominating process and thus undermine the intent of a
majority independent Board. As discussed above, an independent director
may not truly be independent from the influence of, or bias toward, a
large shareholder or group of shareholders, other non-independent
directors, or even from management. Consequently, if the nominating
committee is composed of enough directors who are subject to such
influence or bias, the palliative purpose of requiring a wholly
independent nominating committee could be compromised. Accordingly, the
Commission requests comment on

whether it should prescribe or limit the manner in which a SB SEF, SBS
exchange, or SBS exchange facility could appoint the nominating
committee. Should the Commission consider an alternative to a
compositional requirement for a nominating committee, such as allowing
a SB SEF, SBS exchange, or SBS exchange facility to have a board of
trustees responsible for nominating candidates for the Board? If this
were a viable alternative, should there be compositional requirements
or other limits imposed on the board of trustees? How should such a
board of trustees be appointed? Would the alternative of a board of
trustees to nominate directors provide greater assurance that
independent directors are truly independent not only at the time of
their nomination but during their service on the Board as well?
    Conversely, the Commission also notes that dealer-owners that are
Board members would not be able to serve on a wholly independent
nominating committee and thus would not have a voice in the process of
nominating candidates for Board seats. This would mean that the
nominating committee would not have access to the dealer-owners'
potentially valuable insights with respect to qualified candidates for
either independent or non-independent director positions. Accordingly,
the Commission invites commenters to suggest the appropriate
compositional requirements for the nominating committee and explain
their views. Should the Commission instead require a majority
independent nominating committee? Would a majority independent
nominating committee be consistent with the proposal's goal to mitigate
conflicts for SB SEFs and SBS exchanges? \179\
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    \179\ The SRO Governance Proposing Release proposed that certain
committees, including the nominating committee, be composed solely
of independent directors. See SRO Governance Proposing Release,
supra note 59. Some commenters favored this requirement. See, e.g.,
PSX Comment Letter, supra note 156. A number of commenters,
particularly national securities exchanges, objected to the
requirement that certain board committees be composed solely of
independent directors. See supra note 175.
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    SB SEFs are not subject to ``fair representation'' requirements,
like national securities exchanges, which must assure their members
``fair representation'' in the selection of directors and the
administration of the exchange's affairs.\180\ Should the Commission
adopt additional compositional requirements to provide SB SEF
participants a guaranteed voice in the selection of the SB SEF's
directors and the administration of its affairs? \181\ For example,
should the Commission require that the nominating committee consult
with participants in the SB SEFs or SBS exchanges, as applicable? Or,
should the Commission require that the participants in the SB SEFs or
SBS exchanges select a certain percentage of directors? If so, should
the Commission also limit the ability of owner participants (such as
dealers) to participate in this process? If that is the case, should
any such limitation depend on whether ownership is concentrated in a
small number of dealers? Should end users also be given guaranteed
rights of participation in the governance of the SB SEF?
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    \180\ See Section 6(b)(3) of the Exchange Act, 15 U.S.C.
78f(b)(3).
    \181\ As discussed above, Section 763(c) of the Dodd-Frank Act
sets forth 14 core principles that SB SEFs must satisfy, including
one relating to conflicts of interest, and provides the Commission
with rulemaking authority with respect to implementation of these
core principles. As the Commission has not yet proposed rules
regarding the requirements and operation of a SB SEF, including the
scope of trading on and which entities would be allowed to directly
access a SB SEF, the Commission may determine that it is more
appropriate to propose participant representation requirements, if
any, in its broader rulemaking relating to SB SEFs.
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    The Commission also seeks comment on whether the proposed
compositional requirements relating to any committee that is delegated
the authority to act on behalf of the Board are appropriate and whether
there are any other areas in which the Commission should propose
compositional requirements for SB SEF and SBS exchange committees. For
example, the Commission requests comment on whether it should require
any SB SEF, SBS exchange, or SBS exchange facility committee that
determines which security-based swaps will trade on the SB SEF or SBS
exchange, respectively, be composed of majority independent directors,
or require participation by other groups on such committee. Should the
ROC be required to oversee decisions regarding access to the SB SEF and
regarding which security-based swaps are made available to trade on the
SB SEF?
4. Disciplinary Process
    As noted above, the Commission historically has required that
national securities exchanges' disciplinary panels be balanced and
include industry member representation.\182\ Proposed Rule 702(g) under
Regulation MC would require that any disciplinary process of a SB SEF
and SBS exchange shall preclude any group or class of persons that is a
SB SEF participant or SBS exchange member from dominating or exercising
disproportionate influence. In other words, to the extent that there is
more than one type of group or class of persons that are participants
or members in a SB SEF or SBS exchange, as applicable, the composition
of any disciplinary panel should not allow one group or class to have
representation on the disciplinary panel that is out of proportion as
compared to other groups or classes of persons that are participants in
the SB SEF or SBS exchange. In addition, any panel that is responsible
for disciplinary decisions, and any appeals body, must include at least
one independent director.\183\ These proposed provisions should help
mitigate conflicts of interest in the SB SEF's and SBS exchange's
disciplinary process. This requirement also would apply to a national
securities exchange that posts or makes available for trading a
security-based swap through its facility.\184\
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    \182\ See supra Section III.B.
    \183\ See proposed Rule 702(h) under Regulation MC.
    \184\ See supra note 173. Similar to the requirement pertaining
to the ROC, the exchange, not the facility, bears the responsibility
of disciplining its members. See Section 6 of the Exchange Act.
Consequently, proposed Rule 702(h) does not explicitly mention SBS
exchange facility. However, a national securities exchange that
posts or makes available for trading a security-based swap through
its facility must also comply with the requirements of proposed Rule
702(h) under Regulation MC.
---------------------------------------------------------------------------

    The Commission seeks comment on the proposal relating to
requirements of the disciplinary process, including the compositional
requirements. Should any disciplinary panel also be required to include
representatives selected by SB SEF participants or SBS exchange
members, as applicable? Would the proposed provisions help to mitigate
the identified conflicts of interest? Should any other persons be
precluded from dominating the disciplinary process? Are there any
additional provisions that should be proposed to mitigate conflicts of
interest in the disciplinary process? \185\ The Commission also
requests comment on whether the Commission's proposal would
meaningfully supplement or enhance the requirements that SBS exchanges,
as national securities exchange, already have in place with respect to
the disciplinary process.
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    \185\ See supra note 181.
---------------------------------------------------------------------------

VI. Discussion of Exemptive Authority Pursuant to Section 36 of the
Exchange Act

    The Commission pursuant to Section 36 of the Exchange Act may grant
an exemption from any rule or any provision of any rule under
Regulation MC. Any such exemption could be subject to conditions and
could be revoked by the Commission at any time.

Generally, the Commission would consider granting an exemption where
the exemption is necessary or appropriate in the public interest and
consistent with the protection of investors. For example, the SBS
exchange, SB SEF, or security-based swap clearing agency might be
unable, on a temporary basis and for reasons beyond its control, to
comply with one of the rules under Regulation MC. The Commission could
also grant an exemption where the SBS exchange, SB SEF, or security-
based swap clearing agency demonstrated that it established alternative
means to effectively mitigate conflicts of interest as contemplated
under Regulation MC and that it would otherwise be unable to comply
with the requirements under Regulation MC, including as a start-up SB
SEF, SBS exchange, or security-based swap clearing agency. The
Commission in its sole discretion would determine whether to grant or
deny a request for an exemption. In addition, the Commission could
revoke an exemption at any time, including if the SBS exchange, SB SEF,
or security-based swap clearing agency could no longer demonstrate that
such exemption is necessary or appropriate in the public interest, or
is consistent with the protection of investors.
    The Commission requests comment on all aspects of the exemptive
authority. Would such exemptive authority be useful to facilitate the
purposes of Section 765? If so, in what circumstances should the
Commission grant exemptions? Should exemptions only be granted in
limited circumstances? Should the Commission potentially consider
granting exemptions from all rules under Regulation MC or are
exemptions only warranted for specific rules or specific entities? For
example, should exemptions only be available with respect to the voting
interest restrictions applicable to security-based swap clearing
agencies? What specific factors should the Commission consider in
determining whether to grant an exemption? Are there cases where
exemptions may not be appropriate and should not be considered?

VII. Effective and Compliance Date

    The Commission is required to adopt rules under Section 765 within
180 days of enactment of Title VII. However, certain of the rules the
Commission is proposing today would apply to SB SEFs, which will be the
subject of new definitional rules that are required under the Dodd-
Frank Act to be completed by July 15, 2011. Accordingly, the Commission
is proposing that provisions of Regulation MC as applicable to SB SEFs
would become effective sixty (60) days after July 15, 2011. All other
provisions of the rules under Regulation MC would become effective
sixty (60) days after the final rules are published in the Federal
Register.
    The Commission recognizes that existing entities may need a
transitional period to implement any final rules. Accordingly, the
Commission is proposing to permit the phase-in implementation of the
rules under Regulation MC over two (2) years or two regularly-scheduled
Board elections. The phase-in implementation would apply to existing
exchanges, clearing agencies, or other institutions that apply to
register as a SBS exchange, SB SEF, or security-based swap clearing
agency. However, the Commission expects that entities that are newly
created in order to establish a SBS exchange, SB SEF, or security-based
swap clearing agency would fully comply with the final rules.
    The Commission requests comment on (i) the timing of effectiveness
for the final rules, and (ii) the length and applicability of the
implementation period.

VIII. General Request for Comments

    The Commission seeks comment on the proposed rules that are
intended to mitigate conflicts of interest with respect to security-
based swap clearing agencies, SB SEFs, SBS exchanges, and SBS exchange
facilities, on any additional or different provisions that would
mitigate conflicts of interest for these entities, and on any other
matters that might have an implication on the proposals. The Commission
particularly requests comment from the point of view of entities that
plan to register as security-based swap clearing agencies or SB SEFs
and from national securities exchanges that plan to become SBS
exchanges or create SBS exchange facilities; entities operating
platforms that currently trade or clear security-based swaps; broker-
dealers, financial institutions, major security-based swap
participants, and other persons that trade security-based swaps; and
end-users generally.
    The Commission invites commenters to address whether the proposed
rules are appropriately tailored to achieve the goal of mitigating
conflicts of interest in the ownership and governance of security-based
swap clearing agencies, SB SEFs, SBS exchanges, and SBS exchange
facilities, including with respect to the administration of these
entities' regulatory activities. The Commission also requests comment
on the necessity and appropriateness of mandating ownership and voting
limitations for security-based swap clearing agencies, SB SEFs, SBS
exchanges, and SBS exchange facilities and on whether there are other
means to achieve the statutory mandate of Section 765 of the Dodd-Frank
Act.
    The Commission is proposing governance requirements for security-
based swap clearing agencies, SB SEFs, SBS exchanges, and SBS exchange
facilities that are designed to mitigate conflicts of interest. The
Commission requests comment on whether the governance requirements, by
themselves, would be enough to mitigate conflicts.
    The Commission requests comment on the two alternative proposals
for security-based swap clearing agencies. Are there other alternatives
that would more effectively mitigate conflicts of interest? Should
security-based swap clearing agencies be permitted to choose between
alternatives at all? The Commission may determine to adopt only one of
the proposed alternatives as a final rule. If only one alternative were
to be adopted as a final rule, which one should it be? Should any of
the provisions of the proposed alternatives be revised? The Commission
may combine aspects of each proposed alternative rule (with or without
modifications) and adopt them as a single final rule. If that approach
is taken, which aspects of each alternative should be combined? For
example, should the voting interest restrictions in Rule 701(a) be
combined with the governance restrictions in Rule 701(b) to create a
stronger rule to mitigate conflicts of interest at security-based swap
clearing agencies? As compared to each other, how is each alternative
likely to affect access and risk management at security-based swap
clearing agencies? How will each alternative affect and be affected by
developments in the market, including the prospect of future
competition?
    The Commission also requests comment on the impact on competition
the two alternative proposals might have. The Voting Interest Focus
Alternative and the Governance Focus Alternative are designed to
address the unique conflict of interest issues at security-based swap
clearing agencies. The Commission requests comment on whether imposing
voting interest and governance limitations could have the unintended
consequence of deterring new, competitive security-based swap clearing
agencies at a time when central clearing for security-based swaps is
still developing. A security-based swap clearing agency that currently
clears security-based swaps but would not

meet the proposed voting interest limits would need to revise its
ownership structure. There could be costs and delays as the security-
based swap clearing agency seeks to find one or more additional owners
to satisfy the proposed limits, with a possible diminution in the value
of the original owner(s)' investment.
    The Commission is sensitive to arguments against imposing ownership
and voting limits for security-based swap clearing agencies, some of
which were articulated at the Conflicts Roundtable. However, it also
understands that the OTC derivatives market is highly concentrated and
dealer dominated. As a result, voting interest and governance
restrictions may be necessary at security-based swap clearing agencies
where they have not been necessary at other securities clearing
agencies. Access to central clearing services will be crucial for most
firms that will actively trade in security-based swaps that are
required to be cleared. Although the proposed restrictions may have the
effect of creating barriers to potential security-based swap clearing
agencies (and thus market participants could have fewer clearing
agencies to choose from) the incentives of independent directors will
likely promote increased access to central clearing for market
participants. In contrast, although ownership and voting limits may
more directly affect the ability of SB SEFs and SBS exchanges to start
up, the lack of market characteristics to promote competing trading
venues for security-based swaps may emphasize the greater need for
ownership and voting limits. If the market characteristics for
security-based swaps naturally promote dealer domination without robust
competing trading venues, there is more need to mitigate the types of
concerns that underlie Section 765, such as by imposing ownership and
voting limits.\186\
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    \186\ In the equities market a small group of broker-dealers or
single-dealer proprietary firms can and do own alternative trading
systems (``ATSs'') and thus it can be argued that SB SEFs and SBS
exchanges should be permitted to operate similarly. See Securities
Exchange Act Release No. 60997 (November 13, 2009), 74 FR 61208
(November 23, 2009) (as of November 2009, there were approximately
73 ATSs that are subject to Regulation ATS). However, ATSs exist in
the context of a marketplace with robust competition among numerous
trading venues. Therefore, ATSs that are owned by one broker-dealer
or a small group of broker-dealers, by virtue of their ownership
structure alone, generally do not present a concern that they could
lessen price competition or market efficiency.
---------------------------------------------------------------------------

    The CFTC is adopting rules to mitigate conflicts of interest for
derivatives clearing organizations that clear swaps, swap execution
facilities and boards of trade designated as a contract markets that
post swaps or make swaps available for trading as required under
Section 726 of the Dodd-Frank Act. Understanding that the Commission
and the CFTC regulate different products and markets and, as such,
appropriately may be proposing alternative regulatory requirements, the
Commission requests comments on the impact of any differences between
the Commission and CFTC approaches to the mitigation of conflicts of
interest. Specifically, would the regulatory approaches under the
Commission's proposed rulemaking pursuant to Section 765 of the Dodd-
Frank Act and the CFTC's proposed rulemaking pursuant to Section 726 of
the Dodd-Frank Act result in duplicative or inconsistent efforts on the
part of market participants subject to both regulatory regimes or
result in gaps between those regimes? If so, in what ways do commenters
believe that such duplication, inconsistencies, or gaps should be
minimized? Do commenters believe the approaches proposed by the
Commission and the CFTC to mitigate conflicts of interest are
comparable? If not, why? Do commenters believe there are approaches
that would make the mitigation of conflicts of interest more
comparable? If so, what? Do commenters believe that it would be
appropriate for the Commission to adopt an approach proposed by the
CFTC that differs from the Commission's proposal? Is so, which one? The
Commission requests commenters to provide data, to the extent possible,
supporting any such suggested approaches.
    In addition, the Commission seeks comment regarding any potential
implication of the proposals on users of any security-based swap
clearing agencies, SB SEFs, and SBS exchanges, other market
participants, and the public generally. The Commission seeks comment on
the proposals as a whole, including their interaction with the other
provisions of the Dodd-Frank Act. The Commission seeks comment on
whether the proposals would help achieve the broader goals of
increasing transparency and accountability in the OTC derivatives
market.
    Commenters should, when possible, provide the Commission with
empirical data to support their views. Commenters suggesting
alternative approaches should provide comprehensive proposals,
including any conditions or limitations that they believe should apply,
the reasons for their suggested approaches, and their analysis
regarding why their suggested approaches would satisfy the statutory
mandate contained in Section 765 of the Dodd-Frank Act regarding
mitigation of conflicts of interest.

IX. Paperwork Reduction Act

    The proposed rules contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\187\ The titles for these collections are Rule 701 of
Regulation MC, both in the Voting Interest Focus Alternative and the
Governance Focus Alternative, and Rule 702 of Regulation MC.
---------------------------------------------------------------------------

    \187\ 44 U.S.C. 3501 et seq.
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    The Commission has submitted the information to the Office of
Management and Budget (``OMB'') for review in accordance with 44 U.S.C.
3507 and 5 CFR 1320.11.

A. Summary of Collection of Information

1. Security-Based Swap Clearing Agencies
    Proposed alternative Rule 701(a)(2) under Regulation MC would
require security-based swap clearing agencies to have rules that would:
(1) Provide for an effective mechanism to divest any participant of any
interest owned in excess of the proposed 20% ownership limit; (2) not
give effect to the portion of any voting interest held by one
participant in excess of the proposed 20% voting limit; (3) not give
effect to the portion of any voting interest among all security-based
swap clearing agency participants owned in the aggregate in excess of
the proposed 40% ownership limit; and (4) provide an effective
mechanism for the security-based swap clearing agency to obtain
information relating to the voting interests in such entity.
Alternative Rule 701(b)(2) under Regulation MC would require security-
based swap clearing agencies to have rules that would: (1) Provide for
an effective mechanism to divest any participant of any interest owned
in excess of the proposed 5% ownership limit; (2) not give effect to
the portion of any voting interest held by one participant in excess of
the proposed 5% voting limit; and (3) provide an effective mechanism
for the security-based swap clearing agency to obtain information
relating to the voting interests in such entity. Each security-based
swap clearing agency must comply with one of the alternatives.
Establishing such rules would result in a paperwork burden for a
security-based swap clearing agency. In addition, if the security-based
swap clearing agency was to request to receive ownership and voting
information from participants

pursuant to Rule 701(a) or (b), the request would be a collection of
information.
2. SB SEFs, SBS Exchanges, and SBS Exchange Facilities
    Proposed Rule 702(c) under Regulation MC would require SB SEFs, SBS
exchanges, and SBS exchange facilities to have rules that would: (1)
Provide for an effective mechanism to divest any participant or member,
as applicable, of any interest owned in excess of the proposed 20%
ownership limit; (2) not to give effect to the portion of any voting
interest help by one or more participants or members, as applicable, in
excess of the proposed 20% voting limit; and (3) provide an effective
mechanism for the SB SEF, SBS exchange or SBS exchange facility to
obtain information relating to ownership and voting interests in such
entity. Establishing such rules would result in a paperwork burden for
a SB SEF, SBS exchange, or SBS exchange facility, as applicable. In
addition, if a SB SEF, SBS exchange, or SBS exchange facility were to
request to receive ownership and voting information from participants
or members pursuant to Rule 702(c) that would be a collection of
information.
    Proposed Rule 702(e) under Regulation MC would require SB SEFs and
SBS exchanges to establish a ROC that is composed solely of independent
directors,\188\ to oversee the SB SEF's and SBS exchange's obligations
under Section 763(c) of the Dodd-Frank Act and Section 6 of the
Exchange Act, respectively.\189\ The proposed rule would require that
any recommendation of the ROC that is not adopted or implemented by the
SB SEF's or SBS exchange's Board be reported promptly to the
Commission.
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    \188\ Proposed Rule 702(e) under Regulation MC does not
explicitly include SBS exchange facilities because the exchange
whose facility posts or makes available for trading a security-based
swap must itself establish the requisite ROC. See supra note 173.
    \189\ See Section 763(c) of the Dodd-Frank Act, Public Law 111-
203, Section 763(c). Specifically, the ROC would oversee the SBS
exchange's and SB SEF's regulatory program on behalf of the Board
and the Board would be required to delegate sufficient authority,
dedicate sufficient resources, and allow sufficient time for the ROC
to fulfill its mandate.
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B. Proposed Use of Information

1. Security-Based Swap Clearing Agencies
    The purpose of the collection of information in proposed Rule
701(a) or (b) under Regulation MC is to enable a security-based swap
clearing agency to monitor voting interests with respect to the
security-based swap clearing agency, and enable the security-based swap
clearing agency to take necessary action if the voting interests by a
participant or group of participants in the security-based swap
clearing agency exceed those allowed under proposed Rule 701(a) or (b).
2. SB SEFs, SBS Exchanges, and SBS Exchange Facilities
    The purpose of the collection of information in proposed Rule
702(c) under Regulation MC is to enable a SB SEF, SBS exchange, or SBS
exchange facility to monitor voting interests with respect to such
entity, and enable the SB SEF, SBS exchange, or SBS exchange facility,
as applicable, to take necessary action if the ownership or voting
rights by a participant or member or group of participants or members,
as applicable, exceed those allowed under proposed Rule 702(b).
    The purpose of the collection of information in proposed Rule
702(e) under Regulation MC is to provide the Commission with
information regarding the instances in which the SB SEF or SBS exchange
does not adopt or implement a recommendation of the ROC, which would
help the Commission in its oversight of SB SEFs and SBS exchanges. The
information collection also should promote sound regulatory policies
and foster the effectiveness of the ROC by putting the SB SEF or SBS
exchange on notice that the Commission must be apprised promptly of any
recommendation that is made by the ROC that is not adopted or
implemented.

C. Respondents

1. Security-Based Swap Clearing Agencies
    The collection of information associated with the proposed Rule
701(a) and (b) under Regulation MC would apply to security-based swap
clearing agencies. Currently, four clearing agencies are authorized to
clear credit default swaps, including security-based swaps,\190\
pursuant to temporary conditional exemptions under Section 36 of the
Exchange Act.\191\ The obligation to centrally clear security-based
swap transactions is a new requirement under Title VII of the Dodd-
Frank Act. Based on the fact that there are currently four clearing
agencies authorized to clear security-based swaps and that there could
conceivably be one or two more in the future,\192\ the Commission
preliminarily estimates that four to six clearing agencies may seek to
clear security-based swaps and be subject to the information collection
requirements in proposed Rule 701(a) or (b). The Commission is using
the higher estimate of six for the PRA analysis.
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    \190\ Of the four clearing agencies granted temporary exemptions
from registration, only three have cleared products that are
classified as security-based swaps under Title VII of the Dodd-Frank
Act.
    \191\ 15 U.S.C. 78mm.
    \192\ The Commission does not expect there to be a large number
of clearing agencies that clear security-based swaps, based on the
significant level of capital and other financial resources necessary
for the formation of a clearing agency.
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2. SB SEFs, SBS Exchanges, and SBS Exchange Facilities
    The collection of information associated with the proposed Rule
702(c) under Regulation MC would apply to SB SEFs, SBS exchanges, and
SBS exchange facilities. In the Dodd-Frank Act, Congress defined for
the first time a SB SEF and mandated the registration of these new
facilities.\193\ Based on conversations with the CFTC and industry
sources, the Commission preliminarily believes that approximately 10-20
entities could seek to become SB SEFs and thus be subject to the
collection of information requirement of proposed Rule 702(c). The
Commission is using the higher estimate of 20 SB SEFs for this PRA
analysis. In addition, there are currently 15 national securities
exchanges that could be subject to the collection of information
requirement of Rule 702(c).\194\ To provide an estimate that is not
under-inclusive, the Commission preliminarily estimates that all 15 of
the currently registered national securities exchanges could become SBS
exchanges or could create a separate legal entity that would be a
facility of the exchange to trade security-based swaps.
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    \193\ See Sections 763(a) and 763(c) of the Dodd-Frank Act,
Public Law 111-203, Section 763(a) and (c).
    \194\ The 15 national securities exchanges are: BATS Exchange,
Inc.; BATS Y-Exchange, Inc.; Chicago Board Options Exchange,
Incorporated; Chicago Stock Exchange, Inc.; C2 Options Exchange,
Incorporated, EDGA Exchange, Inc., EDGX Exchange, Inc.,
International Securities Exchange, LLC; The NASDAQ Stock Market LLC;
NASDAQ OMX BX, Inc.; NASDAQ OMX PHLX, Inc.; National Stock Exchange
Inc.; New York Stock Exchange LLC; NYSE Amex LLC; and NYSE Arca,
Inc.
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    The collection of information associated with the proposed Rule
702(e) under Regulation MC would apply to SB SEFs and SBS exchanges.
Based on the estimates noted above, to provide an estimate that is not
under-inclusive, the Commission preliminarily believes that 20 SB SEFs
and 15 SBS exchanges or SBS exchange facilities would be subject to the
collection of information requirement of Rule 702(e).

D. Total Annual Reporting and Recordkeeping Burdens

1. Security-Based Swap Clearing Agencies
    Proposed Rule 701(a) would require security-based swap clearing
agencies to have rules that would: (1) Provide for an effective
mechanism to divest any participant of any interest owned in excess of
the proposed 20% ownership limit; (2) not give effect to the portion of
any voting interest held by one participant in excess of the proposed
20% voting limit; (3) not give effect to the portion of any voting
interest among all security-based swap clearing agency participants
owned in the aggregate in excess of the proposed 40% ownership limit;
and (4) provide an effective mechanism for the security-based swap
clearing agency to obtain information relating to the voting interests
in such entity. Proposed Rule 701(b) would require security-based swap
clearing agencies to have rules that would: (1) Provide for an
effective mechanism to divest any participant of any interest owned in
excess of the proposed 5% ownership limit; (2) not give effect to the
portion of any voting interest held by one participant in excess of the
proposed 5% voting limit; and (3) provide an effective mechanism for
the security-based swap clearing agency to obtain information relating
to the voting interests in such entity. Each security-based swap
clearing agency must comply with one of the alternatives.
    Establishing such rules would result in a paperwork burden for a
security-based swap clearing agency. The Commission preliminarily
believes that there would be a one-time paperwork burden of 15 hours
per entity associated with the drafting and implementation of any such
rules by the security-based swap clearing agency for a total of 90
hours (15 hours x 6 respondents).
    Any collection of information by a security-based swap clearing
agency from a participant that has a voting interest in the security-
based swap clearing agency would differ depending upon the number of
shareholders or other owners of voting interests that are participants
in the security-based swap clearing agency. Accordingly, the number of
responses per year that would be generated by proposed Rule 701(a) or
(b) under Regulation MC would vary by security-based swap clearing
agency. At this point, however, currently only the largest fourteen
dealer firms are participants that clear security-based swaps at such
clearing agencies. The Commission believes that it would be reasonable
for security-based swap clearing agencies to collect information
related to the voting interests held by participants on a quarterly
basis. This would provide the security-based swap clearing agency with
sufficiently current information regarding participants' voting
interests in the security-based swap clearing agency and allows the
security-based swap clearing agency to review the information at a
single point in time. Accordingly, the Commission preliminarily
estimates that each security-based swap clearing agency would request
information approximately 4 times per year from approximately 14
participants.
    The Commission also estimates that the preparation and sending of
each of the 4 requests for information would require approximately 4
hours and reviewing the responses to each of the 4 requests for
information would require 10 hours. This would result in a total annual
reporting and recordkeeping burden of 56 hours ((4 requests x 4 hours)
+ (4 requests x 10 hours)) for each security-based swap clearing
agency, and a total annual burden for all security-based swap clearing
agencies of 336 hours (56 hours x 6 clearing agencies). The Commission
preliminarily estimates that each participant would require 1 hour to
prepare and send the security-based swap clearing agency its response
to the request, for a total annual reporting and recordkeeping burden
for each participant of each security-based swap clearing agency of 4
hours (4 requests x 1 hour) and a total annual burden for all
participants in all 6 security-based swap clearing agencies of 336
hours (14 participants x 4 hours x 6 security-based swap clearing
agencies) thereby resulting in a total estimated annual burden for all
security-based swap clearing agencies and participants of 672 hours
(336 hours for all participants + 336 hours for all security-based swap
clearing agencies). The Commission requests comment on these estimates.
    The Commission estimates that the total paperwork burden resulting
from the proposals relating to security-based swap clearing agencies is
762 hours for an initial paperwork burden and 672 hours
thereafter.\195\
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    \195\ The aggregate initial paperwork burden is calculated as
follows: 90 hours (one time paperwork burden for security-based swap
clearing agencies to establish rules to divest any ownership
interest in excess of the limit and not to give effect to any
portion of the voting interests in excess of the limit) + 336 hours
(annual burden for security-based swap clearing agencies to prepare
and send requests for voting information) + 336 hours (annual burden
for participants of security-based swap clearing agencies to prepare
and send responses to requests for voting information) = 762 hours.
After the initial year, the paperwork burden is calculated as
follows: 762 hours (total paperwork burden resulting from the
proposals relating to security-based swap clearing agencies) - 90
hours (one-time paperwork burden for security-based swap clearing
agencies) = 672 hours.
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2. SB SEFs, SBS Exchanges, and SBS Exchange Facilities
    Proposed Rule 702(c) would require SB SEFs, SBS exchanges, and SBS
exchange facilities to have rules that would provide for an effective
mechanism to divest any participant or member, as applicable, of any
interest owned in excess of the proposed 20% ownership limit; that
would not give effect to the portion of any voting interest held by one
or more participants or members, as applicable, in excess of the
proposed 20% voting limit; and that would provide an effective
mechanism for the SB SEF, SBS exchange, or SBS exchange facility to
obtain information relating to ownership and voting interests in such
entity. Establishing such rules or policies and procedures, as
applicable, would result in a paperwork burden for a SB SEF, SBS
exchange, or SBS exchange facility, as applicable. The Commission
preliminarily believes that there would be a one-time paperwork burden
of 15 hours per entity associated with the drafting and implementation
of any such rules by the SB SEF, SBS exchange, or SBS exchange
facility, as applicable, for a total of 525 hours (15 hours x 35
respondents).
    The number of responses per year that would be generated by
requests by a SB SEF, SBS exchange, or SBS exchange facility, as
applicable, for ownership or voting information from participants or
members that are owners of securities entitled to vote or otherwise
have a voting interest in the SB SEF, SBS exchange, or SBS exchange
facility would depend upon the number of owners of voting securities
that are participants or members. Assuming that all classes of
securities entitled to vote are owned or otherwise controlled by
participants or members, the minimum number per SB SEF, SBS exchange,
or SBS exchange facility would be 5. Based on the Commission's
understanding of the ownership structures and voting rights of existing
entities that may register as SB SEFs, and its understanding of the
ownership structures and voting rights of existing national securities
exchanges, the Commission preliminarily estimates that each SB SEF, SBS
exchange, or SBS exchange facility on average would request information
from approximately 20 participants or members, as applicable. The
Commission believes that it would be reasonable for a SB

SEF, SBS exchange, or SBS exchange facility to collect information on
ownership and voting rights on a quarterly basis. Accordingly, the
Commission preliminarily estimates that each SB SEF, SBS exchange, or
SBS exchange facility would request information approximately 4 times
per year from approximately 20 participants or members.
    The Commission estimates that the preparation and sending of each
of the 4 requests for information would require approximately 4 hours,
and reviewing the responses to each of the 4 requests for information
would require 10 hours. This would result in a total annual reporting
and recordkeeping burden of 56 hours ((4 requests x 4 hours) + (4
requests x 10 hours)) for each SB SEF, SBS exchange, or SBS exchange
facility, as applicable, and a total annual burden for all SB SEFs, SBS
exchanges, and SBS exchange facilities of 1,960 hours (56 hours x 35
respondents). The Commission preliminarily estimates that each
participant or member would require 1 hour to prepare and send the
response to the request, for a total annual reporting and recordkeeping
burden for each participant or member of 4 hours (4 requests x 1 hour)
and a total annual burden for all participants or members of 2,800
hours (700 participants or members x 4 hours). The Commission requests
comment on these estimates.
    The Commission preliminarily believes that the collection of
information burden imposed by proposed Rule 702(e) under Regulation MC
would be minimal. The Commission estimates that a representative of the
Board of a SB SEF or SBS exchange would spend no more than one hour to
complete the required notice to the Commission. This figure includes
the time to prepare, review, and electronically submit such notice to
the Commission. The Commission expects to establish an electronic
mailbox for these notices and would identify the address if the
Commission were to adopt this specific proposal. Although the
Commission preliminarily believes that the Board of a SB SEF or SBS
exchange often would adopt or implement the recommendations of its ROC,
the Commission preliminarily believes that the Board of a SB SEF or SBS
exchange could occasionally decide not to adopt such recommendations.
Although the Commission expects that this would be an infrequent
occurrence, the Commission preliminarily estimates that a Board could
decide not to adopt a ROC recommendation up to 12 times per year. This
estimate assumes that the Board of a SB SEF or SBS exchange would meet
at least once per month and would decide each time that it meets not to
adopt a ROC recommendation. Therefore, the Commission estimates that
the total reporting burden under the proposed Rule 702(e) for all SB
SEFs and SBS exchanges combined would be 420 hours.\196\
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    \196\ (20 (estimated number of SB SEFs subject to the collection
of information under the proposed Rule 702(e)) + 15 (estimated
number of SBS exchanges subject to the collection of information
under the proposed Rule 702(e))) x 12 (estimated number of notices
prepared annually by each SB SEF pursuant to the proposed Rule
702(e)) x 1 hour (estimate of total time to complete, review, and
prepare required notice) = 420 hours.
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    The Commission estimates that the total paperwork burden resulting
from the proposals relating to SB SEFs, SBS exchanges or SBS exchange
facilities is 5,705 for an initial paperwork burden and 5,180
thereafter.\197\
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    \197\ The aggregate initial paperwork burden is calculated as
follows: 525 hours (one-time paperwork burden for SB SEFs, SBS
exchanges and SBS exchange facilities to establish rules to divest
any ownership interest in excess of, and to not give effect to any
portion of voting interests in excess of, the proposed 20% limit) +
1,960 hours (annual burden for SB SEFs, SBS exchanges and SBS
exchange facilities to prepare and send requests for ownership and
voting information) + 2,800 hours (annual burden for participants to
prepare and send responses to requests for ownership and voting
information) + 420 hours (annual burden for SB SEFs and SBS
exchanges to prepare and submit notices pursuant to proposed Rule
702(e)(2)) = 5,705 hours. After the initial year, the paperwork
burden is calculated as follows: 5,705 hours (total paperwork burden
resulting from the proposals relating to SB SEFs, SBS exchanges and
SBS exchange facilities)--525 hours (one-time paperwork burdens for
SB SEFs, SBS exchanges and SBS exchange facilities) = 5,180 hours.
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E. Retention Period of Recordkeeping Requirements

1. Security-Based Swap Clearing Agencies
    Security-based swap clearing agencies will be required to be
registered with the Commission following the effective date of Title
VII of the Dodd-Frank Act.\198\ Accordingly, once registered with the
Commission, security-based swap clearing agencies would be required to
retain any collection of information pursuant to proposed Rules 701(a)
or (b) under Regulation MC as applicable, in accordance with, and for
the periods specified in Rule 17a-1 under the Exchange Act.\199\
Retention and recordkeeping requirements have not been established for
security-based swap clearing agencies before the effective date of
Title VII; however, security-based swap clearing agencies may be
required to retain records and information collected pursuant to
proposed Rules 701(a) or (b) similar to the current recordkeeping
requirements in Rule 17a-1.
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    \198\ New Exchange Act Section 17A(g) provides that it shall be
unlawful for a clearing agency, unless registered with the
Commission, directly or indirectly to make use of the mails or any
means or instrumentality of interstate commerce to perform the
functions of a clearing agency with respect to a security-based
swap. 15 U.S.C. 78q-1(g).
    \199\ 17 CFR 240.17a-1.
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2. SB SEFs, SBS Exchanges, and SBS Exchange Facilities
    Although recordkeeping and retention requirements have not yet been
established for SB SEFs under new Exchange Act provisions added by the
Dodd-Frank Act, the Commission is authorized to adopt such rules.\200\
In addition, the recordkeeping and reporting core principle applicable
to SB SEFs, as set forth in Section 763(c) of the Dodd-Frank Act,
requires a SB SEF to maintain records of all activities relating to the
business of the facility, including a complete audit trail, in a form
and manner acceptable to the Commission for a period of five
years.\201\ Therefore, for purposes of this PRA, the Commission assumes
that a SB SEF would be required to retain any collection of information
pursuant to proposed Rules 702(c) and 702(e) under Regulation MC, as
applicable, for a period of not less than five years. Should the
Commission propose rules to implement the recordkeeping and reporting
core principle for SB SEFs, it would include any collection of
information burden with respect to any proposed recordkeeping and
retention rules for SB SEFs in such rulemaking.
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    \200\ As discussed above, Section 763(c) of the Dodd-Frank Act
sets forth 14 core principles that SB SEFs must satisfy, including
one relating to recordkeeping and reporting, and provides the
Commission with rulemaking authority with respect to implementation
of these core principles. See Section 763(c) of the Dodd-Frank Act,
Public Law 111-203, Section 763(c).
    \201\ See Section 763(c) of the Dodd-Frank Act, Public Law 111-
203, Section 763(c).
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    All registered national securities exchanges must currently comply
with the recordkeeping and reporting requirements in Rule 17a-1 under
the Exchange Act.\202\ Therefore, SBS exchanges would be required to
retain any collection of information pursuant to proposed Rules 702(c)
and 702(e), as applicable, in accordance with, and for the periods
specified in, Rule 17a-1 under the Exchange Act.
---------------------------------------------------------------------------

    \202\ 17 CFR 240.17a-1.
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F. Collection of Information Is Mandatory

1. Security-Based Swap Clearing Agencies
    The collection of information under proposed alternative Rules
701(a) and (b) under Regulation MC would be

mandatory. The collection of information under proposed Rules 701(a)
and (b) would be required from participants in a security-based swap
clearing agency upon request from the security-based swap clearing
agency. The collection of information would allow the security-based
swap clearing agency and the Commission to determine whether the
requirements in proposed Rules 701(a) and (b) regarding limitations on
voting interests are met.
2. SB SEFs, SBS Exchanges, and SBS Exchange Facilities
    The collection of information under proposed Rule 702(c) under
Regulation MC would be mandatory. The collection of information would
allow the SB SEF, SBS exchange, or SBS exchange facility as applicable,
and the Commission to determine whether the requirements in proposed
Rule 702(c) regarding limitations on ownership and voting rights are
met and enable the SB SEF, SBS exchange, or SBS exchange facility, as
applicable, to take necessary action if the ownership or voting rights
by a participant or group of participants exceed those allowed under
proposed Rule 702(b).
    The collection of information under proposed Rule 702(e) under
Regulation MC would be mandatory and permit the Commission to collect
accurate information about the regulatory program of SB SEFs and SBS
exchanges. Specifically, the collection of information would allow the
Commission to stay informed about the recommendations of the ROC that
are not followed by the SB SEF or SBS exchange and the SB SEF's or SBS
exchange's reasons for not adopting such recommendations.

G. Responses to Collection of Information Will Not Be Kept Confidential

1. Security-Based Swap Clearing Agencies
    Other than information for which a security-based swap clearing
agency requests confidential treatment and which may be withheld from
the public in accordance with the provisions of 5 U.S.C. 522, the
collection of information pursuant to the proposed Rules 701(a) and (b)
would not be confidential and would be publicly available.
2. SB SEFs, SBS Exchanges, and SBS Exchange Facilities
    Other than information for which a SB SEF, SBS exchange or SBS
exchange facility requests confidential treatment and which may be
withheld from the public in accordance with the provisions of 5 U.S.C.
522, the collection of information pursuant to the proposed Rules
702(c) and (e) would not be confidential and would be publicly
available.

H. Request for Comment

    Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits
comment to:
    1. Evaluate whether the proposed collection of information is
necessary for the performance of the functions of the agency, including
whether the information shall have practical utility;
    2. Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
    3. Enhance the quality, utility, and clarity of the information to
be collected; and
    4. 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.
    Persons wishing to submit comments on the collection of information
requirements should direct them to the following persons: (1) Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, OMB, Room 3208, New Executive
Office Building, Washington, DC 20503; and (2) Secretary, Securities
and Exchange Commission, Station Place, 100 F Street, NE., Washington,
DC 20549-1090 with reference to File No. S7-27-10. OMB is required to
make a decision concerning the collection of information between 30 and
60 days after publication, so a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. The Commission has submitted the proposed collection of
information to OMB for approval. Requests for the materials submitted
to OMB by the Commission with regard to this collection of information
should be in writing, refer to File No. S7-27-10, and be submitted to
the Securities and Exchange Commission, Office of Investor Education
and Advocacy, Station Place, 100 F Street, NE., Washington, DC 20549-
0213.

X. Cost-Benefit Analysis

    Congress has required the Commission to implement rules under
Section 765 of the Dodd-Frank Act to mitigate conflicts of interest in
the security-based swaps market. The proposed rules under Regulation MC
are designed to enhance, through mitigation of conflicts of interest,
the benefits of having security-based swaps cleared through a security-
based swap clearing agency and traded on a SB SEF or SBS exchange. The
proposed rules, however, are also likely to impose costs on security-
based swap clearing agencies, SB SEFs, and SBS exchanges. The
Commission is sensitive to the costs and benefits that would result
from the proposed rules and has identified certain costs and benefits
of these proposals, as described below.

A. Background

    The proposed governance and ownership and voting rules are intended
to reduce conflicts of interest in security-based swap clearing
agencies, SB SEFs, and SBS exchanges. Ownership and voting limitations
and other governance rules are designed to limit the influence of any
single market participant or a group of participants in the operation
of security-based swap clearing agencies, SB SEFs, and SBS exchanges
and thus reduce the risk that conflicts of interest would negatively
affect the operation of these entities and the security-based swaps
market.\203\ However, since the OTC swaps marketplace regulated under
Title VII likely would change significantly after the effective date of
the Dodd-Frank Act and the Commission's rules promulgated thereunder,
it is difficult to quantify the costs and benefits that the proposed
rules may create. These issues are discussed more fully below.
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    \203\ The Commission pursuant to Section 36 of the Exchange Act
may grant an exemption from any rule or any provision of any rule
under Regulation MC. Any such exemption could be subject to
conditions and could be revoked by the Commission at any time. See
supra Section VI for a discussion of the Commission's exemptive
authority under Section 36 of the Exchange Act.
---------------------------------------------------------------------------

B. Security-Based Swap Clearing Agencies

    The Commission has granted exemptions from Section 17A of the
Exchange Act to five entities to act as clearing agencies for security-
based swaps.\204\ The first cleared CDS transaction pursuant to the
exemptive orders was cleared on March 9, 2009. Security-based swap
clearing is, therefore, in an emergent stage and empirical evidence on
how the security-based swaps market will develop following the
effective date of the Dodd-Frank Act and rules thereunder is scarce.
However, the number of security-based swap clearing agencies may
converge in the long run to a very small number or even a single
security-based swap clearing agency.\205\ This is

because of the potential for efficiency gains through convergence given
that central clearing of securities is characterized by large fixed
costs and benefits to participants associated with consolidating
portfolios. Alternatively, competitive forces may result in use of a
larger number of security-based swap clearing agencies, particularly if
the security-based swap clearing agencies specialize in clearing
particular types of security-based swaps or if they clear security-
based swaps only in certain jurisdictions.\206\
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    \204\ See CDS Clearing Exemption Orders, supra note 17.
    \205\ See, e.g., Darrell Duffie and Haoxiang Zhu, ``Does a
Central Clearing Counterparty Reduce Counterparty Risk?'' Stanford
University Working Paper, March 2010; Craig Pirrong, 2009, ``The
Economics of Clearing in Derivatives Markets: Netting, Asymmetric
Information, and the Sharing of Default Risks Through a Central
Counterparty,'' Working paper, University of Houston.
    \206\ The central clearing of security-based swaps is still
developing and the Commission has not made any determinations about
the number of security-based swap clearing agencies that may be used
by market participants. However, it is important that emerging
security-based swap clearing agencies have the opportunity to
compete with existing security-based swap clearing agencies.
---------------------------------------------------------------------------

1. Costs and Benefits Related to Ownership Restrictions in Security-
Based Swap Clearing Agencies
    Restrictions on the voting interests held by clearing participants
may affect the number of potential clearing participants and may also
affect the level of their participation in clearing security-based
swaps. The 20% individual voting limitation on security-based swap
clearing agencies and the 40% aggregate voting limitation on security-
based swap clearing agencies, under the proposed Voting Interest Focus
Alternative, and the 5% individual voting limitation under the
Governance Focus Alternative, are intended to keep participants from
exercising undue influence over the security-based swap clearing agency
and to lessen the likelihood of anti-competitive behavior. One
particular concern is that without a limitation on voting interests,
large dealers may control a security-based swap clearing agency and set
standards--such as a heightened capital threshold for participation or
a requirement that participants have execution capabilities--to limit
participation by non-owner dealers or brokers and increase or protect
their market share and potentially influence market prices. Hence, a
potential benefit of voting limitations may be the preservation of non-
owner dealers' access to central clearing and promotion of competition
that results in lower costs to market participants. The proposed
limitations in both the Voting Interest Focus Alternative and the
Governance Focus Alternative are designed to achieve this result.
    Another potential benefit of the imposition of a limitation on
voting interests is the chance that a broader group of participants
would have the ability to reduce their risk exposure as greater levels
of central clearing is encouraged if the risks at the clearing agency
are managed appropriately. Clearing agencies decrease systemic risk by
mutualizing losses \207\ and netting otherwise bilateral obligations.
There may, however, at times be a trade-off between a clearing agency's
risk management and its participation standards. It likely would be
beneficial if the voting restrictions proposed by Rules 701(a) and (b)
under Regulation MC in each of the Voting Interest Focus Alternative
and the Governance Focus Alternative lead to increased market
participation. Conversely though, to the extent that such market
participation goes beyond prudent levels, it may create more systemic
risk at the security-based swap clearing agency. For example, lessening
capital requirements to increase participation beyond a prudent level
may increase the overall risk of clearing operations, while increasing
capital requirements for clearing members without an adequate basis may
needlessly exclude some smaller dealers or other firms from
participation and thereby create market inefficiencies.\208\
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    \207\ See, e.g., Ice Trust Overview, p. 7 (available at https://
www.theice.com/publicdocs/clear_us/ICE_Trust_Overview.pdf).
    \208\ See supra Section II.A.2.a.
---------------------------------------------------------------------------

    Non-participant shareholders may also have an incentive to permit
more clearing agency participation than clearing agency participant
shareholders would. Non-participant shareholders benefit from increased
membership to the extent that additional revenues are generated and
therefore have an incentive to promote increased use of central
clearing both in terms of number of participants and the scope of
products cleared. This could potentially reduce systemic risk by making
more OTC products eligible for central clearing. In addition, non-
shareholder participants have an incentive to promote appropriate risk
management because a financial loss to the clearing agency would
devalue their investment. For example, security-based swap clearing
agencies may put their own capital or surplus funds at risk in the
event of a default. In addition, clearing agencies face reputational
risk associated with a member default that would likely negatively
affect the value of shareholders' shares. This aligns the interests of
shareholders with appropriate risk management of a clearing agency.
However, non-participant shareholders may not face the same potential
of downside risk as clearing agency participants. For example, non-
participant shareholders do not bear certain costs associated with
increased risk since the clearing agency losses are shared by the
clearing agency participants. To the extent that non-participant
shareholders use their control to maximize revenues of the clearing
agency without full consideration of the total clearing agency risks,
the potential cost is that suboptimal clearing agency participation
standards will be developed. All directors have a fiduciary duty to the
security-based swap clearing agency and its shareholders, however, they
also have a duty to oversee the security-based swap clearing agency's
compliance with the requirements in the Exchange Act and the rules and
regulations thereunder. In certain circumstances, independent directors
could give greater emphasis to profit-maximizing initiatives and fail
to give sufficient consideration to the related risk management issues.
    Another potential cost of ownership and voting limitations,
notwithstanding the fact that the market structure may converge in the
long-run to a single security-based swap clearing agency, is the
potential effect on competition among alternative security-based swap
clearing agency venues. Under the Voting Interest Focus Alternative, a
20% individual participant voting limit and a 40% aggregate participant
voting limit restricts the ability of any single dealer or small group
of dealers to own a security-based swap clearing agency, but it may
also reduce the potential number of investors that would be willing to
devote resources to form a security-based swap clearing agency. This
potentially diminishes the likelihood for a long-term market structure
with multiple clearing agencies. Conversely, the Governance Focus
Alternative would not impose an aggregate cap and would allow the
voting interests in a security-based swap clearing agency to be owned
entirely by participants. This would facilitate the formation of
security-based swap clearing agencies by potential users and promote
greater competition among security-based swap clearing agencies.
    In addition, if a participant is subject to restrictions regarding
the amount of voting interest it may own in a security-based swap
clearing agency, then it may forgo a potential investment opportunity,
unless it is willing to invest in non-voting shares of the security-
based swap clearing agency. The effect of these restrictions is

different with respect to individual participants under the Governance
Focus Alternative, which limits any one participant's voting interest
in a security-based swap clearing agency to 5%, than it is under the
Voting Interest Focus Alternative, which limits any one participant's
voting interests to 20% and has an aggregate voting interest limit of
40%. In the case of an ownership position in excess of regulator's
restrictions, the owner would have to divest a portion of its voting
shares in order to meet the regulatory requirement. The potential
foregone benefits include profits generated from clearing activities
that are distributed to owners as well as any private ownership
benefits from directing the clearing operations, which include
activities discussed above with respect to conflicts of interest. While
it is difficult to assess the value of these investment opportunities,
the 2010 six-month data from consolidated reports of condition and
income from the Federal Financial Institutions Examinations Council of
the largest security-based swap clearing agency provides a snapshot of
the magnitude of current profits being generated.\209\
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    \209\ ICE Trust's profits for the first six months of 2010 were
$1,325,000, which would represent an annual profit of $2,650,000.
FFIEC Central Data Repository's Public Data Distribution, https://
cdr.ffiec.gov/public/Default.aspx.
---------------------------------------------------------------------------

    Moreover, as previously discussed in the PRA section, proposed
Rules 701(a) and (b) under Regulation MC would require a security-based
swap clearing agency to have an effective mechanism to obtain
information relating to voting interests in the security-based swap
clearing agency by any participant in the security-based swap clearing
agency. It was estimated that these obligations would result in a total
annual burden for all security-based swap clearing agencies of 336
hours plus a total annual reporting and recordkeeping burden for all
participants of 336 hours. It was also estimated that there would be a
90 hour one-time paperwork burden for security-based swap clearing
agencies to establish rules to divest any ownership interest in excess
of the limit and not to give effect to any portion of the voting
interests in excess of the limit. Assuming an hourly cost of $291 for a
compliance attorney \210\ to meet these requirements, this would result
in an overall estimated initial annual cost of $221,742 and an annual
cost thereafter of $195,552 for participants and security-based swap
clearing agencies collectively.\211\
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    \210\ The hourly rate for the compliance attorney is from
SIFMA's Management & Professional Earnings in the Securities
Industry 2009, modified by the Commission's staff to account for an
1,800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
    \211\ Overall initial annual cost for participants and clearing
agencies information requirements = (336 hours + 336 hours + 90
hours) x $291 = $221,742. Overall subsequent annual cost for
participants and clearing agencies information requirements = (336
hours + 336 hours) x $291 = $195,552.
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    Under the Voting Interest Focus Alternative, proposed Rule 701(a)
in Regulation MC would require the security-based swap clearing agency
to have rules requiring a participant to divest voting interest greater
than the 20% threshold and rules reasonably designed not to give effect
to a voting interest of a participant greater than the 20% threshold or
voting interests of participants considered in the aggregate with any
other participants greater than the 40% threshold. This proposed rule
would impose a cost on the security-based swap clearing agency to
initiate the divestiture or not give effect to the voting rights that
surpass the stated threshold. Particularly in the case of the aggregate
participant voting limitation, the security-based swap clearing agency
would have to develop standards regarding how to allocate the voting
interest for which it will give effect if the aggregate voting interest
is above the 40 percent threshold.
    Similarly, under the Governance Focus Alternative, proposed Rule
701(b) in Regulation MC would impose a cost on the security-based swap
clearing agency to require the divestiture or not give effect to the
voting rights that surpass the stated threshold of 5 percent. However,
because there is not a proposed limit on participants' aggregate voting
interests under the Governance Focus Alternative, the security-based
swap clearing agency would not have to adopt rules for allocating
voting interests in the case of a divestiture.
2. Costs and Benefits Related to Independence Requirements for
Security-Based Swap Clearing Agencies
    Potential conflicts of interest also exist between participants of
a security-based swap clearing agency and the public interest. Even
when the influence of any single dealer is limited through voting
restrictions, economic incentives could align several dealer
participants in a way that may be costly to investors. For instance, in
order for a product to be required to trade through an SB SEF or SBS
exchange, it must be deemed eligible for clearing at a clearing agency.
A dealer-controlled security-based swap clearing agency may have an
incentive to limit the products deemed eligible for clearing because
then such a product would remain viable in the OTC markets, in which
the dealers have a significant financial stake.\212\ Products that are
eligible for clearing that are not cleared do not have the price
transparency or investor accessibility that they would otherwise have,
increasing market participant costs paid by investors. As a result,
there are potential incentives for security-based swap clearing agency
participants to coordinate in ways that voting restrictions cannot
address. Representation by independent directors would provide views
and influence that by design are not subject to these conflicts.
---------------------------------------------------------------------------

    \212\ See, generally, Darrell Duffie, ``How Should We Regulate
Derivatives Markets?'' Pew Financial Reform Project, Briefing Paper
5, 2009.
---------------------------------------------------------------------------

    Proposed Rule 701(b)(3) in Regulation MC of the Governance Focus
Alternative would require that a majority of directors must be
independent. As a result, participants could not directly control the
Board regardless of their voting interests. To further the goal of
majority independence on the Board, proposed Rule 701(b)(4) under
Regulation MC in the Governance Focus Alternative would require a
security-based swap clearing agency to establish a nominating committee
composed solely of independent directors. Since many of the Board
decisions come from committees and conflicts may be prevalent or even
more pronounced in these situations, proposed Rule 701(b)(5) under
Regulation MC in the Governance Focus Alternative would require that if
any committee, including but not limited to a risk committee, has
authority to act on behalf of the Board, that committee must also be
composed of a majority of independent directors. This would help
prevent important decisions from escaping the view of a majority of
independent directors. To the extent that independent directors reduce
the likelihood that one group of participants coordinate decision-
making in such a way that is detrimental to the security-based swap
clearing agency as a whole, it would serve to benefit the security-
based swap clearing agency and the market generally.
    The Voting Interest Focus Alternative would require 35%, rather
than a majority, of the Board be composed of independent directors.
While director independence is widely believed to be a catalyst for
improved governance, there is no conclusive empirical evidence to
support the view that a majority of independent directors benefits
shareholder profits.\213\ It also is often argued that the presence of
inside

affiliated board members is important in facilitating the flow of
material information to independent directors so that they may come to
informed decisions.\214\ This may be especially important for a
security-based swap clearing agency because it provides highly
specialized and technical services. The imposition of a Board structure
that precludes the likely owners of a security-based swap clearing
agency--dealers--from gaining a majority may have a negative effect on
the operations of the security-based swap clearing agency if
independent directors do not have commensurate qualifications or skills
as participant directors. There could be significant costs associated
with educating independent directors about the clearance and settlement
process and the complex risk management issues that must be considered
by the Board. This could slow the Board or committee processes, at
least initially. Clearing and settlement is a highly specialized area
and it may be difficult to find independent directors with relevant
experience. As a result, independent directors may defer to industry
directors or to the officials of the clearing agency, who have more
knowledge and experience, thereby undermining the benefits of requiring
independence.
---------------------------------------------------------------------------

    \213\ However, the Commission recognizes that the industry
widely accepts a majority of independent directors as ``best
practices.'' See supra note 122.
    \214\ See M. Harris and A. Raviv, 2007, ``A Theory of Board
Control and Size,'' The Journal of Finance; R. Adams and D.
Fererria, 2008, ``A Theory of Friendly Boards,'' The Journal of
Finance, vol. 62(1) pp. 217-250.
---------------------------------------------------------------------------

    In the context of wholly independent committees, such as a
nominating committee, the independent directors may become reliant on
executive directors and other employees of the security-based swap
clearing agency to inform their decision-making due to their lack of
expertise in clearing and settlement. If management fails to keep the
directors on wholly independent committees fully informed, the
independent directors on such committees fail to seek sufficient
information from management to make informed decisions, or management
fails to give independent directors adequate resources to make
effective decisions, there could be costs to the security-based swap
clearing agency. On the other hand, if management fully apprises the
directors on wholly independent committees of necessary information and
the independent directors have sufficient resources and are fully
engaged with respect to their duties, there would be benefits to the
security-based swap clearing agency.
    In addition, the effectiveness of the Board can depend on the
personalities and personal traits, as well as the qualifications, of
the persons serving on the Board. Independent directors that take the
time to understand the operations and programs of a security-based swap
clearing agency and to ask probing questions of management are more
likely to be effective independent directors. However, independent
directors would unlikely be able to acquire the specific risk
management expertise related to clearance and settlement if they do not
have relevant experience prior to serving on the Board. In addition,
because independent directors would not be employed by or participants
in the security-based swap clearing agency, they may often need to rely
on management or other directors to keep fully informed. There could be
costs to the security-based swap clearing agency if one or more
independent directors is ineffectual because he or she did not fully
understand the operations or risk management procedures of the
security-based swap clearing agency. Thus, imperfect decisions by
independent directors could result in costs to the security-based swap
clearing agency. This may potentially be more likely where the majority
of the Board is required to be independent. On the other hand,
independent directors who have relevant expertise, are engaged in
carrying out their director duties, and who grasp the issues
confronting the security-based swap clearing agency could be very
beneficial to the security-based swap clearing agency because they
could bring an outside perspective and fresh insights and ideas to the
security-based swap clearing agency.
    The proposed governance requirements under both the Voting Interest
Focus Alternative and the Governance Focus Alternative could impose
other costs on security-based swap clearing agencies. An entity that
plans to register as a security-based swap clearing agency may need to
revise the composition of its Board if the Board currently is not
composed of 35% or a majority of independent directors. Moreover,
security-based swap clearing agencies may have to restructure their
nominating committees as well as other committees that are authorized
to act for the Board. In this regard, security-based swap clearing
agencies could face difficulties locating qualified individuals to
serve as independent directors, particularly because security-based
swaps trading is complex and the pool of qualified candidates may be
limited. There also may be costs in educating independent directors to
become familiar with the manner in which these security-based swaps are
traded and the new regulatory structure governing security-based swaps,
which could slow Board processes at least initially. These costs would
be greater under the Governance Focus Alternative, which requires a
higher percentage of independent directors on the Board and on the
committees.
    The proposed governance requirements could impose other costs on
security-based swap clearing agencies. A security-based swap clearing
agency may incur costs as a result of the requirement to include 35% or
a majority of independent directors on its Board and a similar or
heightened requirement with respect to committees authorized to act on
behalf of the Board. Any such costs are likely to be incurred in
connection with conducting a search for independent directors with the
necessary qualifications and expertise to serve on the Board of a
security-based swap clearing agency. The actual cost for each security-
based swap clearing agency may vary based on the current governance
arrangements and practices of the security-based swap clearing
agencies. In addition, if a security-based swap clearing agency is
required to conduct a search for independent directors, the costs
incurred by the security-based swap clearing agency may vary based on
whether it has the resources to conduct its own search or has to retain
an outside consultant. The Commission preliminarily estimates that
those security-based swap clearing agencies that must rely on a
recruitment specialist to secure an independent director could incur a
cost of approximately $68,000 per director.\215\
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    \215\ The Commission is basing this estimate on a recent study
noting that the retainer fee for outside directors is on average
$67,624. See http://www.hewittassociates.com/_
MetaBasicCMAssetCache_/Assets/Articles/2010/2010_Outside_
Director_Compensation.pdf. 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.
---------------------------------------------------------------------------

C. SB SEFs and SBS Exchanges

    Currently, there are no trading venues that are registered with the
Commission as SB SEFs, and no national securities exchanges that
currently post or make available for trading security-based swaps.
Based on the Dodd-Frank Act's definition, a SB SEF could include a
trading platform with participating dealers.\216\ SB SEFs are
conceptually

similar to alternative trading systems and national securities
exchanges in the equity and options markets and designated contract
markets in the futures markets in that they will provide a centralized
trading facility for the trading of security-based swaps. To the extent
that SB SEFs would organize and form in a similar manner to these
structures, the Commission preliminarily anticipates that SB SEFs and
SBS exchanges would be significantly more competitive than security-
based swap clearing agencies. In particular, barriers to entry in terms
of capital are likely to be lower, and many existing dealers, national
securities exchanges and other entities of various sizes currently have
electronic trading capabilities that could allow them to enter this
market readily.
---------------------------------------------------------------------------

    \216\ Section 763(c) of the Dodd-Frank Act sets forth 14 core
principles that SB SEFs must satisfy and provides the Commission
with rulemaking authority with respect to implementation of these
core principles. The Commission expects to address the issue of what
is a SB SEF in a separate rulemaking under Section 763(c) of the
Dodd-Frank Act. See Section 763(c) of the Dodd-Frank Act, Public Law
111-203, Section 763(c).
---------------------------------------------------------------------------

1. Costs and Benefits Related to Ownership Requirements of SB SEFs and
SBS Exchanges
    The 20% ownership and voting limits contained in proposed Rule
702(b) under Regulation MC would prohibit any SB SEF participant or SBS
exchange member or small group thereof from owning or otherwise
controlling any class of voting securities or other interests of a SB
SEF, SBS exchange or SBS exchange facility, as applicable. The intent
of this requirement, as with security-based swap clearing agencies, is
to limit the influence of any single dealer or a small group of dealers
in a single SB SEF, SBS exchange or SBS exchange facility and thus
reduce the likelihood that smaller non-owner dealers would be
unfavorably treated and the ability of dealer-owners to influence
market prices of security-based swaps. It is hard to predict, however,
what entities will be SB SEFs or SBS exchanges or whether there will be
any market power from owning or controlling a SB SEF or SBS exchange as
discussed above. If the concern, as with central clearing, is that a
single SB SEF or SBS exchange emerges as the dominant trading platform,
then ownership and voting restrictions may be an important
consideration. For example, the NYSE was the dominant exchange for
trading equity securities for a long period, and even today U.S.
futures markets are characterized by a dominant exchange connected to a
single clearing agency.
    However, evidence from the current cash equity and options markets
shows that several trading platforms with different business models and
clienteles often emerge.\217\ Hence, SB SEFs, SBS exchanges, and SBS
exchange facilities that are controlled by a single dealer may not
necessarily result in unfair trading practices if market participants
have alternative comparable venues to execute the same security-based
swaps and those venues are able to compete effectively with single
dealer platforms. Allowing SB SEFs, SBS exchanges and SBS exchange
facilities that are controlled by a single dealer may in fact increase
the level of competition, which would benefit investors. A 20%
restriction on ownership of voting securities could require a dealer to
partner with either other dealers or a non-dealer majority owner, or to
hold a non-voting ownership interest, which could reduce incentives to
start up a new venue, potentially limiting innovative alternatives to
security-based swap execution and security-based swap products.\218\
---------------------------------------------------------------------------

    \217\ For example, there are currently 15 registered national
securities exchanges with varying platforms and business models that
compete for clients and order flow in the equities and/or options
markets.
    \218\ As noted above, Section 763(c) of the Dodd-Frank Act sets
forth 14 core principles that SB SEFs must satisfy, including one
relating to conflicts of interest, and provides the Commission with
rulemaking authority with respect to implementation of these core
principles. The Commission may determine that it is appropriate to
propose additional rules to mitigate conflicts of interest with
respect to SB SEFs, including incorporating ownership and/or voting
limits and other requirements with respect to ownership of a SB SEF
by persons other than SB SEF participants. The Commission also may
consider proposals such as providing for the fair representation of
SB SEF participants in the selection of the SB SEF's directors and
the administration of its affairs as part of its broader rulemaking
relating to SB SEFs.
---------------------------------------------------------------------------

    The Commission anticipates that the proposed ownership and voting
limitations may impose costs on SB SEFs, SBS exchanges and SBS exchange
facilities. Entities planning to register as SB SEFs and SBS exchanges
would have to ensure that they are in compliance with the proposed
ownership and voting limitations and thus would need to spend time and
incur costs to design or modify their ownership structure and internal
processes, as well as take the necessary steps to draft or amend their
governing documents and rules to comply with such ownership and voting
limitations. Designing or modifying internal processes and drafting or
revising governing documents and rules would impose costs on SB SEFs,
SBS exchanges and SBS exchange facilities. The Commission estimates
that it would take a compliance attorney approximately 15 hours to
revise the relevant governing documents and to file them with the
appropriate authorities. Assuming an hourly cost of $291 for a
compliance attorney,\219\ these requirements would result in an overall
annual cost per SB SEF, SBS exchange or SBS exchange facility of
$4,365, or $152,775 in the aggregate for all SB SEFs, SBS exchanges,
and SBS exchange facilities.\220\
---------------------------------------------------------------------------

    \219\ See supra note 210.
    \220\ Overall annual cost per SB SEF, SBS exchange, or SBS
exchange facility = 15 hours x $291 = $4,365; aggregate annual cost
for all SB SEFs, SBS exchanges, and SBS exchange facilities = $4,365
x 35 = $152,775.
---------------------------------------------------------------------------

    As previously discussed in the PRA section, proposed Rule 702(c)
would require SB SEFs, SBS exchanges, or SBS exchange facilities, as
applicable, to have an effective mechanism to obtain information
relating to ownership and voting interest in the SB SEF, SBS exchange,
or SBS exchange facility, by any participant or member of the SB SEF,
SBS exchange or SBS exchange facility.\221\ It was estimated that these
obligations would result in a total annual burden for all SB SEFs, SBS
exchanges, and SBS exchange facilities of 1,960 hours. It was also
estimated that there would be a total annual reporting and
recordkeeping burden for all participants or members of 2,800 hours.
Assuming an hourly cost of $291 for a compliance attorney \222\ to meet
these requirements, this would result in an overall annual cost of
$1,385,160 for participants or members and SB SEFs, SBS exchanges, and
SBS exchange facilities collectively.\223\ To the extent that certain
participants or members may be required to file ownership or voting
information with a domestic or international government authority
pursuant to securities laws, and such information is made available to
the SB SEF, SBS exchange, or SBS exchange facility, this cost would be
reduced.
---------------------------------------------------------------------------

    \221\ See supra Section IX.
    \222\ See supra note 210.
    \223\ Overall annual cost for participants or members and SB
SEFs, SBS exchanges and SBS exchange facilities = (1,960 hours +
2,800 hours) x $291 = $1,385,160.
---------------------------------------------------------------------------

    Proposed Rule 702(c) under Regulation MC also would require a SB
SEF, SBS exchange or SBS exchange facility to have rules to divest a
participant or member of an ownership interest that violates the
proposed ownership limits, and to not give effect to a voting interest
of a participant or member that violates the proposed voting limits. As
previously discussed in the PRA section, this requirement is estimated
to result in an initial paperwork burden for all SB SEFs, SBS
exchanges, or SBS exchange facilities of 525 hours. Assuming an hourly
cost of $291 for a compliance attorney \224\ to meet these
requirements, this would

result in an initial cost of $152,775 for all SB SEFs, SBS exchanges,
and SBS exchange facilities.\225\
---------------------------------------------------------------------------

    \224\ See supra note 210.
    \225\ This initial cost is estimated as follows: 15 hours x 35
respondents x $291 per hour = $152,775.
---------------------------------------------------------------------------

    This proposed rule also would impose costs on SB SEFs, SBS
exchanges, or SBS exchange facilities to initiate the divestiture or
not give effect to the voting rights that surpass the stated threshold.
For example, a SB SEF, SBS exchange, or SBS exchange facility could
incur costs involved with redeeming shares held in excess of the
proposed limits if such entity chooses to provide in its rules that any
such excess shares would be purchased by the entity. A SB SEF, SBS
exchange, or SBS exchange facility also could adopt rules to limit
voting by any participant or member that owns more than 20% of
outstanding interests. Thus, a SB SEF, SBS exchange, or SBS exchange
facility also could incur costs associated with monitoring votes cast
at any shareholder meeting to determine that no SB SEF participant or
SBS exchange member and its related persons subject to the voting
limits exceeds those limits.
    The Commission recognizes that entities that are currently in
existence and plan to become SB SEFs, SBS exchanges or SBS exchange
facilities could incur costs if they do not meet the proposed ownership
and voting limitations. For example, if a single or small group of
market participants that would be direct participant(s) in a SB SEF
plans to register a platform as a SB SEF, it or they potentially would
need to secure additional owners to meet the 20% limitation on
ownership of voting securities of a SB SEF. This could impose costs on
an entity that has a single owner-participant or a small number of
owner-participants and that plans to register a platform as a SB SEF,
from the costs of finding other owners or the sharing of potential
profits with a larger group of owners. As noted above, currently there
are no trading venues that are registered with the Commission as SB
SEFs. Based on initial discussions with market participants that have
indicated an interest in registering as a SB SEF, the Commission
preliminarily believes that few entities that may register as a SB SEF
currently have ownership structures that would conflict with the
proposed ownership and voting limitations for SB SEFs. In addition, as
discussed above, national securities exchanges that may potentially
register as SBS exchanges or create a facility that will be a SBS
exchange facility should already be in compliance with the proposed
ownership and voting limitations. Based on these factors, the
Commission preliminarily believes that the aggregate costs imposed by
the ownership and voting limitations on entities initially seeking to
register as SB SEFs, SBS exchanges or SBS exchange facilities would not
be significant.
2. Costs and Benefits Related to Independence Requirements in SB SEFs
and SBS Exchanges
    Proposed Rule 702(d) under Regulation MC would require the Boards
of SB SEFs and SBS exchanges or SBS exchange facilities to be composed
of at least a majority of independent directors to mitigate conflicts
of interest and help ensure that the entity does not advance the
interests of its owners, some of which may be dealer-participants or
their affiliates. By mandating a structure that would require a
majority of Board members to be independent, the governance of SB SEFs,
SBS exchanges and SBS exchange facilities should be less susceptible to
promoting the self-interests of such participants. The majority
independent directors should help foster a greater degree of
independent decision-making consistent with the objectives of the Dodd-
Frank Act and the Exchange Act. Further, a Board whose independent
directors constitute at least a majority of the Board should help
ensure that the views of independent directors are taken into account
and should help strengthen the hand of independent directors when
dealing with management. In the Commission's preliminary view,
requiring the Boards of SB SEFs, SBS exchanges and SBS exchange
facilities to have a majority of independent directors should help
reduce the possibility of damaging conflicts of interest that otherwise
might arise when persons who do not meet the definition of independent
director at the SB SEF, SBS exchange or SBS exchange facility are
involved in key decisions, such as which products will be made
available for trading and the access levels of potential market
participants. To the extent that independent directors would reduce the
likelihood that one group of participants could coordinate decision-
making in such a way that would be detrimental to the SB SEF, SBS
exchange or SBS exchange facility as a whole, this would be a benefit.
    In addition, proposed Rule 702(f) under Regulation MC would require
that the nominating committee of a SB SEF, SBS exchange or SBS exchange
facility be composed solely of independent directors. This proposed
requirement should foster a process for nominating independent
directors that would help to assure that such directors are independent
and not likely to be unduly influenced by an owner of the SB SEF, SBS
exchange or SBS exchange facility who is possibly a SB SEF participant-
dealer or SBS exchange member or affiliate thereof. In addition, the
requirement in proposed Rule 702(g) under Regulation MC that any
committee that would have the authority to act on behalf of the Board
be composed of a majority of independent directors is designed to
prevent important decisions from escaping the view of a majority of
independent directors. Many Board decisions come from committees and
conflicts may be similarly prevalent or even more pronounced in these
situations.
    Proposed Rule 702(e) under Regulation MC also would require the
Board of any SB SEF and SBS exchange to establish a ROC consisting
solely of independent directors to oversee the entity's regulatory
obligations.\226\ The Commission preliminarily believes that this
requirement should be effective in managing the conflicts of interest
inherent in the Board's oversight of whether a SB SEF or SBS exchange
satisfies its regulatory obligations. The proposed provision relating
to the establishment of an independent ROC should help promote greater
accountability on the part of SB SEFs and SBS exchanges with respect to
the obligations placed on them by the Exchange Act, including as
amended by the Dodd-Frank Act, and strengthen their ability to meet
those obligations. A ROC composed solely of independent directors
should result in a greater degree of objective decision-making with
respect to the SB SEF's or SBS exchange's regulatory obligations.
Vigilant and informed oversight by a strong, effective and independent
ROC may increase investor confidence in the operation of SB SEFs and
SBS exchanges, and the security-based swaps market generally. National
securities exchanges that currently have a ROC composed of independent
directors have noted the benefits of such a governance mechanism.\227\
In

addition, requiring the Board to report promptly to the Commission any
recommendation of the ROC that the Board does not implement should
provide the Commission with information on a timely basis regarding the
Board's decision not to take certain actions.
---------------------------------------------------------------------------

    \226\ Proposed Rule 702(e) under Regulation MC does not
explicitly include SBS exchange facilities because the exchange
whose facility posts or makes available for trading a security-based
swap must itself establish the requisite ROC. See supra note 173.
    \227\ See CBOE Comment Letter, supra note 165 (``CBOE also
implemented other changes that are similar to the proposals
contained in the Release, for example establishing a Regulatory
Oversight Committee, composed solely of public directors * * *. As a
result, CBOE believes that its existing governance structure and
practices serve not only to protect investors and the public
interest and assure the integrity of CBOE's regulatory activities,
but also to enhance the ability of CBOE to develop and implement
sound business strategies''); NYSE Comment Letter, supra note 165
(``As an important part of the reform process of 2003, the NYSE
formalized the effective functional separation of regulatory
programs from the competitive business functions, under a Chief
Regulatory Officer (``CRO'') reporting to a Regulatory Oversight
Committee (``ROC'') of the Board of Directors consisting of all
independent directors * * *. We agree with the Commission that this
structure, with a separate regulatory executive reporting to an
empowered, qualified and independent board, amply funded and
professionally staffed, assures the integrity of the regulatory
process.'')
---------------------------------------------------------------------------

    The governance proposals for SB SEFs, SBS exchanges and SBS
exchange facilities would complement the proposed ownership and voting
limits for these entities. Five or more dealer-participants or members
could still own 100% of the voting securities of a SB SEF, SBS exchange
or SBS exchange facility, as applicable, under the proposed voting and
ownership limits. In addition, even when the influence of any single
dealer is limited through ownership and voting restrictions, economic
incentives can align several dealer participants in a way that may be
costly to investors. As a result, there are potential incentives for SB
SEF participant-dealers and SBS exchange member-dealers to coordinate
in ways that ownership and voting restrictions could not address.
Requiring independence on the Board and certain key Board committees
should further reduce the ability of the participant-owners of the SB
SEF or member-owners of the SBS exchange or SBS exchange facility to
unduly influence decision-making at the Board level in a way that
advances their interests. Representation by independent directors would
provide views and influence that by design are not subject to these
conflicts.
    As noted in the discussion relating to security-based swap clearing
agencies, while director independence is widely believed to be a
catalyst for improved governance and the Commission recognizes that the
industry widely accepts a majority of independent directors as ``best
practices,'' \228\ there is no conclusive empirical evidence to support
the view that a majority of independent directors benefits shareholder
profits. However, the Model Business Corporation Act recognizes the
important role of independent directors.\229\
---------------------------------------------------------------------------

    \228\ See supra note 122.
    \229\ MODEL BUS. CORP. ACT Sec.  8.01(c) (4th ed. 2008).
---------------------------------------------------------------------------

    The proposed governance requirements could impose costs on SB SEFs,
SBS exchanges and SBS exchange facilities. Entities planning to
register as SB SEFs and SBS exchanges may need to draft or amend their
governing documents and design or modify their governance processes to
comply with the proposed governance requirements, which would impose
costs on SB SEFs, SBS exchanges and SBS exchange facilities. The
Commission estimates that it would take a compliance attorney
approximately 15 hours to revise the relevant governing documents and
to file them with the appropriate authorities, for a total estimated
cost per SB SEF, SBS exchange or SBS exchange facility of $4,365, or
$152,775 in the aggregate for all SB SEFs or SBS exchanges, and SBS
exchange facilities.\230\
---------------------------------------------------------------------------

    \230\ Assuming an hourly cost of $291 for a compliance attorney,
the overall annual cost per SB SEF, SBS exchange or SBS exchange
facility and aggregate cost for all SB SEFs, SBS exchanges, and SBS
exchange facilities was calculated as follows: per entity annual
cost = 15 hours x $291 = $4,365; aggregate annual cost = $4,365 x 35
= $152,775. See supra note 210.
---------------------------------------------------------------------------

    An entity that plans to register as a SB SEF or a SBS exchange may
need to revise the composition of its Board (or that of its SBS
exchange facility, in the case of an exchange that posts or makes
available for trading security-based swaps through a facility with a
separate governance structure), if the Board currently is not composed
of a majority of independent directors. SB SEFs and SBS exchanges or
SBS exchange facilities also would need to establish wholly independent
nominating committees, and SB SEFs and SBS exchanges would need to
establish wholly independent ROCs. In this regard, SB SEFs, SBS
exchanges and SBS exchange facilities could face difficulties in
locating qualified individuals to serve as independent directors,
particularly because security-based swaps trading is complex and some
potential candidates may decline to serve as a director if they believe
that they lack sufficient expertise.
    The Commission preliminarily believes that the cost of securing
independent directors to serve on the Board of the SB SEF, SBS exchange
or SBS exchange facility could range from a relatively low cost for
those entities that have the contacts and resources to be able to
search for one or more independent directors on their own; to a
moderate cost for those entities that can undertake the search on their
own but would incur some expenditures, such as placing advertisements
in national media; to a higher cost for those entities that must secure
the services of a recruitment firm that specializes in the placement of
independent directors. The Commission preliminarily estimates that
those SB SEFs, SBS exchanges or SBS exchange facilities that must rely
on a recruitment specialist to secure an independent director could
incur a cost of approximately $68,000 per director.\231\ The Commission
preliminarily estimates that 10-20 entities could seek to register as
SB SEFs and notes that there are 15 national securities exchanges;
however, the number of Board members could vary widely among SB SEFs,
SBS exchanges and SBS exchange facilities. Therefore, the Commission
provides an estimate of a maximum recruitment cost of $68,000 per
independent director.\232\
---------------------------------------------------------------------------

    \231\ The Commission is basing this estimate on a recent study
noting that the retainer fee for outside directors is on average
$67,624. See http://www.hewittassociates.com/_
MetaBasicCMAssetCache_/Assets/Articles/2010/2010_Outside_
Director_Compensation.pdf. 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.
    \232\ As discussed above, since 2004 when the Commission
proposed rules to promote the fair administration and governance of,
and to impose ownership and voting limitations on, national
securities exchanges, a number of exchanges have adopted governance
structures which meet many of the requirements of proposed Rule 702.
Thus, the costs for complying with the proposed governance rules
would be decreased for some SBS exchanges.
---------------------------------------------------------------------------

    The imposition of a Board structure that precludes the likely
participants in SB SEFs, SBS exchanges or SBS exchange facilities--
dealers--from gaining a majority or having representation on certain
Board committees may have a negative effect on the operations of the SB
SEF, SBS exchange or SBS exchange facility if independent directors do
not have commensurate qualifications or skills as affiliated directors
or do not engage actively in their Board or committee duties. There
could be costs in educating independent directors to become familiar
with the manner in which security-based swaps are traded and in the new
regulatory structure that would govern them, which could slow Board or
committee processes at least initially. In addition, independent
directors may yield to industry directors who have more knowledge and
experience, thereby undermining the benefits of requiring independence.
In the context of wholly independent committees, such as a nominating

committee or ROC, the independent directors may become reliant on
executive officers and other employees of the SB SEF or SBS exchange to
inform their decision-making due to their lack of expertise in the
industry. If management fails to keep the directors on wholly
independent committees fully-informed, if the independent directors on
such committees fail to seek sufficient information from management to
make informed decisions or if management fails to give independent
directors adequate resources to make effective decisions, there could
be costs to the SB SEF, SBS exchange or SBS exchange facility. On the
other hand, if management fully apprises the directors on wholly
independent committees of necessary information and the independent
directors have sufficient resources and are fully engaged with respect
to their duties, there would be benefits to the SB SEF, SBS exchange or
SBS exchange facility.
    In addition, the effectiveness of majority independent Boards can
depend on the personalities and personal traits, as well as the
qualifications, of the persons serving on the Board. Independent
directors that take the time to understand the operations and programs
of a SB SEF, SBS exchange or SBS exchange facility and to ask probing
questions of management are more likely to be effective independent
directors. However, because independent directors would not be employed
by the SB SEF, SBS exchange, or SBS exchange facility or be
participants or members of such entity, they often may need to rely on
management or other directors to keep them fully informed. There could
be costs to the SB SEF, SBS exchange, or SBS exchange facility if one
or more independent directors is ineffectual because he or she did not
fully understand the operations of the SB SEF or SBS exchange, either
because the independent directors did not take the necessary initiative
or management failed to keep the independent directors fully apprised
of information that would lead to their effective decision-making.
Thus, imperfect decisions by independent directors could result in
costs to the SB SEF, SBS exchange, or SBS exchange facility. On the
other hand, independent directors who have expertise in areas that
could be helpful to the SB SEF, SBS exchange or SBS exchange facility,
who are engaged in carrying out their director duties, and who grasp
the issues confronting the SB SEF, SBS exchange or SBS exchange
facility could be very beneficial to the SB SEF, SBS exchange or SBS
exchange facility because they could bring fresh insights and ideas to
these entities.
    Finally, under the proposed Rule 702(e)(2) under Regulation MC, SB
SEFs and SBS exchanges would need to report promptly to the Commission
any recommendation of the ROC that the Board does not adopt or
implement, which would result in costs to SB SEFs and SBS exchanges. As
discussed above, the Commission preliminarily estimates that the annual
information collection burden for each SB SEF or SBS exchange under
this provision of the proposed rules would be 12 hours.\233\
Accordingly, the Commission's staff estimates that it would cost each
SB SEF or SBS exchange $3,492 annually to comply with this provision of
the proposed rules.\234\
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    \233\ See supra Section IX.D.
    \234\ 12 hours (estimated annual information collection burden
for each SB SEF and SBS exchange) x $291 (hourly cost for a
compliance attorney) = $3,492. The hourly rate for the compliance
attorney is from SIFMA's Management & Professional Earnings in the
Securities Industry 2009, modified by the Commission's staff to
account for an 1,800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.
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D. Request for Comments

    The Commission requests that commenters provide views and
supporting information regarding the costs and benefits associated with
the proposals. The Commission seeks estimates of these costs and
benefits, as well as any costs and benefits not already identified. The
Commission also requests comment regarding the relative costs and
benefits of pursuing alternative regulatory approaches that are
consistent with Section 765 of the Dodd-Frank Act. In addition, the
Commission requests comment on whether other provisions of the Dodd-
Frank Act for which Commission rulemaking is required are likely to
have an effect on the costs and benefits of the proposed rules.

XI. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act \235\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action would promote efficiency, competition, and capital
formation. In addition, Section 23(a)(2) of the Exchange Act \236\
requires the Commission, when adopting rules under the Exchange Act, to
consider the effect such rules would have on competition. Section
23(a)(2) of the Exchange Act also prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
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    \235\ 15 U.S.C. 78c(f).
    \236\ 15 U.S.C. 78w(a)(2).
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    Security-based swaps are currently executed and traded in the OTC
market, with five large commercial banks representing 97% of the total
U.S. banking industry national amounts outstanding of derivatives.\237\
The gross notional amount of CDS as of the end of 2009 was
approximately $30 trillion.\238\
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    \237\ See Office of the Comptroller of the Currency, Quarterly
Report on Bank Trading and Derivatives Activities, First Quarter
2010.
    \238\ Data available at http://www.isda.org/statistics/pdf/ISDA-
Market-Survey-results1987-present.xls.
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    As discussed above, the Commission has granted exemptions to five
entities to act as security-based swap clearing agencies for CDS.\239\
Four of the exemptions are currently active. SB SEFs and SBS exchanges
are expected to register to trade security-based swaps in connection
with the implementation of rules under Title VII of the Dodd-Frank Act.
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    \239\ See CDS Clearing Exemption Orders, supra note 17.
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    As discussed above, the intent of the ownership and voting
limitations and governance proposed rules is to mitigate potential
conflicts of interests of market participants in the clearing and
trading of security-based swaps. These proposed rules may have a
significant effect on the level of competition within the marketplace.
    The voting restrictions on security-based swap clearing agencies
that limit the influence of any single participant or group of
participants could increase the level of competition at the participant
level if they preserve access to central clearing and trading by other
participants. Without these voting restrictions, it may be possible for
a dominant participant owner to use its voting interest to set rules,
fees, or capital requirements that engender an uncompetitive
environment. For instance, a heightened capital threshold for
participation might prevent some firms from qualifying as participants
and thus deny them access to clearing. However, the proposed voting
limitations among participants may also impede competition at the
security-based swap clearing agency level, since

there are likely a limited number of firms with the expertise,
resources and desire to have an ownership interest in a security-based
swap clearing agency.\240\
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    \240\ The Commission pursuant to Section 36 of the Exchange Act
may grant an exemption from any rule or any provision of any rule
under Regulation MC. See supra Section VI.
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    As previously noted, evidence from the securities markets suggests
that clearing agencies over the long-run tend to converge to a small
number of entities or even a single entity. Clearing activities are
characterized by high start-up costs and low marginal costs such that
there are large economies of scale. For example, all trades executed on
the eight U.S. based options exchanges are cleared at the Options
Clearing Corporation, and trades executed on the U.S. equity markets,
composed of exchanges, alternative trading platforms, and OTC trading,
are cleared at the National Securities Clearing Corporation, a wholly-
owned subsidiary of the Depository Trust and Clearing Corporation.\241\
A single security-based swap clearing agency may also be more efficient
in that it would facilitate the fungibility of contracts across
multiple execution facilities and exchanges.
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    \241\ The central clearing of security-based swaps is still
developing and the Commission has not made any determinations about
the number of security-based swap clearing agencies that may be used
by market participants.
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    Whether the differences in the Voting Interest Focus Alternative
and the Governance Focus Alternative would result in substantially
different effects on efficiency, capital formation, and competition
remains uncertain. Preliminarily, the Commission believes that the
aggregate cap on participant voting interests may limit the formation
of new clearing agencies and, consequently, limit the opportunity for
competition among security-based swap clearing agencies. However, the
aggregate cap under the Voting Interest Focus Alternative may also be
more effective at mitigating conflicts of interest than the rules
proposed under the Governance Focus Alternative, and could result in
greater access to central clearing and a higher volume of security-
based swap products made eligible for clearing. As discussed
previously, central clearing would facilitate improved transparency,
risk management, and competition in the security-based swaps market.
This in turn should have a positive effect on efficiency, capital
formation, and competition.
    The Commission preliminarily believes that the start-up costs for a
SB SEF, SBS exchange or SBS exchange facility, or for an existing
national securities exchange to post or make available for trading
security-based swaps, will be low. If a SB SEF, SBS exchange or SBS
exchange facility would not provide the desired level of access to a
market participant, and the start-up costs of setting up a competing SB
SEF, SBS exchange or SBS exchange facility are low, then this would
encourage the entrance of alternate trading venues for market
participants and allow competition to discipline harmful practices by
any single SB SEF, SBS exchange, or SBS exchange facility. However, if
ownership restrictions are such that dealers must coordinate ownership
among a group, then there may be fewer potential owners available, and
thus there could be less incentive to form competing SB SEFs, SBS
exchanges, or SBS exchange facilities. In this case, ownership
limitations would impede competition.\242\
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    \242\ See supra note 240.
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    The proposed rules under Regulation MC relating to Board and
committee independence may also increase the level of participant
competition by making it more difficult for a small group of dealer-
owners to influence a security-based swap clearing agency, SB SEF or
SBS exchange even in light of the proposed ownership and voting
restrictions. This is necessary because economic incentives could align
the interests of participants against the interest of the security-
based swap clearing agency, SB SEF or SBS exchange as a whole
irrespective of whether those participants are owners. For example, if
the Board of a dealer-controlled security-based swap clearing agency
determines to refuse to clear a proposed security-based swap product,
then such a product would not be required to be traded on a SB SEF or
SBS exchange and would likely trade OTC, reducing price transparency
and likely resulting in higher revenue for the dealers in the OTC
market than if the product was available through a SB SEF, SBS exchange
or SBS exchange facility. Majority independence requirements for the
Board and committees that have the authority to act on behalf of the
Board are an additional tool to address this potential conflict of
interest. Given the size of the security-based swaps market and its
non-competitive tendencies, the benefits with respect to efficiency and
competition that ownership, voting, and director representation
requirements would provide are likely to be substantial.
    The Commission requests comment on the possible effects of the
proposed rules under Regulation MC on efficiency, competition, and
capital formation. The Commission requests that commenters provide
views and supporting information regarding any such effects. The
Commission notes that such effects are difficult to quantify. The
Commission seeks comment on possible anti-competitive effects of the
proposed rules under Regulation MC not already identified. The
Commission also requests comment regarding the competitive effects of
pursuing alternative regulatory approaches that are consistent with
Section 765 of the Dodd-Frank Act. In addition, the Commission requests
comment on how the other provisions of the Dodd-Frank Act for which
Commission rulemaking is required will interact with and influence the
competitive effects of the proposed rules under Regulation MC.

XII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \243\ the Commission must advise the OMB as
to whether proposed Regulation MC and the rules proposed thereunder
constitute a ``major'' rule. Under SBREFA, a rule is considered
``major'' where, if adopted, it results or is likely to result in: (1)
An annual effect on the economy of $100 million or more (either in the
form of an increase or a decrease); (2) a major increase in costs or
prices for consumers or individual industries; or (3) significant
adverse effect on competition, investment or innovation.
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    \243\ Public Law 104-121, Title II, 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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    The Commission requests comment on the potential impact of proposed
Regulation MC and the rules proposed thereunder on the economy on an
annual basis. Commenters are requested to provide empirical data and
other factual support for their view to the extent possible.

XIII. Regulatory Flexibility Act Certification

    Section 603(a) of the Regulatory Flexibility Act \244\ (``RFA'')
requires the Commission to undertake an initial regulatory flexibility
analysis of the proposed rules under Regulation MC on small entities,
unless the Commission certifies that the proposed rules, if adopted,
would not have a significant economic impact on a substantial number of
small entities.\245\
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    \244\ 5 U.S.C. 603(a).
    \245\ 5 U.S.C. 605(b).

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A. Security-Based Swap Clearing Agencies

    Proposed Rule 701 under Regulation MC would apply to all security-
based swap clearing agencies. Four entities are currently exempt from
registration as a clearing agency under section 17A of the Exchange Act
to provide central clearing services for CDS, a class of security-based
swaps.\246\ The Commission believes, based on its understanding of the