\426\ See 17 CFR 240.17Ad-22(e)(2)(vi).
    \427\ See, e.g., CCP12, at 9; DTCC, at 12; LSEG, at 15; OCC, at
14; OCC, Order Approving Proposed Rule Change, Exchange Act Release
No. 88029 (Jan. 24, 2020), 85 FR 5500, 5508 (Jan. 30, 2020) (``OCC
also describes the formal and informal mechanisms that OCC employs
to solicit feedback from Clearing Members and other interested
stakeholders, including its Financial Risk Advisory Committee,
Operations Roundtable, multiple letters and open calls with Clearing
Members and other interested stakeholders, and routine in-person
meetings with trade groups and individual firms.''); Cf. J.P. Morgan
et al., A Path Forward for CCP Resilience, Recovery and Resolution
(Mar. 10, 2020), available at https://www.jpmorgan.com/content/dam/jpm/cib/complex/content/news/a-path-forward-for-ccp-resilience-recovery-and-resolution/pdf-0.pdf (``[C]learing participants have
provided diverse perspectives and detailed feedback to CCPs and
regulators through individual firm and industry association position
papers, targeted comment letters, and participation in regulatory
and industry-sponsored forums on a global scale.'').
    \428\ See, e.g., CCP12 at 9; DTCC at 13; ICE at 6-7; OCC at 15.
    \429\ See, e.g., J.P. Morgan et al., supra note 427, at 1
(explaining that ``[w]hile CCPs and the regulatory community have
taken significant steps to address the feedback received, there
remain outstanding issues that require additional attention'' and
recommending ``[e]nhancing governance practices to obtain and
address input from a broader array of market participants on
relevant risk issues'' to enhance CCP resilience).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

    \435\ See Paolo Saguato, The Unfinished Business of Regulating
Clearinghouses, 2020 Colum. Bus. L. Rev. 449, 488 (2020), available
at https://journals.library.columbia.edu/index.php/CBLR/article/view/7219/3838 (``The agency costs between clearinghouses'
shareholders and members (the former participating in the profits of
the business, and the latter bearing its final costs) increase the
moral hazard of these institutions and threaten clearinghouses'
systemic resilience.''); Saguato, supra note 384.
---------------------------------------------------------------------------

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

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

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

    Some academic literature on corporate governance could be
interpreted to suggest that, under the final definition of independent
director and the minimum requirements for independent directors on the
board and board committees, divergent interests \438\ may continue to
adversely affect governance, because independent directors in closely
held companies may cede to the interests of controlling shareholders
unless they are affirmatively incentivized to protect the interests of
one or more stakeholder groups.\439\ In this context, one paper
suggests that although independent directors may not be an ultimate
solution to the agency problem for all companies (especially when there
is concentrated ownership), independent directors can contribute to
effective corporate governance if: (1) their explicit purpose is to
``prevent minority expropriation at the hands of the block-holders,''
(2) there is a strong regulation and enforcement regime, and (3) the
nomination procedure and the design of incentives guarantee the
independent director is accountable to a specific constituency other
than controlling shareholders.\440\ Another author argues that
including independent directors in the governance process provides a
roadmap for effective corporate governance, but does not guarantee
results in terms of favoritism and objectivity.\441\ While these
studies on the benefits of independent directors offer mixed results
and note that independence alone is unlikely to be sufficient to
further motivate a director to act solely in the public interest,\442\
the studies also note that director independence, particularly when
complemented with other governance requirements, may help mitigate
divergent incentives.
---------------------------------------------------------------------------

    \438\ The divergent interests referred to here are those between
owners and participants, among various types of participants, and
between registered clearing agency stakeholders and the broader
financial markets.
    \439\ See, e.g., Lucian A. Bebchuk & Assaf Hamdani, Independent
Directors and Controlling Shareholders, 165 Univ. Pa. L. Rev. 1271,
1274 (2017), available at https://scholarship.law.upenn.edu/penn_law_review/vol165/iss6/1/ (taking the position that independent
directors have incentives to go along with controlling shareholders'
wishes because the directors depend on the controlling shareholders
for election and retention, and that the best way to help ensure an
independent director does not capitulate to controlling
shareholders' or management's interests is to help ensure the
independent director is accountable to (i.e., nominated by) another
group of stakeholders); Donald C. Clarke, Three Concepts of the
Independent Director, 32 Del. J. Corp. L. 73 (2007), available at
https://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=1045&context=faculty_publications, at 83
(``In the real world, of course, any director without security of
tenure will, in the absence of counterincentives and assuming that
the position is desirable, tend to be accountable to whoever was
responsible for appointing her.''). See also id. at 85 (explaining
that even if directors were independent of shareholders, ``[T]he
role of the independent direct [as] one who is independent of
profit-seeking shareholders as well as independent of management has
not, however, found fertile soil in American corporate law
scholarship or practice. The dominant view has been that directors
who are responsible to many constituencies are in effect responsible
to none . . .'').
    \440\ See Maria Gutierrez & Maribel Saez, Deconstructing
Independent Directors, 13 J. Corp. L. Stud. 63, 90 (2013).
    \441\ See Bruce Dravis, Director Independence and the Governance
Process (Aug. 14, 2018), available at https://www.americanbar.org/groups/business_law/publications/blt/2018/08/05_dravis/.
    \442\ See Clarke, supra note 439, at 82-83 (``If one is to rely
on NMDs [Non-Management Director's] to exercise their voting power
in favor of compliance with external standards, then there needs to
be some reason for believing that NMDs will be more likely to do so
than non-NMDs. Both kinds of directors can be subject to sanctions
for voting to violate clear legal obligations. If the purpose is to
encourage corporations to act in accordance with principles that do
not constitute legal obligations (for example, ``maximize local
employment''), then it is unlikely that NMDs elected by, and
accountable to, profit-maximizing shareholders will produce this
result. A director serving the ``public interest'' should arguably
be independent of everyone--dominant shareholders, management, and
indeed all those who have an interest in the company--and follow
only the dictates of her conscience. Assuming accountability to be a
good thing, however, it is hard to see how such a director could
properly be made accountable. In the real world, of course, any
director without security of tenure will, in the absence of
counterincentives and assuming that the position is desirable, tend
to be accountable to whoever was responsible for appointing her.'').
---------------------------------------------------------------------------

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

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

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

    \444\ This figure is based on the analysis in infra Part V.A.
The per-hour costs are from SIFMA's Management and Professional
Earnings in the Securities Industry--2013, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. See SIFMA, Management and Professional
Earnings in the Securities Industry--2013 (Oct. 7, 2013).
    \445\ This figure is based on the analysis in infra Part V.A.
The per-hour costs are from SIFMA's Management and Professional
Earnings in the Securities Industry--2013, supra note 444.
---------------------------------------------------------------------------

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

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

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

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

    \448\ The Commission is basing this estimate on a report by The
Good Search, which explains that their average retainer for an
executive search is between $85,000 and $100,000, and the fee
charged by large retained executive search firms usually starts at
$100,000. See The Good Search, Retained Search Fees, available at
https://tgsus.com/executive-search-blog/executive-search-fees-search-firm-pricing. The $100,000 estimate serves as a reasonable
proxy for the amount a recruitment firm might charge to conduct a
national search for an independent director. The Commission did not
receive any comments providing an estimated cost of finding an
independent director.
---------------------------------------------------------------------------

    Third, to the extent that non-independent directors tend to have
more relevant knowledge and experience than independent directors do,
requiring that a majority of directors (or 34 percent, if a majority of
the voting interests are directly or indirectly held by participants)
be independent could reduce the depth or breadth of relevant expertise
that can be brought to registered clearing agency boards. A reduced
level of combined experience on a registered clearing agency board
might impair registered clearing agency efficiency in the near term.
However, this potential cost is mitigated under the final rules by
allowing eligible participant employees to serve as independent
directors.\449\ One commenter stated that allowing for the potential
inclusion of participant employees as independent directors had several
benefits, including industry expertise, strong alignment with the risk
management and operational integrity of the registered clearing agency,
and diverse perspectives.\450\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

6. Economic Considerations for Final Rules Regarding Formalized
Solicitation, Consideration, and Documentation of Stakeholders'
Viewpoints
    As discussed in more detail above, Rule 17Ad-25(j) requires
policies and procedures to solicit, consider, and document the
registered clearing agency's consideration of the views of its
participants and other relevant stakeholders regarding material
developments in its governance and operations.\478\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

    The final rules regarding obligations of the board will cause
registered clearing agency boards to expend resources reviewing,
revising, and possibly creating governance documents and related
policies and procedures. For example, boards might need to create
policies for soliciting, considering, and documenting the consideration
of stakeholders' views. The Commission estimates that each operating
registered clearing agency will incur a one-time burden of
approximately $7,086 \483\ to comply with Rule 17Ad-25(j).

Registered clearing agency boards will also need to expend future
resources for monitoring, compliance, and documentation activities
related to the new or revised policies and procedures. The Commission
estimates that each operating registered clearing agency will incur an
annual, recurring burden of approximately $1,748 \484\ to comply with
Rule 17Ad-25(j).
---------------------------------------------------------------------------

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

D. Reasonable Alternatives to the Final Rules

1. Allow More Flexibility in Governance, Operations, and Risk
Management
    When determining the content of its policies and procedures, each
registered clearing agency must have the ability to consider the
effects of its unique characteristics and circumstances, including
ownership and governance structures, on direct and indirect
participants, markets served, and the risks inherent in products
cleared.\485\
---------------------------------------------------------------------------

    \485\ See CCA Standards Adopting Release, supra note 4, at 70806
(``The Commission believes it is appropriate to provide covered
clearing agencies with flexibility, subject to their obligations and
responsibilities as SROs under the Exchange Act, to structure their
default management processes to take into account the particulars of
their financial resources, ownership structures, and risk management
frameworks.'').
---------------------------------------------------------------------------

    It has been the Commission's experience that particular securities
markets (e.g., equities, fixed income, and options) have unique
conventions, characteristics, and structures that are best addressed on
a market-by-market basis. The Commission recognizes that a less
prescriptive approach could help promote efficient and effective
practices and encourage regulated entities to consider how to manage
their regulatory obligations and risk management practices in a way
that complies with Commission rules, while considering the particular
characteristics of their business.\486\
---------------------------------------------------------------------------

    \486\ See CCA Standards Adopting Release, supra note 4, at
70801; see also Randall S. Kroszner, Central Counterparty Clearing:
History, Innovation, and Regulation, 30 Econ. Persp. 37, 41 (2006)
(``[M]ore intense government regulation of CCPs may prove
counterproductive if it creates moral hazard or impedes the ability
of CCPs to develop new approaches to risk management.'').
---------------------------------------------------------------------------

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

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

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

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

    As discussed in the previous reasonable alternative, the Commission
believes that the final rules appropriately balance the benefits and
burdens of more prescriptive governance requirements against the
benefits and risks of flexibility in governance and risk management. On
the one hand, a more prescriptive governance approach could help ensure
that registered clearing agencies internalize the social costs of
differing incentives between owners and participants, among various
types of participants, and between registered clearing agency
stakeholders and the broader financial markets. On the other hand,
adopting more prescriptive governance requirements could limit clearing
agencies' flexibility to implement policies and procedures that are
equally effective but also take into account the agency's unique
characteristics and circumstances . The final rules strike a reasonable
balance between these two considerations by codifying the current
governance best practices to enhance registered clearing agency
governance while still allowing registered clearing agencies to tailor
governance structures, policies, and procedures to their specific
needs.
3. Establish Limits on Participant Voting Interests
    In 2010, the Commission proposed Regulation MC, which was
``designed to mitigate potential conflicts of interest . . . through
conditions and structures related to ownership, voting, and
governance.'' \498\ Regulation MC proposed mitigating divergent
incentives, especially between larger and smaller participant-owners,
by imposing maximum voting interest limits on participants.
Specifically, Regulation MC proposed that security-based swap clearing
agencies be required to choose one of two governance alternatives: the
Voting Interest Alternative and the Governance Interest Alternative.
The Voting Interest Alternative in part prevented any single
participant from having more than 20 percent ownership or voting
interest in a clearing agency, and limited total

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

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

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

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

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

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

4. Increase Shareholders' At-Risk Capital (``Skin in the Game'')
    The final rules are intended, in part, to better manage divergent
incentives of registered clearing agency owners and non-owner
participants. One suggested cause of the incentive misalignment is
owners' lack of at-risk capital (``skin in the game'').\502\ Under the
existing regulatory structure, for-profit registered clearing agencies
can bifurcate risk from reward, sending the reward (e.g., profits) to
owners and requiring participants to hold disproportionate risks (e.g.,
responsibility for non-default losses or participants' defaulted
positions).\503\ In the Governance Proposing Release, the Commission
also expressed its belief that the proposed rules would help facilitate
registered clearing agencies' ability and motivation to adopt policies
to further mitigate incentive misalignment, including a skin in the
game requirement.
---------------------------------------------------------------------------

    \502\ See, e.g., Saguato, supra note 435, at 488 (``[There is]
significant imbalance of the economic exposure of clearing members
vis-[agrave]-vis clearinghouses and their holding groups. This
imbalance . . . results in the misaligned incentives of members and
share-holders, which creates agency costs between the firms' primary
stakeholders that threaten clearinghouses' systemic resilience.'').
    \503\ See OCC, Order Approving Proposed Rule Change to Establish
OCC's Persistent Minimum Skin-In-The-Game, Exchange Act Release No.
92038 (May 27, 2021), 86 FR 29861, 29863 (June 3, 2021) (``The
Commission continues to regard skin-in-the-game as a potential tool
to align the various incentives of a covered clearing agency's
stakeholders, including management and clearing members.'').
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

V. Paperwork Reduction Act

    As discussed in the Governance Proposing Release, Rule 17Ad-25
contains ``collection of information'' requirements within the meaning
of the Paperwork Reduction Act of 1995 (``PRA'').\516\ The Commission
submitted the proposed collections of information to the Office of
Management and Budget (``OMB'') for review in accordance with the PRA.
The title of the information collection is ``Rule 17Ad-25--Clearing
Agency Governance and Conflicts of Interest'' (OMB Control No. 3235-
0800). An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
---------------------------------------------------------------------------

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

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

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

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

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

A. Rule 17Ad-25(b)

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

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

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

B. Rule 17Ad-25(c)

    The requirements and purpose of Rule 17Ad-25(c) have been discussed
in Part II.B and also in the Governance Proposing Release.\527\ As
discussed in the Governance Proposing Release,\528\ Rule 17Ad-25(c)(1)
through (4) add governance requirements regarding the nominating
committee of the board that do not appear in the existing requirements
for governance arrangements in Rules 17Ad-22(d)(8) and 17Ad-
22(e)(2).\529\ Because the governance requirements in Rule 17Ad-25(c)
are consistent with the discussion of the proposed rule in the
Governance Proposing Release, the initial burden is unchanged from the
original proposal. Therefore, the Commission continues to expect that
the PRA burden for a respondent clearing agency includes the
incremental burdens of reviewing and revising existing governance
documents and related policies and procedures, and creating new
governance documents and related policies and procedures, as necessary,
pursuant to the rule. Accordingly, the Commission continues to estimate
that respondent clearing agencies will incur an aggregate one-time
burden of approximately 720 hours to review and revise existing
governance documents and related policies and procedures and to create
new governance documents and related policies and procedures, as
necessary.\530\
---------------------------------------------------------------------------

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

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

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

C. Rule 17Ad-25(d)

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

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

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

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

D. Rule 17Ad-25(g)

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

in the rule, and that the PRA burden includes the incremental burdens
of reviewing and revising current policies and procedures and creating
new policies and procedures, as necessary, pursuant to the rule.
Accordingly, the Commission continues to estimate that respondent
clearing agencies will incur an aggregate one-time burden of
approximately 72 hours to review and revise existing policies and
procedures and to create new policies and procedures as necessary to
ensure compliance with Rule 17Ad-25(g)(1).\539\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

E. Rule 17Ad-25(h)

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

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

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

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

F. Rule 17Ad-25(i)

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

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

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

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

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

G. Rule 17Ad-25(j)

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

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

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

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

H. Chart of Total PRA Burdens

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

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\564\ Section 603(a) of the Administrative Procedure Act,\565\
as amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules to determine the
impact of such rulemaking on ``small entities.'' \566\ Section 605(b)
of the RFA states that this requirement shall not apply to any proposed
rule which, if adopted, would not have a significant economic impact on
a substantial number of small entities.\567\ The Commission certified
in the Governance Proposing Release, pursuant to section 605(b) of the
RFA, that the proposed rules would not, if adopted, have a significant
impact on a substantial number of small entities. The Commission
received no comments on this certification.
---------------------------------------------------------------------------

    \564\ See 5 U.S.C. 601 et seq.
    \565\ 5 U.S.C. 603(a).
    \566\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this rulemaking, are set forth in 17 CFR
240.0-10.
    \567\ See 5 U.S.C. 605(b).

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

A. Registered Clearing Agencies

    Rule 17Ad-25 applies to all registered clearing agencies. For the
purposes of Commission rulemaking and as applicable to Rule 17Ad-25, a
small entity includes, when used with reference to a clearing agency, a
clearing agency that (i) compared, cleared, and settled less than $500
million in securities transactions during the preceding fiscal year,
(ii) had less than $200 million of funds and securities in its custody
or control at all times during the preceding fiscal year (or at any
time that it has been in business, if shorter), and (iii) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\568\
---------------------------------------------------------------------------

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

    Based on the Commission's existing information about the clearing
agencies currently registered with the Commission,\569\ all such
registered clearing agencies exceed the thresholds defining ``small
entities'' set out above. While other clearing agencies may emerge and
seek to register as clearing agencies with the Commission, no such
entities would be ``small entities'' as defined in Exchange Act Rule 0-
10.\570\
---------------------------------------------------------------------------

    \569\ See supra notes 379-380 and accompanying text (discussing
volume of activity in the cleared SBS market and the value of
transactions processed by DTCC and OCC). The notional value of CDS
cleared by ICE was $23.8 trillion and $17.0 trillion in 2022 and
2021, respectively. See ICE, 2022 Annual
Report,450739CLEANLPDF_LAN_26Mar202318511551_013.PDF (q4cdn.com).
The notional value of CDS cleared by LCH SA was [euro]3,367 billion
and $2,283 billion in 2022 and 2021, respectively. See LCH Group
Holdings Ltd., 2022 Annual Report, https://www.lch.com/system/files/media_root/lch-group-holdings-limited-financial-statements-2022.pdf.
In each case, these volumes exceed the $500 million threshold for
small entities.
    \570\ See 17 CFR 240.0-10(d). The Commission based this
determination on its review of public sources of financial
information about registered clearing agencies.
---------------------------------------------------------------------------

B. Certification

    For the reasons described above, the Commission certifies that Rule
17Ad-25 does not have a significant economic impact on a substantial
number of small entities for purposes of the RFA.

VII. Other Matters

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

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

Statutory Authority

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

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

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

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

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

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

0
2. Section 240.17ad-25 is added after Sec.  240.17Ad-24 to read as
follows:

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

    (a) Definitions. All terms used in this section have the same
meaning as in the Securities Exchange Act of 1934, and unless the
context otherwise requires, the following definitions apply for
purposes of this section:
    Affiliate means a person that directly or indirectly controls, is
controlled by, or is under common control with the registered clearing
agency.
    Board of directors means the board of directors or equivalent
governing body of the registered clearing agency.
    Director means a member of the board of directors or equivalent
governing body of the registered clearing agency.
    Family member means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law, including adoptive relationships, any person (other than a
tenant or employee) sharing a household with the director or a nominee
for director, a trust in which these persons (or the director or a
nominee for director) have more than 50 percent of the beneficial
interest, a foundation in which these persons (or the director or a
nominee for director) control the management of assets, and any other
entity in which these persons (or the director or a nominee for
director) own more than 50 percent of the voting interests.
    Independent director means a director of the registered clearing
agency who has no material relationship with the registered clearing
agency or any affiliate thereof.
    Material relationship means a relationship, whether compensatory or
otherwise, that exists or existed during a lookback period of one year
from the initial determination in paragraph (b)(2) and that reasonably
could affect the independent judgment or decision-making of the
director.
    Service provider for core services means any person that, through a
written services provider agreement for services provided to or on
behalf of the registered clearing agency, on an ongoing basis, directly
supports the delivery of clearance or settlement functionality or any
other purposes material to the business of the registered clearing
agency.
    (b) Composition of the board of directors. (1) A majority of the
members of the board of directors of a registered clearing agency must
be independent directors, unless a majority of the voting interests
issued as of the immediately prior record date are directly or
indirectly held by participants, in which case at least 34 percent of
the members of the board of directors must be independent directors.
    (2) Each registered clearing agency shall broadly consider all the
relevant facts and circumstances, including under paragraph (g) of this
section, on an ongoing basis, to affirmatively determine that a
director does not have a material relationship with the registered
clearing agency or an affiliate of the registered clearing agency, and
is not precluded from being an independent director under paragraph (f)
of this section. In making such determination, a registered clearing
agency must:
    (i) Identify the relationships between a director and the
registered clearing agency or any affiliate thereof and any
circumstances under paragraph (f) of this section;

    (ii) Evaluate whether any relationship is likely to impair the
independence of the director in performing the duties of director; and
    (iii) Document the evaluation and determination in writing.
    (c) Nominating committee. (1) Each registered clearing agency must
establish a nominating committee and a written evaluation process
whereby such nominating committee shall evaluate nominees for serving
as directors and evaluate the independence of nominees and directors.
    (2) A majority of the directors serving on the nominating committee
must be independent directors, and the chair of the nominating
committee must be an independent director.
    (3) The fitness standards for serving as a director shall be
specified by the nominating committee, documented in writing, and
approved by the board of directors. Such fitness standards must be
consistent with the requirements of this section and include that the
individual is not subject to any statutory disqualification as defined
under Section 3(a)(39) of the Act.
    (4) The nominating committee must document the outcome of the
written evaluation process consistent with the fitness standards
required under paragraph (c)(3) of this section. Such process shall:
    (i) Take into account each nominee's expertise, availability, and
integrity, and demonstrate that the board of directors, taken as a
whole, has a diversity of skills, knowledge, experience, and
perspectives;
    (ii) Demonstrate that the nominating committee has considered
whether a particular nominee would complement the other board members,
such that, if elected, the board of directors, taken as a whole, would
represent the views of the owners and participants, including a
selection of directors that reflects the range of different business
strategies, models, and sizes across participants, as well as the range
of customers and clients the participants serve;
    (iii) Demonstrate that the nominating committee considered the
views of other stakeholders who may be affected by the decisions of the
registered clearing agency, including transfer agents, settlement
banks, nostro agents, liquidity providers, technology or other service
providers; and
    (iv) Identify whether each nominee or director would meet the
definition of independent director in paragraphs (a) and (f) of this
section, and whether each such nominee or director has a known material
relationship with the registered clearing agency or any affiliate
thereof, an owner, a participant, or a representative of another
stakeholder of the registered clearing agency described in paragraph
(c)(4)(iii) of this section.
    (d) Risk management committee. (1) Each registered clearing agency
must establish a risk management committee (or committees) of the board
to assist the board of directors in overseeing the risk management of
the registered clearing agency. The membership of each risk management
committee must be re-evaluated annually and at all times include
representatives from the owners and participants of the registered
clearing agency.
    (2) In the performance of its duties, the risk management committee
must be able to provide a risk-based, independent, and informed opinion
on all matters presented to the committee for consideration in a manner
that supports the overall risk management, safety and efficiency of the
registered clearing agency.
    (e) Committees generally. If any committee has the authority to act
on behalf of the board of directors, the composition of that committee
must have at least the same percentage of independent directors as is
required for the board of directors, as set forth in paragraph (b)(1)
of this section.
    (f) Circumstances that preclude directors from being independent
directors. In addition to how the definition of independent director
set forth in this section is applied by a registered clearing agency,
the following circumstances preclude a director from being an
independent director, subject to a lookback period of one year
(counting back from making the initial determination in paragraph
(b)(2) of this section) applying to paragraphs (f)(2) through (6) of
this section:
    (1) The director is subject to rules, policies, or procedures by
the registered clearing agency that may undermine the director's
ability to operate unimpeded, such as removal by less than a majority
vote of shares that are entitled to vote in such director's election;
    (2) The director, or a family member, has an employment
relationship with or otherwise receives compensation other than as a
director from the registered clearing agency or any affiliate thereof,
or the holder of a controlling voting interest of the registered
clearing agency;
    (3) The director, or a family member, is receiving payments from
the registered clearing agency, or any affiliate thereof, or the holder
of a controlling voting interest of the registered clearing agency,
that reasonably could affect the independent judgment or decision-
making of the director, other than the following:
    (i) Compensation for services as a director on the board of
directors or a committee thereof; or
    (ii) Pension and other forms of deferred compensation for prior
services not contingent on continued service;
    (4) The director, or a family member, is a partner in, or
controlling shareholder of, any organization to or from which the
registered clearing agency, or any affiliate thereof, or the holder of
a controlling voting interest of the registered clearing agency, is
making or receiving payments for property or services, other than the
following:
    (i) Payments arising solely from investments in the securities of
the registered clearing agency, or affiliate thereof; or
    (ii) Payments under non-discretionary charitable contribution
matching programs;
    (5) The director, or a family member, is employed as an executive
officer of another entity where any executive officers of the
registered clearing agency serve on that entity's compensation
committee; or
    (6) The director, or a family member, is a partner of the outside
auditor of the registered clearing agency, or any affiliate thereof, or
an employee of the outside auditor who is working on the audit of the
registered clearing agency, or any affiliate thereof.
    (g) Conflicts of interest. Each registered clearing agency must
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to:
    (1) Identify and document existing or potential conflicts of
interest in the decision-making process of the clearing agency
involving directors or senior managers of the registered clearing
agency; and
    (2) Mitigate or eliminate and document the mitigation or
elimination of such conflicts of interest.
    (h) Obligation of directors to report conflicts. Each registered
clearing agency must establish, implement, maintain, and enforce
written policies and procedures reasonably designed to require a
director to document and inform the registered clearing agency promptly
of the existence of any relationship or interest that reasonably could
affect the independent judgment or decision-making of the director.
    (i) Management of risks from relationships with service providers
for core services. Each registered clearing agency must establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to:
    (1) Require senior management to evaluate and document the risks
related to an agreement with a service provider

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

    By the Commission.

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