subject to the same corporate governance regime of the company.'');
Saguato at 4 (stating that ``[a] [c]learing agency should have one
or more risk committee to support the board in its operation.'').
    \127\ DTCC at 6.
    \128\ See SIFMA at 3 (stating that ``the Commission's specific
proposal in this regard will help formalize this structure and
further foster consistent practices across such clearing
agencies.'').
---------------------------------------------------------------------------

    Two commenters, however, objected to the Commission's approach that
would require the RMC to be a board-level committee.\129\ For example,
one commenter stated that registered clearing agencies should be given
the discretion to structure their RMCs as they see fit, whether as a
board committee or an advisory group with a broader membership than the
board and

with requisite expertise in risk management matters, stating it does
not view that ``a board level risk management committee . . .
improve[s] the board's engagement with clearing agency risk management,
nor is there any evidence that it makes a board's oversight of
management's decisions more effective.'' \130\
---------------------------------------------------------------------------

    \129\ See ICE at 4 (stating that it ``supports the Commission's
proposal to require a SEC Registered CA to establish a risk
management committee but disagrees with the requirement that a risk
management committee be a committee of the board.''); CCP12 at 4
(stating that ``we do not support making this a requirement for all
clearing agencies, as there are other models that clearing agencies
use that are also effective.'').
    \130\ ICE at 4 (also stating that ``[a] risk committee that is
not board level can benefit from the expertise of a wider range of
individuals and thus better inform the board than a board level risk
committee would.'').
---------------------------------------------------------------------------

    In response to commenters, the Commission is modifying Rule 17Ad-
25(d)(1) to specify that the RMC is ``of the board'' to make clear that
the RMC is not merely an advisory board. The Commission is modifying
Rule 17Ad-25(d)(2) to specify that the RMC's work supports the
``overall risk management, safety and efficiency of the clearing
agency.'' \131\ The Commission disagrees with the commenter's
suggestion that requiring registered clearing agencies to structure
their RMCs as board-level committees would not make a board's oversight
of management's decisions more effective. As stated in the Governance
Proposing Release, a RMC of the board is a more effective way to help
ensure that the board is engaged with and informed of the ongoing risk
management of the clearing agency, because a dedicated committee of the
board remains focused exclusively on matters related to risk
management.\132\ One reason that a board-level RMC is a more effective
structure for the registered clearing agency's risk management
decisions lies in the fact that such RMC is directly answerable to the
board; requiring registered clearing agencies to establish a RMC of the
board would help ensure that the board can more effectively oversee
management's decisions concerning matters that implicate the clearing
agency's risk management, including its policies, procedures, and tools
for mitigating risk.\133\ As one commenter stated, board-level RMCs of
registered clearing agencies ``do not function in such a passive
manner, but instead act pursuant to delegated authority from the full
board to evaluate and take risk management decisions directly . . . .
allowing for this balancing of roles and responsibilities between the
two bodies [of the RMC and the board] enhances the clearing agency's
ability to evaluate and respond in a timely manner to evolving risks
and other changes in the relevant cleared market.'' \134\ While the
board may or may not take the recommendations of an advisory group,
RMCs generally have delegated authority from the board to conduct
oversight and make decisions regarding risk management, as most
commenters have observed,\135\ pursuant to a charter or other governing
document specifying its purpose and its delegation of authority from
the board. Notwithstanding the above, the requirement for a board-level
RMC in no way precludes the establishment or use of an advisory
committee composed of non-board members, as the commenter has
suggested.\136\
---------------------------------------------------------------------------

    \131\ To address the concern that the board can also benefit
from input and expertise reflecting a broader set of potential
stakeholders in the registered clearing agency, the Commission is
separately adopting Rule 17Ad-25(j), as discussed in Part II.F,
which requires a registered clearing agency to seek input from other
relevant stakeholders, such as the customers of clearing agency
participants, regarding its risk management and operations.
    \132\ See Governance Proposing Release, supra note 2, at 51831.
    \133\ See id.
    \134\ DTCC at 6.
    \135\ See LSEG at 10 (stating that ``. . . this would be an
effective way to structure the committee. As a board sub-committee,
the RMC can be formally delegated certain authorities . . .'');
CCP12 at 5 (stating that ``[o]ur view is that board-level RMCs may
be delegated authority by the board to proactively address certain
aspects of risk management. This is in line with generally accepted
corporate governance principles.'').
    \136\ See ICE at 4.
---------------------------------------------------------------------------

    In addition, Rule 17Ad-25(d) specifies that, in the performance of
its duties, the RMC must be able to provide a risk-based, independent,
and informed opinion on all matters presented to it in a manner that
supports the overall risk management, safety and efficiency of the
registered clearing agency. As discussed in the Governance Proposing
Release,\137\ this requirement helps ensure that the RMC has a clear
scope and sufficient direction to effectively address risk management-
related matters and not merely serve as a ``rubber stamp'' for
recommendations presented to it by management.\138\ In this sense, it
is neither advisory in its review of management's decisions nor
advisory in its recommendations provided to the board. As a general
matter, based on its supervisory experience, the Commission has
observed that the boards of registered clearing agencies often give
considerable deference to the recommendations, advice, and opinions of
their RMCs. The Commission continues to believe that it is appropriate
for the board, while retaining ultimate responsibility over risk
management, to assign certain tasks to the RMC (and other committees)
to assist the board in discharging its ultimate responsibility.\139\
---------------------------------------------------------------------------

    \137\ See Governance Proposing Release, supra note 2, at 51831.
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

3. Annual Requirement To Re-Evaluate RMC Membership
    Several commenters disagreed with the Commission's approach to
require RMC membership reconstitution on a regular basis, as proposed
in Rule 17Ad-25(d)(1), because doing so could remove individuals with
useful subject matter expertise and institutional knowledge required
for the RMC to be effective.\140\ One commenter suggested alternative
language for a different approach, requesting that the Commission
modify the proposed rule to require the registered clearing agency to
``reevaluate'' the composition of the RMC rather than ``reconstitute,''
as proposed.\141\ Some commenters proposed a staggered rotation system
with term limits, as well as fitness standards.\142\ Another
alternative suggested by a commenter is to have the clearing agency use
an outcomes-based approach to review the work of the RMC and prevent it
from becoming non-representative or entrenched.\143\ Another commenter
suggested annual review of the membership is sufficient and also
requested that the Commission clarify whether membership refers to

participant firms or individuals representing them.\144\
---------------------------------------------------------------------------

    \140\ See, e.g., OCC at 8 (stating that ``[w]e believe a forced
reconstitution on a regular basis would frustrate the Commission's
goal . . . as registered clearing agencies may be required to remove
directors from the risk management committee(s) with deep industry
and subject matter experience to meet this requirement.''); ISDA at
3-4 (stating that ``a situation where the CCP spends a considerable
part of RMC meetings on educating new RMC members should be
avoided.''); CCP12 at 6 (stating that ``RMC members often serve
because they have specialized expertise or a familiarity with the
intricacies of a clearing agency's risk management framework that
would merit a longer term.''); ICE at 4-5 (stating that
``reconstitution requirements must consider the value an experienced
and knowledgeable risk management committee member provides to a
clearing agencies' risk management function.'').
    \141\ See DTCC at 6 (stating that ``[i]nstead, we would suggest
that that the Commission consider alternative terms such as
`reevaluate' '').
    \142\ See, e.g., ISDA at 3-4 (stating that ``staggered rotation
system . . . allows to have new members on while still retaining
institutional knowledge.''); SIFMA AMG at 5-6 (stating that ``[i]t
will be important that the requirement is principles-based, is
subject to the requirement for the inclusion of clearing members and
clearing member customers, applies the recommended fitness
standards, and requires a staggered rotation . . .'').
    \143\ See DTCC at 6 (requesting that the Commission consider
registered clearing agencies to ``periodically evaluate whether the
risk committee membership and structure continues to provide
current, diverse and expert risk management oversight that supports
the safety and efficiency of the clearing agency'').
    \144\ See LSEG at 12 (stating that ``it should be sufficient for
a clearing agency to regularly (e.g., annually) review the
membership of its RMC to ensure there is sufficient representation
of its participants.'').
---------------------------------------------------------------------------

    The Commission is modifying Rule 17Ad-25(d)(1) to require an annual
re-evaluation of the RMC. Having considered the comments received, the
Commission agrees that a required reconstitution of the RMC on a
regular basis could lead to the undesired outcome of turnover in the
committee membership before members are able to contribute optimally,
with a loss of continuity and expertise. In this way, the modification
to Rule 17Ad-25(d)(1) reflects an outcomes-based approach. As
registered clearing agencies may have different methods of term limits,
including staggered rotation, the Commission leaves the frequency and
type of reconstitution to the discretion of the registered clearing
agency, while at the same time requiring a re-evaluation to be
conducted annually. Rule 17Ad-25(d), as modified, will preserve the
initial intent of the rule--to prevent stagnation of the RMC
membership, while also allowing registered clearing agencies
flexibility and discretion in the composition of the RMC. As stated in
the Governance Proposing Release, many registered clearing agencies
have established policies and procedures for governance arrangements
that help promote participation from a broader array of owners and
participants on the RMC through the use of RMC membership changes.\145\
The Commission continues to believe that codifying this practice will
set a minimum standard for re-evaluation of the RMC membership.\146\
Requiring the registered clearing agency to re-evaluate the RMC
membership annually helps ensure that a broad range of owners and
participants will be able to provide their risk management expertise
and participate in the decision-making of the RMC over time.\147\ As
stated in the Governance Proposing Release, the Commission continues to
believe that Rule 17Ad-25(d)(1) achieves the above objective of
ensuring a broad range of participation on the RMC without imposing
specific obligations related to owners, participants, or independent
directors that may be suitable in some, but not necessarily all, cases,
and because the RMC is broadly responsible for providing
recommendations to the board on all risk management related matters, it
is important that the RMC's membership reflects a wide range of owners
and participants with relevant experience and expertise on a variety of
risk management issues.\148\ By requiring the RMC to re-evaluate its
membership annually, Rule 17Ad-25(d)(1), as modified, helps ensure
ongoing diversity of perspectives across owners and participants and
expertise on the RMC, while better ensuring that the RMC is not subject
to stagnation of views that neither serves the safety and efficiency of
the registered clearing agency in its risk management decision-making
nor promotes effective and reliable risk management practices at a
registered clearing agency.\149\ As stated in the Governance Proposing
Release, the charter that defines the terms of the RMC could also
establish that RMC members serve for a specified term, or that the RMC
would rotate or replace directors on the RMC at certain intervals
absent a specified turnover threshold among directors, or that their
terms could be staggered to have regular turnover of participants and
other RMC members.\150\
---------------------------------------------------------------------------

    \145\ See Governance Proposing Release, supra note 2, at 51832-
33.
    \146\ See id.
    \147\ See id.
    \148\ See id.
    \149\ See id.
    \150\ See Governance Proposing Release, supra note 2, at 51833.
---------------------------------------------------------------------------

    Although some commenters recommend against the Commission requiring
a certain percentage or number of small participant representatives on
the RMC,\151\ a few commenters requested substantive modifications to
the rule that would address RMC composition requirements.\152\ One
commenter suggested requiring directors serving on the RMC be
individuals selected from smaller clearing agency participants,\153\
although another commenter stated that obtaining a broad range of
perspectives is not necessary.\154\ This commenter suggested that the
Commission go further and that the RMC of the board ``should be
structured to represent more participants than the board . . . [and]
neither clearing members or clients of clearing members should
represent a majority.'' \155\ One commenter suggested that ``a majority
of the [RMC] should be composed of independent directors,'' and that
``a dual-level [RMC] structure would be theoretically ideal.'' \156\
With regard to this comment, requiring a board-level RMC pursuant to
Rule 17Ad-25(d) in conjunction with requiring the registered clearing
agency to solicit and document stakeholder viewpoints pursuant to Rule
17Ad-25(j) is fully consistent with the commenter's recommendation of a
``dual-level'' structure, in which the board-level RMC acts with
delegated authority from the board on risk management issues while the
registered clearing agency is required to solicit stakeholder views
from representatives of clearing agency participants, their customers,
other end users, and any other relevant stakeholders.\157\ Another
commenter requested clarification from the Commission on RMC
composition requirements and the reference to ``independent'' opinion
in Rule 17Ad-25(d)(2).\158\
---------------------------------------------------------------------------

    \151\ See, e.g., CCP12 at 5 (stating that ``additional
requirements may make the governance of RMCs more burdensome and
inefficient, which could potentially have a negative impact on the
functioning of the committee.''); ICE at 5 (advising ``against
mandating specific risk management committee composition
requirements, such as a specific percentage or number of
representatives from small participants.'').
    \152\ See, e.g., Better Markets at 21 (stating that ``diversity
needs to be genuine and can only be strengthened by guaranteeing
enough representation for smaller entities to check the largest
players.''); IDTA at 4-5 (recommending that ``that the rule include
a requirement to ensure sufficient representation on the risk
committees of non-SIFI entities (smaller and middle-market
firms).'').
    \153\ See IDTA at 5.
    \154\ See LSEG at 11 (stating that ``[w]e do not believe that
small participants should be systematically represented since very
small participants may not have this expertise, nor the required
involvement'').
    \155\ LSEG at 10.
    \156\ Saguato at 4 (stating that ``[i]n actuality a dual level
risk committee structure would be theoretically ideal as it would
better incorporate inputs from the many constituencies of a clearing
agency'').
    \157\ See infra Part II.F (further discussing the requirements
of Rule 17Ad-25(j)).
    \158\ See OCC at 9 (requesting the Commission ``clarify that one
representative from each of the owners and the participants of the
registered clearing agency would satisfy the requirement of Proposed
Rule 17Ad-25(d)(1) . . . . [and] that a risk management committee(s)
may provide such an independent opinion so long as a majority of
participating directors on the committee(s) are themselves
independent.'').
---------------------------------------------------------------------------

    With regard to other comments on specifying RMC membership
composition, the Commission is not modifying Rule 17Ad-25(d) to require
that the RMC be composed of majority independent directors because such
requirement may exclude too many directors with specialized technical
expertise from the pool of directors eligible to serve on the RMC, as
previously considered and discussed in the Governance Proposing
Release.\159\ However, pursuant to the requirements

of Rule 17Ad-25(e), if the RMC 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. The Commission continues to believe that, by
requiring the RMC to provide an independent opinion, irrespective of
its composition, Rule 17Ad-25(d) helps ensure that the RMC is free from
influence in the performance of its duties.\160\ In response to
commenters' request to clarify the reference to ``independent''
opinion, ``independent'' here refers to the nature of the opinion and
does not mean independent in the same context as the requirements
discussed in Part II.A for ``independent'' directors; when making
recommendations to the board, the RMC's decisions or opinions must be
its own--not a rubber stamp of management's decisions or opinions--so
that the RMC is free from influence in the performance of its duties to
reflect how its decisions support the safety and efficiency of the
clearing agency and represent the best interests of the clearing
agency.\161\ The requirement to include directors on the committee
representative of both owners and participants, without also providing
further specificity as to the size (or market power) of the
participants so included, is consistent with the requirements set forth
in Rule 17Ad-25(c)(4) regarding the nomination of directors by the
nominating committee more generally. Specifically, those requirements
establish that the nominating committee shall consider, when selecting
nominees for director, representation on the board as a whole that
reflects a range of participants with different business strategies,
models, and sizes, as further discussed in Part II.B.3.
---------------------------------------------------------------------------

    \159\ See, e.g., Governance Proposing Release, supra note 2, at
51831; see also id. at 58132 (``Because the risks a clearing agency
faces will vary depending on the products it clears and the markets
it serves, the Commission believes that a clearing agency should
have discretion to determine the appropriate qualifications and
expertise needed for the risk management committee to provide an
informed opinion.'').
    \160\ See id. at 51831 (emphasis added).
    \161\ See id.
---------------------------------------------------------------------------

    The Governance Proposing Release also stated that clearing agencies
will benefit from the diverse perspectives and expertise that
representatives from owners and participants can provide, which
enhances the effectiveness of their risk management practices, and so
Rule 17Ad-25(d) requires that RMCs at all times include representatives
from the owners and participants of the registered clearing
agency.\162\ As discussed in the Governance Proposing Release, these
representatives would be persons who have a relationship with the
clearing agency's owners and participants, such as employees of the
owners and participants or those who have an ownership interest in the
owners and participants.\163\ Based on its supervisory experience, the
Commission continues to believe that, because representatives from a
clearing agency's owners and participants will likely have an
understanding of the clearing agency's operations and procedures, as
well as the complex risk management issues that the clearing agency's
board must consider, requiring the RMC to include representatives from
the clearing agency's owners and participants helps ensure that the
RMC's recommendations to the board reflect these stakeholders' unique
perspectives and expertise on risk management issues.\164\
---------------------------------------------------------------------------

    \162\ See id.
    \163\ See id.
    \164\ See id.
---------------------------------------------------------------------------

    Accordingly, the rule provides a registered clearing agency with
some discretion to determine the appropriate composition for the RMC
with respect to representation from its owners and participants. The
RMC generally should include representation reflective of both small
and large participants, and the affirmative Commission requirements
reflected in the selection process for directors generally under Rule
17Ad-25(c) would better ensure appropriate representation of a diverse
set of stakeholder viewpoints.\165\ Therefore, the Commission is not
modifying the proposed rule in response to these commenters.
---------------------------------------------------------------------------

    \165\ See id.
---------------------------------------------------------------------------

4. Harmonization With CFTC and EMIR Requirements
    Some commenters recommended that the Commission harmonize Rule
17Ad-25(d) with CFTC requirements for the RMCs of DCOs,\166\
particularly for entities dually registered as DCOs with the CFTC and
registered clearing agencies with the Commission.\167\ Specifically,
some commenters suggested the Commission clarify the expected
perspective to be applied by RMC members to support not just the safety
and efficiency of the clearing agency, as required in Rule 17Ad-
25(d)(2), but also the stability of the broader financial system.\168\
---------------------------------------------------------------------------

    \166\ See 17 CFR part 39; see also CFTC Final Rule: Governance
Requirements for Derivatives Clearing Organizations, 88 FR 44675
(July 13, 2023) (CFTC adopting amendments to its rules to require
DCOs to establish and consult with one or more RMCs composed of
clearing members and customers of clearing members on matters that
could materially affect the DCO's risk profile, minimum requirements
for RMC composition and rotation, and requiring DCOs to establish
and enforce fitness standards for RMC members; also adopting
requirements for DCOs to maintain written policies and procedures
governing the RMC consultation process and the role of RMC members;
also adopting requirements for DCOs to establish one or more market
participant risk advisory working groups (RWGs) that must convene at
least two times per year, and adopt written policies and procedures
related to the formation and role of the RWG).
    \167\ See, e.g., ICI at 5 (stating that ``[h]armonization would
promote consistency, certainty, and efficiency in how clearing
entities--especially CFTC and SEC dual-registrants--manage risk by
detailing the process by which the board consults and obtains an
RMC's input.''); CCP12 at 6 (encouraging the Commission and the CFTC
``to coordinate . . . . [by] adopt[ing] a flexible outcomes-based
approach in which the clearing agency would periodically evaluate
whether the RMC membership is appropriately expert, diverse and
current in terms of tenure.''); ICE at 5 (urging ``coordination and
harmonization'').
    \168\ See Barclays et al. at 2 (recommending ``[o]ne approach to
addressing this conflict would be to require RMC members to also
consider the safety and efficiency of the broader financial markets,
rather than solely the registered clearing agency.''); SIFMA AMG at
5 (recommending the Commission ``explicitly state that in addition
to supporting the safety and efficiency of the RCA, RMC and RWG
members should also support the stability of the broader financial
system''); see also 17 CFR 39.24(c)(1)(iv)(3) (``A derivatives
clearing organization shall maintain policies designed to enable
members of risk management committee(s) to provide informed opinions
in the form of risk-based input on all matters presented to the risk
management committee for consideration, and perform their duties in
a manner that supports the safety and efficiency of the derivatives
clearing organization and the stability of the broader financial
system.'').
---------------------------------------------------------------------------

    The Commission is adopting the proposed rule without modification
because the goal of safety and efficiency of the clearing agency is not
mutually exclusive with that of overall financial stability. As stated
in the Governance Proposing Release, in providing risk-based opinions,
the RMC must focus on both the risks that the clearing agency faces and
the tools at its disposal to mitigate and address such risks in its aim
toward the goal of supporting the safety and efficiency of the clearing
agency itself.\169\ The stability of clearing agencies is an essential
part of the stability of the overall financial system and the markets
that clearing agencies serve.\170\ Therefore, the Commission is not
modifying Rule 17Ad-25(d)(2) as suggested by commenters.
---------------------------------------------------------------------------

    \169\ See Governance Proposing Release, supra note 2, at 51831.
    \170\ See Committee on Payment and Settlement Systems (``CPSS'')
and Technical Committee of the International Organization of
Securities Commissions (``IOSCO''), Principles for financial market
infrastructures (Apr. 16, 2012), at 5, available at http://www.bis.org/publ/cpss101a.pdf (``PFMI'') (stating that ``[f]inancial
market infrastructures that facilitate the clearing, settlement, and
recording of monetary and other financial transactions can
strengthen the markets they serve and play a critical role in
fostering financial stability.''). In 2014, the CPSS became the
Committee on Payments and Market Infrastructures (``CPMI'').
---------------------------------------------------------------------------

    Additionally, one commenter requested that the Commission adopt the
list of factors specified in CFTC requirements for DCO RMCs by
explicitly requiring a registered clearing

agency to present to the RMC and any advisory committee or RWG all
matters regarding, and proposed changes to, the registered clearing
agency's rules, procedures, or operations that could materially affect
the risk profile of the registered clearing agency, including, but not
limited to, any material change to the registered clearing agency's
risk model, default procedures, participation requirements, and risk
management practices, as well as the clearing of new products that
could significantly impact the clearing agency's risk profile.\171\
According to the commenter, ``the greater detail we have recommended is
important to ensure the requirements are clear, that the views of
clearing member customers are included, that the board must engage with
the RMC, and that issues of material risk must be brought to the RMC
and RWG for consideration.'' \172\ Additionally, another commenter
suggested that ``the requirements for the function, composition, and
reconstitution should specifically include considerations of
concentration of risk in the markets, competitiveness of the markets,
and the impact of policies on competitiveness.'' \173\ However, one
commenter stated that listing factors for RMC consideration would be
overly prescriptive,\174\ while another commenter stated that listing
all matters for RMC consideration would be difficult.\175\
---------------------------------------------------------------------------

    \171\ See SIFMA AMG at 5-7 (requesting the Commission
``explicitly require that the RCA [registered clearing agency]
present to the RMC and RWG all matters and proposed changes to the
RCA's rules, procedures, or operations that could materially affect
the risk profile of the RCA, including, but not limited to, any
material change to the RCA's risk model, default procedures,
participation requirements, and risk management practices, as well
as the clearing of new products that could significantly impact the
RCA's risk profile'').
    \172\ See id.
    \173\ IDTA at 4-5.
    \174\ See LSEG at 11 (stating that ``[i]t is not necessary for
the SEC to define the matters to be presented to the RMC and be
overly prescriptive. Requiring that clearing agencies are explicit
in the committee Terms of Reference (`TOR') would meet the SEC's
objective . . .'').
    \175\ See ISDA at 4 (stating that ``[i]t will be difficult to
clearly specify in detail all matters that have to be presented to
the RMC.'').
---------------------------------------------------------------------------

    The Commission is not modifying the proposed rule by adopting the
CFTC DCO list of factors for RMC consideration into Rule 17Ad-25(d). In
the Governance Proposing Release, the Commission explained that the
purpose of the RMC is to ``provide risk-based, independent, and
informed opinion on all matters presented to it for consideration in a
manner that supports the safety and efficiency of the registered
clearing agency''--matters that implicate the clearing agency's risk
management, including its policies, procedures, and tools for
mitigating risk.\176\ The Commission further stated that Rule 17Ad-
25(d) ``helps ensure that the committee has a clear scope and
sufficient direction to more effectively address risk management
related matters, regardless of the participants, markets, and products
that a clearing agency serves.'' \177\ Explicitly enumerating the
matters presented to the RMC, as suggested by commenters, would be
unnecessarily prescriptive, and that the individual clearing agencies
are best qualified to determine the matters presented to the board
based on the specifics of their participants, markets and products.
Additionally, whereas the CFTC considers DCO policies and procedures
under a self-certification process, the SEC requires that registered
clearing agencies submit to the Commission for approval, after a public
comment period, certain policies and procedures--including policies and
procedures related to the level of risks faced by the registered
clearing agency--under the SRO rule filing process for registered
clearing agencies, except for certain rule changes that are immediately
effective upon filing as set forth in Exchange Act section 19(b)(3)(A)
\178\ and 17 CFR 240.19b-4(f).\179\ Not only are the financial risk
management matters referred to by the commenters subject to the SRO
rule filing process, registered clearing agencies designated as
systemically important financial market utilities (``SIFMUs'') are
required to file 60-days advance notice of changes to rules,
procedures, and operations that could materially affect the nature or
level of risk presented by the SIFMU.
---------------------------------------------------------------------------

    \176\ See Governance Proposing Release, supra note 2, at 51831
(stating that ``[t]he proposed rule is intended to specify the role
of the risk management committee by stating the committee's
purpose--namely, to provide a risk-based, independent, and informed
opinion on all matters presented to it in a way that supports the
safety and efficiency of the registered clearing agency.'').
    \177\ Id.
    \178\ 15 U.S.C. 78s(b)(3)(A).
    \179\ See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    In a similar vein, a commenter suggested that the Commission assess
how greater predictability and transparency can be provided to market
participants regarding margin methodologies as part of a clearing
agency's governance process to assist market participants in managing
their liquidity needs and minimize the risk of market disruptions.\180\
The Commission agrees that predictability and transparency of margin
requirements can help clearing members better manage their liquidity
and other market risks. The focus of this rulemaking regarding
transparency is to ``increase transparency into board governance,''
rather than into the specific margin methodologies. In fact, improved
governance could generally lead to more transparent margin
methodologies. Accordingly, the Commission is not modifying the rule in
response to this comment.\181\
---------------------------------------------------------------------------

    \180\ See Stephen John Berger, Managing Director, Global Head of
Government & Regulatory Policy, Citadel (Oct. 7, 2022) (``Citadel'')
at 1.
    \181\ See Governance Proposing Release, supra note 2, at 51812
(stating that ``[t]he proposed rules would identify certain
responsibilities of the board, increase transparency into board
governance, and, more generally, improve the alignment of incentives
among owners and participants of a registered clearing agency'').
---------------------------------------------------------------------------

    One commenter urged the Commission to harmonize Rule 17Ad-25(d)
with EMIR, which requires that an RMC be chaired by an independent
director.\182\ Another commenter requested clarification that a risk
committee with some non-independent members can still provide overall
independent opinions to the board.\183\ The Commission is not modifying
the rule as suggested by commenters. Rule 17Ad-25(d)(2) requires that
the RMC ``be able to provide a risk-based, independent, and informed
opinion on all matters presented to the committee for consideration.''
This opinion on risk matters brought before the RMC can be independent
without an explicit prescriptive requirement that the RMC is chaired by
an independent director.\184\ The rule's focus is on RMC decisions and
opinions being free of influence from management by virtue of being a
board-level committee, not the chair's independence in the context of
the requirements in Rule 17Ad-25(b), because at the heart of the rule
is the safety and efficiency of the registered clearing agency, and
critical to the effective functioning of a registered clearing agency
is the board's ability to understand and engage with the risks that a
registered clearing agency faces and the risk management practices it
employs to mitigate those risks.\185\ With respect to registered
clearing agencies, it

is critically important that the chair of the RMC, which generally sets
the agenda for and prioritizes the work of the RMC, has a high level of
expertise in, and familiarity with, the risk management topics likely
to come before the RMC for its review and opinion. In this regard, the
expertise required to chair the RMC of a registered clearing agency to
ensure that the RMC provides risk-based, independent, and informed
opinions for the proper functioning and effectiveness of the RMC is
more important than requiring that the chair of the RMC be independent
subject to the requirements of Rules 17Ad-25(b), (e), and (f) because
clearing agencies perform a unique and often systemically important
function that facilitates effective risk management in the U.S.
securities markets.\186\ As stated in the Governance Proposing Release,
by requiring the RMC to provide an independent opinion, ``irrespective
of its composition,'' the rule would help ensure that the RMC is free
from influence in the performance of its duties.\187\
---------------------------------------------------------------------------

    \182\ See LSEG at 10 (stating that ``independent directors are
required under EMIR, hence LCH SA does not rely solely on experts
from the participants and owners of the clearing agency. The INEDs
selected for the Risk Management Committee (`RMC') must have good
risk knowledge, and we support the RMC being chaired by an INED.'').
    \183\ See OCC at 9 (requesting clarification that an RMC ``may
provide such an independent opinion so long as a majority of
participating directors on the committee(s) are themselves
independent.'').
    \184\ See Governance Proposing Release, supra note 2, at 51831
(stating that ``the proposed rule helps ensure that the committee is
free from influence in the performance of its duties.'').
    \185\ See id.
    \186\ Cf. Governance Proposing Release, supra note 2, at 51830-
31.
    \187\ See id. at 51831.
---------------------------------------------------------------------------

    One commenter stated that the RMC composition requirements in Rule
17Ad-25(d) conflict with the composition requirements for the RMC set
forth in EMIR.\188\ Contrary to the commenter's view, Rule 17Ad-25(d)
can be read consistently with EMIR. Article 28 of EMIR states, ``A CCP
shall establish a risk committee, which shall be composed of
representatives of its clearing members, independent members of the
board and representatives of its clients.'' It further states that,
``The advice of the risk committee shall be independent of any direct
influence by the management of the CCP.'' \189\ By comparison, Rule
17Ad-25(d) requires that the RMC be a board-level committee and that it
at all times include representatives from the owners and participants
of the registered clearing agency. The commenter indicated that
``owners are not permitted to be on the RMC under EMIR,'' but Article
28 of EMIR as described here suggests that only management is barred
from direct representation on the RMC.\190\ Even if the commenter is
correct that owners are not permitted to be on the RMC under EMIR, Rule
17Ad-25(d) does not require that management serve on the RMC; nor does
it require that owners serve as directors on the RMC. Rather, Rule
17Ad-25(d) requires that the composition of the RMC include
representatives of owners (and participants). A non-independent
director may serve as a representative of owners without being part of
management or an owner of the clearing agency; for example, such a
director could be non-management and a non-owner who nonetheless
maintains a material relationship with the registered clearing agency,
or that falls within a specific exclusion set forth in Rule 17Ad-25(f).
For this reason, the Commission is not modifying Rule 17Ad-25(d) to
address the comment. Nonetheless, to the extent that a registered
clearing agency identifies facts or circumstances that clearly
demonstrate a requirement under Rule 17Ad-25 is in direct conflict with
a requirement of EMIR, the Commission has previously provided guidance
as to how such a registered clearing agency can request an exemption
from said requirement.\191\
---------------------------------------------------------------------------

    \188\ See LSEG at 11 (stating that ``it is important that
members of the RMC have necessary levels of expertise to make
effective risk decisions and provide sound advice. Further, owners
are not permitted to be on the RMC under EMIR, which will create a
conflict for dually registered clearing agencies.'').
    \189\ See EMIR, supra note 56.
    \190\ EMIR Article 28(1) provides: ``A CCP shall establish a
risk committee, which shall be composed of representatives of its
clearing members, independent members of the board and
representatives of its clients . . . The advice of the risk
committee shall be independent of any direct influence by the
management of the CCP. None of the groups of representatives shall
have a majority in the risk committee.''
    \191\ See Release No. 34-90492 (Nov. 23, 2020), 85 FR 76635
(Nov. 30, 2020) (``CCP Statement''). In the CCP Statement, the
Commission explained (i) that it would take substantially the same
approach for other jurisdictions that have adopted a regulatory
framework substantially similar to EMIR, and (ii) that the policy
and guidance provided also would apply to CCPs for securities
products other than security-based swaps. See id. at nn.1 & 23.
---------------------------------------------------------------------------

5. Other Comments
    One commenter requested that Rule 17Ad-25(d) include an explicit
provision that allows directors on the RMC to obtain feedback from
experts within their ``member firms,'' to enhance the quality of input
the registered clearing agencies receive from directors on the
committee.\192\ As a general matter, directors on the RMC should be
fully qualified to serve without having to rely on expertise from
others, such as other personnel at their employer firm (i.e., a
clearing agency participant), to provide input on risk management
decisions before the RMC. The more appropriate venue for providing the
input described by the commenter is via the structure established in
Rule 17Ad-25(j), as discussed in Part II.F, pursuant to which a
relevant stakeholder would provide such input in response to
solicitations of stakeholder viewpoints by the registered clearing
agency. Ultimately, the ability of directors to consult with their
primary employers on risk management matters will be governed by the
specific governing documents of the clearing agency, its board, and any
obligations as to confidentiality or information sharing that the
registered clearing agency imposes through those documents on
directors. Accordingly, the Commission is not modifying Rule 17Ad-25(d)
to specifically permit directors on the RMC to consult with a clearing
agency participant.
---------------------------------------------------------------------------

    \192\ See Barclays et al. at 3 (stating that ``[w]e believe that
the proposed rules should include explicit provisions that allow RMC
members to obtain feedback from experts within their member firms
which will enhance the quality of input the registered clearing
agencies receive from RMC members'').
---------------------------------------------------------------------------

    Additionally, one commenter requested that Rule 17Ad-25(d) go
further by detailing additional RMC requirements, including
requirements that: (1) registered clearing agencies create and maintain
minutes or other documentation of RMC meetings that should be made
available to the Commission and a summary of which that is made public;
(2) the RMC document and share with regulators any dissenting RMC views
with regard to the clearing agency's material risk decisions or the
clearing agency not following the advice of the RMC, as well as the
accompanying rationale for not accommodating dissenting views; and (3)
the RMC meet on a regular basis and at least quarterly.\193\ The
Commission is not modifying Rule 17Ad-25(d) as suggested by the
commenter in recognition that each entity has particular policies and
needs, and that there could be different ways to accomplish the rule's
objectives. The Commission designed Rule 17Ad-25(d) to balance
establishing a common set of minimum standards on RMCs across
registered clearing agencies while still providing registered clearing
agencies with discretion to design the RMC to be most effective at
conducting its risk management function. The Commission believes that
registered clearing agencies currently are capable of determining how
to apply these factors for the operation of their respective RMCs, and
will continue to consider whether the Commission's objectives are being
met and whether further rulemaking in this area is appropriate.
---------------------------------------------------------------------------

    \193\ See ISDA at 4.

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

D. Conflicts of Interest

1. Proposed Rules 17Ad-25(g) and (h)
    Proposed Rule 17Ad-25(g) would require each registered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to identify and document existing or
potential conflicts of interest in the decision-making process of the
clearing agency involving directors or senior managers of the
registered clearing agency; and mitigate or eliminate and document the
mitigation or elimination of such conflicts of interest. Additionally,
proposed Rule 17Ad-25(h) would require registered clearing agencies to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to require a director to document and
inform the registered clearing agency promptly of the existence of any
relationship or interest that reasonably could affect the independent
judgment or decision-making of the director.
    In the Governance Proposing Release, the Commission explained that
proposed Rules 17Ad-25(g) and (h) help promote the integrity of
governance arrangements of registered clearing agencies by helping
ensure that a registered clearing agency is capable of both identifying
potential conflicts when they arise and subjecting conflicts to a
transparent and uniform process of review, mitigation or elimination,
and documentation.\194\ The proposed rules would help ensure that
potential conflicts of interest are identified and documented, that
policies and procedures for their management have been established ex
ante to help ensure a consistent approach over time, and that cases are
subject to established processes for review and mitigation or
elimination.\195\ By requiring the registered clearing agency to
identify and document both existing and potential conflicts of interest
involving directors or senior managers of the registered clearing
agency, proposed Rule 17Ad-25(g) was intended to address the conflicts
of interests of directors and senior managers that could undermine the
decision-making process within a registered clearing agency or
interfere with fair representation and equitable treatment of clearing
members or other market participants by a registered clearing
agency.\196\ The Commission stated that the ability to identify
potential conflicts of interest is critical to ensuring the effective
identification and management of actual conflicts of interest.\197\ In
the Governance Proposing Release, the Commission specifically explained
that a clearing agency must be able to spot close cases, where another
director, manager, employee, or observer might perceive a conflict of
interest, in order to more effectively manage actual conflicts and help
ensure the integrity of decisions made in the governance of the
clearing agency.\198\
---------------------------------------------------------------------------

    \194\ Governance Proposing Release, supra note 2, at 51834.
    \195\ Id.
    \196\ Id.
    \197\ Id.
    \198\ Id.
---------------------------------------------------------------------------

    With regard to proposed Rule 17Ad-25(h), the Commission explained
in the Governance Proposing Release that because a registered clearing
agency may not have access to information necessary to identify a
potential conflict of interest, the proposed rule would also require a
registered clearing agency to have policies and procedures that require
a director to document and inform the registered clearing agency
promptly of the existence of any relationship or interest that
reasonably could affect the independent judgment or decision-making of
the director.\199\ The Commission explained that it is requiring
policies and procedures that focus on any relationship or interest that
reasonably could affect the independent judgment or decision-making of
the director, rather than material relationships or interests, so that
the registered clearing agency--not the party with a reporting
obligation--can determine whether a relationship or interest is subject
to mitigation or elimination under the conflicts of interest
policy.\200\ The Commission stated that this approach would help ensure
that the registered clearing agency has sufficient information to
investigate, identify and address potential conflicts.\201\
---------------------------------------------------------------------------

    \199\ Id. at 51835.
    \200\ Id.
    \201\ Id.
---------------------------------------------------------------------------

    Commenters generally supported proposed Rules 17Ad-25(g) and
(h),\202\ notably the principles-based approach to the rules.\203\ Two
commenters urged the Commission to consider modifications to the
rules.\204\
---------------------------------------------------------------------------

    \202\ See, e.g., Better Markets at 22 (stating that ``[w]e
commend the Proposal for requiring written policies to identify,
document, disclose, and mitigate conflicts of interest''); DTCC at
3-4 (stating that it ``generally finds that the requirements laid
out in proposed Rules 17Ad-25(g) and (h) regarding conflicts of
interest also are appropriately designed, and therefore recommends
that they be adopted without further modification''); Chris Barnard
at 2 (stating that ``[p]roposed Rule 17Ad-25(g) . . . I agree with
this. . . . I also agree with proposed Rule 17Ad-25(h)''); ICE at 5
(stating that it ``welcomes such approach and believes it would
provide SEC Registered CAs with the flexibility necessary for
effective governance by allowing such clearing agencies the
discretion to design policies that fit their particular structure
and characteristics''); LSEG at 13 (stating that ``[t]he clearing
agency should have policies and procedures in place to address
conflicts of interest. . . . [and] should leverage the conflicts
identified by the SEC to build its own policy''); IDTA at 5 (stating
that ``[r]equiring clearing agencies to adopt policies and
procedures with respect to the management of conflicts is
instrumental to maintaining a sound regulatory framework'').
    \203\ See DTCC at 3-4; ICE at 5; LSEG at 13.
    \204\ See, e.g., Better Markets at 22; IDTA at 5.
---------------------------------------------------------------------------

1. Mitigation or Elimination of Conflicts
    While generally supportive of the proposed rules, one commenter
urged the Commission to strengthen the rule, stating that proposed Rule
17Ad-25(g) is vague on exactly how a registered clearing agency should
``mitigate or eliminate'' conflicts.\205\ The commenter suggested that
the proposed rule should instead specify that agency policies should
require recusal unless or until a conflict has been fully
eliminated.\206\
---------------------------------------------------------------------------

    \205\ See Better Markets at 22 (stating that ``[f]irst, the
Proposal is vague on exactly how a clearing agency should `mitigate
or eliminate' conflicts. It should instead specify that agency
policies should require recusal unless or until a conflict has been
fully eliminated. Second, the . . . double layer of reasonableness
review seems unnecessary and likely to be too generous towards
clearing agencies and their boards. The Proposal should instead
require clearing agencies to affirmatively oblige directors to
disclose any material relationships'').
    \206\ See id.
---------------------------------------------------------------------------

    The Commission is not modifying Rule 17Ad-25(g) in the ways
suggested by the commenter. The Commission disagrees that ``mitigate or
eliminate'' conflicts is vague and therefore, should be replaced by an
outright requirement to recuse. As stated in the Governance Proposing
Release, the registered clearing agency is best positioned to identify
and address conflicts of interest that may arise in its operations and
risk management and decision-making.\207\ Specifically, given the array
of potential conflicts of interest scenarios that a registered clearing
agency may need to address, the registered clearing agency is best
positioned through reasonable policies and procedures to mitigate--
namely, reduce the harm--or eliminate these conflicts of interest so
that such conflicts do not undermine the integrity of decisions made in
the governance of the clearing agency.\208\ This rule is principles-
based to provide flexibility, for example, to dictate the disposition
or resolution of private interests that may be unworkable or discourage
qualified, experienced individuals from performing their duties to the
registered clearing agency. Therefore, the rule focuses on the process
to identify and

document existing or potential conflicts of interest in the clearing
agency decision-making involving directors or senior managers.
Mitigation of the harm of such conflicts may include raising awareness
of the circumstances in which conflicts can arise for the purpose of
preventing conflicts of interest and providing training on how to
identify and report such conflicts. In the Governance Proposing
Release, the Commission explained that in some cases a conflicts of
interest policy may simply require that a director or senior manager
recuse herself from a particular decision to mitigate or eliminate the
conflict of interest; \209\ whether recusal is necessary depends on the
conflict at hand. The Commission emphasizes that pursuant to the
overarching obligation of this rule, elimination of conflicts of
interest is one method of addressing the conflict. Depending on the
circumstances, it may be appropriate to mitigate a conflict through
other methods.\210\
---------------------------------------------------------------------------

    \207\ Governance Proposing Release, supra note 2, at 51834.
    \208\ See id.
    \209\ See id.
    \210\ See id. (stating that ``disclosure, while an effective
tool for the clearing agency to identify and recognize a conflict of
interest, is insufficient by itself to reduce the potential harm a
conflict of interest may have on the clearing agency.'').
---------------------------------------------------------------------------

    Additionally, another commenter encouraged the Commission to have
the rules consider the impact on institutions that are not designated
systemically important financial institutions (``SIFIs'') by the
Financial Stability Oversight Council (``FSOC''), as small and middle-
market participants would be able to provide ongoing feedback on how
policies are impacting the markets to minimize conflicts of interest
and ensure competition among institutions of all sizes.\211\
---------------------------------------------------------------------------

    \211\ See IDTA at 5 (stating that ``[t]o ensure all voices are
heard, the policies and procedures should mandate that the reviewing
and mitigation of conflicts are conducted by a diverse group, and,
most particularly, not only large institutions. . . . the IDTA
recommends the consideration of the impact on institutions that are
not FSOC designated SIFIs. Small and middle-market participants
would be able to provide ongoing feedback on how policies are
impacting the markets in order to minimize conflicts of interest and
ensure competition among institutions of all sizes'').
---------------------------------------------------------------------------

    The Commission is not modifying Rule 17Ad-25(d) in response to the
comment. Because the types and sizes of participants vary significantly
across different registered clearing agencies depending on the markets
they serve, registered clearing agencies could determine the impact on
non-SIFIs by requiring the consideration of viewpoints of small
participants and a range of participants pursuant to Rule 17Ad-25(j).
The Commission understands the overarching concerns that the commenter
highlights about the need to have a process to include a wider array of
stakeholder viewpoints in the registered clearing agency's decision-
making. In this regard, Rules 17Ad-25(c) and (j) (rather than Rules
17Ad-25(g) and (h)) are designed to address concerns about a process to
include stakeholder viewpoints in the registered clearing agency's
decision-making, including the context that the commenter
describes.\212\
---------------------------------------------------------------------------

    \212\ See supra Part II.B.3 (discussing the approach to
participation by small and medium-sized participants); infra Part
II.F (discussing requirements for considering stakeholder
viewpoints, including the views of small and medium-sized
participants).
---------------------------------------------------------------------------

2. Use of ``Reasonably Designed'' Policies and Procedures Approach
    Some commenters supported the principles-based approach of proposed
Rules 17Ad-25(g) and (h).\213\ However, one commenter found the
language of proposed Rule 17Ad-25(h) ``unnecessary and likely . . . too
generous towards clearing agencies and their boards,'' specifically,
the ``double layer of reasonableness review'' that the clearing agency
must have policies ``reasonably designed'' to prompt disclosure of
relationships that ``reasonably could affect the independent judgment
of . . . the director.'' \214\ The commenter suggests that the rule
``should instead require clearing agencies to affirmatively oblige
directors to disclose any material relationships.'' \215\
---------------------------------------------------------------------------

    \213\ See DTCC at 3-4, ICE at 5, LSEG at 13.
    \214\ Better Markets at 22.
    \215\ Id.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that disclosure of
material relationships is an important consideration, but the overall
structure of the rule already requires evaluation of certain
relationships of a director from an objective perspective, and that
additional modifications to the rule are therefore not necessary. The
Commission proposed rules in the context of the overlay of ``written
policies and procedures reasonably designed.'' \216\ The ``reasonably
designed'' component, consistent with other Commission rules for
clearing agencies, helps ensure that policies and procedures are
thoughtfully tailored to the specific governance and organizational
structure of each individual clearing agency. The commenter suggests
that the construction of the proposed requirement for this policies and
procedures rule is ``generous'' to the registered clearing agencies and
the boards. Policies and procedures are subject to the SRO rule filing
process for registered clearing agencies. Except for certain rule
changes that do not need approval, set forth in Exchange Act section
19(b)(3)(A) \217\ and 17 CFR 240.19b-4(f), an SRO must submit proposed
rule changes to the Commission for review (after a public comment
period) pursuant to Rule 19b-4 under the Exchange Act.\218\ This
established process, as required by statute and implemented through a
regulatory framework, is not designed to be ``generous'' to the
registered clearing agency and its board. An impact of having the rule
as a policies and procedures requirement is to subject such policies
and procedures to the rigorous SRO rule filing process.
---------------------------------------------------------------------------

    \216\ See, e.g., 17 CFR 240.17Ad-22(d), (e); 17 CFR 240.17Ad-27;
see also Exchange Act Release No. 96930 (Feb. 15, 2023), 88 FR
13872, 13905 (Mar. 6, 2023) (explaining that a ``reasonably
designed'' requirement enables the clearing agency to tailor
policies and procedures to accommodate its individualized internal
operations, systems, business models and users as it determines how
best to achieve compliance with the rule).
    \217\ 15 U.S.C. 78s(b)(3)(A).
    \218\ See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Additionally, the ``reasonableness'' standard embedded in the
policies and procedures requirement that is meant to be applied to the
independent judgment of the director imposes an objective standard on
what would otherwise be the subjective judgment of the director. Such a
reasonableness standard helps ensure that analysis under the rule
occurs from an objective, rather than subjective perspective. The
reasonableness standard better ensures that the director and the
registered clearing agency could not simply assume that the director's
judgment would not be impaired by a relationship when it would be
favorable for the director to avoid a conflict in a particular
circumstance. Based on the requirements of the rule, registered
clearing agencies generally should evaluate whether certain
relationships might affect the judgment of a director.

E. Management of Risks From Relationships With Service Providers for
Core Services

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

written policies and procedures reasonably designed to enable the board
to confirm and document that risks related to relationships with
service providers for critical services are managed in a manner
consistent with the registered clearing agency's risk management
framework, and to review senior management's monitoring of
relationships with service providers for critical services. Proposed
Rule 17Ad-25(i)(2) would require each registered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to enable the board to approve policies
and procedures that govern the relationship with service providers for
critical services. Proposed Rule 17Ad-25(i)(3) would require each
registered clearing agency to establish, implement, maintain, and
enforce written policies and procedures reasonably designed to enable
the board to review and approve plans for entering into third-party
relationships where the engagement entails being a service provider for
critical services to the registered clearing agency. Proposed Rule
17Ad-25(i)(4) would require each registered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to enable the board to, through regular
reporting to the board by senior management, confirm that senior
management takes appropriate actions to remedy significant
deterioration in performance or address changing risks or material
issues identified through ongoing monitoring.
    In the Governance Proposing Release, the Commission explained that
it proposed a companion governance requirement to existing rules to
make explicit the registered clearing agency's board obligation to
oversee the range of its service providers for critical services,
particularly as registered clearing agencies explore and use new
technologies to facilitate prompt and accurate clearance and settlement
in new and innovative ways and may increasingly determine that service
providers will offer the most effective technology to perform key
functions.\219\ The Commission provided many examples of service
provider relationships meant to be scoped into the proposal to capture
the range of relationships and wide variety of functions that service
providers perform on behalf of the registered clearing agency.\220\ For
example, a clearing agency may contract with its parent company to
staff the registered clearing agency; \221\ a clearing agency may
contract with one or more investment advisers to help facilitate the
closing out of a defaulting participant's portfolio; \222\ a clearing
agency may use one or more data service providers to help calculate
pricing information for securities; \223\ a clearing agency may also
purchase technology services from service providers that may help to
facilitate clearance and settlement in a number of ways.\224\ As the
Commission stated in the Governance Proposing Release, in each of the
cases described above, failure of the service provider to perform its
obligations would pose significant operational risks and have critical
effects on the ability of the registered clearing agency to perform its
risk management function and facilitate prompt and accurate clearance
and settlement.\225\ Additionally, absent regular monitoring and
oversight, these relationships could endanger the operational
resilience of a registered clearing agency and call into question the
registered clearing agency's ability to meet its obligations under the
Exchange Act.\226\ In this regard, the Commission emphasized that
outsourcing a clearance and settlement functionality to a service
provider for critical services does not relieve the registered clearing
agency of its statutory and regulatory obligations, which remain with
the registered clearing agency.\227\ It was against this backdrop and
as part of the evolution of the registered clearing agency regulatory
framework that the Commission proposed these requirements.\228\
---------------------------------------------------------------------------

    \219\ See Governance Proposing Release, supra note 2, at 51836-
37.
    \220\ See id. at 51836.
    \221\ See, e.g., DTCC, Businesses and Subsidiaries, https://www.dtcc.com/about/businesses-and-subsidiaries; see also Governance
Proposing Release, supra note 2, at 51836 n.137 (providing the same
example and also explaining that three registered clearing agencies,
DTC, FICC, and NSCC, are subsidiaries of DTCC).
    \222\ See, e.g., NSCC, Disclosure Framework for Covered Clearing
Agencies and Financial Market Infrastructures (Dec. 2021), at 84,
https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf (``NSCC utilizes the
services of investment advisors and executing brokers to facilitate
such [close-out purchase and sale] transactions [for open Continuous
Net Settlement (CNS) positions] promptly following its determination
to cease to act. NSCC may engage in hedging transactions or
otherwise take action to minimize market disruption as a result of
such purchases and sales.''); see also Governance Proposing Release,
supra note 2, at 51836 n.138 (providing the same example).
    \223\ See, e.g., FICC, Disclosure Framework for Covered Clearing
Agencies and Financial Market Infrastructures (Dec. 2021), at 58,
65, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf (``Collateral securities
are re-priced every night, from pricing sources utilized by FRM's
[Financial Risk Management's] Securities Valuation unit. . . . FICC
utilizes multiple third-party vendors to price its eligible
securities and uses a pricing hierarchy to determine a price for
each security.''); see also Governance Proposing Release, supra note
2, at 51836 n.139 (providing the same example).
    \224\ See Governance Proposing Release, supra note 2, at 51836.
    \225\ See id.
    \226\ See id. at 51837.
    \227\ See id. at 51836.
    \228\ See id.
---------------------------------------------------------------------------

    Commenters generally supported the proposed rule and the
Commission's policy objectives.\229\ However, some commenters objected
to the definition of ``service provider for critical services'' as
unclear and overbroad and to proposed Rule 17Ad-25(i) as confusing the
roles of senior management and the board.\230\ Some commenters also
believed that the Commission underestimated the burdens and costs of
proposed Rule 17Ad-25(i).\231\
---------------------------------------------------------------------------

    \229\ See Barclays et al. at 3; ISDA at 6; DTCC at 7.
    \230\ See OCC at 10 (stating that the Commission approach is
``overbroad, unnecessarily prescriptive, and duplicative of long-
standing director obligations extant in general corporate law and
reinforced by current Commission regulation and OCC rules.''); DTCC
at 3 (stating that ``[w]hile we support the Commission's overall
policy objectives . . . the proposed requirements and definition are
overly broad, could conflict with existing requirements and
standards other regulators have applied in respect of CSPs, confuse
the distinction between the roles of the board and management, and
will deter otherwise qualified individuals from serving as
registered clearing agency board directors'').
    \231\ See OCC at 10 (stating that ``though more time and clarity
regarding the scope and application of the Proposed Rule 17Ad-25(i)
are required to conduct a deeper analysis into the potential
cumulative costs of compliance with it, we preliminarily believe
such costs could be considerable''); DTCC at 3 (stating that ``[w]e
also believe the Proposal significantly underestimates the burdens
and costs of these requirements''); CCP12 at 7.
---------------------------------------------------------------------------

    The proposed definition and requirements on service provider
oversight were: (i) meant to capture outsourced services \232\ directly
applicable to core clearance and settlement functionality; (ii) not
meant to impose duplicative responsibility to manage service provider
relationships on the board when these are already within the remit of
senior management to manage service provider relationships,\233\ and,
so, in this regard, (iii) the proposed requirements would

not double or multiply the costs and burdens required of the registered
clearing agencies. Nonetheless, as discussed below, to ensure the
Commission has fully addressed the concerns raised by commenters, and
to specify the intended scope of proposed Rule 17Ad-25(i) and the roles
of the board and senior management in the oversight of service
providers, the Commission is modifying at adoption (1) the definition
of ``service provider for critical services'' \234\ and (2) Rule 17Ad-
25(i).
---------------------------------------------------------------------------

    \232\ See Governance Proposing Release, supra note 2, at 51836,
51846 n.195.
    \233\ See id. at 51837 (explaining that ``the board should be
aware of the risks flowing into the registered clearing agency . . .
and maintain awareness of those risks over time by monitoring
management's oversight of the relationship. In its traditional
function as a check on management, the board can help ensure that,
for example, management assesses and addresses performance issues by
the provider under any agreement with the provider and helps to
ensure that product or other deliverables are provided timely and
consistent with the terms of the agreement.'').
    \234\ As discussed further below, Rule 17Ad-25(a) now uses the
term ``service providers for core services,'' not ``critical
services.''
---------------------------------------------------------------------------

    Specifically, the Commission is modifying the definition to refer
to: (a) ``a written services provider agreement for services provided
to or on behalf of the registered clearing agency, on an ongoing
basis'' to replace the proposed definition's reference to
``contractually obligated to the registered clearing agency''; and (b)
``directly supports the delivery of clearance or settlement
functionality'' to replace the proposed definition's reference to
``supporting clearance and settlement functionality.'' The Commission
also provides guidance below that the scope of the definition of
``service providers for core services'' generally should include cloud
services, pricing services, model services, matching services, any
services related to straight-through processing, and collateral
management services.
    Additionally, the Commission is modifying Rule 17Ad-25(i) to more
clearly delineate the roles of senior management and the board, in
response to commenters. First, under Rule 17Ad-25(i)(1), the Commission
is preserving the proposed Rule 17Ad-25(i)(1) policies and procedures
requirement to document service provider risks but is modifying the
final rule to make clear that senior management must evaluate and
document risks related to the service provider agreement, including
under changes to circumstances and potential disruptions, and whether
the risks can be managed consistent with the clearing agency's risk
management framework. Second, under Rule 17Ad-25(i)(2), the Commission
is requiring a companion policies and procedures requirement found in
Rule 17Ad-25(i)(1) by requiring in Rule 17Ad-25(i)(2) that senior
management submit to the board for review and approval the service
provider agreement and senior management's evaluation that is required
in Rule 17Ad-25(i)(1). Third, the Commission is moving the policies and
procedures requirement originally in proposed Rule 17Ad-25(i)(2) to
Rule 17Ad-25(i)(3), now modified to make clear that senior management
has the responsibility to establish policies and procedures that govern
relationships and manage risks related to service provider agreements,
while also making clear that the board is responsible for reviewing and
approving such policies and procedures.
    Fourth, under Rule 17Ad-25(i)(4), the Commission is preserving the
proposed policies and procedures requirement originally contained in
proposed Rule 17Ad-25(i)(4) to have ongoing monitoring to remedy
significant deterioration in performance or address changing risks or
material issues identified through ongoing monitoring. But the
Commission is now modifying Rule 17Ad-25(i)(4) to clearly delineate the
roles of senior management and the board. Specifically, Rule 17Ad-
25(i)(4) is modified to require through policies and procedures that
senior management performs the ongoing monitoring and report to the
board any action senior management takes to remedy significant
deterioration in performance or address changing risks or material
issues identified. Rule 17Ad-25(i)(4) is also modified to have policies
and procedures to require senior management to assess and document
weaknesses or deficiencies in the relationship with the service
provider in circumstances where the risks or issues cannot be remedied,
which senior management must submit to the board. Rule 17Ad-25(i)(4) is
also being modified to clearly delineate that the board is to evaluate
any senior management action taken to remedy significant deterioration
in performance or address changing risks or materials identified.
    The modifications are meant to address commenters' concerns
regarding the potential that the board is being required to undertake
responsibilities reserved for senior management, as well as other
elements of the proposed rule. In this regard, the modifications
differentiate more clearly 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. While the words and phrases in the proposed rule
have changed and moved, the thematic elements in the requirements for
the board and senior management remain unchanged.
2. Definition of Service Provider for Core Services
    Although a commenter stated that the definition of ``service
provider for critical services'' is sufficiently clear and scoped,\235\
other commenters stated that it is unclear and overbroad.\236\ One
suggested amending the definition to: (1) cover any mutual
understanding or agreement between a registered clearing agency and
third-party entity by which the third-party entity is required or
commits to provide ongoing goods or services to the registered clearing
agency pursuant to a written contract; \237\ (2) establish a clear
definition of what makes a service provider ``critical,'' including
providing a non-exhaustive list of relationships and service providers
that registered clearing agencies should consider, as well as guidance
on how to interpret materiality in this context; \238\ and (3) to
include only a service provider that ``directly supports the delivery
of clearing and settlement functionality or any other purpose material
to the business of the registered clearing agency.'' \239\ Another
commenter objected to the definition, stating that its scope is broader
than the definition of ``SCI System'' under Regulation SCI \240\ and
also stated that the text ``supporting clearance and settlement
functionality'' without modification could ``potentially capture
virtually all non-trivial service providers to registered clearing
agencies, particularly if clearance and settlement services is the only
or primary service offering of the registered clearing agency.'' \241\
Another commenter stated that this proposed requirement would
potentially capture a large number of non-trivial service providers to
registered clearing

agencies, particularly in cases where clearance and settlement services
are the only or the primary service offering of the registered clearing
agency, and therefore, suggested that the definition be changed to
``any person that is contractually obligated to the registered clearing
agency for the purpose of providing critical services that directly
support clearance and settlement functionality.'' \242\
---------------------------------------------------------------------------

    \235\ See ISDA at 7.
    \236\ See, e.g., DTCC at 21; OCC at 10; ICE at 6; CCP12 at 6-7.
    \237\ See DTCC at 7 (``[T]he written contract would make clear
that local police, fire, and other municipal services are explicitly
out of scope. The proposed definition of service provider should
also include an `ongoing basis' element. Without this element, a
one-off or single service may be included within the scope of the
Proposal and trigger application of the full risk management
lifecycle in the same way that a recurring arrangement does.'').
    \238\ See id. at 8 (stating that ``[w]ith respect to the
question of clarifying which service providers are in fact
`critical' for the purposes of ensuring effective board oversight,
we respectfully ask that the Commission first consider more fully
how its approach to CSPs in the Proposal interacts, and potentially
creates redundancy or misalignment, with existing similar concepts
that apply to registered clearing agencies, whether under existing
Commission requirements (such as Regulation Systems Compliance and
Integrity or `Regulation SCI') or under applicable international
standards.'').
    \239\ Id. at 8.
    \240\ See OCC at 12-13 (stating that ``the proposed definition
is significantly broader than the definition used to define SCI
Systems.' . . . If the Commission adopts a rule regarding the
oversight of relationships with service providers for critical
services, OCC requests the Commission revise the definition of
`service providers for critical services' to align it with the
definition of SCI Systems.'').
    \241\ Id. at 27.
    \242\ See CCP12 at 7.
---------------------------------------------------------------------------

    To address the concerns raised above, the Commission is modifying
the definition in Rule 17Ad-25(a) at adoption to contain three key
elements to specify its scope: (i) ``a written services provider
agreement for services provided to or on behalf of the registered
clearing agency'' to replace the proposed definition's reference to
``contractually obligated to the registered clearing agency''; (ii)
``on an ongoing basis'' nature of the services provided; and (iii)
``directly supports the delivery of clearance or settlement
functionality'' to replace the proposed definition's reference to
``supporting clearance and settlement functionality.'' The changes to
the definition better ensure that the final definition of ``service
providers for core services'' is clear and properly scoped. The
Commission discusses each of these modifications in turn below.
    First, the Commission is modifying the defined term at adoption to
refer to ``core services,'' rather than ``critical services'' as
proposed.\243\ To provide further clarity and to address comments
requesting a non-exhaustive list of service provider relationships
under Rule 17Ad-25(i),\244\ the Commission provides guidance that
``core services'' generally should include cloud services, pricing
services, model services, matching services, any services related to
straight-through processing, and collateral management services. This
list is not meant to be an exhaustive list of ``core services'' but is
being provided to give examples of the services that generally should
be in scope of the definition while allowing clearing agencies some
discretion to apply the definition to their specific markets and
participants served and products cleared. The services in this list
reflect services that registered clearing agencies are seeking from
service providers, based on the Commission's supervisory experience.
For example, a registered clearing agency may consider the use of cloud
services to modernize and further develop the systems that underpin its
core clearance and settlement functionality, facilitating, among other
things, the calculation of its margin requirements, the modeling of
financial risk, and communication with clearing agency participants.
Similarly, pricing and model services directly support core clearance
and settlement functionality when they are used by a registered
clearing agency to calculate end-of-day settlement obligations and
margin requirements for clearing agency participants. In addition,
clearing agency technologies that facilitate matching services,
straight-through processing, and collateral management are themselves
the functions of a clearing agency and facilitate core clearance and
settlement of securities transactions, and so such technologies
generally should be within the scope of the modified ``core services''
definition.
---------------------------------------------------------------------------

    \243\ See Governance Proposing Release, supra note 2, at 51836.
    \244\ See DTCC at 8.
---------------------------------------------------------------------------

    Second, the Commission is modifying the definition of ``service
provider for core services'' in adopting Rule 17Ad-25(a) to mean ``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.'' Rule 17Ad-25(a) now uses the term
``service providers for core services,'' not ``critical services,'' as
the Commission observes that some commenters requested that the
Commission scope the definition of service providers to overlap with
the definition of ``SCI system'' in Regulation SCI.\245\ The Commission
recognizes that the use of the word ``critical'' could evoke Regulation
SCI considerations for some commenters. However, as explained in the
Governance Proposing Release, the definition in proposed Rule 17Ad-
25(a) is not the same as used in Regulation SCI--in scope or subject
matter.\246\ The Commission is not conforming the scope of the defined
term to Regulation SCI because the definition of ``service provider for
critical services'' in proposed Rule 17Ad-25(a) is, as suggested by a
commenter, purposefully wider in scope than the definition of ``SCI
system'' in Regulation SCI because the definition of ``service provider
for critical services'' addresses relationships beyond those concerning
only technology or systems, as explained in the Governance Proposing
Release.\247\
---------------------------------------------------------------------------

    \245\ See OCC at 12, 27; DTCC at 8.
    \246\ See Governance Proposing Release, supra note 2, at 51836
(providing examples of a wide variety of functions that service
providers perform on behalf of the registered clearing agency,
including its parent company providing staff, investment advisers
facilitating the closing out of a defaulting participant's
portfolio, data service providers helping calculate pricing
information for securities, technology service providers
facilitating clearance and settlement).
    \247\ See id.
---------------------------------------------------------------------------

    The definition is modified to include the components of ``a written
services agreement for services provided to or on behalf of the
registered clearing agency, on an ongoing basis'' because in the
Commission's view, core services supporting clearance or settlement
functionality should be clearly memorialized in a written agreement
that specifies the key elements of any core services being provided.
Specifically, cloud services, pricing services, model services,
matching services, any services related to straight-through processing,
and collateral management services are examples of ongoing services
often provided to a registered clearing agency that would be subject to
a written services agreement and therefore within scope of the final
rule. Such written services agreements may not necessarily be entered
into by the registered clearing agency with a service provider for core
services; rather, and consistent with the final rule, such written
services agreement could be entered into by the parent or an affiliate
of the registered clearing agency for services provided to or on behalf
of the registered clearing agency. In modifying this element of the
definition, the Commission recognizes that the written agreement
provides the foundation upon which a registered clearing agency can
assess, manage, and monitor the performance of a service provider, as
well as assess, manage, and monitor the risks of the core service--and
outsourced clearance or settlement functionality. In this regard, the
Commission agrees with the commenter that the written agreement
provides the registered clearing agency with the legal authority to
direct the service provider to comply with the obligations in the
agreement,\248\ which is important as the registered clearing agency
still bears the responsibility for compliance with any statutory or
regulatory obligation when it chooses to rely on such a service
provider.\249\
---------------------------------------------------------------------------

    \248\ See DTCC at 7.
    \249\ Cf. Governance Proposing Release, supra note 2, at 51836
(stating that ``[u]ltimately, it is the responsibility of the board
to oversee the relationships that management establishes with
service providers to help ensure that management is performing its
function more effectively and that the clearing agency can
facilitate prompt and accurate clearance and settlement.'').
---------------------------------------------------------------------------

    Additionally, the modifications to the definition are intended to
make clearer that municipal service providers (which are not generally
subject to written

service agreements for ongoing services to the registered clearing
agency) are not captured in the definition, as commenters have
suggested.\250\ The Commission previously addressed this scoping
concern in the Governance Proposing Release,\251\ and such services
neither support the core clearance or settlement functionality of the
registered clearing agency nor are material to the clearing agency's
business, in that the power company does not perform the core clearance
or settlement functionality or material clearing agency business
functions itself.
---------------------------------------------------------------------------

    \250\ See DTCC at 7 (suggesting a modification to the definition
to include a ``written contract [which] would make clear that local
police, fire, and other municipal services are explicitly out of
scope. The proposed definition of service provider should also
include an `ongoing basis' element. Without this element, a one-off
or single service may be included within the scope of the Proposal
and trigger application of the full risk management lifecycle in the
same way that a recurring arrangement does.'').
    \251\ See Governance Proposing Release, supra note 2, at 51835,
n.133 (explaining that the proposed rule would not apply to utility
companies, such as a power company providing general power services
for the registered clearing agency, although general power services
are necessary to allow a registered clearing agency to function and
operate, as a general matter).
---------------------------------------------------------------------------

    In addition, the Commission is modifying the definition to capture
service providers that provide services on an ongoing basis that
directly support the delivery of clearance or settlement functionality
or any other purposes material to the business of the registered
clearing agency. The modifications change the scope of the proposed
definition to capture ongoing services and not limit capture of
services to a single instance. The defined term also captures those
services that directly support the core functionality of a clearing
agency. In this regard, service providers retained for administrative
tasks or a limited, one-time provision of services would not be covered
by this definition. These changes respond to commenters' concerns and
also reflect current practices in which registered clearing agencies
have cloud services, pricing services, model services, matching
services, services related to straight-through processing, and
collateral management services provided by service providers to
directly support the registered clearing agency's clearance or
settlement functionality on an ongoing basis. Finally, the Commission
is modifying the definition to refer to ``clearance or settlement''
functionality (emphasis added), rather than ``clearance and settlement
functionality'' as proposed, to ensure that the definition is
consistent with the generalized way in which the Commission often
refers to ``clearance and settlement.'' That is, the definition was
intended to address both functions in an ``either/or'' sense, as not
all registered clearing agencies provide both functions and the
Commission often speaks to the collective set of functions without
specifying whether one is ``clearance'' or ``settlement.''
3. Roles of Senior Management and the Board
    While at least two commenters acknowledged the corporate governance
principle that the board conducts oversight of management,\252\ several
commenters objected to the approach in proposed Rule 17Ad-25(i),
stating that the rule confused the distinction between the roles of the
board and management, thereby contravening this corporate governance
principle and potentially deterring otherwise qualified individuals
from serving as directors.\253\ Specifically, some commenters
understood the proposed rule to shift the responsibility for oversight
of service providers from management to the board.\254\ One commenter
urged a more principles-based approach and also sought clarity as to
the scope of proposed Rule 17Ad-25(i)(4), which in the commenter's view
did not appear to be limited to ``service providers for critical
services'' and so could apply to ``significant deterioration in
performance,'' ``changing risks,'' or ``material issues'' regarding the
business of the registered clearing agency. This commenter recommended
adding a materiality threshold to proposed Rule 17Ad-25(i)(4) to focus
the board on ensuring that management has appropriate processes in
place to identify and elevate material changing risks.\255\ One
commenter recommended flexibility in allowing the board to determine
``the process and materiality'' of service providers of critical
services.\256\ Another commenter urged the Commission to take an
alternative approach to differentiate the board and management roles in
oversight of service provider relationships.\257\
---------------------------------------------------------------------------

    \252\ See, e.g., CCP12 at 7; LSEG at 14 (``We agree that it is a
specific responsibility of the board to have oversight.'').
    \253\ See, e.g., CCP12 at 7 (stating that the ``enhanced board
oversight would duplicate the work that is currently performed by
staff and management at considerable additional cost, compromising
the careful check and balance relationship of the board and
management.''); OCC at 10-11 (stating that the proposed rule's
oversight dynamic ``would impose responsibilities on the Board akin
to those that are squarely within the purview of management by
effectively requiring the Board to manage the relationship with
service providers for critical services''); ICE at 6 (stating that
the proposal ``would require the board to go beyond its oversight
responsibilities and tasks the board with a role in managing such
relationships.'').
    \254\ See, e.g., DTCC at 8-10, 14 (stating that ``[w]e believe
that such a shift in responsibility is inappropriate insofar as what
the Proposal effectively requires is not board oversight of CSP
relationships but instead direct board management of such
relationships.''); OCC at 10-11; CCP12 at 7.
    \255\ See OCC at 13.
    \256\ See LSEG at 14 (``[T]here should be flexibility to allow
the board to determine the process and materiality of service
providers of critical services. For example, allowing the board to
specifically delegate to a qualified sub-committee of the board,
with appropriate escalation and reporting to the board.'').
    \257\ See DTCC at 8-10, 14 (stating that ``[a]s an alternative
approach, we recommend that the Commission not impose the
obligations set forth in sub-parts (1) and (3) of proposed Rule 17
Ad-25(i) directly on the board. . . . [and] follow the approach it
and other global regulators have applied in similar contexts and
with the positive outcome of helping ensure resiliency and
management of CSP risk,'' citing to Rule 1003(b)(l) of Regulation
SCI and Annex F of the PFMI as precedent).
---------------------------------------------------------------------------

    Additionally, some commenters expressed concern regarding the
proposed requirement for the board to ``confirm'' risks posed by a
service provider. According to one commenter, because proposed Rule
17Ad-25(i)(4) includes a requirement for the board to ``confirm that
senior management takes appropriate actions to remedy significant
deterioration in performance or address changing risks or material
issues,'' which is ``not consistent with a board's oversight role[, ]
[i]t is unclear how, in practice, a board could satisfy this
`confirmation' function without engaging in a management function,
which would conflict with and distract from the board's oversight
functions.'' \258\ With regard to statements in the Governance
Proposing Release that registered clearing agencies could confirm and
document the risks posed by a service provider for critical services by
completing a self-assessment based on the format and substance of Annex
F to the PFMI,\259\ two commenters expressed concern. One stated that
``the board itself should not conduct such an assessment, as such tasks
should be performed by an internal corporate function such as third-
party risk management, internal audit, or a similar function and then
reported to the board (or board-level committee).'' \260\ Another
commenter stated that although it ``does not believe that the
Commission should require that the board confirm and document through a
self-assessment that risks related to relationships with service
providers for critical services are managed in a manner consistent with
its risk management framework. . . . [it] does believe that the
Commission

should state explicitly that a properly executed self-assessment
similar to the Annex F described in the Proposed Rule is evidence of
compliance with Proposed Rule 17Ad-25(i).'' \261\
---------------------------------------------------------------------------

    \258\ ICE at 6.
    \259\ See Governance Proposing Release, supra note 2, at 51837.
    \260\ CCP12 at 8.
    \261\ OCC at 27.
---------------------------------------------------------------------------

    It was not the Commission's intent to merge, adjust, or duplicate
management functions with those of the board in contravention of
traditional corporate governance principles with the board directly
managing the service provider relationships, as commenters have
suggested.\262\ In the Governance Proposing Release, the Commission
acknowledged the differentiated roles and traditional functions \263\
of senior management and the board.\264\ To improve clarity in response
to commenters concerns,\265\ the Commission is modifying the rule at
adoption to specify and differentiate the roles and responsibilities of
the board and senior management of the registered clearing agency in
the oversight of service providers. These changes in the final rule
better ensure that risks posed by service providers for core services
are properly monitored and managed and better delineate the board
oversight function in line with corporate governance principles.
Because the modifications are meant to more 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, the
words and phrases in the proposed rule have changed and moved in Rule
17Ad-25(i), but the requirements for the board and senior management
remain unchanged. Each requirement of Rule 17Ad-25(i) is further
explained below.
---------------------------------------------------------------------------

    \262\ For this reason, the Commission also believes that the
proposed costs and burdens for Rule 17Ad-25(i) were generally
accurate, as further discussed in Part V.F.
    \263\ See, e.g., Governance Proposing Release, supra note 2, at
51837 (stating that ``[i]n its traditional function as a check on
management, the board can help ensure that, for example, management
assesses and addresses performance issues by the provider under any
agreement with the provider and helps to ensure that product or
other deliverables are provided timely and consistent with the terms
of the agreement.'').
    \264\ See, e.g., Governance Proposing Release, supra note 2, at
51836 (recognizing that ``the board . . . oversee[s] the
relationships that management establishes with service providers to
help ensure that management is performing its function more
effectively and that the clearing agency can facilitate prompt and
accurate clearance and settlement.'').
    \265\ See DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC at 10-
11; ICE at 6.
---------------------------------------------------------------------------

    First, under Rule 17Ad-25(i)(1) as adopted, a registered clearing
agency must establish, implement, maintain, and enforce written
policies and procedures reasonably designed to 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.\266\ In the Governance Proposing Release, the
Commission discussed the role of senior management to monitor each
relationship with a service provider for critical services, confirming
and documenting that the risks related to such relationships have been
considered and addressed consistent with the clearing agency's risk
management framework.\267\ The Commission agrees with the commenter's
concern with regard to the term ``confirm.'' \268\ Under Rule 17Ad-
25(i)(1), while preserving proposed Rule 17Ad-25(i)(1)'s policies and
procedures requirement to document service provider risks, the
Commission is modifying the final rule to specify that senior
management must evaluate--rather than requiring that the board must
``confirm''--and document risks related to the service provider
agreement, 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. If
changes to circumstances (e.g., a need to expand or scale up the scope
or breadth of services of the service provider beyond what was
initially agreed to or envisioned) and potential disruptions (e.g.,
disruptions caused by natural disasters or systems outages) occur,
senior management must evaluate and document risks related to such
changes and disruptions. The added language of ``changes to
circumstances and potential disruptions'' is meant to reflect the
parallel elements in Rule 17Ad-25(i)(4) regarding ``changing risks or
material issues identified.'' These modifications to Rule 17Ad-25(i)(1)
require the policies and procedures to clearly delineate the role
senior management must undertake to evaluate risks posed by service
providers for core services to the registered clearing agency, as
requested by commenters. For the same reason to address commenters'
concerns \269\ regarding a board self-assessment under Annex F of the
PFMI, the Commission is not requiring the board to conduct a self-
assessment of such risks.
---------------------------------------------------------------------------

    \266\ In the Governance Proposing Release, the Commission had
suggested that one method of confirming and documenting the risks
posed by a service provider for critical services to the registered
clearing agency would be for the board to complete a self-assessment
based on the format and substance of Annex F in the PFMI, which
highlights oversight expectations applicable to critical service
providers. Given that commenters expressed concerns about
duplicating management functions at the board level, the Commission
is not adopting this guidance. See DTCC at 3; CCP12 at 7.
    \267\ See Governance Proposing Release, supra note 2, at 51837.
    \268\ See ICE at 6.
    \269\ CCP12 at 8; OCC at 27; DTCC at 8-10, 14 (stating that
``[a]s an alternative approach, we recommend that the Commission not
impose the obligations set forth in sub-parts (1) and (3) of
proposed Rule 17 Ad-25(i) directly on the board'').
---------------------------------------------------------------------------

    Second, under Rule 17Ad-25(i)(2) as adopted, a registered clearing
agency must establish, implement, maintain, and enforce written
policies and procedures reasonably designed to require senior
management to submit to the board 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 Rule 17Ad-
25(i)(1). As a companion policies and procedures requirement to Rule
17Ad-25(i)(1), Rule 17Ad-25(i)(2) captures the intent of proposed Rule
17Ad-25(i)(3)'s requirement for policies and procedures to require the
board to ``review and approve plans for entering into third-party
relationships where the engagement entails being a service provider for
critical services.''
    Rule 17Ad-25(i)(1) requires policies and procedures to have senior
management evaluate service provider relationship risks posed to the
registered clearing agency, while Rule 17Ad-25(i)(2) requires policies
and procedures to have senior management submit to the board its risk
evaluation and any agreements for board review and approval. In
response to commenters' concerns,\270\ the modifications are designed
to clearly differentiate the responsibilities the board and senior
management have in this regard in line with corporate governance
principles, which was the Commission's intent at proposal. In the
Governance Proposing Release, the Commission explained that Proposed
Rule 17Ad-25(i)(1) would also require review of senior management's
oversight of a service provider relationship.\271\ The Commission
stated its belief that the board should be aware of the risks flowing
into the registered clearing agency, including through its
relationships with service providers for critical services, and
maintain awareness of those risks over time by monitoring management's
oversight of

the relationship. In the Governance Proposing Release, the Commission
explained that, under Proposed Rule 17Ad-25(i)(3), the board would
review and approve plans for entering into third-party relationships
where the engagement entails being a service provider for critical
services to the registered clearing agency.\272\ The Commission stated
its belief such board participation is necessary to ensure the
maintenance of sound risk management principles as the clearing agency
enters into contractual relationships with third parties.\273\ Board
involvement helps ensure that management has sufficiently established
terms of performance by the service provider that can support the needs
of the registered clearing agency and that management also has
evaluated, assessed, and accounted for any increased level of risk to
the registered clearing agency.\274\ As stated in the Governance
Proposing Release, the board generally should monitor such matters as
part of its oversight responsibilities.\275\ In this regard, Rule 17Ad-
25(i)(2), modified as adopted, is substantively consistent with the
discussion of this element of the proposed rule in the Governance
Proposing Release.
---------------------------------------------------------------------------

    \270\ See, e.g., DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC
at 10-11; ICE at 6.
    \271\ See Governance Proposing Release, supra note 2, at 51837.
    \272\ See id.
    \273\ See id.
    \274\ See id.
    \275\ See id.
---------------------------------------------------------------------------

    Third, under Rule 17Ad-25(i)(3) as adopted, a registered clearing
agency must establish, implement, maintain, and enforce written
policies and procedures reasonably designed to 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 to be responsible for reviewing and approving such policies and
procedures. In modifying Rule 17Ad-25(i)(3), the Commission is moving
the policies and procedures responsibility originally in proposed Rule
17Ad-25(i)(2) to Rule 17Ad-25(i)(3). These modifications are being made
to address commenters' concerns about the rule not being clear about
differentiated senior management and board responsibilities under
corporate governance principles.\276\ As a general matter, proposed
changes to a registered clearing agency's policies and procedures must
be approved by board action or under authority delegated by the
board.\277\ As adopted, Rule 17Ad-25(i)(3) is written to explicitly
require that senior management--as the group responsible for evaluating
the risks of service provider relationships pursuant to Rule 17Ad-
25(i)(1)--establish policies and procedures to manage the risks posed
by and relationships with the service providers for core services, and
that such policies and procedures are reviewed and approved by the
board. In this regard, Rule 17Ad-25(i)(3), as adopted, is substantively
consistent with established practices of registered clearing agencies
with regard to board review and approval of registered clearing agency
policies and procedures.
---------------------------------------------------------------------------

    \276\ See, e.g., DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC
at 10-11; ICE at 6.
    \277\ See CCA Standards Adopting Release, supra note 4, at
70805.
---------------------------------------------------------------------------

    Fourth, under Rule 17Ad-25(i)(4) as adopted, a registered clearing
agency must establish, implement, maintain, and enforce written
policies and procedures reasonably designed to require senior
management to perform ongoing monitoring of the relationship, and
report to the board 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.
Under Rule 17Ad-25(i)(4) at adoption, the Commission is preserving
proposed Rule 17Ad-25(i)(4)'s policies and procedures requirement to
have ongoing monitoring to remedy significant deterioration in
performance or address changing risks or material issues identified
through ongoing monitoring. But the Commission is now modifying Rule
17Ad-25(i)(4) to clearly delineate the roles of senior management and
the board in this context, as a response to commenters' corporate
governance concerns.\278\ Specifically, Rule 17Ad-25(i)(4) is modified
to require policies and procedures that senior management perform the
ongoing monitoring and report to the board any action senior management
takes to remedy significant deterioration in performance or address
changing risks or material issues identified. Rule 17Ad-25(i)(4) is
also modified to require policies and procedures that has senior
management assess and document weaknesses or deficiencies in the
relationship with the service provider in circumstances where the risks
or issues cannot be remedied, which senior management must submit to
the board. Elements of ``remedy significant deterioration in
performance or address changing risks or material issues'' were
contained in Proposed Rule 17Ad-25(i)(4). The modifications in the
adopted rule are meant to frame the responsibilities more clearly to
senior management, as requested by commenters. Rule 17Ad-25(i)(4) is
also being modified to clearly delineate that the board is to evaluate
any senior management action taken to remedy significant deterioration
in performance or address changing risks or materials identified.
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    \278\ See, e.g., DTCC at 8-10, 14; CCP12 at 7; LSEG at 14; OCC
at 10-11; ICE at 6.
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    In its traditional function as a check on management based on
corporate governance principles, the board can better ensure that
products or other deliverables are provided timely and consistent with
the terms of a service provider agreement, if the board evaluates
senior management action to address service provider performance
issues.\279\ In the Governance Proposing Release, the Commission
explained that under Proposed Rule 17Ad-25(i)(4), the board would have
responsibility for overseeing the extent to which senior management
remedies performance issues under a service provider contract.\280\ The
changes to Rule 17Ad-25(i)(4) make clear that while senior management
is responsible for ongoing monitoring of the service provider
relationship and its attendant risks, it is the board that is
responsible for overseeing senior management's response to those risks.
This layered oversight responsibility in the context of service
providers is important because a key source of risk in any service
provider relationship to a registered clearing agency is the
operational risks that may arise if a service provider is not
performing pursuant to the agreed terms of the contractual
relationship.\281\ Without the board's effective ongoing monitoring of
such risks and oversight of management's remedial actions to control
such risks, the registered clearing agency may be faced with increasing
levels of risk that undermine sound risk management and operational
resilience.\282\ Accordingly, the Commission continues to believe that
policies and procedures should specifically provide for reporting to
the board by senior management regarding the service provider
relationship and associated risks, as well as the board oversight and
evaluation of senior management's ongoing monitoring of

and response to the service provider relationship and risks.\283\
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    \279\ See CCA Standards Adopting Release, supra note 4, at
70805.
    \280\ See Governance Proposing Release, supra note 2, at 51837.
    \281\ See id.
    \282\ See id.
    \283\ See id.
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    The Commission is not modifying Rule 17Ad-25(i)(4) to be more
flexible and principles-based, as two commenters requested.\284\ Rule
17Ad-25(i)(4) provides the general parameters for registered clearing
agencies to establish policies and procedures to meet the requirements
of the rule without prescribing the manner and content of the ongoing
monitoring of the service provider relationship and the manner and
content of the board's evaluation of senior management action taken to
remedy significant deterioration in performance or address changing
risks or material issues identified through such monitoring. In
response to one commenter's request to have the flexibility for the
board to delegate its responsibilities under Rule 17Ad-25(i) to a
qualified board sub-committee,\285\ the board may choose to do so under
Rule 17Ad-25(e), which provides that if any committee has the authority
to act on behalf of the board, the composition of that committee must
have at least the same percentage of independent directors as is
required for the board of directors.
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    \284\ See OCC at 13; LSEG at 14.
    \285\ See LSEG at 14 (``[T]here should be flexibility to allow
the board to determine the process and materiality of service
providers of critical services. For example, allowing the board to
specifically delegate to a qualified sub-committee of the board,
with appropriate escalation and reporting to the board.'').
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F. Obligation To Formally Consider Stakeholder Viewpoints

1. Proposed Rule 17Ad-25(j)
    Proposed Rule 17Ad-25(j) would require each registered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to solicit, consider, and document
its consideration of the views of participants and other relevant
stakeholders of the registered clearing agency regarding material
developments in its governance and operations on a recurring basis.
    In the Governance Proposing Release, the Commission explained that
such ``other relevant stakeholders'' generally would include investors,
customers of clearing agency participants, and securities issuers.\286\
The Commission also explained that requiring registered clearing
agencies to document their consideration of such viewpoints would help
ensure that a record exists of the viewpoints provided by participants
and other relevant stakeholders regarding material developments in a
registered clearing agency's governance and operations by requiring the
registered clearing agency to document that it had received such
viewpoints and evaluated their merits.\287\
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    \286\ See Governance Proposing Release, supra note 2, at 51838
(``The Commission believes that other relevant stakeholders
generally would include investors, customers of participants, as
well as securities issuers.'').
    \287\ See id. (``[T]he Commission believes that requiring
registered clearing agencies to document their consideration of such
viewpoints would help ensure that a record exists of the viewpoints
provided by participants and other relevant stakeholders regarding
material developments in a clearing agency's governance and
operations, ensuring that the clearing agency indicated that it had
received such viewpoints and evaluated their merits.'').
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    Many commenters supported the proposed approach to addressing
stakeholder viewpoints.\288\ Some commenters sought clarity regarding
whether existing registered clearing agency rules are sufficient to
comply with the proposed rule or whether they need to introduce or
modify any existing processes.\289\ Furthermore, some commenters
recommended limiting the scope of the rule to material developments
which affect clearing agencies' risk management or risk profile.\290\
Other commenters sought clarity on the frequency of outreach with
relevant stakeholders, as well as the design and approach to fora
formation.\291\ Finally, some commenters recommended that the
Commission harmonize proposed Rule 17Ad-255(j) with CFTC regulations at
17 CFR 39.24(b)(12) requiring the establishment of an RWG to obtain
input from stakeholders.\292\ The Commission addresses each of these
topics in Parts II.F.2 through II.F.7.
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    \288\ See ISDA at 5; SIFMA at 3; Citadel at 1; Barclays et al.
at 2.
    \289\ See OCC at 14; DTCC at 12-13; CCP12 at 9.
    \290\ See OCC at 15, CCP12 at 9; DTCC at 13-14.
    \291\ See CCP12 at 8,10; ISDA at 5; SIFMA AMG at 5-7; Barclays
et al. at 2; ICI at 5; Better Markets at21.
    \292\ See ICI at 4; SIFMA AMG at 5; SIFMA at 3-4.
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2. Concern Regarding Duplicative Requirements
    Several commenters suggested that existing rules at the registered
clearing agencies already consider views of clearing agency
participants and other stakeholders, stating that Rule 17Ad-255(j) may
be duplicative, redundant, or unnecessary.\293\ As discussed further
below, the Commission is adopting Rule 17Ad-255(j) to supplement
existing Commission requirements and to help formalize processes and
structures at the registered clearing agencies.
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    \293\ See OCC at 14; DTCC at 12-13; CCP12 at 9; ICE at 6.
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    First, one registered clearing agency commenter explained that its
existing governance framework, which includes the composition of its
board and reliance on an advisory group it titles the ``Financial Risk
Advisory Council'' (FRAC), affords relevant stakeholders the
opportunity to provide their viewpoints on relevant risk management
issues.\294\ Another registered clearing agency commenter similarly
stated that its existing governance framework captures clearing
participant and other stakeholder views through its board composition
as well as through its diverse array of clearing agency participant and
stakeholder working groups.\295\ Given its current structure, the
commenter sought clarity on whether a covered clearing agency, subject
to requirements in 17 CFR 240.17Ad-252(e)(2)(iii) and (vi) (``Rule
17Ad-252(e)(2)''),\296\ is likely already observing the requirements
set forth in proposed Rule 17Ad-255(j), or whether there is something
more a covered clearing agency should do to satisfy the proposed
requirements. If the latter, the commenter stated its belief that such
an approach would be redundant, overly prescriptive, and likely reduce
the ability of each unique covered clearing agency to develop the
necessary stakeholder inputs.\297\ If the former, the

commenter recommended that the Commission clarify this point
further.\298\ The commenter also inquired whether the proposed rule was
intended for covered clearing agencies to document how they currently
comply with Rules 17Ad-252(e)(2)(iii) and (vi), recommending that the
Commission modify the proposed rule to more specifically consider how
it would apply to covered clearing agencies versus other registered
clearing agencies.\299\
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    \294\ See OCC at 14-15 (explaining various initiatives as part
of a ``multi-pronged'' governance framework that furthers ``the goal
of considering the viewpoints of relevant stakeholders in corporate
initiatives,'' including elements of its bylaws and committee
structure, use of public directors on its board, and the FRAC).
    \295\ See DTCC at 12 (explaining its view that ``DTCC's
participant-owned governance structure results in a board and board
committee composition that is strongly aligned and widely diverse in
representing the various participant types that benefit from the
services of the registered clearing agencies'' and that the DTCC
clearing agencies ``maintain a diverse array of participant and
stakeholder working groups that are designed to solicit input from
constituencies beyond those immediately represented on the boards of
the registered clearing agencies'' including its ``Systemic Risk
Roundtable, Risk Advisory Council, Clearing Agency Liquidity
Council, Client Risk Forum, and FMI Forum'').
    \296\ See 17 CFR 240.17Ad-252(e)(2)(iii) (requiring a covered
clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to support the
public interest requirements in Exchange Act section 17A, and the
objectives of owners and participants); 17 CFR 240.17Ad-
252(e)(2)(vi) (requiring a covered clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to consider the interests of participants'
customers, securities issuers and holders, and other relevant
stakeholders of the covered clearing agency).
    \297\ See DTCC at 13 (stating that further prescribing and
standardizing the current approach in existing Rules 17Ad-
252(e)(2)(iii) and (vi) is redundant, overly prescriptive, and will
likely reduce the ability of each unique covered clearing agency to
develop the necessary stakeholder inputs unique to the cleared
markets that they serve).
    \298\ See id.
    \299\ See id.
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    With respect to the first two comments stating that the registered
clearing agencies' existing governance framework already captures
clearing participant and other stakeholder views, the Governance
Proposing Release explained that many clearing agencies already have
established committees, working groups, and other fora of varying size,
scope, and formality to share and solicit information with
participants, the customers of their clearing agency participants, and
other stakeholders regarding changes to risk management and other
services offered by the registered clearing agency.\300\ The Commission
proposed Rule 17Ad-255(j) to help promote the formalization of these
processes and structures to help ensure their ongoing use, both for the
existing set of registered clearing agencies and for potential future
registrants.\301\ Registered clearing agencies that have already
established such structures generally should evaluate their own
internal processes, including their approach to observing Rules 17Ad-
252(e)(2)(iii) and (vi) if applicable, and determine to what extent any
additional steps need to be defined, formalized, or otherwise
undertaken to ensure compliance with Rule 17Ad-255(j). In contrast to
existing rules for covered clearing agencies, Rule 17Ad-255(j)
establishes new requirements for written policies and procedures
reasonably designed to require the solicitation, consideration, and
documentation of the consideration of the view of stakeholders
regarding certain material developments. The specific requirements with
respect to solicitation and documentation do not exist in Rule 17Ad-
252(e)(2) and therefore the new requirements are not redundant. The
requirements are also not overly prescriptive or likely to reduce the
ability of each unique covered clearing agency to develop the necessary
stakeholder inputs because the registered clearing agencies would have
the discretion to determine the appropriate approach to solicitation
and documentation relating to stakeholder views. Because Rule 17Ad-
255(j) is not duplicative of requirements in Rule 17Ad-252(e)(2), the
Commission is also not modifying Rule 17Ad-255(j) for covered clearing
agencies in response to these comments.
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    \300\ See Governance Proposing Release, supra note 2, at 51838.
    \301\ See id.
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    In asserting that proposed Rule 17Ad-255(j) is duplicative of
existing requirements, several commenters cited Exchange Act Rule 19b-
4, which generally requires a registered clearing agency, as an SRO, to
submit proposed changes to its rules, policies, and procedures to the
Commission for review, a process which includes publication and a
solicitation of public comments.\302\ In addition, commenters also
cited requirements under the Dodd-Frank Act for registered clearing