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

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

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

    \307\ See Governance Proposing Release, supra note 2, at 51813
(``[C]lear and transparent governance arrangements help optimize the
clearing agency's decisions, rules and procedures that the
Commission considers in the SRO rule filing process because clearing
agency transparency improves the quality of the information shared
with stakeholders, which in turn improves the public comments
submitted in response to rule filings.'').
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \327\ See LSEG at 15.

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

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

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

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

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

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

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

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

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

5. Use of Fora To Satisfy the Rule
    As stated in the Governance Proposing Release, the Commission
recognized that many registered clearing agencies already have
established committees, working groups, and other fora of varying size,
scope, and formality to share and solicit information with clearing
agency participants, the customers of clearing agency participants, and
other stakeholders regarding changes to risk management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

III. Compliance Dates

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

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

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

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

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

IV. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic consequences and
effects of the final rules, including their benefits and costs.\372\
The Commission acknowledges that, since many of these rules could
require a registered clearing agency to adopt new policies and
procedures, the economic effects and consequences of these rules
include those flowing from the substantive results of those new
policies and procedures. Further, as stated above, Exchange Act section
17A directs the Commission to have due regard for the public interest,
the protection of investors, the safeguarding of securities and funds,
and maintenance of fair competition among brokers and dealers, clearing
agencies, and transfer agents when using its authority to facilitate
the establishment of a national system for clearance and settlement of
transactions in securities.\373\
---------------------------------------------------------------------------

    \372\ Under Exchange Act section 3(f), whenever the Commission
engages in rulemaking under the Exchange Act and is required to
consider or determine whether an action is necessary or appropriate
in the public interest, it must consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f). In
addition, section 23(a)(2) of the Exchange Act prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
    \373\ See 15 U.S.C. 78q-1(a)(2)(A).
---------------------------------------------------------------------------

    This economic analysis addresses the likely economic effects of the
final rules, including their anticipated and estimated benefits and
costs and their likely effects on efficiency, competition, and capital
formation. Many of the benefits and costs are difficult to quantify.
For example, the issue of divergent incentives is a core economic
matter that is persistent across many different types of economic
interactions among registered clearing agency stakeholders. Incentives
affect the economic outcome of a transaction, but there is no reliable
or comparable data across different organizations about how decision-
making processes directly affect monetary gains and losses. In
addition, quantification of these incentive effects is particularly
challenging due to the number of assumptions that would be needed to
forecast how registered clearing agencies will respond to the final
rules, and how those responses will, in turn, affect the broader market
for cleared securities. While the Commission has attempted to quantify
economic effects where possible, much of the discussion of economic
effects is qualitative in nature. However, the inability to quantify
benefits and costs does not mean that the benefits and costs of the
final rules are any less significant. The Commission sought comment on
all aspects of the economic analysis, especially any data or
information that would enable a quantification of economic effects, and
the analysis below takes into consideration relevant comments received.
The Commission also discusses the potential economic effects of certain
alternatives to the final rules.

B. Economic Baseline

    To consider the effect of the final rules, the Commission first
explains the current state of affairs in the market (i.e., the economic
baseline). All the benefits and costs from adopting the final rules are
changes relative to the economic baseline. The economic baseline in
this release considers: (1) the current market for registered clearing
agency activities, including the number of registered clearing
agencies, the distribution of participants across these clearing
agencies, and the scope of trading activity these clearing agencies
process, (2) the current regulatory framework for registered clearing
agencies, and (3) the current practices of registered clearing agencies
that relate to the final rules.
1. Description of Market
    Clearing agencies are financial markets infrastructures, which
include central securities depositories and central counterparties, and
each clearing agency plays an important role in the financial system.
In the United States, there are currently six active registered
clearing agencies (NSCC, DTC, FICC, ICC, LCH SA, and OCC), and two
registered clearing agencies that are inactive (BSECC and SCCP).\374\
---------------------------------------------------------------------------

    \374\ Neither BSECC nor SCCP has provided clearing services in
over a decade. See Exchange Act Release No. 63629 (Jan. 3, 2011)
(BSECC ``returned all clearing funds to its members by September 30,
2010, and [ ] no longer maintains clearing members or has any other
clearing operations as of that date. [ ] BSECC [ ] maintain[s] its
registration as a clearing agency with the Commission for possible
active operations in the future.''); Exchange Act Release No. 63268
(Nov. 8, 2010) (``SCCP returned all clearing fund deposits by
September 30, 2009; [and] as of that date SCCP no longer maintains
clearing members or has any other clearing operations. [ ] SCCP [ ]
maintain[s] its registration as a clearing agency for possible
active operations in the future.''). Because they do not provide
clearing services, BSECC and SCCP are not included in the economic
baseline or the consideration of benefits and costs. They are
included in the PRA for purposes of the PRA estimate, see infra at
Part V.
---------------------------------------------------------------------------

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

    \375\ For example, DTC, NSCC, and FICC are subsidiaries of DTCC.
Participants of DTC, FICC, and NSCC that make full use of the
services of one or more of these clearing agency subsidiaries of
DTCC are required to purchase DTCC common shares. See, e.g.,
Exchange Act Release No. 52922 (Dec. 7, 2005), 70 FR 74070 (Dec. 14,
2005).
    \376\ For example, OCC is owned by certain options exchanges;
ICC is a subsidiary of ICE, which is listed on the New York Stock
Exchange; and LCH SA is a subsidiary of LCH Group Holdings, Ltd.,
which is majority-owned by London Stock Exchange Group plc (a
publicly traded company).
---------------------------------------------------------------------------

    Registered clearing agencies currently operate specialized clearing
services and face limited competition in their markets. For example,
there is only one registered clearing agency serving as a central
counterparty for each of the following asset classes: exchange-traded
equity options (OCC), government securities (FICC), mortgage-backed
securities (FICC), and equity securities (NSCC). There is also only one
registered clearing agency providing central securities depository
services (DTC). Registered clearing agencies' participants include
securities brokers and dealers, custodian and clearing banks, and
certain other investment institutions. Table 1 summarizes the most
recent data on the number of participants at each registered clearing
agency.
    Registered clearing agency activities exhibit high barriers to
entry and economies of scale. These features of the existing market,
and the resulting concentration of clearing and settlement services
within a handful of entities,\377\ informs the Commission's examination
of the effects of the final rules on competition, efficiency, and
capital formation, as discussed below.
---------------------------------------------------------------------------

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

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

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

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

    \378\ See Governance Proposing Release. supra note 2, at 51813.
    \379\ Data from DTCC's Trade Information Warehouse, compiled by
Commission staff.
    \380\ See OCC, Annual Report (2022), available at https://annualreport.theocc.com; DTCC, Annual Report (2022), available at
https://www.dtcc.com/about/annual-report. Within DTCC, NSCC cleared
$2.1 trillion of equity trades every day on average, FICC cleared a
total of $1,512 trillion of government securities transactions and
$61 trillion of agency mortgage-backed securities transactions, and
DTC settled a total of $462 trillion of securities.
---------------------------------------------------------------------------

    Central clearing generally benefits the markets in which it is
available through significantly reducing participants' counterparty
risk and through more efficient netting of margin. Consequently,
central clearing also benefits the financial system as a whole by
increasing financial resilience and the ability to monitor and manage
risk.\381\ Notwithstanding the benefits, central clearing concentrates
risk in the registered clearing agency.\382\ Disruption to a registered
clearing agency's operations, or failure on the part of a registered
clearing agency to meet its obligations, could serve as a source of
contagion across U.S. securities markets, resulting in significant
costs not only to the registered clearing agency itself or its
participants but also to other market participants and the broader U.S.
financial system.\383\ As a result, proper management of the risks
associated with central clearing helps ensure the stability of the U.S.
securities markets and the broader U.S. financial system.\384\
---------------------------------------------------------------------------

    \381\ See Darrell Duffie, Still the World's Safe Haven?
Redesigning the U.S. Treasury Market After the COVID-19 Crisis,
Hutchins Center Working Paper No. 62 (June 2020), at 15, available
at https://www.brookings.edu/wp-content/uploads/2020/05/wp62_duffie_v2.pdf (``Central clearing increases the transparency of
settlement risk to regulators and market participants, and in
particular allows the CCP to identify concentrated positions and
crowded trades, adjusting margin requirements accordingly. Central
clearing also improves market safety by lowering exposure to
settlement failures. . . . As depicted, settlement failures rose
less in March [2020] for [U.S. Treasury] trades that were centrally
cleared by FICC than for all trades involving primary dealers. A
possible explanation is that central clearing reduces `daisy-chain'
failures, which occur when firm A fails to deliver a security to
firm B, causing firm B to fail to firm C, and so on.'').
    \382\ See generally Albert J. Menkveld & Guillaume Vuillemey,
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153
(2021).
    \383\ See generally Dietrich Domanski, Leonardo Gambacorta &
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS
Q. Rev. (Dec. 2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf (describing links between CCP financial risk
management and systemic risk); Darrell Duffie, Ada Li & Theo Lubke,
Policy Perspectives on OTC Derivatives Market Infrastructure, Fed.
Res. Bank N.Y. Staff Rep. No. 424, at 9 (Mar. 2010), available at
http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a
CCP is successful in clearing a large quantity of derivatives
trades, the CCP is itself a systemically important financial
institution. The failure of a CCP could suddenly expose many major
market participants to losses. Any such failure, moreover, is likely
to have been triggered by the failure of one or more large clearing
agency participants, and therefore to occur during a period of
extreme market fragility.''); Craig Pirrong, The Inefficiency of
Clearing Mandates, Policy Analysis No. 655, at 11-14, 16-17, 24-26
(July 2010), available at http://www.cato.org/pubs/pas/PA665.pdf
(stating, among other things, that ``CCPs are concentrated points of
potential failure that can create their own systemic risks,'' that
``[a]t most, creation of CCPs changes the topology of the network of
connections among firms, but it does not eliminate these
connections,'' that clearing may lead speculators and hedgers to
take larger positions, that a CCP's failure to effectively price
counterparty risks may lead to moral hazard and adverse selection
problems, that the main effect of clearing would be to
``redistribute losses consequent to a bankruptcy or run,'' and that
clearing entities have failed or come under stress in the past,
including in connection with the 1987 market break); Glenn Hubbard
et al., Report of the Task Force on Financial Stability, Brookings
Institution (June 2021), available athttps://www.brookings.edu/wp-content/uploads/2021/06/financial-stability_report.pdf, at 96 (``In
short, the systemic consequences from a failure of a major CCP, or
worse, multiple CCPs, would be severe. Pervasive reforms of
derivatives markets following 2008 are, in effect, unfinished
business; the systemic risk of CCPs has been exacerbated and left
unaddressed.''); Froukelien Wendt, Central Counterparties:
Addressing their Too Important to Fail Nature, IMF Working Paper No.
15/21 (Jan. 2015), available at http://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf (assessing the potential channels for
contagion arising from CCP interconnectedness); Manmohan Singh,
Making OTC Derivatives Safe--A Fresh Look, IMF Working Paper No. 11/
66 (Mar. 2011), at 5-11, available at http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing factors that could lead
central counterparties to be ``risk nodes'' that may threaten
systemic disruption).
    \384\ See Paolo Saguato, Financial Regulation, Corporate
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J.
1071, 1074-75 (2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3269060 (``[T]he decision to centralize risk
in clearinghouses made them critical for the stability of the
financial system, to the point that they are considered not only
too-big-to-fail, but also too-important-to-fail institutions.'').
---------------------------------------------------------------------------

2. Overview of the Existing Regulatory Framework
    The existing regulatory framework for clearing agencies registered
with the Commission includes Exchange Act section 17A and the Dodd-
Frank Act, and the related rules adopted by the Commission. The current
regulatory system is discussed in the Governance Proposing
Release.\385\
---------------------------------------------------------------------------

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

    The Commission is aware that clearing agencies registered with the
Commission may also be subject to other domestic or foreign regulators.
Specifically, registered clearing agencies operating in the United
States may also be subject to regulation by the CFTC (as derivatives
clearing organizations for futures or swaps) and the Board of Governors
of the Federal Reserve System (as systemically important financial
market utilities or state member banks).\386\ In addition, clearing
agencies registered with the Commission may be subject to foreign
clearing agency regulators. For example, LCH SA is subject to EMIR and
is regulated by l'Autorit[eacute] des march[eacute]s financiers,
l'Autorit[eacute] de Contr[ocirc]le Prudentiel et de R[eacute]solution,
and the Banque de France.\387\
---------------------------------------------------------------------------

    \386\ Currently, ICC, LCH SA, and OCC are regulated by the CFTC.
DTC, FICC, NSCC, ICC, and OCC have been designated systemically
important financial market utilities. DTC is also a state member
bank of the Federal Reserve System.
    \387\ See LCH, Company Structure, available at https://www.lch.com/about-us/structure-and-governance/company-structure.
---------------------------------------------------------------------------

    The Commission also considers relevant international standards when
engaging in rulemaking for registered clearing agencies. For example,
in 2012, CPMI and IOSCO issued the PFMI, a set of international
standards for financial market infrastructures.\388\ In connection with
rulemaking required by section 805(a)(2)(A) of the Clearing Supervision
Act, 12 U.S.C. 5464(a)(2)(A), the Commission considered the principles
and responsibilities in the PFMI when adopting Rule 17Ad-22(e).\389\
Further, registered clearing agencies must follow state laws applicable
to their choice of business structure, such as limited liability
companies, corporations, or trusts.\390\ Table 2 summarizes the board
composition and independent director requirements of the CFTC, the
Board of Governors of the Federal Reserve System, and EMIR, as well as
the related principle in the PFMI.\391\
---------------------------------------------------------------------------

    \388\ See Committee on Payment and Settlement Systems and
Technical Committee of the International Organization of Securities
Commissions, PFMI (Apr. 16, 2012), available athttp://www.bis.org/publ/cpss101a.pdf.
    \389\ CCA Standards Adopting Release, supra note 4, at 70789,
70796-97. A CPMI-IOSCO assessment report also has assessed that the
Commission's rules are consistent with the PFMI principles. See
CPMI-IOSCO, Implementation monitoring of PFMI: Assessment report for
the United States--Payment systems, central securities depositories
and securities settlement systems (May 31, 2019), at 2, available at
https://www.bis.org/cpmi/publ/d184.pdf (presenting the conclusions
drawn by the CPMI and IOSCO from a Level 2 assessment).
    \390\ For example, the OCC is a Delaware corporation. See OCC,
Certificate of Incorporation, available at https://www.theocc.com/Company-Information/Documents-and-Archives/OCC-Certificate-of-Incorporation.
    \391\ PFMI is an international standard, and as such does not
have the force of law.

   Table 2--Board Composition and Independent Director Requirements of
          CFTC, Board of Governors, EMIR, and CPMI-IOSCO (PFMI)
------------------------------------------------------------------------
                                     Board composition and independence
           Organization                         requirements
------------------------------------------------------------------------
CFTC..............................  ``A derivatives clearing
                                     organization shall ensure that the
                                     composition of the governing board
                                     or board-level committee of the
                                     derivatives clearing organization
                                     includes market participants and
                                     individuals who are not executives,
                                     officers, or employees of the
                                     derivatives clearing organization
                                     or an affiliate thereof.'' (17 CFR
                                     39.26).
Board of Governors of the Federal   ``. . . the designated financial
 Reserve System.                     market utility has governance
                                     arrangements that are designed to
                                     ensure . . . [t]he board of
                                     directors includes a majority of
                                     individuals who are not executives,
                                     officers, or employees of the
                                     designated financial market utility
                                     or an affiliate of the designated
                                     financial market utility'' (12 CFR
                                     234.3(a)(2)(iv)(D)).\a\
European Market Infrastructure      ``A CCP shall have a board. At least
 Regulation (EMIR).                  one third, but no less than two, of
                                     the members of that board shall be
                                     independent. Representatives of the
                                     clients of clearing members shall
                                     be invited to board meetings for
                                     matters relevant to Articles 38 and
                                     39. The compensation of the
                                     independent and other non-
                                     executive members of the board
                                     shall not be linked to the business
                                     performance of the CCP''
                                     (Regulation (EU) No 648/2012 of the
                                     European Parliament and of the
                                     Council of 4 July 2012, Title IV,
                                     Article 27).
                                    `` `[I]ndependent member' of the
                                     board means a member of the board
                                     who has no business, family or
                                     other relationship that raises a
                                     conflict of interests regarding the
                                     CCP concerned or its controlling
                                     shareholders, its management or its
                                     clearing members, and who has had
                                     no such relationship during the
                                     five years preceding his membership
                                     of the board'' (Regulation (EU) No
                                     648/2012 of the European Parliament
                                     and of the Council of 4 July 2012,
                                     Title I, Article 2(28)).
CPMI-IOSCO........................  ``[Board] members should be able to
                                     exercise objective and independent
                                     judgment. Independence from the
                                     views of management typically
                                     requires the inclusion of non-
                                     executive board members, including
                                     independent board members, as
                                     appropriate. Definitions of an
                                     independent board member vary and
                                     often are determined by local laws
                                     and regulations, but the key
                                     characteristic of independence is
                                     the ability to exercise objective,
                                     independent judgment after fair
                                     consideration of all relevant
                                     information and views and without
                                     undue influence from executives or
                                     from inappropriate external parties
                                     or interests. The precise
                                     definition of independence used by
                                     an F[inancial] M[arket]
                                     I[nfrastructure (FMI)] should be
                                     specified and publicly disclosed,
                                     and should exclude parties with
                                     significant business relationships
                                     with the FMI, cross-directorships,
                                     or controlling shareholdings, as
                                     well as employees of the
                                     organisation'' (PFMI, Sec.
                                     3.2.10, footnotes omitted).
------------------------------------------------------------------------
\a \ ``The risk management standards [12 CFR 234] do not apply, however,
  to . . . a clearing agency registered with the Securities and Exchange
  Commission . . .'' (12 CFR 234.1(b)).

3. Divergent Incentives of Registered Clearing Agency Stakeholders
    Registered clearing agency stakeholders, such as owners and direct
and indirect participants, have incentives that may not be in alignment
with the interests of the broader financial markets.\392\ Any such
misalignment, if left unmitigated, could limit the benefits of central
clearing and hinder the resilience of other financial market
intermediaries and the broader financial market.\393\ For example, in
securities markets where all or part of a transaction may not be
subject to a central clearing requirement, a single participant or a
small group of participants may have a profit incentive to select
bilateral clearing over central clearing \394\ or seek to influence a
registered clearing agency to not clear a security that would profit
the participants more if the security were cleared bilaterally. Not
only could such incentives limit the benefits of central clearing, but
they could also reduce resilience in the broader financial market by
increasing overall counterparty risk.\395\ In addition, indirect
participants that are not permitted to directly access clearing
services have incentives to ``avoid clearing and seek higher-margin
trading activity through faux customization.'' \396\ This, too, could
hinder resilience in the broader financial market by increasing overall
counterparty risk. Lastly, as pointed out in a BIS and IOSCO report,
``. . . an FMI and its participants may generate significant negative
externalities for the entire financial system and real economy if they
do not adequately manage their risks.'' \397\ To the extent these
negative externalities are not adequately internalized by the
registered clearing agency or otherwise mitigated, they could present
systemic risks to the broader financial markets.\398\ Multiple
commenters agreed that the incentives of registered clearing

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

    \392\ Cf. Bank of England, The Bank of England's supervision of
financial market infrastructures--Annual Report (Mar. 2015), at
Chapter 2.1.4 (``Strong user and independent representation in [UK
CCPs] governance structures should help ensure that UK CCPs focus
not only on the management of microprudential risks to themselves
but also on systemic risks.'').
    \393\ See Sean Griffith, Governing Systemic Risk: Towards a
Governance Structure for Derivatives Clearinghouses, 61 Emory L. J.
1153, 1197 (2012), available at https://scholarlycommons.law.emory.edu/elj/vol61/iss5/3, at 1210 (``[T]he
containment of systemic risk [is] a public good. . . . Because no
private party can enjoy the full benefit of eliminating systemic
risk, no private party has an incentive to fully internalize the
cost of doing so. As a result, no private party can simply be
entrusted with the means of doing so because it is more likely to
use those means to some other ends. . . . In other words, none of
the commercial parties has the right incentives.'').
    \394\ Cf. Treasury Market Practices Group (TMPG), Best Practice
Guidance on Clearing and Settlement, at 3 (July 2019), available at
https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_BestPractices_071119.pdf (in commenting on the ``potential role
for expanded central clearing'' in the secondary U.S. Treasuries
market, the TMPG stated that ``changes to market structure that have
occurred have also resulted in a substantial increase, in both
absolute and percentage terms, in the number of trades that clear
bilaterally rather than through a central counterparty. This
principally stems from the increased prevalence of P[rincipal]
T[rading] F[irm] activity on I[nter]D[ealer ]B[roker] platforms.'').
    \395\ See Griffith, supra note 393, at 1197 (``[D]ealers have a
clear incentive to protect the profits they receive from the
bilateral market. . .by keeping trades off of clearinghouses.
Keeping trades off of clearinghouses has obvious systemic risk
implications: a clearinghouse cannot contain the risk of trades that
it does not clear.''). Though bi-lateral clearing serves a well-
defined function in eliminating basis risk and allowing for more
precise hedging, its benefits in terms of systemic risk mitigation
are more limited relative to centralized clearing.
    \396\ See Griffith, supra note 393, at 1200.
    \397\ See PFMI, supra note 388, at 11.
    \398\ Cf. id. at 128 (Noting that regulators have a role in
addressing negative externalities. ``[R]egulation, supervision, and
oversight of an FMI are needed to . . . address negative
externalities that can be associated with the FMI, and to foster
financial stability generally.''); Menkveld & Vuillemey, supra note
382, at 22 (``Network externalities create a role for regulators to
coordinate investors on a socially desirable equilibrium.'').
    \399\ See, e.g., comments by Ian Marshall (Aug. 17, 2022) (``. .
. very rarely do individuals operate outside their own interests
which in the case of powerful far reaching institutions such as
clearing agencies, produces the potential to risk the well being of
members, affiliated parties, and market stability. . . ''); Chris
Barnard (Sept. 9, 2022) (``. . . conflicts of interest inherent in
clearing agency relationships could substantially harm the security-
based swaps or wider financial market.'').
---------------------------------------------------------------------------

    Several researchers have commented that the misalignment of
interests between registered clearing agency stakeholders (owners and
non-owner participants, for example) weakens the effectiveness of
registered clearing agencies' risk management under the existing
regulatory framework.\400\ Less effective risk management, in turn,
hinders the resilience of individual registered clearing agencies, the
clearing services market, and the broader financial markets, as well as
competition among participants. However, academic literature has not
coalesced around a standard model describing clearing agency
governance, leaving some uncertainty about the theoretical best way to
mitigate divergent incentives.\401\
---------------------------------------------------------------------------

    \400\ See Saguato, supra note 384, at 5, 13 (stating that
``effective risk management in financial institutions can be
achieved only if the final risk bearers have a voice in the
governance of the firm'' and that ``the existing regulatory
framework underestimates and does not address the misaligned
incentives that spill from the agency costs of the separation of
risk and control and from the member-shareholder divide . . .'');
Hester Peirce, Derivatives Clearinghouses: Clearing the Way to
Failure, 64 Clev. St. L. Rev. 589 (2016), available at https://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=3915&context=clevstlrev (arguing that
clearing members must play a central role in risk management); Craig
Pirrong, The Economics of Central Clearing: Theory and Practice,
ISDA Discussion Papers Series No. 1 (May 2011), at 3, available at
https://www.isda.org/a/yiEDE/isdadiscussion-ccp-pirrong.pdf (``CCPs
should be organized so as to align the control of risks with those
who bear the consequences of risk management decisions.'').
    \401\ See Menkveld & Vuillemey, supra note 382, at 21 (``While
the literature on central clearing has made significant progress
over the past ten years, a number of important questions remain
open. On the theoretical front, there is still no standard model of
. . . [CCP] governance.'').
---------------------------------------------------------------------------

    As discussed more fully below, the Commission is aware of divergent
incentives at some registered clearing agencies between clearing agency
owners and non-owner participants, and the importance of actively
addressing these divergent incentives through proactive measures to
achieve sound governance and resilience. In the 2020 Staff Report on
the Regulation of Clearing Agencies, Commission staff emphasized that
``robust written rules, policies, and procedures are important to
clearing agency functioning, but represent only the first step in
achieving resilience and compliance. To achieve real-life outcomes that
help promote resilience and compliance, rules, policies, and procedures
must be . . . subject to sound governance that ensures they will be
executed promptly and effectively.'' \402\
---------------------------------------------------------------------------

    \402\ SEC Division of Trading and Markets and Office of
Compliance Inspections and Examinations, Staff Report on the
Regulation of Clearing Agencies (Oct. 1, 2020) (``Staff Report on
Clearing Agencies''), available athttps://www.sec.gov/files/regulation-clearing-agencies-100120.pdf, at 25.
---------------------------------------------------------------------------

(a) Divergent Incentives of Owners and Non-Owner Participants
    Because registered clearing agencies mutualize risk among
participants but not all participants necessarily hold an equity
interest in the registered clearing agencies,\403\ the incentives of
clearing agency owners can differ from the incentives of clearing
agency participants.\404\ For example, owners have an incentive to
transfer as much risk of loss as possible to non-owner participants or
to lower risk management standards.\405\ In such cases, the owners
benefit by receiving higher profits or tying up less capital in their
investment while participants are left with greater potential losses in
the event of a counterparty default or non-default loss and potentially
higher margin and default fund requirements.
---------------------------------------------------------------------------

    \403\ For example, OCC, ICC, and LCH SA are not owned by
participants.
    \404\ See Saguato, supra note 384, at 1099 (``This new agency
conflict that stems from the separation of risk and control and from
the `member-shareholder divide' misaligns the incentives of the
clearinghouse from those of its members . . .''). This specific
agency conflict is less of a concern in cases where clearing agency
participants own shares of the clearing agency, because there is
less separation of risk and control. For example, DTC, NSCC, and
FICC operate under a utility model, where the participants own
shares of the parent company, DTCC.
    \405\ See Menkveld & Vuillemey, supra note 382, at 20 (noting
that because participants are a ``captive clientele,'' clearing
agencies could be incentivized to relax risk management standards);
Saguato, supra note 384, at 1099, 1102. However, it is possible that
a captive clientele could also incentivize a clearing agency to
increase its risk management standards if there is participant
representation in the governance structure.
---------------------------------------------------------------------------

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

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

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

    \407\ See Kristin N. Johnson, Commentary on the Abraham L.
Pomerantz Lecture: Clearinghouse Governance: Moving Beyond Cosmetic
Reform, 77 Brook. L. Rev. 2, 698 (2012), available at https://brooklynworks.brooklaw.edu/blr/vol77/iss2/5 (``Large dealers have
incentives to limit smaller dealers' access to clearinghouse
membership. When large dealers act as brokers for the smaller
nonmember dealers, the larger dealers earn revenues for executing
transactions for dealers who are nonmembers and ineligible for
membership. If eligibility standards preclude smaller dealers from
gaining the full benefits of membership, then small dealers who
desire to execute transactions must seek the assistance of the
larger dealers who are members. Thus, large dealers have commercial
incentives to ensure that smaller dealers remain ineligible for
membership.''); Griffith, supra note 393, at 1197 (``The major
dealers may also use their influence over clearinghouses to protect
[their] trading profits, using the clearinghouse as a means of
increasing their market share and excluding competitors.'').
Multiple commenters agreed that large participants stand to gain
from anti-competitive conduct against smaller participants (See
Better Markets at 9-10; IDTA at 3).
    \408\ See 17 CFR 240.17Ad-22(b)(5) through (b)(7), and (e)(18).
---------------------------------------------------------------------------

    Large participants also have incentives to influence the registered
clearing agency to adopt policies that could disproportionately
allocate a risk of loss to smaller participants, such as by allowing
the large participant to contribute lower quality collateral to satisfy
margin or default fund requirements or by promoting margin requirements
that are not commensurate with the risks and particular attributes

of each participant's specific products, portfolio, and market. The
diverging incentives of large participants compared to smaller direct
participants are also mitigated by Rule 17Ad-22, which in part requires
a registered clearing agency to establish minimum margin and liquidity
requirements.\409\ By establishing minimum margin and liquidity
requirements, Rule 17Ad-22 reduces a large participant's ability to
obtain or maintain a competitive advantage through activities such as
providing lower quality collateral or promoting margin requirements
that are not commensurate with the risks and particular attributes of
each participant's specific products, portfolio, and market.
---------------------------------------------------------------------------

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

4. Current Governance Practices
    Registered clearing agencies must operate in compliance with Rule
17Ad-22, though they may vary in the particular ways they achieve such
compliance. Some variation in practices across registered clearing
agencies derives from the products they clear and the markets they
serve.
    An overview of current practices at the six operating registered
clearing agencies is set forth below and includes discussion of
registered clearing agency boards' policies and procedures related to
the composition of the board and board committees, conflicts of
interests involving directors and senior managers, the obligations of
the board regarding overseeing relationships with service providers for
core services, and consideration of stakeholders' views. This
discussion is based on the Commission's general understanding of
current practices as of the date of this release and reflects the
Commission's experience supervising registered clearing agencies.
(a) Current Practices Regarding Board Composition
    Each registered clearing agency has a board that governs its
operations and supervises senior management. Exchange Act section
17A(b)(3)(C) prohibits a clearing agency from registering unless the
Commission finds that ``the rules of the clearing agency assure a fair
representation of its shareholders (or members) and participants in the
selection of its directors and administration of its affairs. (The
Commission may determine that the representation of participants is
fair if they are afforded a reasonable opportunity to acquire voting
stock of the clearing agency, directly or indirectly, in reasonable
proportion to their use of such clearing agency.).'' \410\ In addition,
Rule 17Ad-252(e)(2) requires governance arrangements that support the
objectives of owners and participants and consider the interests of
other relevant stakeholders.
---------------------------------------------------------------------------

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

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

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

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

ICE Clear Credit...................  9 directors (a/k/a Board of            An independent director must satisfy
                                      Managers): at least 5 independent      the independence requirements in
                                      directors and 2 management             the NYSE Listed Company Manual.\d\
                                      directors. 5 directors elected by      An independent director also may
                                      ICE US Holding Company L.P. (3 of 5    not (among other things):
                                      are independent and the remaining 2    ``have any material
                                      are from ICE management). The Risk     relationships with the Company and
                                      Committee designates four nominees     its subsidiaries.''
                                      (two must be independent and two may   be affiliated with a Member
                                      be non-independent). (See ICC          Organization or, within the last
                                      Regulation and Governance Fact Sheet   year, (a) be employed by a Member
                                      \c\ at 2.).                            Organization, (b) have an immediate
                                                                             family member who was an executive
                                                                             officer of a Member Organization,
                                                                             or (c) have received from any
                                                                             Member Organization more than
                                                                             $100,000 per year in direct
                                                                             compensation. (See ICC Independence
                                                                             Policy.\e\)
LCH SA.............................  3 to 18 directors (currently 11 with   Independent director ``means an
                                      5 independent): ``the board shall be   independent director, who satisfies
                                      composed of the following categories   applicable Regulatory Requirements
                                      of Directors:'' an independent         regarding independent directors and
                                      Chair, independent directors,          who is appointed in accordance with
                                      executive directors, a director        the Nomination Committee terms of
                                      proposed by Euronext, user             reference'' (LCH SA Terms of
                                      directors, and a director              Reference of the Board at 2).
                                      representing London Stock Exchange
                                      Group plc. (See https://www.lch.com/about-us/structure-and-governance/board-directors-0; LCH SA Terms of
                                      Reference of the Board \f\ at 3.).
----------------------------------------------------------------------------------------------------------------
\a\ DTCC, Board of Directors Charter (June 2023), available at https://www.dtcc.com/~/media/Files/Downloads/
  legal/policy-and-compliance/DTCC-BOD-Mission-and-Charter.pdf. DTCC stated that ``a definition [of what
  currently constitutes an independent director] may in fact be found under the definition of a `non-participant
  director' '' DTCC at 4.
\b\ OCC, Board of Directors Charter and Corporate Governance Principles (May 26, 2022), available at https://www.theocc.com/getmedia/99ed48a4-aa44-45ac-8dee-9399b479a1c8/board_of_directors_charter.pdf.
\c\ ICE, ICC Regulation and Governance Fact Sheet, available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.
\d\ See Section 303.A.02 of the NYSE Listed Company Manual, available at https://nyseguide.srorules.com/listed-company-manual (``No director qualifies as `independent' unless the board of directors affirmatively
  determines that the director has no material relationship with the listed company (either directly or as a
  partner, shareholder or officer of an organization that has a relationship with the company).'' The
  independence requirements also list five situations that would preclude a director from being considered
  independent).
\e\ ICE, Independence Policy of the Board of Directors of Intercontinental Exchange, Inc., available athttps://
  s2.q4cdn.com/154085107/files/doc_downloads/governance_docs/ICE-Independence-Policy.pdf.
\f\ LCH SA, Terms of Reference of the Board (Sept. 9, 2020), available at https://www.lch.com/system/files/media_root/LCH%20SA%20Boards%20Terms%20of%20Reference.pdf.

(2) Nominating Committee
    Five of the six operating registered clearing agency boards have a
nominating committee or a committee that serves a similar function.
Current practices regarding the minimum level of independent directors
on the nominating committee vary widely. DTC, NSCC, and FICC require
that the nominating committee be composed entirely of ``non-
management'' directors; LCH SA requires that its nomination committee
include an independent chair, at least two independent directors (as
defined by LCH SA), and one user director; and OCC requires that the
committee be chaired by a ``public director'' and include at least one
exchange director and at least one member director.\414\ As stated
previously, the definition of independent director varies across
registered clearing agencies.\415\
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    \414\ See DTCC Governance Committee Charter 1 (Feb. 2020),
available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/Governance-Committee-Charter.pdf (``All
members of the Committee shall be members of the Board who are not
employed by DTCC (`non-management' directors).''); LCH SA Terms of
Reference of the Nomination Committee of the Board of Directors
(Sept. 9, 2020), available at https://www.lch.com/system/files/media_root/LCH%20SA%20-%20NomCom%20ToRs.pdf (``[The] membership
shall comprise the Chairman, at least two Independent Directors, one
User Director and the LSEG Director. The size of the Committee . . .
for the current time, will comprise four to six directors.''); OCC
Governance and Nominating Committee Charter 1 (Sept. 22, 2021),
available at https://www.theocc.com/getmedia/483ac739-0d43-46d2-a1ca-7ed38094975c/governance_nominating_charter.pdf (``The Committee
will be composed of at least one Public Director, one Exchange
Director, and one Member Director. No Management Director will be a
member of the Committee. [ ] The Committee Chair will be designated
by the Board from among the Public Director Committee members.'').
    \415\ See supra Table 3 and accompanying text.
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    All six registered clearing agency boards have fitness standards
for directors, processes for evaluating directors, and processes for
evaluating director independence. The fitness standards and processes
for evaluating directors vary across registered clearing agencies. For
example, OCC's nominating committee is required to ``identify, screen
and review individuals qualified to be elected or appointed [to the
Board] after consultation with the Chairman,'' \416\ whereas DTCC's
governance committee, which serves as the nominating committee for DTC,
NSCC, and FICC, is not required to consult with the chairman. Instead,
DTCC's governance committee ``considers possible nominations on its own
initiative and invites suggestions from all participants of each of
DTCC's clearing and depository subsidiaries. [ ] The Governance
Committee may also use a professional director search consultant to
assist in identifying candidates for the non-participant Board
positions.'' \417\ ICC, which does not have a nominating committee,
uses its risk committee to nominate four directors. ICC's direct parent
company, ICE US Holding Company L.P., decides whether to elect the four
nominees from the risk committee, and then appoints another five
directors on their own.\418\
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    \416\ OCC Governance and Nominating Committee Charter, supra
note 414, at 3.
    \417\ DTCC, Procedure for the Annual Nomination and Election of
the Board of Directors (Feb. 11, 2021), at 2, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTCC-BOD-Election-Procedure.pdf.
    \418\ ICC, ICE Clear Credit Regulation and Governance (Apr.
2022), at 2, available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Regulation_and_Governance.pdf.

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(3) Risk Management Committee
    Five of the six operating registered clearing agencies have RMCs of
the board.\419\ The sixth registered clearing agency, ICC, has an RMC
but has not identified it as a board committee. All six registered
clearing agencies include representatives from clearing participants on
the RMC, though only three registered clearing agencies require
it.\420\ Three of the six operating registered clearing agencies
require the membership of the RMC to be re-evaluated annually.\421\
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    \419\ DTC, NSC, FICC, OCC, and LCH SA.
    \420\ OCC, ICC, and LCH SA each require that the risk committee
include representatives from participants. Article 28 of EMIR
requires that a clearing agency have a risk committee that includes
representatives of its clearing members. See EMIR, supra note 56, at
art. 28(1).
    \421\ OCC, ICC, and LCH SA.
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(b) Current Practices Regarding Conflicts of Interest Involving
Directors or Senior Managers
    The boards of all six operating registered clearing agencies have
policies and procedures in place to identify and mitigate conflicts of
interest involving directors or senior managers. All six boards also
require directors to notify the clearing agency if a conflict of
interest arises.
(c) Current Practices Regarding Management of Risks From Relationships
With Service Providers for Core Services
    The Commission already requires registered clearing agencies to
manage risks from operations,\422\ which can include risks associated
with relationships with service providers.\423\ The Commission is aware
that at least some registered clearing agencies periodically inform
their boards regarding risk management associated with service
providers for core services.
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    \422\ See 17 CFR 240.17Ad-22(d)(4) and (e)(17).
    \423\ In addition, DTC, as a state member bank of the Federal
Reserve System, has received guidance from the Board of Governors of
the Federal Reserve System regarding managing service provider
risks. See SR Letter 13-19/CA Letter 13-21, Guidance on Managing
Outsourcing Risk (Dec. 5, 2013, rev. Feb. 26, 2021). The Board of
Governors of the Federal Reserve System, jointly with the Federal
Deposit Insurance Corporation and the Office of the Comptroller of
the Currency, adopted updated guidance for banking organizations in
2023 regarding the management of risks arising from third-party
relationships. See 88 FR 37920 (June 9, 2023).
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    The Commission also requires that SCI entities--including
registered clearing agencies--conduct risk assessments of ``SCI
systems'' at least once per year in accordance with Regulation SCI and
report the findings to senior management and the board of
directors.\424\ Insofar as service providers for core services are the
providers of SCI systems, each registered clearing agency board likely
already has written policies and procedures reasonably designed to,
among other things, require senior management to: (1) evaluate and
document the risks related to service provider relationships and
whether the risks can be managed in a manner consistent with the
registered clearing agency's risk management framework, (2) establish
policies and procedures that govern service provider relationships, (3)
monitor service provider relationships on an ongoing basis for
deterioration in performance, change in risks, or other material
issues, and (4) report all new service provider relationships, related
policies and procedures, and ongoing monitoring to the board of
directors.\425\
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    \424\ See 17 CFR 242.1000 through 1007.
    \425\ See Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR
72251 (Dec. 5, 2014) (``Regulation SCI Adopting Release''), at 77276
(noting that ``The Commission agrees with the comment that an SCI
entity should be responsible for managing its relationship with
third parties operating systems on behalf of the SCI entity through
due diligence, contract terms, and monitoring of third party
performance. [. . .] The Commission believes that it would be
appropriate for an SCI entity to evaluate the challenges associated
with oversight of third-party vendors that provide or support its
applicable systems subject to Regulation SCI. If an SCI entity is
uncertain of its ability to manage a third-party relationship
(whether through due diligence, contract terms, monitoring, or other
methods) to satisfy the requirements of Regulation SCI, then it
would need to reassess its decision to outsource the applicable
system to such third party.'').
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(d) Current Practices Regarding Board Consideration of Stakeholder
Viewpoints
    Currently, each covered clearing agency is required to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide governance arrangements that consider
the interests of participants' customers, securities issuers and
holders, and other relevant stakeholders of the covered clearing
agency.\426\ The Commission understands that registered clearing agency
boards currently use both formal and informal channels to solicit,
receive, and consider the viewpoints of participants and other relevant
stakeholders.\427\ Multiple commenters confirmed, for example, that
registered clearing agencies are already required to solicit
stakeholder viewpoints every time they propose a rule change as a self-
regulatory organization (i.e., pursuant to Rule 19b-4) or an advance
notice requirement as a SIFMU.\428\ Registered clearing agency
participants acknowledge that their ability to offer viewpoints has
yielded positive but mixed results.\429\
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