722 Federal Register / Vol. 76, No. 4 / Thursday, January 6, 2011 / Proposed Rules 

1 17 CFR 145.9. 

2See Dodd-Frank Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov./ 

LawRegulation/OTCDERIVATIVES/index.htm. 3Pursuant to Section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

4 7 U.S.C. 1 et seq. 5 In this release, the terms ‘‘swap dealer’’ and 

‘‘major swap participant’’ shall have the meanings 

set forth in Section 721(a) of the Dodd-Frank Act, 

which added Sections 1a(49) and (33) of the CEA. 

However, Section 721(c) of the Dodd-Frank Act 

directs the Commission to promulgate rules to 

further define, among other terms, ‘‘swap dealer’’ 

and ‘‘major swap participant.’’ The Commission is 

in the process of this rulemaking. See, e.g., http:// 

www.cftc.gov/LawRegulation/DoddFrankAct/

OTC_2_Definitions.html. The Commission 

anticipates that such rulemaking will be completed 

by the statutory deadline of July 15, 2011. 

6 75 FR 63732 (Oct. 18, 2010). 

7According to the Conflicts of Interest NPRM: 

(i) Each DCO, DCM, or SEF must have a Board of 

Directors with at least 35 percent, but no less than 

two, public directors; (ii) each DCO, DCM, or SEF 

must have a nominating committee with at least 51 

percent public directors; (iii) each DCO, DCM, or 

SEF must have one or more disciplinary panels, 

with a public participant as chair; (iv) each DCM 

or SEF must have (A) a regulatory oversight 

committee (‘‘ROC’’), with all public directors, and 

(B) a membership or participation committee, with 

35 percent public directors; and each DCO must 

have a risk management committee (‘‘RMC’’), with 

at least (A) 35 percent public directors and (B) 10 

percent customer representatives. See generally 75 

FR 63732 (Oct. 18, 2010). 

8According to the Conflicts of Interest NPRM, no 

DCM or SEF member (and related persons) may (i) 

beneficially own more than 20 percent of any class 

of voting equity or (ii) directly or indirectly vote an 

interest exceeding 20 percent of the voting power 

of any class of equity. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 37, 38, 39, and 40 

RIN 3038–AD01 

Governance Requirements for 

Derivatives Clearing Organizations, 

Designated Contract Markets, and 

Swap Execution Facilities; Additional 

Requirements Regarding the Mitigation 

of Conflicts of Interest 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (the 

‘‘Commission’’) hereby proposes 

regulations to further implement new 

statutory provisions enacted by Title VII 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (‘‘DoddFrank Act’’). Specifically, the 

Commission proposes certain 

substantive requirements on the 

resolution of conflicts of interest, in 

order to further implement core 

principles applicable to derivatives 

clearing organizations (‘‘DCOs’’), 

designated contract markets (‘‘DCMs’’), 

and swap execution facilities (‘‘SEFs’’). 

Such substantive requirements address 

reporting, transparency in decisionmaking, and limitations on use or 

disclosure of non-public information, 

among other things. For DCOs and 

DCMs, the Commission also proposes 

regulations to implement core 

principles concerning governance 

fitness standards and the composition of 

governing bodies. Finally, for publiclytraded DCMs, the Commission proposes 

regulations to implement the core 

principle on diversity of Boards of 

Directors. 

The Commission welcomes comments 

on all aspects of the proposed 

regulations. 

DATES: Submit comments on or before 

March 7, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AD01 number, 

by any of the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the Commission’s Regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Nancy Liao Schnabel, Special Counsel, 

Division of Clearing and Intermediary 

Oversight (DCIO), at 202–418–5344 or 

nschnabel@cftc.gov; Lois Gregory, 

Assistant Deputy Director for Market 

Review, the Division of Market 

Oversight (DMO), at 202–418–5569 or 

lgregory@cftc.gov; Alicia Lewis, 

Attorney-Advisor, DCIO, at 202–418– 

5862 or alewis@cftc.gov; Jordan 

O’Regan, Attorney-Advisor, DCIO, at 

202–418–5984 or joregan@cftc.gov; or 

Jolanta Sterbenz, Counsel, Office of the 

General Counsel, at 202–418–6639 or 

jsterbenz@cftc.gov; in each case, also at 

the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.2 Title VII of 

the Dodd-Frank Act 3 amended the 

Commodity Exchange Act (‘‘CEA’’) 4 to 

establish a comprehensive new 

regulatory framework for swaps and 

certain security-based swaps. The 

legislation was enacted to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: 

(i) Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; 5

(ii) imposing mandatory clearing and 

trade execution requirements on 

clearable swap contracts; (iii) creating 

robust recordkeeping and real-time 

reporting regimes; and (iv) enhancing 

the rulemaking and enforcement 

authorities of the Commission with 

respect to, among others, all registered 

entities and intermediaries subject to 

the oversight of the Commission. 

In order to ensure the proper 

implementation of the comprehensive 

new regulatory framework, the DoddFrank Act requires the Commission to 

promulgate regulations regarding the 

mitigation of conflicts of interest in the 

operation of certain DCOs, DCMs, and 

SEFs. On October 1, 2010, the 

Commission identified possible 

conflicts. Section II below briefly 

summarizes these conflicts. To address 

these conflicts, the Commission 

proposed 6 both (i) structural 

governance requirements 7 and 

(ii) limits on ownership of voting equity 

and exercise of voting power 8 (the 

‘‘Conflicts of Interest NPRM’’). 


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A DCO may choose one of the following 

alternatives. Under the first alternative, no 

individual member may beneficially own more than 

20 percent of any class of voting equity or directly 

or indirectly vote an interest exceeding 20 percent 

of the voting power of any class of equity. In 

addition, the enumerated entities, whether or not 

they are DCO members, may not collectively own 

on a beneficial basis more than 40 percent of any 

class of voting equity, or directly or indirectly vote 

an interest exceeding 40 percent of the voting 

power of any class of equity. 

Under the second alternative, no DCO member or 

enumerated entity, regardless of whether it is a DCO 

member, may own more than five (5) percent of any 

class of voting equity or directly or indirectly vote 

an interest exceeding five (5) percent of the voting 

power of any class of equity. Notwithstanding the 

foregoing, the Conflicts of Interest NPRM provides 

a procedure for the DCO to apply for, and the 

Commission to grant, a waiver of the 

abovementioned limits. See generally 75 FR 63732 

(Oct. 18, 2010). 

‘‘Enumerated entities’’ are those entities listed in 

Section 726(a) of the Dodd-Frank Act and include: 

(i) Bank holding companies with over 

$50,000,000,000 in total consolidated assets; (ii) a 

nonbank financial company supervised by the 

Board of Governors of the Federal Reserve System; 

(iii) an affiliate of (i) or (ii); (iv) a swap dealer; (v) 

a major swap participant; or (vi) an associated 

person of (iv) or (v). 

9First, Section 726(a) of the Dodd-Frank Act 

specifically empowers the Commission to adopt 

‘‘numerical limits * * * on control’’ or ‘‘voting 

rights’’ that enumerated entities may hold with 

respect to such DCOs, DCMs, and SEFs. Second, 

Section 726(b) of the Dodd-Frank Act directs the 

Commission to determine the manner in which its 

rules may be deemed necessary or appropriate to 

improve the governance of certain DCOs, DCMs, or 

SEFs or to mitigate systemic risk, promote 

competition, or mitigate conflicts of interest in 

connection with the interaction between swap 

dealers and major swap participants, on the one 

hand, and such DCOs, DCMs, and SEFs. Finally, 

Section 726(c) of the Dodd-Frank Act directs the 

Commission to consider the manner in which its 

rules address conflicts of interest in the 

abovementioned interaction arising from equity 

ownership, voting structure, or other governance 

arrangements of the relevant DCOs, DCMs, and 

SEFs. 

Section 725(d) of the Dodd-Frank Act states: 

‘‘[t]he Commodity Futures Trading Commission 

shall adopt rules mitigating conflicts of interest in 

connection with the conduct of business by a swap 

dealer or a major swap participant with a 

derivatives clearing organization, board of trade, or 

a swap execution facility that clears or trades swaps 

in which the swap dealer or major swap participant 

has a material debt or material equity investment.’’ 

10Section 725(c) of the Dodd-Frank Act amends 

Section 5b(c) of the CEA to include new DCO Core 

Principle O (Governance Fitness Standards), P 

(Conflicts of Interest), and Q (Composition of 

Governing Boards). Together, such core principles 

empower the Commission to develop performance 

standards for determining whether a DCO has: (i) 

Governance arrangements that are transparent to 

fulfill public interest requirements and to permit 

consideration of the views of owners and 

participants; (ii) appropriate fitness standards for 

directors, members, and others; (iii) rules to 

minimize and resolve conflicts of interest in DCO 

decision-making; and (iv) governing boards or 

committees that include market participants. 

11Section 735(b) of the Dodd-Frank Act retains 

the existing DCM core principle on conflicts of 

interest and governance fitness standards, but (i) 

amends the existing DCM core principle on 

composition of governing boards of contract 

markets to state: ‘‘[t]he governance arrangements of 

the board of trade shall be designed to permit 

consideration of the views of market participants,’’ 

and (ii) adds a new DCM core principle on diversity 

of the Board of Directors. Together, such core 

principles empower the Commission to develop 

performance standards for determining whether a 

DCM has: (i) Appropriate fitness standards for 

directors, members, and others; (ii) rules to 

minimize conflicts of interest in DCM decisionmaking; (iii) appropriate governance arrangements 

to permit the Board of Directors to consider the 

views of market participants; and (iv) rules, if the 

DCM is a publicly-traded company, regarding the 

cultural diversity of the Board of Directors. 

12Section 733 of the Dodd-Frank Act includes 

SEF Core Principle 12 (Conflicts of Interest) in new 

Section 5h of the CEA. Such core principle 

empowers the Commission to establish performance 

standards for determining whether a SEF has rules 

to minimize and resolve conflicts of interest in SEF 

decision-making. 

13The conflicts of interest core principles are 

DCO Core Principle P, DCM Core Principle 16, and 

SEF Core Principle 12. Such core principles shall 

hereinafter be referred to as ‘‘Conflicts of Interest 

Core Principles.’’ 

14 In addition, a DCO would be required to report 

to the Commission when its RMC rejects a 

recommendation from or supersedes an action of a 

subcommittee of the RMC. 

15The proposed regulations would also require 

the ROC of a DCM or SEF to prepare an annual 

report to the Board of Directors assessing various 

components of the regulatory program of such DCM 

or SEF. 

16 In general, the Commission interprets the term 

‘‘market participants’’ to be more expansive than the 

term ‘‘member’’ (as defined in Section 1a(34) of the 

CEA). Therefore, with respect to DCMs, DCOs, and 

SEFs, the Commission construes the term ‘‘market 

participants’’ to encompass customers of members 

(to the extent that such customers do not fall within 

Section 1a(34) of the CEA). 

17As Section IV(c)(ii) below describes further, the 

Commission is reconsidering that portion of the 

Continued 

The Conflicts of Interest NPRM 

primarily aims to implement Sections 

726 and 725(d) of the Dodd-Frank Act.9

However, the Commission drew 

additional authority to propose the 

abovementioned requirements from 

Sections 725(c),10 735(b),11 and 733 12 of 

the Dodd-Frank Act. Together, such 

sections contain DCO, DCM, or SEF core 

principles that require each such entity 

to (i) establish and enforce rules to 

minimize conflicts of interest in its 

decision-making process and (ii) 

establish a process for resolving such 

conflicts.13 This proposed rulemaking 

(the ‘‘Governance NPRM’’) aims to more 

fully implement such core principles. 

Therefore, the Governance NPRM 

proposes the following requirements, 

which complement those in the 

Conflicts of Interest NPRM: 

• Each DCO must report to the 

Commission when its Board of Directors 

rejects a recommendation from or 

supersedes an action of the RMC; 14

• Each DCM or SEF must report to the 

Commission when its Board of Directors 

rejects a recommendation from or 

supersedes an action of the ROC or the 

Membership or Participation 

Committee; 15

• Each DCO, DCM, or SEF must: 

Æ Implement a regulatory program to 

identify, on an ongoing basis, existing 

and potential conflicts of interest, as 

well as a method for making fair and 

non-biased decisions in the event of 

such a conflict; 

Æ Prescribe limits on the use or 

disclosure of non-public information by 

owners, members of the Board of 

Directors, members of any committee, 

officers or other employees; and 

Æ Make certain information on 

governance arrangements available to 

the public and relevant authorities, 

including summaries of significant 

decisions. 

In addition to containing the Conflicts 

of Interest Core Principles, Sections 

725(c), 735(b), and 733 of the DoddFrank Act add or amend DCO or DCM 

core principles on (i) governance fitness 

standards and (ii) composition of the 

Board of Directors or other governing 

bodies. Section 735(b) of the DoddFrank Act also adds a DCM core 

principle on diversity of certain Boards 

of Directors. To implement such core 

principles, the Governance NPRM 

proposes the following requirements: 

• Each DCO or DCM must specify and 

enforce fitness standards for its 

members, directors, members of any 

Disciplinary Panel or Disciplinary 

Committee, persons with direct access, 

and certain affiliates; 

• Each publicly-traded DCM must 

evaluate the breadth and cultural 

diversity of its Board of Directors; 

• Each DCM must design and 

institute a process for considering the 

range of opinions that market 

participants 16 hold with respect to 

(i) the functioning of an existing market 

and (ii) new rules or rule amendments; 

and 

• Each DCO must have 10 percent 

customer representation on its Board of 

Directors, in lieu of having such 

representation on the RMC (or the RMC 

Subcommittee). Alternatively, each DCO 

must have 10 percent customer 

representation on the RMC (or the RMC 

Subcommittee), in lieu of having such 

representation on the DCO Board of 

Directors.17


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724 Federal Register / Vol. 76, No. 4 / Thursday, January 6, 2011 / Proposed Rules 

Conflicts of Interest NPRM that requires 10 percent 

customer representation on the RMC. The 

Commission notes that it has authority under both 

Section 726 of the Dodd-Frank Act, as well as under 

DCO Core Principles P (Conflicts of Interest) and Q 

(Composition of Governing Boards) to adopt either 

a Board or RMC composition requirement. 

18As the Conflicts of Interest NPRM states: 

In applying such requirements and limits, the 

Commission does not propose to distinguish 

between DCMs and SEFs listing swap contracts. As 

mentioned above, such DCMs and SEFs may 

experience sustained competition with respect to 

the same swap contract, and therefore would face 

the same pressures on self-regulation. Additionally, 

the Commission does not propose to distinguish 

between (i) DCMs listing swap contracts and (ii) 

DCMs listing only commodity futures and options. 

As mentioned above, clearable swap contracts may 

share sufficiently similar characteristics with 

certain commodity futures and options as to 

compete with respect to execution. Therefore, a 

DCM listing only commodity futures and options 

may face competition from a SEF with fewer selfregulatory requirements, in the same manner as a 

DCM listing swap contracts. Given that the same 

conflicts of interest may concern both types of 

DCM, it would appear that the same (i) structural 

governance requirements and (ii) limits on the 

ownership of voting equity and the exercise of 

voting power should apply. 

In addition, the Commission does not propose to 

distinguish between (i) DCOs clearing swap 

contracts and (ii) DCOs clearing only commodity 

futures and options. Certain standardized swap 

contracts have sufficiently similar risk profiles to 

commodity futures and options that the 

Commission has, on occasion, permitted such 

products to be commingled and margined within 

the segregated customer account under Section 4d 

of the CEA. If the Commission applied differential 

(i) structural governance requirements and (ii) 

limits on the ownership of voting equity and the 

exercise of voting power, the Commission risks 

creating an incentive for regulatory arbitrage 

between the two types of DCO. 

75 FR at 63737. The Commission has requested 

comment in the Conflicts of Interest NPRM 

regarding this approach. The Commission reiterates 

its request for comment in the context of the 

Governance NPRM. 

19Section 765 of the Dodd-Frank Act requires the 

SEC to promulgate rules to mitigate conflicts of 

interest in the operation of (i) a clearing agency that 

clears security-based swaps, (ii) a security-based 

swap execution facility, or (iii) a national securities 

exchange that posts or makes available for trading 

security-based swaps. Core Principles for securitybased swap execution facilities are set forth in 

Section 763 of the Dodd-Frank Act. 

20The transcript from the roundtable (the 

‘‘Roundtable Tr.’’) is available at: http:// 

www.cftc.gov/ucm/groups/public/@newsroom/

documents/file/derivative9sub082010.pdf. 

21Such comments are available at: http:// 

www.cftc.gov/LawRegulation/DoddFrankAct/

OTC_9_DCOGovernance.html. 

22Currently, the Commission regulates certain 

entities based outside of the United States (e.g., 

LCH.Clearnet Limited and ICE Clear Europe 

Limited, each of which is based in the United 

Kingdom). 

23COM(2010) 484/5. 

24The CCP Recommendations are available at: 

http://www.bis.org/publ/cpss61.pdf. 

25This term is defined in 72 FR 6936 (Feb. 14, 

2007), which includes acceptable practices that the 

Commission previously adopted for the DCM core 

principle on conflicts of interest. 

26The Conflicts of Interest NPRM defines 

‘‘Executive Committee’’ as a committee of the Board 

of Directors that may exercise the authority 

delegated to it by the Board of Directors with 

Sections 725(c), 735(b), and 733 

explicitly authorize the Commission to 

promulgate regulations implementing 

DCO, DCM, and SEF core principles 

under Section 8a(5) of the CEA. Section 

8a(5) of the CEA states that ‘‘[t]he 

Commission is authorized * * * to 

make or promulgate such rules and 

regulations as, in the judgment of the 

Commission, are reasonably necessary 

to effectuate any of the provisions or to 

accomplish any of the purposes of [the 

CEA].’’ The requirements that the 

Governance NPRM proposes apply to all 

DCOs and DCMs, regardless of whether 

they clear or list swap contracts or only 

commodity futures or options.18

The Governance NPRM reflects 

consultation with staff of the following 

agencies: (i) The Securities and 

Exchange Commission (the ‘‘SEC’’); 19

(ii) the Board of Governors of the 

Federal Reserve; (iii) the Office of the 

Comptroller of the Currency; (iv) the 

Federal Deposit Insurance Corporation; 

and (v) the Treasury Department. The 

Governance NPRM has been further 

informed by (i) the joint roundtable that 

Commission and SEC staff conducted on 

August 20, 2010 (the ‘‘Roundtable’’) 20

and (ii) public comments posted to the 

Web site of the Commission.21 Finally, 

mindful of the importance of 

international harmonization,22 the 

Governance NPRM incorporates certain 

elements of: (i) The Proposal for a 

Regulation of the European Parliament 

and of the Council on OTC Derivatives, 

Central Counterparties, and Trade 

Depositories (the ‘‘European 

Commission Proposal’’); 23 and (ii) the 

Recommendations for Central 

Counterparties, drafted by the 

Committee on Payment and Settlement 

Systems of the Bank for International 

Settlements and the Technical 

Committee of the International 

Organization of Securities Commissions, 

dated November 2004 (the ‘‘CCP 

Recommendations’’).24

The Commission requests comment 

on all aspects of the Governance NPRM. 

II. Conflicts of Interest 

As mentioned above, Title VII of the 

Dodd-Frank Act amended the CEA to 

establish a comprehensive new 

framework for swaps and certain 

security-based swaps. This framework 

imposes mandatory clearing and trade 

execution requirements with respect to 

clearable swap contracts. Some market 

participants, investor advocates, and 

academics have expressed a concern 

that the enumerated entities have 

economic incentives to minimize the 

number of swaps subject to mandatory 

clearing and trading. They contend that 

control of a DCO by the enumerated 

entities, whether through ownership or 

otherwise, constitutes the primary 

means for keeping swap contracts out of 

the mandatory clearing requirement, 

and therefore also out of the trading 

requirement. A further contention is 

that sustained competition between 

DCMs or SEFs may exacerbate certain 

structural conflicts of interest.25

As the Conflicts of Interest NPRM 

further describes, the potential conflicts 

of interest that the Commission has 

identified are: Conflicts of interest that 

a DCO may confront when determining 

(i) whether a product is capable of being 

cleared, (ii) the minimum criteria that 

an entity must meet in order to become 

and remain a clearing member, and (iii) 

whether a particular entity satisfies such 

criteria; and conflicts of interest that a 

DCM or SEF may confront in balancing 

advancement of commercial interests 

and fulfillment of self-regulatory 

responsibilities. 

In addition, the Commission has 

identified misuse or disclosure of nonpublic information as a conflict of 

interest that a DCO, DCM, or SEF may 

confront. Certain individuals (e.g., 

owners, members of the Board of 

Directors, officers, or other employees) 

will be privy to non-public information. 

Such non-public information could be 

used or disclosed improperly (e.g., to 

the detriment of competitors), whether 

advertently or inadvertently. 

III. Mitigation of Conflicts of Interest 

To more fully implement the Conflicts 

of Interest Core Principles, the 

Commission proposes certain 

requirements related to (i) reporting, (ii) 

identification and mitigation of conflicts 

of interest, (iii) transparency of 

governance arrangements, and (iv) 

limitations on use or disclosure of nonpublic information. 

A. Reporting Requirements 

1. DCOs, DCMs, and SEFs 

As mentioned above, the Conflicts of 

Interest NPRM imposes specific 

compositional requirements on the 

Boards of Directors and certain 

committees of DCOs, DCMs, and SEFs. 

In order to facilitate the responsibility of 

the Commission to oversee compliance 

with such requirements, the Governance 

NPRM proposes to mandate that each 

DCO, DCM, or SEF submit to the 

Commission within 30 days after each 

election of its Board of Directors: 

• A list of all members of the Board 

of Directors, each committee with a 

composition requirement (including any 

Executive Committee 26), and each other 


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respect to the management of the company or 

organization. See proposed § 1.3(ccc). 75 FR at 

63747. 

27With respect to DCOs, the Commission also 

requires the basis for any determination that a 

director qualifies as a customer representative. 

28 75 FR at 63740. 

29See Section IV(c)(ii) below on Commission 

reconsideration of requiring customer 

representation on the RMC, rather than on the DCO 

Board of Directors. 

30This observation would be true regardless of 

whether the Commission ultimately requires 

customer representation on the RMC or the DCO 

Board of Directors. However, the Commission 

requests comment on whether the reporting 

requirement described herein should apply to a 

DCO if the Commission requires the latter and not 

the former. 

31 If, after examination, the Commission 

determines that such rejection or supersession 

originates from a conflict of interest, the 

Commission may find that the DCO regulatory 

program (as referenced in Section III(b) herein) is 

non-compliant with DCO Core Principle P. Upon 

making such a finding, the Commission may resort 

to certain administrative remedies (e.g., pursuant to 

Section 5c(d) of the CEA). 

32See Article 26(5) of the European Commission 

Proposal. 

33 75 FR 63741. 

34Such regulatory program is described further in 

section III(b) herein. The Dodd-Frank Act has 

redesignated DCM Core Principle 15 as DCM Core 

Principle 16, but has left the actual language of the 

core principle substantively unchanged. See section 

3(ii)(E) under Acceptable Practices for Core 

Principle 15 in Appendix B to Part 38 of the 

Commission’s regulations. 

35See note 30 supra. 

committee that has the authority to 

amend or constrain the action of the 

Board of Directors, 

• A description of the relationship, if 

any, between such directors and the 

registered entity or the members of the 

registered entity (and, in each case, any 

affiliates thereof), 

• The basis for any determination that 

a director qualifies as a Public Director, 

and 27

• A description of how the 

composition of the Board of Directors 

and each of the abovementioned 

committees allows the registered entity 

to comply with applicable core 

principles, regulations, as well as to the 

rules of the registered entity. 

2. DCOs 

As the Conflict of Interest NPRM 

states: 

swap clearing members at DCOs that 

currently clear large volumes of swap 

contracts are exclusively enumerated entities. 

Some have argued that the enumerated 

entities have an incentive to influence DCO 

risk assessments regarding (i) whether a swap 

contract is capable of being cleared, (ii) the 

appropriate membership criteria for a swap 

clearing member, and (iii) whether a 

particular entity meets such criteria. 

Therefore, the Commission must carefully 

consider the composition of the Risk 

Management Committee, in order to achieve 

(i) the increased clearing of swap contracts 

that the Dodd-Frank Act contemplates 

without compromising (ii) DCO safety and 

soundness.28

The Conflicts of Interest NPRM 

proposes to require each DCO to have an 

RMC, with at least (i) 35 percent public 

directors and (ii) 10 percent customer 

representatives.29 If a DCO would like to 

have greater clearing member 

participation in risk management, then 

it may cause its RMC to delegate to a 

subcommittee (the ‘‘RMC 

Subcommittee’’) decisions implicating 

whether (i) a product is capable of being 

cleared and (ii) particular entities or 

categories of entities are capable of 

performing such clearing. After such 

delegation the RMC would be free of 

any composition requirements. 

In the abovementioned structure, the 

RMC Subcommittee reports to the RMC, 

whereas the RMC reports to the DCO 

Board of Directors. Therefore, a DCO 

governing body that is not subject to the 

same compositional requirements as the 

RMC or the RMC Subcommittee may 

reject a recommendation or supersede 

an action thereof.30 To enable the 

Commission to determine whether such 

a rejection or supersession originates 

from a conflict of interest, the 

Governance NPRM proposes to require 

a DCO to submit a written report to the 

Commission, whenever such a rejection 

or supersession occurs.31 Such report 

would detail, among other things, the 

rationale for such rejection or 

supersession. This requirement parallels 

the requirements for central 

counterparties (‘‘CCPs’’) in the European 

Commission Proposal.32 The 

Commission anticipates that such a 

reporting requirement may serve to 

deter conflicts from arising in the first 

place. 

3. DCMs or SEFs 

The Conflicts of Interest NPRM 

emphasizes the importance of the ROC 

and Membership or Participation 

Committees in ensuring that the DCM or 

SEF does not prioritize commercial 

interests over self-regulatory 

responsibilities, including restricting 

access or imposing burdens on access in 

a discriminatory manner.33 As 

mentioned above, the Conflicts of 

Interest NPRM proposes to require each 

DCM or SEF to have (i) a ROC with all 

public directors and (ii) a Membership 

or Participation Committee with 35 

percent public directors. However, the 

Conflicts of Interest NPRM contemplates 

that such ROC or Membership or 

Participation Committee would report to 

the DCM or SEF Board of Directors. As 

such DCM or SEF Board of Directors 

may not be subject to the same 

composition requirements (or may not 

have the same members) as the ROC or 

Membership or Participation 

Committee, the Governance NPRM 

proposes to require a DCM or SEF to 

submit a written report to the 

Commission whenever such Board of 

Directors rejects a recommendation of 

the ROC or the Membership or 

Participation Committee or supersedes 

an action. Such report would detail 

among other things, the rationale for 

such action. The Commission believes 

that such a reporting requirement would 

alert it to potential conflicts of interests, 

as well as deter such conflicts from 

arising in the first place. 

In addition to the above, the 

Governance NPRM proposes to require 

the ROC to prepare an annual report to 

the Board of Directors assessing various 

components of the DCM or SEF 

regulatory program. Such a requirement 

generally parallels current acceptable 

practices under DCM Core Principle 

15.34

4. Questions 35

The Commission requests comment 

on all aspects of the reporting 

requirements. The Commission further 

requests comment on the questions set 

forth below. 

• Pursuant to Article 31(2) of the 

European Commission Proposal, if a 

CCP cannot manage, through structural 

or substantive governance arrangements, 

conflicts of interest that may 

disadvantage a specific member or 

customer, then that CCP must disclose 

to that member (or customer, if known) 

the general nature or sources of such 

conflicts. The CCP must make such 

disclosure before accepting new 

transactions from the affected member, 

presumably so that such member (or 

customer thereof) may choose to 

discontinue clearing with the CCP. 

Should the Commission consider 

imposing a similar requirement on 

DCOs? Why or why not? 

• If the Commission decides to 

impose a similar requirement on DCOs, 

should the Commission extend such a 

requirement to cover DCMs and SEFs? 

Why or why not? 

B. Regulatory Program 

The Governance NPRM proposes to 

require that, as part of its regulatory 

program, each DCO, DCM, or SEF must 

establish, maintain, and enforce written 

procedures to: 

• Identify, on an ongoing basis, 

existing and potential conflicts of 

interest; and 


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36See ‘‘Trading Facilities, Intermediaries, and 

Clearing Organizations; New Regulatory 

Framework; Final Rule,’’ 66 FR 42256, 42266 

(August 10, 2001). Although the relevant discussion 

focuses on DCMs, a similar logic would apply to 

DCOs. Further, pursuant to the Dodd-Frank Act, the 

Commission is contemplating proposing regulations 

regarding such contractual relationships. 

37See, e.g., Comments from Jason Kastner, Vice 

Chairman, Swaps and Derivatives Markets 

Association (‘‘I think that the issue is making sure 

that the risk committees of these DCOs are 

transparent, that you know who the membership is, 

that the decisions that are taken about whether to 

permit new clearing members and whether to 

permit new products to be listed are transparent 

and readily appraisable, and so that everyone 

knows, you know, what’s going on. * * * So this 

is an open hearing, right? There’s a public record. 

There’s cameras. There’s recordings. The same type 

of transparency should apply to DCO governance so 

that everyone is clear about how decisions are taken 

and how they’re made and who’s making them.’’), 

Roundtable Tr. at 74–75; and Comments from 

Randy Kroszner, Professor of Economics, Booth 

School of Business, University of Chicago (‘‘I think 

this gets back to the transparency point, but I do 

think it’s extremely important to have people with 

the knowledge, the wherewithal, and with their 

money on the line having input into these riskmanagement decisions, and I think the best way to 

ensure that is to ensure a very, very transparent 

process so that outsiders can evaluate and provide 

the commentary and the independent directors will 

have enough wherewithal, enough knowledge to 

know what is going on.’’), Roundtable Tr. 78–79. 

38 71 FR 38741 (July 7, 2006) (which proposed the 

acceptable practices for current DCM core principle 

15) (‘‘* * * the current market environment 

mandates enhanced and transparent governance as 

an essential business practice for maintaining 

market integrity and public trust.’’). 

39According to Section 4.13.3 of the CCP 

Recommendations, ‘‘[g]overnance arrangements 

should be clearly specified and publicly available.’’ 

40The Commission intends to promulgate the 

transparency requirements for DCMs and SEFs 

pursuant to its authority under DCM Core Principle 

P, SEF Core Principle 12 (in each case, Conflicts of 

Interest), and Section 8a(5) of the CEA. The 

Commission intends to promulgate the 

transparency requirements for DCOs pursuant to its 

authority under DCO Core Principle O (Governance 

Fitness Standards), and Section 8a(5) of the CEA. 

This core principle requires that a DCO establish 

governance arrangements that are transparent to, 

among other things, fulfill public interest 

requirements. This core principle is interrelated to 

DCO Core Principle P (Conflicts of Interest), since 

transparency requirements enhance the ability of 

the Commission to detect conflicts of interest, and 

may serve to deter such conflicts. The Commission 

believes that it has the authority to promulgate 

transparency requirements under either DCO Core 

Principle O or P. 

41As Section III discusses in greater detail, the 

Commission proposes to require DCOs and DCMs 

to meet additional standards regarding the manner 

in which the Board of Directors considers the 

opinions of market participants, among others. 

42Such information includes (i) the charter (or 

mission statement) of the registered entity; (ii) the 

charter (or mission statement) of the Board of 

Directors and certain committees; (iii) the Board of 

Directors nominations process for the registered 

entity, as well as the process for assigning members 

of the Board of Directors or other persons to certain 

committees; (iv) names of all members of (a) the 

Board of Directors and (b) certain committees; (v) 

the identities of all Public Directors (and with 

respect to a DCO, all customer representatives); (vi) 

the lines of responsibility and accountability for 

each operational unit of the registered entity; and 

(vii) summaries of significant decisions implicating 

the public interest. 

• Make fair and non-biased decisions 

in the event of a conflict of interest. 

Such procedures would include rules 

regarding the recusal, when appropriate, 

of parties involved in the making of 

decisions. The Chief Compliance Officer 

(for DCOs and SEFs), or the Chief 

Regulatory Officer (for DCMs), shall, in 

consultation with the Board of Directors 

of the entity or a senior officer of the 

entity, resolve any conflicts of interest. 

The Commission anticipates that the 

potential conflicts of interest that each 

DCO, DCM, or SEF confronts may 

change as the swaps market evolves 

under regulation. Consequently, the 

Commission believes that it is 

appropriate to require a DCO, DCM, or 

SEF to have a regulatory program to 

monitor existing and potential conflicts 

of interest on an ongoing basis. The 

Commission intends to permit a DCO, 

DCM, or SEF to contract with a thirdparty regulatory service provider to 

fulfill such requirement, subject to 

Commission guidance generally 

applicable to such contractual 

relationships.36

To protect the integrity of trade 

execution and clearing, the Commission 

believes that it is appropriate to require 

each DCO, DCM, or SEF to have 

procedures, including recusal 

procedures, to make fair and non-biased 

decisions in the event of a conflict of 

interest. Article 26(4) of the European 

Commission Proposal includes a similar 

recusal requirement for CCP risk 

committees. Specifically, if the 

chairman of a CCP risk committee 

determines that a member has an actual 

or potential conflict of interest on a 

particular matter, that member would 

not be allowed to vote on that matter. 

1. Questions 

The Commission requests comment 

on all aspects of the regulatory program. 

The Commission further requests 

comment on the questions set forth 

below: 

• As mentioned above, the 

Commission intends to permit a DCO, 

DCM, or SEF to contract with a thirdparty regulatory service provider (e.g., 

the National Futures Association) to 

implement the abovementioned 

regulatory program. Would a third-party 

regulatory service provider itself ever 

experience a conflict of interest from the 

performance of its obligations under 

such a contract? If so, under what 

circumstances? 

• Should the Commission propose 

any other substantive requirements with 

respect to the decision-making process 

of a DCO, DCM, or SEF? 

C. Transparency Requirements 

At the Roundtable, certain market 

participants emphasized that DCO 

governance arrangements must be 

transparent to permit the Commission, 

as well as the public, to (i) learn of 

decisions that have systemic importance 

(e.g., whether a product is capable of 

being cleared), and (ii) identify the 

governing bodies (e.g., the RMC) 

responsible for making such 

decisions.37 Previously, when the 

Commission proposed acceptable 

practices for current DCM Core 

Principle 15 (Conflicts of Interest), the 

Commission recognized the value of 

transparency in ‘‘maintaining market 

integrity and public trust.’’ 38 Such a 

rationale would appear to also apply to 

DCOs and SEFs.39

In light of the above, the Governance 

NPRM proposes to establish minimum 

standards for the transparency of the 

governance arrangements of each DCO, 

DCM, or SEF to relevant authorities 

(including the Commission) as well as 

the public.40 These minimum 

standards 41 require each DCO, DCM, or 

SEF to: 

• Make available certain information 

to the public and relevant authorities; 42

• Ensure that the information made 

available is current, accurate, clear and 

readily accessible; and 

• Disclose summaries of certain 

significant decisions. 

DCM, SEF, and DCO significant 

decisions involve those areas in which 

conflicts of interest identified in Section 

II above may be most manifest. With 

respect to a DCM or a SEF, significant 

decisions would relate to access, 

membership, and disciplinary 

procedures. With respect to a DCO, 

significant decisions would relate to 

open access, membership, and the 

finding of products acceptable (or not 

acceptable) for clearing. The 

Commission proposes to require that the 

DCO specifically disclose whether (i) its 

Board of Directors has rejected a 

recommendation or superseded an 

action of the RMC, or (ii) the RMC has 

rejected a recommendation or 

superseded an action of the RMC 

Subcommittee. The Commission does 

not intend the foregoing to require a 

DCM, SEF, or DCO to disclose any ‘‘nonpublic information’’ (as proposed 

§ 1.3(ggg) defines such term), including, 

without limitation, minutes from 

meetings of its Board of Directors or 

committees or information that it may 

have received on a confidential basis 

from an applicant for membership. 


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43The Commission recognizes that the disclosure 

of non-public information may be necessary in 

certain instances, even without the written consent 

of the DCO, DCM, or SEF. Such instances include 

if disclosure is compelled by valid legal process 

(provided that the individual or entity notifies the 

registered SDR) or required by a regulatory 

authority. 

44For example, a DCO, DCM, or SEF member may 

use or disclose non-public information (e.g., the 

possibility of disciplinary action) to the detriment 

of its competitor. 

45See Article 26(4) of the European Commission 

Proposal (stating that ‘‘[w]ithout prejudice to the 

right of competent authorities to be duly informed, 

the members of the risk committee shall be bound 

by confidentiality.’’). 

46 7 U.S.C. 5b(c)(2)(O). 

47The Conflicts of Interest NPRM defines 

‘‘Disciplinary Panel’’ as a panel that shall be 

responsible for conducting hearings, rendering 

decisions, and imposing sanctions with respect to 

disciplinary matters. See proposed § 40.9(c)(3)(i). 75 

FR at 63752. 

48Section 1.63 of the Commission’s regulations 

defines ‘‘Disciplinary Committee’’ as a person or 

committee of persons, or any subcommittee thereof, 

that is authorized by a self-regulatory organization 

to issue disciplinary charges, to conduct 

disciplinary proceedings, to settle disciplinary 

charges, to impose disciplinary sanctions or to hear 

appeals thereof. See 17 CFR 1.63. 

49 7 U.S.C. 12(a)(2). Bases for refusal to register a 

person under Section 8a(2) of the CEA include, 

among other things, suspension or revocation of 

registration, certain court orders prohibiting action 

in the capacity of a registrant under the CEA, 

certain felony convictions, or findings of violation 

of the CEA or certain other Federal statutes. 

50 17 CFR 1.63. Such offenses include violations 

of certain self-regulatory organization rules and 

violations of the CEA or the Commission’s 

regulations thereunder. 

51The Governance NPRM proposes to define 

‘‘affiliate’’ as a person that directly, or indirectly 

through one or more intermediaries, controls, is 

controlled by, or is under common control with, a 

registered entity. 

1. Questions 

The Commission requests comment 

on all aspects of the transparency 

requirements. The Commission further 

requests comment on the questions set 

forth below. 

• Are the abovementioned proposals 

necessary or appropriate to mitigate 

DCO, DCM, or SEF conflicts of interest 

or to ensure that DCO governance 

arrangements are transparent to, among 

other things, fulfill public interest 

requirements? If not, why not? What 

would be a better alternative? 

• Should the Commission require that 

a DCO, DCM, or SEF make available to 

the public and relevant authorities 

information other than that identified 

above? 

• Has the Commission accurately 

identified DCO, DCM, or SEF significant 

decisions? Should the Commission 

explicitly deem any other DCO, DCM, or 

SEF decisions as significant? 

Conversely, should the Commission 

deem any of the DCO, DCM, or SEF 

decisions that it has identified to be not 

significant? Why? 

• Should the Commission permit a 

DCO, DCM, or SEF to keep confidential 

any information identified above? If so, 

why? 

D. Limitation on Use or Disclosure of 

Non-Public Information 

1. Requirements 

The Governance NPRM proposes to 

require each DCO, DCM, or SEF to 

establish and maintain written policies 

and procedures on safeguarding nonpublic information. These policies and 

procedures must, at a minimum, 

preclude a DCO, DCM, or SEF owner, 

director, officer, or employee from using 

or disclosing any non-public 

information gained through their 

interest or position, absent prior written 

consent from the DCO, DCM, or SEF, as 

applicable.43 The Commission intends 

for such requirements to prohibit those 

in a position of power, either by holding 

a certain position in the organization or 

through an ownership interest, from 

leveraging such power to benefit, 

commercially or otherwise, from nonpublic information.44 The Commission 

believes that such leveraging would 

constitute a clear conflict of interest. 

The Commission notes that such 

requirements comport with certain 

aspects of the European Commission 

Proposal.45

The Governance NPRM proposes to 

define ‘‘non-public information’’ as any 

information that the DCO, DCM, or SEF 

owns or any information that such 

entity otherwise deems confidential, 

such as intellectual property belonging 

to (A) such registered entity or (B) a 

third party, which property such 

registered entity receives on a 

confidential basis. The Commission will 

not preclude a DCO, DCM, or SEF from 

adopting a more expansive definition of 

‘‘non-public information.’’ 

2. Questions 

The Commission requests comment 

on all aspects of the limitation on use 

of non-public information. The 

Commission further requests comment 

on the questions set forth below. 

• Are the abovementioned proposals 

necessary or appropriate to mitigate 

DCO, DCM, and SEF conflicts of 

interests? If not, why not? What would 

be a better alternative? 

• Has the Commission proposed an 

appropriate definition for ‘‘non-public 

information’’? If not, why not? What 

would be a better alternative? 

• Should the Commission consider 

any other concerns regarding the use of 

‘‘non-public information’’? 

IV. Regulations Implementing 

Governance Core Principles 

In addition to regulations more fully 

implementing the Conflicts of Interest 

Core Principles, the Commission also 

proposes regulations implementing DCO 

and DCM core principles on governance 

fitness and the composition of 

governing boards. Further, the 

Commission proposes regulations to 

implement the DCM core principle on 

diversity of certain Boards of Directors. 

A. Governance Fitness Standards 

DCO Core Principle O,46 as added by 

Section 725(c) of the Dodd-Frank Act, 

provides that each DCO shall (i) 

establish governance arrangements that 

are transparent to fulfill public interest 

requirements and to permit the 

consideration of the views of owners 

and participants and (ii) establish and 

enforce appropriate fitness standards for 

(A) directors, (B) members of any 

disciplinary committee, (C) members of 

the DCO, (D) any other individual or 

entity with direct access to the 

settlement or clearing activities of the 

DCO, and (E) any party affiliated with 

any entity mentioned above. DCM Core 

Principle 15, as retained by Section 

735(b) of the Dodd-Frank Act, provides 

that a DCM shall establish and enforce 

appropriate fitness standards for (i) 

directors, (ii) members of any 

disciplinary committee, (iii) members of 

the DCM, (iv) any other person with 

direct access to the facility, and (v) any 

person affiliated with any entity 

mentioned above. 

1. Fitness Requirements 

To implement DCM Core Principle 15 

and partially implement DCO Core 

Principle O, the Governance NPRM 

proposes to require each DCM and DCO 

to specify and enforce fitness standards 

for (i) directors, (ii) members of any 

Disciplinary Panel,47 and (iii) members 

of the Disciplinary Committee.48 These 

standards shall include, at a minimum, 

(i) those bases for refusal to register a 

person under Section 8a(2) of the 

CEA,49 and (2) the absence of a 

significant history of serious 

disciplinary offenses, such as those that 

would be disqualifying under § 1.63 of 

the Commission’s regulations.50

Also, the Governance NPRM proposes 

to require each DCM and DCO to specify 

and enforce fitness standards for (i) its 

members and affiliates 51 thereof, (ii) 

persons with direct access to the DCM 

or, in the case of a DCO, to its settlement 

and clearing activities, (iii) natural 

persons who, directly or indirectly, own 

greater than ten percent of any one class 


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52This provision is a clarification of acceptable 

practices under current DCM Core Principle 14. 53Currently, the Governance NPRM does not 

propose to impose any requirement on each DCM 

and DCO with respect to fitness standards for 

affiliates of persons with direct access. Therefore, 

under Section 5(d)(1)(B) of the CEA, as added by 

Section 735 of the Dodd-Frank Act, each DCM has 

reasonable discretion in comporting with DCM Core 

Principle 15 with respect to such affiliates. Also, 

under Section 5b(c)(2)(A)(ii) of the CEA, as added 

by Section 725 of the Dodd-Frank Act, each DCO 

retains similar discretion. 

54See note 49 supra. 55 DCM Core Principle 14 is redesignated as DCM 

Core Principle 15 under the Dodd-Frank Act. 56 DCMs facilitate the execution of, and DCOs 

provide clearing for, ‘‘* * * transactions * * * 

affected with a national public interest.’’ See 

Section 3(a) of the CEA, 7 U.S.C. 5. 

57 7 U.S.C. 5b(c)(2)(O). 

58To comport with the European Commission 

Proposal, the Commission has additionally 

interpreted DCO Core Principle O to require 

governance arrangements that are well-defined and 

that include a clear organizational structure with 

consistent lines of responsibility and effective 

internal controls. 

59 7 U.S.C. 7(d)(17). 

60The Dodd-Frank Act redesignated DCM Core 

Principle 16 (Composition of Boards of Mutually 

Owned Contract Markets) as DCM Core Principle 17 

(Composition of Governing Boards of Contract 

Markets), and amended the language of the core 

principle. Former DCM Core Principle 16 stated: ‘‘In 

the case of a mutually owned contract market, the 

board of trade shall ensure that the composition of 

the governing board reflects market participants.’’ 

DCM Core Principle 17, as amended by the DoddFrank Act states that ‘‘[t]he governance 

arrangements of the board of trade shall be designed 

to permit consideration of the views of market 

participants.’’ 

of equity interest in a DCM or DCO,52

and (v) parties affiliated with (A) 

directors, (B) members of any 

Disciplinary Panel, and (C) members of 

the Disciplinary Committee.53 At a 

minimum, such standards shall include 

those bases for refusal to register a 

person under Section 8a(2) of the 

CEA.54

Further, the Governance NPRM 

proposes to require each DCM and DCO 

to collect and verify information that 

supports compliance with the standards 

articulated above and provide that 

information to the Commission 

annually. 

The abovementioned proposals codify 

the acceptable practices under current 

DCM Core Principle 14 (Governance 

Fitness Standards) and extend such 

practices to DCOs.55 The Commission 

believes that such proposals are 

appropriate to ensure the integrity of 

individuals and entities specified above. 

Such integrity, in turn, allows DCMs 

and DCOs to operate in the best interests 

of the public.56

In addition to the above, the 

Governance NPRM proposes to mandate 

that members and certain other persons 

must agree to become subject to the 

jurisdiction of the DCM or the DCO, as 

a condition of access. Such a proposal 

ensures that a DCM or DCO, each of 

which has self-regulatory 

responsibilities, would be able to 

appropriately discipline a member or 

such other person for violation of DCM 

or DCO rules. The Commission believes 

that a DCM or DCO must have the 

ability to exert such discipline in order 

to ensure the fitness of members or such 

other persons. 

2. Questions 

The Commission requests comment 

on all aspects of the governance fitness 

standards. Specifically, the Commission 

requests comment on the questions set 

forth below. 

• Are the abovementioned proposals 

necessary or appropriate to implement 

DCM Core Principle 15 and DCO Core 

Principle O? If not, why not? What 

would be a better alternative? 

• Should the Commission propose 

any minimum fitness standards other 

than those specified above? 

• Is the Commission’s proposed 

definition of affiliate appropriate? If not, 

why? 

B. Transparency Requirements 

As mentioned above, DCO Core 

Principle O 57 provides that each DCO 

shall establish governance arrangements 

that are transparent to fulfill public 

interest requirements.58 Section III(C) of 

the Governance NPRM discusses 

proposals to implement such portion of 

the core principle. However, DCO Core 

Principle O also provides that each DCO 

shall establish governance arrangements 

that are transparent to permit the 

consideration of the views of owners 

and participants. Such language appears 

unique to DCOs. Hence, the Governance 

NPRM sets forth the following 

additional proposals for DCOs: 

• Each DCO shall make available to 

the public, as well as relevant 

authorities (including the Commission), 

a description of the manner in which its 

governance arrangements permit the 

consideration of the views of owners 

(whether voting or non-voting) and its 

participants, including, without 

limitation, clearing members and 

customers; 

• Such description shall include, at a 

minimum: 

Æ The general method by which the 

DCO learns of the views of owners 

(other than through the exercise of 

voting power) and participants (other 

than through representation on the DCO 

Board of Directors or any DCO 

committee); and 

Æ The manner in which the DCO 

considers such views. 

1. Questions 

The Commission requests comment 

on all aspects of the additional 

proposals. Specifically, the Commission 

requests comment on the questions set 

forth below. 

• Are such additional proposals 

necessary or appropriate to implement 

DCO Core Principle O? If not, why not? 

What would be a better alternative? 

• Should the Commission propose to 

require that each DCO make available to 

the public, as well as relevant 

authorities, information other than that 

identified above? 

C. Composition of the Board of Directors 

1. DCMs 

DCM Core Principle 17,59 as amended 

by Section 735(b) of the Dodd-Frank 

Act,60 provides that the governance 

arrangements of a DCM shall be 

designed to permit consideration of the 

views of market participants. To 

implement this provision, the 

Governance NPRM proposes to require 

each DCM to design and institute a 

process for considering the range of 

opinions that market participants hold 

with respect to (i) the functioning of an 

existing market (including governance 

arrangements) and (ii) new rules or rule 

amendments. The Commission intends 

to permit each DCM to have the 

flexibility to determine the process that 

is most appropriate for its market 

participants. The Commission notes that 

one process by which a DCM may fulfill 

DCM Core Principle 17 is to have 

market participants on its Board of 

Directors (or other governing bodies). 

Regardless of the process that a DCM 

chooses, the Governance NPRM requires 

the DCM to make a description of such 

process available to the public and to 

relevant authorities (including the 

Commission) as part of its compliance 

with the transparency requirements 

described in Section III(C) above.61

a. Questions. 

The Commission requests comment 

on this proposal. Specifically, the 

Commission requests comment on the 

questions set forth below. 

• Is the abovementioned proposal 

appropriate to implement DCM Core 

Principle 17? What would be a better 

alternative? What are the costs and 

benefits of the abovementioned 

proposals? What are the costs and 

benefits of any alternative? 

• Does the Commission need to 

consider proposing any additional 

requirements in order to implement 

DCM Core Principle 17? What would be 

the costs and benefits of any such 

requirement? 


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62The comment period for the Conflicts of 

Interest NPRM closed on November 17, 2010. 

Comments are available at: http:// 

comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=861. 

63See, e.g., Comment from the Investment 

Company Institute, dated November 17, 2010 

(stating that ‘‘[t]he Commissions’ proposals include 

provisions that would allow for industry 

representation on board advisory committees. The 

CFTC proposal, for example, specifically includes 

a requirement that 10 percent of the Risk 

Management Committee of a swap entity be 

composed of customers of clearing members who 

also routinely execute swap contracts and who have 

experience in using pricing models for such 

contracts. We strongly support investor 

representation on board advisory committees. These 

committees are designed to facilitate meaningful 

discussion on important issues before the board. 

Nevertheless, such advisory committee 

representation should not be a substitute for 

investor representation on the board itself. This is 

particularly true in the developing swap markets 

where, at this time, investors have access to only 

a handful of swap entities for clearing and 

trading.’’). C.f. Comment from BlackRock, dated 

November 15, 2010 (stating that ’’ [t]he essence of 

BlackRock’s comments is that buy-side participants, 

like customers of clearing members, need 

meaningful representation on the committees that 

make the critical determinations on the core 

functions of the organization that impact all of its 

participants. Such representation is more important 

than fair representation on the Board of Directors 

because the governance committees, such as the 

Risk Management Committee, will have significant 

influence over the day-to-day affairs of DCOs. The 

Proposing Release would charge the Risk 

Management Committee with determining products 

eligible for clearing, setting standards and 

requirements for initial and continuing clearing 

membership eligibility, and advising the Board of 

Directors on the DCO’s risk model and default 

procedures. See Proposed Rule 39.13(g)(1), 75 FR at 

63,750. In other words, decisions of the Risk 

Management Committee will have profound and 

immediate impacts on all DCO constituencies, 

including customers.’’). 

2. DCOs 

DCO Core Principle Q, as added by 

Section 725(c) of the Dodd-Frank Act, 

provides that each DCO shall ensure 

that the composition of the governing 

board or committee of the DCO includes 

market participants. In partial reliance 

on this core principle, the Conflicts of 

Interest NPRM proposed requiring that 

the RMC (or the RMC Subcommittee) be 

composed of at least 10 percent 

customer representatives. However, 

based on comments that the 

Commission received on the Conflicts of 

Interest NPRM,62 certain market 

participants would prefer that the DCO 

Board of Directors, rather than the RMC, 

include customer representation.63

Therefore, the Commission is 

reconsidering whether requiring 

customer representation on the RMC or 

the DCO Board of Directors would better 

implement both Section 726 of the 

Dodd-Frank Act and DCO Core 

Principle Q. Preliminarily, the 

Commission is not inclined to require 

customer representation on both the 

RMC and the DCO Board of Directors, as 

the former reports to the latter. As 

members of the DCO Board of Directors, 

customer representatives would have 

the opportunity to (i) review 

recommendations and actions of the 

RMC, (ii) request the rationale behind 

such recommendations and actions, and 

(iii) vote to reject such 

recommendations and to supersede 

such actions. 

Based on the above, the Commission 

is proposing to require that a DCO Board 

of Directors include at least 10 percent 

customer representatives. However, in 

case the Commission decides to keep 

such requirement at the RMC level, the 

Commission is alternatively reproposing that the RMC (or the RMC 

Subcommittee) be composed of at least 

10 percent customer representatives. As 

mentioned above, the Commission is 

preliminarily anticipating that it would 

adopt only one requirement on 

customer representation. The 

Commission is not anticipating making 

a final decision regarding customer 

representation until it finishes 

reviewing comments on the Governance 

NPRM. 

a. Questions. 

The Commission requests comment 

on all aspects of the abovementioned 

proposal. Specifically, the Commission 

requests comment on the questions set 

forth below. 

• Should the Commission require 

customer representation on the DCO 

Board of Directors instead of the RMC 

(or RMC Subcommittee)? Why or why 

not? What are the benefits and costs of 

such requirement? 

• Alternatively, should the 

Commission require customer 

representation on the RMC (or the RMC 

Subcommittee) instead of the DCO 

Board of Directors? Why or why not? 

What are the benefits and costs of such 

requirement? 

• Should the Commission consider 

requiring customer representation on 

both the DCO Board of Directors and the 

RMC? Why or why not? 

• Alternatively, should the 

Commission consider requiring 

customer representation on another 

committee, but neither the DCO Board 

of Directors nor the RMC? Why or why 

not? Which committee would be most 

appropriate? For example, the 

Nominating Committee? 

• What percentage or number of 

customer representatives should the 

Commission require on the DCO Board 

of Directors? Should such percentage be 

higher or lower than 10 percent? What 

should such number be? What are the 

benefits and costs of each percentage or 

number? 

• Alternatively, what percentage or 

number of customer representatives 

should the Commission require on the 

RMC? Should such percentage be higher 

or lower than 10 percent? What should 

such number be? What are the benefits 

and costs of each percentage or number? 

• To the extent that the Commission 

requires customer representatives on 

either the DCO Board of Directors or the 

RMC, should the Commission consider 

imposing any additional requirement to 

ensure that these representatives 

appropriately weigh the interests of all 

customers, rather than just advocate on 

behalf of the entity to which such 

representative belongs? 

D. Diversity of DCM Board of Directors 

DCM Core Principle 22, as added by 

Section 735(b) of the Dodd-Frank Act, 

provides that a DCM, if a publiclytraded company, shall endeavor to 

recruit individuals to serve on its Board 

of Directors and its other decisionmaking bodies (as determined by the 

Commission) from among, and to have 

the composition of the bodies reflect, a 

broad and culturally diverse pool of 

qualified candidates. 

To implement DCM Core Principle 22, 

the Governance NPRM proposes to 

permit each publicly-traded DCM the 

flexibility to determine (i) the standards 

by which a Board of Directors could be 

deemed broad and culturally diverse, 

and (ii) the manner in which the DCM 

Board of Directors meets that standard. 

The Governance NPRM proposes that 

each such DCM make available its 

diversity standards to the public and 

relevant authorities (including the 

Commission) as part of its compliance 

with the transparency requirements 

described in Section III(C) above. 

Further, the Governance NPRM 

proposes that each such DCM provide 

the Commission with an annual 

certification of the manner in which its 

Board of Directors meets its diversity 

standards. If such a DCM concludes that 

its Board of Directors does not yet meet 

such standards, then the Governance 

NPRM proposes that the DCM describe 

the manner in which its Nominating 

Committee is structuring recruiting 

efforts to meet such standards. The 

Commission is not currently proposing 

diversity requirements for any other 

DCM decision-making bodies. The 

Commission interprets DCM Core 

Principle 22 to apply only to DCMs that 

are publicly-traded. This does not 

include DCMs that are not publiclytraded but have one or more affiliates 

that are. 


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64 5 U.S.C. 601 et seq. 65 Id. 66 66 FR 45604, 45609 (August 29, 2001). 67 47 FR 18618, 18619 (April 30, 1982). 68See Section 721 of the Dodd-Frank Act. The 

Commission is contemplating proposing regulations 

that would further specify those entities that must 

register as a SEF. The Commission does not believe 

that such proposals would alter its determination 

that a SEF is not a ‘‘small entity’’ for purposes of 

the RFA. 

69See Core Principle 2 applicable to SEFs under 

Section 733 of the Dodd-Frank Act. 

70 44 U.S.C. 3501 et seq. 

1. Questions 

The Commission requests comment 

on all aspects of the diversity 

requirement. Specifically, should the 

Commission extend such requirement to 

other DCM decision-making bodies? 

Why or why not? If the Commission 

proposes to extend such requirement, 

which decision-making bodies should it 

consider? 

V. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(RFA) 64 requires that agencies consider 

whether the regulations they propose 

will have a significant economic impact 

on a substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.65 The proposed rules detailed in 

the Governance NPRM would only 

affect DCOs, DCMs, and SEFs. The 

Commission has previously determined 

that DCOs 66 and DCMs 67 are not ‘‘small 

entities’’ for purposes of the RFA. In 

contrast, SEFs are a new category of 

registrant that the Dodd-Frank Act 

created. Accordingly, the Commission 

has not addressed the question of 

whether SEFs are, in fact, ‘‘small 

entities’’ for purposes of the RFA. 

The Dodd-Frank Act defines a SEF to 

mean ‘‘a trading system or platform in 

which multiple participants have the 

ability to execute or trade swaps by 

accepting bids and offers made by 

multiple participants in the facility or 

system, through any means of interstate 

commerce, including any trading 

facility that (A) facilitates the execution 

of swaps between persons and (B) is not 

a designated contract market.’’ 68 The 

Commission hereby determines that 

SEFs not be considered ‘‘small entities’’ 

for essentially the same reasons that 

DCMs and DCOs have previously been 

determined not to be small entities. 

These reasons include the fact that the 

Commission designates a contract 

market or registers a derivatives clearing 

organization only when it meets specific 

criteria including expenditure of 

sufficient resources to establish and 

maintain adequate self-regulatory 

programs. Likewise, the Commission 

will register an entity as a SEF only after 

it has met specific criteria including the 

expenditure of sufficient resources to 

establish and maintain an adequate selfregulatory program.69 Accordingly, the 

Commission does not expect the rules, 

as proposed herein, to have a significant 

impact on a substantial number of small 

entities. Therefore, the Chairman, on 

behalf of the Commission, hereby 

certifies, pursuant to 5 U.S.C. 605(b), 

that the proposed amendments will not 

have a significant economic impact on 

a substantial number of small entities. 

The Commission invites the public to 

comment on whether SEFs covered by 

these rules should be considered small 

entities for purposes of the RFA. 

B. Paperwork Reduction Act 

The Governance NPRM contains 

information collection requirements. 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 70 imposes certain requirements 

on Federal agencies (including the 

Commission) in conducting or 

sponsoring any ‘‘collection of 

information’’ (as the PRA defines such 

term). Pursuant to the PRA, the 

Commission has submitted to the 

Director of the Office of Management 

and Budget (‘‘OMB’’), an explanation, as 

well as details, of the information 

collection and recordkeeping 

requirements which would be necessary 

to implement the Governance NPRM. 

1. Information Provided by Reporting 

Entities/Persons 

If the Governance NPRM is 

promulgated in final form, they would 

require DCOs, DCMs, and new SEF 

registrants to collect and submit, 

pursuant to parts 37 to 40 of the 

Commission’s regulations, certain 

information to the Commission, which 

such regulations have never previously 

required. For each such proposed 

requirement, set forth below are 

estimates of: (i) The number of 

respondents; (ii) the number of annual 

responses by each respondent; (iii) the 

average hours per response; and (iv) the 

aggregate annual reporting burden (in 

hours as well as dollars). New OMB 

control numbers will be assigned to 

these proposed information collection 

requirements. 

New Collection 3038–NEW 

Sections 37.1201(b)(5) and 

38.851(b)(5) of the Commission’s 

regulations require each SEF and DCM, 

respectively, to provide to the 

Commission on an annual basis a report 

assessing the regulatory program of the 

SEF or DCM, including (i) the 

description of such program, 

(ii) expenses, (iii) staffing and structure, 

(iv) certain disciplinary matters, and (v) 

with respect to a SEF only, the 

performance of the chief compliance 

officer (as referenced in Section 5(f)(15) 

of the Act). 

OMB Control Number 3038–NEW. 

Estimated number of respondents: 51. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

20. 

Aggregate annual reporting burden in 

hours: 1,020. 

Aggregate annual reporting burden in 

dollars: $121,125.00. 

New Collection 3038–NEW 

Sections 37.1201(d) and 38.851(d) of 

the Commission’s regulations require a 

SEF and DCM, respectively, to submit a 

report to the Commission detailing five 

items of information in the event that 

the SEF or DCM Board of Directors 

rejects a recommendation or supersedes 

an action of the Regulatory Oversight 

Committee or the Membership or 

Participation Committee (or entity 

performing the functions of such 

committee). Similarly, § 39.25(b) of the 

Commission’s regulations requires a 

DCO to submit a report to the 

Commission detailing five items of 

information in the event that (i) the DCO 

Board of Directors rejects a 

recommendation or supersedes an 

action of the RMC or (ii) the RMC rejects 

a recommendation or supersedes an 

action of the RMC Subcommittee. 

OMB Control Number 3038–NEW 

Estimated number of respondents: 70. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

15. 

Aggregate annual reporting burden in 

hours: 1,050. 

Aggregate annual reporting burden in 

dollars: $124,688. 

New Collection 3038–NEW 

Sections 38.801(d) and 39.24(b)(4) of 

the Commission’s regulations require 

each DCM and DCO, respectively, to 

provide to the Commission information 

on an annual basis that supports 

compliance with certain governance 

fitness standards. 

OMB Control Number 3038–NEW 

Estimated number of respondents: 35. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

8. 

Aggregate annual reporting burden in 

hours: 280. 

Aggregate annual reporting burden in 

dollars: $33,250.00. 


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71See note 42 supra. 72 7 U.S.C. 19(a). 

New Collection 3038–NEW 

Section 38.901(c) of the Commission’s 

regulations requires each DCM to make 

available to the public and the 

Commission a description of its process 

for considering the range of opinions 

that market participants hold with 

respect to (i) the functioning of an 

existing market (including governance 

arrangements) and (ii) new rules or rule 

amendments. Section 39.24(a) of the 

Commission’s regulations requires each 

DCO to make available to the public and 

to the relevant authorities, including the 

Commission, a description of the 

manner in which its governance 

arrangements permit the consideration 

of the views of its owners, whether 

voting or non-voting, and its 

participants, including, without 

limitation, clearing members and 

customers. 

OMB Control Number 3038–NEW 

Estimated number of respondents: 35. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

15. 

Aggregate annual reporting burden in 

hours: 525. 

Aggregate annual reporting burden in 

dollars: $62,344.00. 

New Collection 3038–NEW 

Section 38.1151(d) of the 

Commission’s regulations requires each 

DCM that is publicly listed on a 

domestic exchange to (i) make available 

to the public and the Commission the 

standards by which its Board of 

Directors shall be deemed broadly and 

culturally diverse, and (ii) certify to the 

Commission on an annual basis whether 

and how its Board of Directors has met 

certain diversity standards. 

OMB Control Number 3038–NEW 

Estimated number of respondents: 16. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

15. 

Aggregate annual reporting burden in 

hours: 240. 

Aggregate annual reporting burden in 

dollars: $28,500.00. 

New Collection 3038–NEW 

Section 40.9(b) of the Commission’s 

regulations requires each DCO, DCM, or 

SEF to submit to the Commission, 

within 30 days after the election of the 

Board of Directors, (i) a list of all 

members of the Board of Directors, each 

committee with a composition 

requirement (including any Executive 

Committee), and each other committee 

with the authority to amend or constrain 

the action of the Board of Directors, (ii) 

a description of the relationship, if any, 

between such directors and the 

registered entity or the members of the 

registered entity (and, in each case, any 

affiliates thereof), (iii) the basis for any 

determination that a director qualifies as 

a Public Director (and with respect to 

DCOs only, as a customer 

representative), and (iv) a description of 

how the composition of the Board of 

Directors and each of the 

abovementioned committees allows the 

DCO, DCM, or SEF to comply with 

applicable core principles, regulations, 

as well as to its rules. 

OMB Control Number 3038–NEW 

Estimated number of respondents: 70. 

Annual responses by each 

respondent: 1. 

Estimated average hours per response: 

2. 

Aggregate annual reporting burden in 

hours: 140. 

Aggregate annual reporting burden in 

dollars: $16,625.00. 

New Collection 3038–NEW 

Section 40.9(d) of the Commission’s 

regulations requires each DCO, DCM or 

SEF to make certain information 

regarding its governance arrangements 

available to the public and the 

Commission on a current basis.71

OMB Control Number 3038–NEW 

Estimated number of respondents: 70. 

Annual responses by each 

respondent: 4. 

Estimated average hours per response: 

10. 

Aggregate annual reporting burden in 

hours: 2,800. 

Aggregate annual reporting burden in 

dollars: $332,500. 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the proposed 

information collection requirements 

discussed above. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission will 

consider public comments on such 

proposed requirements in: 

• Evaluating whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have a 

practical use; 

• Evaluating the accuracy of the 

estimated burden of the proposed 

information collection requirements, 

including the degree to which the 

methodology and the assumptions that 

the Commission employed were valid; 

• Enhancing the quality, utility, and 

clarity of the information proposed to be 

collected; and 

• Minimizing the burden of the 

proposed information collection 

requirements on DCOs, DCMs, and 

SEFs, including through the use of 

appropriate automated, electronic, 

mechanical, or other technological 

information collection techniques, e.g., 

permitting electronic submission of 

responses. 

Copies of the submission from the 

Commission to OMB are available from 

the CFTC Clearance Officer, 1155 21st 

Street, NW., Washington, DC 20581, 

(202) 418–5160 or from http://RegInfo.

gov. Organizations and individuals 

desiring to submit comments on the 

proposed information collection 

requirements should send those 

comments to the OMB Office of 

Information and Regulatory Affairs at: 

• The Office of Information and 

Regulatory Affairs, Office of 

Management and Budget, Room 10235, 

New Executive Office Building, 

Washington, DC 20503, Attn: Desk 

Officer of the Commodity Futures 

Trading Commission; 

• (202) 395–6566 (fax); or 

• OIRAsubmissions@omb.eop.gov 

(e-mail). 

2. Information Collection Comments 

Please provide the Commission with 

a copy of submitted comments so that 

all comments can be summarized and 

addressed in the final rule preamble. 

Please refer to the ADDRESSES section of 

the Governance NPRM for instructions 

on submitting comments to the 

Commission. 

OMB is required to make a decision 

concerning the proposed information 

collection requirements between thirty 

(30) and sixty (60) days after publication 

of the Governance NPRM in the Federal 

Register. Therefore, a comment to OMB 

is best assured of receiving full 

consideration if OMB (as well as the 

Commission) receives it within thirty 

(30) days of publication of the 

Governance NPRM. 

C. Cost-Benefit Analysis 

Section 15(a) of the CEA 72 requires 

that the Commission, before 

promulgating a regulation or issuing an 

order, consider the costs and benefits of 

its action. By its terms, section 15(a) of 

the CEA does not require the 

Commission to quantify the costs and 

benefits of a new regulation or to 

determine whether the benefits of the 

regulation outweigh its costs. Rather, 

section 15(a) of the CEA simply requires 


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732 Federal Register / Vol. 76, No. 4 / Thursday, January 6, 2011 / Proposed Rules 

73See, e.g., Rule 234 of the Chicago Mercantile 

Exchange (‘‘CME’’) (Avoiding Conflicts of Interest in 

‘‘Significant Actions’’), available at: http:// 

www.cmegroup.com/rulebook/CME/I/2/34.html. 

74See, e.g., CME Confidentiality Policy for Market 

Regulation and Audit Departments, available at: 

http://www.cmegroup.com/market-regulation/

overview/files/confidentialitypolicy.pdf. 

75The Conflicts of Interest NPRM states: ‘‘The 

framers of the Dodd-Frank Act observe that the 

clearing of swap contracts constitutes a key means 

for managing systemic risk, because clearing 

removes the type of interconnectedness between 

financial institutions that contributed to the 

financial crisis resulting from the failure and 

bankruptcy of firms such as Bear Stearns, Lehman 

Brothers, and AIG.’’ 75 FR at 63736. 

the Commission to ‘‘consider the costs 

and benefits’’ of its action. Section 15(a) 

of the CEA further specifies that costs 

and benefits shall be evaluated in light 

of the following considerations: (1) 

Protection of market participants and 

the public; (2) efficiency and 

competition; (3) financial integrity of 

the futures markets and price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. Accordingly, the 

Commission could in its discretion, give 

greater weight to any one of the five 

considerations and could determine 

that, notwithstanding its costs, a 

particular regulation was necessary or 

appropriate to protect the public interest 

or to effectuate any of the provisions or 

to accomplish any of the purposes of the 

Act. 

1. The Conflicts of Interest Core 

Principles: Proposed Regulations 

a. Reporting. 

As mentioned above, §§ 37.1201(b)(5) 

and 38.851(b)(5) of the Commission’s 

proposed regulations require each SEF 

and DCM, respectively, to provide to the 

Commission an annual assessment 

report. 

In addition, as mentioned above, 

§§ 37.1201(d) and 38.851(d) of the 

Commission’s proposed regulations 

require a DCO, DCM, or SEF, as 

appropriate, to submit a report to the 

Commission whenever certain 

committees are overruled and § 40.9(b) 

of the Commission’s proposed 

regulations requires each DCO, DCM, or 

SEF to submit to the Commission postBoard election information. 

b. Transparency of Governance 

Arrangements. 

As mentioned above, § 40.9(d) of the 

Commission’s proposed regulations 

requires each DCO, DCM or SEF to make 

certain information regarding its 

governance arrangements available to 

the public and the Commission on a 

current basis. 

c. Identification and Mitigation of 

Conflicts of Interest. 

Section 40.9(e) of the Commission’s 

proposed regulations require each DCO, 

DCM, or SEF to establish, maintain, and 

enforce written procedures to identify 

existing and potential conflicts of 

interest, and to make decisions in the 

event of a conflict of interest. The 

Commission recognizes that such 

requirements impose costs. Such costs 

may be ameliorated to the extent that 

certain DCOs or DCMs may modify 

existing practices to accommodate 

proposed § 40.9(e).73

d. Limitations on Use or Disclosure of 

Non-Public Information. 

As more fully described above, 

§ 40.9(f) of the Commission’s proposed 

regulations requires each DCO, DCM, or 

SEF to establish and maintain written 

policies and procedures on safeguarding 

non-public information. The 

Commission recognizes that such 

requirements impose costs. Such costs 

may be ameliorated to the extent that 

certain DCOs or DCMs may modify 

existing practices to accommodate 

proposed § 40.9(f).74

2. The Costs and Benefits of Regulations 

Implementing the Conflicts of Interest 

Core Principles 

As Section II herein mentions, a DCO 

may face conflicts of interest resulting 

from control by enumerated entities. 

Such conflicts may have detrimental 

effects on the public because they may 

impede the mandatory clearing of 

swaps.75 Also, such conflicts may 

evidence less sound risk management 

practices, as such conflicts may cause a 

DCO to make decisions regarding, e.g., 

membership, based on the commercial 

interests of certain clearing members, 

rather than on objective risk criteria. 

Further, such conflicts may also have 

detrimental effects on market 

participants, as well as on efficiency 

and competition, because such conflicts 

may result in non-risk-based constraints 

on the number of futures commission 

merchants available to clear swaps, 

which may increase the price that 

certain market participants must bear in 

order to obtain clearing. Finally, such 

conflicts may have detrimental effects 

on price discovery because, by 

impeding the mandatory clearing of 

swaps, they may also impede the 

trading of swaps on a SEF or DCM. 

Section II also states that sustained 

competition between DCMs or SEFs 

may exacerbate certain structural 

conflicts of interest. Such structural 

conflicts may lead a DCM or SEF to 

prioritize commercial interests over selfregulatory responsibilities, including 

restricting access or imposing burdens 

on access in a discriminatory manner. 

Such structural conflicts may have a 

detrimental effect on price discovery, as 

prices are best discovered in a market 

with broad participation. Broad 

participation generally results in higher 

liquidity. Because of its effect on price 

discovery, such structural conflicts may 

also have a detrimental effect on market 

participants, and ultimately, the public. 

Certain market participants may face 

higher fees to access a DCM or SEF. 

Others may not be able to access a DCM 

or SEF at all. To the extent that such 

market participants are executing 

transactions to hedge price risk 

(whether their own or those of endusers), increased costs associated with a 

hedge (or the inability to execute a 

hedge) may be passed on to consumers. 

Finally, such structural conflicts may 

have a detrimental effect on efficiency 

and competition, as certain market 

participants may be precluded from 

competing to execute at a lower price 

for end-users. 

As mentioned above, the Governance 

NPRM proposes substantive 

requirements that, together with the 

proposals in the Conflicts of Interest 

NPRM (i.e., structural governance 

requirements and limitations on 

ownership of voting equity and the 

exercise of voting rights), mitigate the 

conflicts of interest described in Section 

II, and therefore, the detrimental effects 

resulting from such conflicts. The 

Commission believes that the benefits of 

such mitigation exceed the costs for 

DCOs, DCMs, and SEFs to implement 

the Governance NPRM. The 

Commission welcomes comment on its 

determination. 

3. Regulations Implementing DCM and 

DCO Core Principles 

a. Governance Fitness. 

As mentioned above, §§ 38.801(d) and 

39.24(b)(4) of the Commission’s 

proposed regulations require each DCM 

and DCO, respectively, to (i) specify and 

enforce fitness standards for directors, 

members, and certain other persons, and 

(ii) provide to the Commission 

information on an annual basis that 

supports compliance with such 

standards. For DCMs, the proposed 

regulations are simply codifications of 

current acceptable practices. Therefore, 

the proposed regulations should impose 

minimal additional costs. For DCOs, 

governance fitness standards are 

necessary to ensure sound risk 

management practices, and therefore the 

protection of market participants and 

the public. The proposed regulations 

should impose minimal costs on DCOs. 

Certain DCOs are divisions of DCMs, 

which means that they may already 

apply current acceptable practices to 


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Federal Register / Vol. 76, No. 4 / Thursday, January 6, 2011 / Proposed Rules 733 

76 7 U.S.C. 7a–1(c)(B). 

77For example, in addition to implementing DCO 

Core Principle Q, certain comments on the Conflicts 

of Interest NPRM state that customer representation 

on the DCO Board of Directors would be a better 

method of ameliorating conflicts of interest under 

Section 726 of the Dodd-Frank Act. See note 63 

supra. See generally, 75 FR at 63746 (discussing the 

costs and benefits of the Conflicts of Interest 

NPRM). 

78See generally, 75 FR at 63746. 

79Currently, no such DCM exists. 

80For example, SEC Commissioner Luis Aguilar 

made the following remarks at an SEC Open 

Meeting held on July 1, 2009: 

Because of the importance of boards of directors, 

investors increasingly care about how directors are 

appointed, and what their background is. This is 

especially true as American businesses increasingly 

compete in both a global environment, and in a 

domestic marketplace that is, itself, increasingly 

diverse. In this ever more challenging business 

environment, the ability to draw on a wide range 

of viewpoints, backgrounds, skills, and experience 

is critical to a company’s success. 

It should be no surprise that studies indicate that 

diversity in the boardroom can result in real value 

for companies—and for shareholders. It also should 

be no surprise that many investors—from 

individual investors to sophisticated institutions— 

have asked the Commission to provide for 

disclosures about the diversity of corporate boards 

and a company’s policies related to board diversity. 

Also, the SEC issued a rule on Proxy Disclosure 

Enhancements which, among other things, requires 

public companies to disclose if they have a formal 

policy to consider diversity with respect to board 

nominees. See 74 FR 68334 (Dec. 16, 2009). 

their directors, members, and other 

persons. All DCOs are currently subject 

to DCO Core Principle B,76 which 

requires each to have ‘‘adequate * * * 

managerial resources to discharge the 

responsibilities of a DCO.’’ Thus, the 

Commission preliminary believes that 

the benefits of DCM and DCO 

governance fitness standards exceed the 

costs of such standards. The 

Commission welcomes comment on its 

determination. 

b. Composition of Governing Boards. 

As mentioned above, § 38.901(a) of 

the Commission’s proposed regulations 

requires DCM governance arrangements 

to be designed to permit consideration 

of the views of market participants. 

Preliminarily, the Commission believes 

that such benefit exceeds any costs 

associated with § 38.901(c), which may 

be idiosyncratic to each DCM. However, 

the Commission notes that it has 

specifically requested comment on the 

costs and benefits of § 38.901(c), as well 

as any alternative thereto. 

Core Principle Q requires each DCO to 

ensure that its governing board or 

committee includes market participants. 

Section 39.26 of the Commission’s 

proposed regulations requires each DCO 

Board of Directors to include 10 percent 

representatives of customers. 

Preliminarily, the Commission believes 

that the benefit of such customer 

representation exceeds any cost 

associated with § 39.26.77 However, the 

Commission notes that it has 

specifically requested comment on the 

costs and benefits of § 39.26, as well as 

any alternative thereto. 

Alternatively, § 39.13(g)(3)(i) of the 

Commission’s proposed regulations 

requires each RMC (or RMC 

Subcommittee) to include 10 percent 

representatives of customers. As 

mentioned above, the Conflicts of 

Interest NPRM had previously proposed 

such requirement. Therefore, the costs 

and benefits of § 39.13(g)(3)(i) have been 

addressed in the Conflicts of Interest 

NPRM.78

c. Regulation Implementing the DCM 

Core Principle on Diversity of Certain 

Boards of Directors. 

As mentioned above, DCM Core 

Principle 22, as added by Section 735(b) 

of the Dodd-Frank Act, provides that a 

DCM, if a publicly-traded company, 

shall endeavor to recruit individuals to 

serve on its Board of Directors and its 

other decision-making bodies (as 

determined by the Commission) from 

among, and to have the composition of 

the bodies reflect, a broad and culturally 

diverse pool of qualified candidates. 

Section 38.1151(d) of the 

Commission’s proposed regulations 

affords flexibility to each such DCM 79

to determine the standards by which a 

Board of Directors may be deemed 

broadly and culturally diverse. Further, 

such section requires the DCM to (i) 

make available to the public and the 

Commission such standards, and (ii) 

certify to the Commission on an annual 

basis whether and how its Board of 

Directors has met certain standards. The 

benefit of cultural diversity on Boards of 

Directors in enhancing the efficiency of 

organizations has been recognized.80

Preliminarily, the Commission believes 

that the benefit of § 38.1151(d) exceeds 

its costs. The Commission welcomes 

comment on its preliminary 

determination. 

4. Conclusion 

Accordingly, after considering the five 

factors specified in Section 15(a) of the 

CEA, the Commission has determined to 

propose the regulations set forth below. 

The Commission invites public 

comment on its evaluation of the costs 

and benefits of all aspects of the 

Governance NPRM. 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Consumer protection, Reporting and 

recordkeeping requirements. 

17 CFR Parts 37, 38 and 40 

Commodity futures, Reporting and 

recordkeeping requirements. 

17 CFR Part 39 

Commodity futures, Consumer 

protection, Reporting and recordkeeping 

requirements. 

For the reasons stated in this release, 

the Commission proposes to amend 17 

CFR parts 1, 37, 38, 39, and 40 as 

follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

1. The authority citation for part 1 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 

6e, 6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 

7a, 7b, 8, 9, 12, 12c, 13a, 13a–1, 16, 16a, 19, 

21, 23, and 24 as amended by Pub. L. 222– 

203, 124 Stat. 1376. 

2. In § 1.3, as proposed to be amended 

at 75 FR 63732, October 18, 2010, 75 FR 

65586, October 26, 2010, 75 FR 77576, 

December 13, 2010, and 75 FR 80211, 

December 21, 2010, redesignate 

paragraphs (zz) to (eee) as paragraphs 

(bbb) to (ggg), redesignate paragraphs 

(fff) to (ggg) as (iii) to (jjj), add and 

reserve paragraph (zz), and add new 

paragraphs (aaa) and (hhh) to read as 

follows: 

* * * * * 

(zz) [Reserved]. 

(aaa) Affiliate. The term ‘‘affiliate’’ 

means a person that directly or 

indirectly through one or more 

intermediaries, controls, is controlled 

by, or is under common control with, 

another person. 

* * * * * 

(hhh) Non-Public Information. 

(1) This term means any information 

that a registered derivatives clearing 

organization, a designated contract 

market, or a registered swap execution 

facility owns or any information that 

such entity otherwise deems 

confidential, such as intellectual 

property belonging to: 

(i) Such registered entity; or 

(ii) A third party, which property 

such registered entity receives on a 

confidential basis. 

(2) Nothing in this paragraph shall 

preclude a registered entity from 

adopting a definition of ‘‘non-public 

information’’ that is more expansive 

than the definition in this paragraph. 

* * * * * 

PART 37—SWAP EXECUTION 

FACILITIES 

3. The authority citation for part 37 

continues to read as follows: 


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Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a– 

2, 7b–3, and 12a as amended by Titles VII 

and VIII of Pub. L. 111–203, 124 Stat. 1376. 

4. Section 37.19, as proposed at 75 FR 

63747, October 18, 2010, is redesignated 

as § 37.1201 and amended by adding 

new paragraph (b)(5), redesignating 

paragraph (d) as paragraph (e), adding 

new paragraph (d), and revising newly 

designated paragraph (e)(1) introductory 

text, to read as follows: 

§ 37.19 Conflicts of Interest. 

* * * * * 

(b) * * * 

(5) Annual Report. The Regulatory 

Oversight Committee shall prepare an 

annual report assessing, for the Board of 

Directors and the Commission, the 

regulatory program of the registered 

swap execution facility. Such report 

shall: 

(i) Describe the self-regulatory 

program; 

(ii) Set forth the expenses of the 

regulatory program; 

(iii) Describe the staffing and structure 

of the same; 

(iv) Catalogue investigations and 

disciplinary actions taken during the 

year; and 

(v) Review the performance of 

disciplinary committees and panels, as 

well as the performance of the Chief 

Compliance Officer (as referenced in 

Section 5(f)(15) of the Act). 

* * * * * 

(d) Reporting to the Commission. In 

the event that the Board of Directors of 

a registered swap execution facility 

rejects a recommendation or supersedes 

an action of the Regulatory Oversight 

Committee or the Membership or 

Participation Committee (or entity 

performing the functions of such 

committee), the registered swap 

execution facility shall submit a written 

report to the Commission detailing: 

(1) The recommendation or action of 

the Regulatory Oversight Committee or 

the Membership or Participation 

Committee (or entity performing the 

functions of such committee); 

(2) The rationale for such 

recommendation or action; 

(3) The rationale of the Board of 

Directors for rejecting such 

recommendation or superseding such 

action; and 

(4) The course of action that the Board 

of Directors decided to take contrary to 

such recommendation or action. 

(e) * * * 

(1) Definitions. For purposes of this 

§ 37.1201(e): 

* * * * * 

PART 38—DESIGNATED CONTRACT 

MARKETS 

5. The authority citation for part 38 

continues to read as follows: 

Authority: 7 U.S.C. 2, 4c, 6, 6a, 6d, 6e, 6f, 

6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b–1, 

7b–3, 8, 9, 15, and 21 as amended by Pub. 

L. 111–203, 124 Stat. 1376. 

6. Add § 38.801 to subpart P, as 

proposed at 75 FR 80612, December 22, 

2010, to read as follows: 

§ 38.801 Governance Fitness Standards. 

(a) General. The designated contract 

market shall establish and enforce 

appropriate fitness standards for 

directors, members of any disciplinary 

committee, members of the contract 

market, and any other person with 

direct access to the facility (including 

any party affiliated with any person 

described in this paragraph). 

(b) Fitness Standards for Directors 

and Members of the Disciplinary Panel 

and Disciplinary Committee. Each 

designated contract market must specify 

and enforce fitness standards for 

directors, members of any Disciplinary 

Panel (as defined in § 1.3(bbb) of this 

chapter), and members of the 

Disciplinary Committee (as defined in 

§ 1.63 of this chapter). At a minimum, 

such standards shall include: 

(1) Those bases for refusal to register 

a person under Section 8a(2) of the Act; 

and 

(2) The absence of a significant 

history of serious disciplinary offenses, 

such as those that would be 

disqualifying under § 1.63 of this 

chapter. 

(c) Fitness Standards for Members, 

Persons with Direct Access, and Certain 

Affiliates. Each designated contract 

market must specify and enforce fitness 

standards for its members and affiliates 

thereof; persons with direct access to 

the facility; natural persons who, 

directly or indirectly, own greater than 

ten percent of any one class of equity 

interest in a designated contract market; 

and parties affiliated with the persons 

enumerated in paragraph (b) of this 

section. At a minimum, such standards 

shall include those bases for refusal to 

register a person under Section 8a(2) of 

the Act. 

(d) Verification. Each designated 

contract market must collect and verify 

information that supports compliance 

with the standards in paragraphs (b) and 

(c) of this section and provide that 

information to the Commission on an 

annual basis. Such information may 

take the form of a certification based on 

verifiable information, an affidavit from 

the general counsel of the designated 

contract market, registration 

information, or other substantiating 

information. 

(e) Jurisdiction. As a condition of 

access, members and non-member 

market participants must agree to 

become subject to the jurisdiction of the 

designated contract market. 

7. In § 38.851, as proposed at 75 FR 

80612, December 22, 2010, add new 

paragraph (b)(5) redesignate paragraph 

(d) as paragraph (e), add new paragraph 

(d), and revise newly designated 

paragraph (e)(1) introductory text, to 

read as follows: 

§ 38.851 Conflicts of Interest. 

* * * * * 

(b) * * * 

(5) Annual Report. The Regulatory 

Oversight Committee shall prepare an 

annual report assessing, for the Board of 

Directors and the Commission, the 

regulatory program of the designated 

contract market. Such report shall: 

(i) Describe the self-regulatory 

program; 

(ii) Set forth the expenses of the 

regulatory program; 

(iii) Describe the staffing and structure 

of the same; 

(iv) Catalogue investigations and 

disciplinary actions taken during the 

year; and 

(v) Review the performance of 

disciplinary committees and panels. 

* * * * * 

(d) Reporting to the Commission. In 

the event that the Board of Directors of 

a designated contract market rejects a 

recommendation or supersedes an 

action of the Regulatory Oversight 

Committee or the Membership or 

Participation Committee (or entity 

performing the functions of such 

committee), the designated contract 

market shall submit a written report to 

the Commission detailing: 

(1) The recommendation or action of 

the Regulatory Oversight Committee or 

the Membership or Participation 

Committee (or entity performing the 

functions of such committee); 

(2) The rationale for such 

recommendation or action; 

(3) The rationale of the Board of 

Directors for rejecting such 

recommendation or superseding such 

action; and 

(4) The course of action that the Board 

of Directors decided to take contrary to 

such recommendation or action. 

(e) * * * 

(1) Definitions. For purposes of this 

§ 38.851(e): 

* * * * * 

8. Add § 38.901 to subpart R, as 

proposed at 75 FR 80612, December 22, 

2010, to read as follows: 


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§ 38.901 Composition of governing boards 

of contract markets. 

(a) General. The governance 

arrangements of each designated 

contract market shall be designed to 

permit consideration of the views of 

market participants. 

(b) Notice. Each designated contract 

market shall design and institute a 

process for considering the range of 

opinions that market participants hold 

with respect to: 

(1) The functioning of an existing 

market (including governance 

arrangements) and 

(2) New rules or rule amendments. 

(c) Transparency. As part of its 

compliance with § 40.9(d) of this 

chapter, each designated contract 

market shall make available to the 

public and to the relevant authorities, 

including the Commission, a 

description of such process. 

(1) Such description shall include, at 

a minimum: 

(i) The manner in which the 

designated contract market obtains 

opinions from market participants; 

(ii) The manner in which the 

designated contract market considers 

such opinions; and 

(iii) A summary of the lines of 

responsibility and accountability for 

considering such opinions, from the 

relevant operational unit to the Board of 

Directors (and any committee thereof). 

(2) Nothing in paragraph (c) of this 

section shall be construed to constrain 

the Commission from requiring the 

designated contract market to describe 

any other element of its process for 

obtaining a fair understanding of the 

opinions of market participants. 

9. Add § 38.1151 to subpart W, as 

proposed at 75 FR 80612, December 22, 

2010, to read as follows: 

§ 38.1151 Diversity of Board of Directors. 

(a) General. A designated contract 

market, if publicly-listed on a domestic 

exchange, shall endeavor to recruit 

individuals to serve on its Board of 

Directors and its other decision-making 

bodies (as determined by the 

Commission) from among, and to have 

the composition of the bodies reflect, a 

broad and culturally diverse pool of 

qualified candidates. 

(b) Standards. Each such designated 

contract market shall formulate, 

describe, and enforce the standards by 

which its Board of Directors shall be 

deemed broadly and culturally diverse. 

(c) Transparency. As part of its 

compliance with § 40.9(d) of this 

chapter, each such designated contract 

market shall make available to the 

public and to the relevant authorities, 

including the Commission, such 

standards. 

(d) Annual Certification. (1) On an 

annual basis, each such designated 

contract market shall certify to the 

Secretary of Commission whether and 

how its Board of Directors has met such 

standards. If the designated contract 

market determines that its Board of 

Directors has failed to meet such 

standards, then the designated contract 

market must describe the manner in 

which its Nominating Committee is 

endeavoring to structure recruitment to 

meet such standards. 

(2) Such certification shall be in the 

form of a letter or an affidavit signed by 

the general counsel of the designated 

contract market. 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

10. Revise the authority citation for 

part 39 to read as follows: 

Authority: 7 U.S.C. 2, 5, 6, 6d, 7a–1, 7a– 

2, and 7b as amended by Pub. L. 111–123, 

124 Stat. 1376. 

11. Amend § 39.13, as proposed at 75 

FR 63750, October 18, 2010, by revising 

paragraph (g)(3)(i) to read as follows: 

§ 39.13 Risk management. 

* * * * * 

(g) * * * 

(3) * * * 

(i) The Risk Management Committee 

shall be composed of at least thirty-five 

percent Public Directors of a derivatives 

clearing organization and at least ten 

percent representatives of customers. In 

this context, a ‘‘customer’’ means any 

customer of a clearing member, 

including, without limitation: 

(A) Any ‘‘customer’’ or ‘‘commodity 

customer’’ within the meaning of § 1.3(k) 

of this chapter; 

(B) Any ‘‘foreign futures or foreign 

options customer’’ within the meaning 

of § 30.1(c) of this chapter; and 

(C) Any customer entering into a 

cleared swap (as defined in Section 

1a(7) of the Act). 

* * * * * 

12. Add § 39.24 to read as follows: 

§ 39.24 Governance Fitness Standards. 

(a) Governance Arrangements. 

(1) General. 

(i) Each derivatives clearing 

organization shall establish governance 

arrangements that are transparent: 

(A) To fulfill public interest 

requirements; and 

(B) To permit the consideration of the 

views of owners and participants. 

(ii) Each derivatives clearing 

organization shall establish governance 

arrangements that are well-defined and 

include a clear organizational structure 

with consistent lines of responsibility 

and effective internal controls. 

(2) Transparency. As part of its 

compliance with § 40.9(d) of this 

chapter, each derivatives clearing 

organization shall make available to the 

public and to the relevant authorities, 

including the Commission, a 

description of the manner in which its 

governance arrangements permit the 

consideration of the views of its owners, 

whether voting or non-voting, and its 

participants, including, without 

limitation, clearing members and 

customers. Such description shall 

include, at a minimum: 

(i) The general method by which the 

derivatives clearing organization learns 

of (A) the views of owners, other than 

through their exercise of voting power, 

and (B) the views of participants, other 

than through representation on the 

Board of Directors or any committee of 

the derivatives clearing organization; 

and 

(ii) The manner in which the 

derivatives clearing organization 

considers such views. 

(3) Construction. Nothing in 

paragraph (a)(2) of this section shall be 

construed to constrain the Commission 

from requiring the derivatives clearing 

organization to describe any other 

element of the manner in which its 

governance arrangements permit the 

consideration of the views of its owners 

and participants. 

(b) Fitness Standards. (1) General. 

Each derivatives clearing organization 

shall establish and enforce appropriate 

fitness standards for directors, members 

of any disciplinary committee, members 

of the derivatives clearing organization, 

any other individual or entity with 

direct access to the settlement or 

clearing activities of the derivatives 

clearing organization, and any party 

affiliated with any individual or entity 

described in this paragraph. 

(2) Fitness Standards for Directors 

and Members of the Disciplinary Panel 

and Disciplinary Committee. Each 

derivatives clearing organization must 

specify and enforce fitness standards for 

directors, members of any Disciplinary 

Panel (as defined in § 1.3(bbb) of this 

chapter), and members of the 

Disciplinary Committee (as defined in 

§ 1.63 of this chapter). At a minimum, 

such standards shall include (i) those 

bases for refusal to register a person 

under Section 8a(2) of the Act, and (ii) 

the absence of a significant history of 

serious disciplinary offenses, such as 

those that would be disqualifying under 

§ 1.63 of this chapter. 

(3) Fitness Standards for Clearing 

Members, Persons with Direct Access, 

and Certain Affiliates. Each derivatives 

clearing organization must specify and 

enforce fitness standards for its clearing 


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members and affiliates thereof; persons 

with direct access to its settlement and 

clearing activities; natural persons who, 

directly or indirectly, own greater than 

ten percent of any one class of equity 

interest in the derivatives clearing 

organization; and parties affiliated with 

the persons enumerated in paragraph 

(b)(2) of this section. At a minimum, 

such standards shall include those bases 

for refusal to register a person under 

Section 8a(2) of the Act. 

(4) Verification. Each derivatives 

clearing organization must collect and 

verify information that supports 

compliance with the standards in 

paragraphs (b)(2) and (3) of this section, 

and provide that information to the 

Commission on an annual basis. Such 

information may take the form of a 

certification based on verifiable 

information, an affidavit from the 

general counsel of the derivatives 

clearing organization, registration 

information, or other substantiating 

information. 

(5) Jurisdiction. As a condition of 

access, clearing members and other 

persons with direct access to the 

settlement and clearing activities of a 

derivatives clearing organization must 

agree to become subject to the 

jurisdiction of the derivatives clearing 

organization. 

13. In § 39.25, as proposed at 75 FR 

63750, October 18, 2010, redesignate 

paragraph (b) as paragraph (c), add new 

paragraph (b), and revise newly 

designated paragraph (c)(1) introductory 

text to read as follows: 

§ 39.25 Conflicts of interest. 

* * * * * 

(b) Reporting to the Commission. In 

the event that: 

(1) The Board of Directors of a 

derivatives clearing organization rejects 

a recommendation or supersedes an 

action of the Risk Management 

Committee, or 

(2) The Risk Management Committee 

rejects a recommendation or supersedes 

an action of its subcommittee (as 

described in § 39.13(g)(5) of this part), 

the derivatives clearing organization 

shall submit a written report to the 

Commission detailing: 

(i) The recommendation or action of 

the Risk Management Committee (or 

subcommittee thereof); 

(ii) The rationale for such 

recommendation or action; 

(iii) The rationale of the Board of 

Directors (or the Risk Management 

Committee, if applicable) for rejecting 

such recommendation or superseding 

such action; and 

(iv) The course of action that the 

Board of Directors (or the Risk 

Management Committee, if applicable) 

decided to take contrary to such 

recommendation or action. 

(c) * * * 

(1) Definitions. For purposes of this 

§ 39.25(c): 

* * * * * 

14. Add § 39.26 to read as follows: 

§ 39.26 Composition of Governing Boards. 

(a) General. (1) Each derivatives 

clearing organization shall ensure that 

the composition of the governing board 

or committee of the derivatives clearing 

organization includes market 

participants. 

(2) Nothing in this section shall 

supersede any other section of this part 

or any requirement applicable to a 

derivatives clearing organization under 

§ 40.9 of this chapter. 

(b) Composition Requirement. The 

Board of Directors of a derivatives 

clearing organization shall be composed 

of at least ten percent representatives of 

customers. In this context, a ‘‘customer’’ 

means any customer of a clearing 

member, including, without limitation: 

(1) Any ‘‘customer’’ or ‘‘commodity 

customer’’ within the meaning of § 1.3(k) 

of this chapter; 

(2) Any ‘‘foreign futures or foreign 

options customer’’ within the meaning 

of § 30.1(c) of this chapter; or 

(3) Any customer entering into a 

cleared swap (as defined in Section 

1a(7) of the Act). 

PART 40—PROVISIONS COMMON TO 

REGISTERED ENTITIES 

15. Revise the authority citation for 

part 40 to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8, and 

12a, as amended by Pub. L. 111–203, 124 

Stat. 1376. 

16. Revise the heading and add new 

paragraphs (b)(1)(iii), (d), (e), and (f) to 

§ 40.9 as proposed at 75 FR 63751, 

October 18, 2010, to read as follows: 

§ 40.9 Governance and conflicts of 

interest. 

* * * * * 

(b) * * * 

(1) * * * 

(iii) Each registered entity referenced 

in paragraph (b)(1)(i) of the section must 

submit to the Commission, within thirty 

days after each election of its Board of 

Directors: 

(A) A list of all members of the Board 

of Directors, each committee with a 

composition requirement (including any 

Executive Committee), and each other 

committee that has the authority to 

amend or constrain actions of the Board 

of Directors; 

(B) A description of the relationship, 

if any, between such directors and the 

registered entity or the members of the 

registered entity (and, in each case, any 

affiliates thereof, as § 1.3(aaa) of defines 

such term); and 

(C) The basis for any determination 

that a director qualifies as a Public 

Director, and, for derivatives clearing 

organizations only, the basis for any 

determination that a director qualifies as 

a representative of customers; and 

(D) A description of how the 

composition of the Board of Directors 

and each of the committees allows the 

registered entity to comply with 

applicable core principles, regulations, 

as well as the rules of the registered 

entity. 

* * * * * 

(d) Transparency of Governance 

Arrangements. (1) Each registered 

derivatives clearing organization, 

designated contract market, or registered 

swap execution facility shall, at a 

minimum, make the following 

information available to the public and 

relevant authorities, including the 

Commission: 

(i) The charter (or mission statement) 

of the registered entity; 

(ii) The charter (or mission statement) 

of the registered entity’s Board of 

Directors, each committee with a 

composition requirement (including any 

Executive Committee), as well as each 

other committee that has the authority 

to amend or constrain actions of the 

Board of Directors; 

(iii) The Board of Directors 

nomination process for the registered 

entity, as well as the process for 

assigning members of the Board of 

Directors or other persons to any 

committee referenced in paragraph 

(d)(1)(ii) of this section; 

(iv) For the Board of Directors and 

each committee referenced in paragraph 

(d)(1)(ii) of this section, the names of all 

members; 

(v) The identities of: all Public 

Directors; and with respect to a 

registered derivatives clearing 

organization, all representatives of 

customers; 

(vi) The lines of responsibility and 

accountability for each operational unit 

of the registered entity; 

(vii) Summaries of significant 

decisions implicating the public 

interest. Such significant decisions shall 

include: 

(A) With respect to a designated 

contract market or a registered swap 

execution facility, all decisions relating 

to access, membership, and disciplinary 

procedures; and 

(B) With respect to a derivatives 

clearing organization, all decisions 

relating to open access (as described in 


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Section 2(h)(1)(B) of the Act), 

membership (as described in Section 

5(b)(c)(2)(C) of the Act), and the finding 

of products acceptable or not acceptable 

for clearing. In describing such 

decisions, the derivatives clearing 

organization shall specifically disclose 

whether: 

(1) Its Board of Directors has rejected 

a recommendation or superseded an 

action of the Risk Management 

Committee; or 

(2) The Risk Management Committee 

has rejected a recommendation or 

superseded an action of its 

subcommittee (as described in 

§ 39.13(g)(5) of this part). 

(C) Nothing in the foregoing shall be 

construed as requiring a designated 

contract market, a registered swap 

execution facility, or a derivatives 

clearing organization to disclose any 

‘‘non-public information’’ (as § 1.3(ggg) 

of this chapter defines such term), 

including, without limitation, minutes 

from meetings of its Board of Directors 

or committees and information that it 

may have received on a confidential 

basis from an applicant for membership. 

(2) The registered entity must ensure 

that the information specified in 

paragraphs (d)(1)(i) to (vii) of this 

section is current, accurate, clear, and 

readily accessible, for example, on its 

Web site. The registered entity shall set 

forth such information in a language 

commonly used in the commodity 

futures and swap markets and at least 

one of the domestic language(s) of the 

jurisdiction in which the registered 

entity is located. 

(e) Regulatory Program. (1) As part of 

its regulatory program, each registered 

derivatives clearing organization, 

designated contract market, or registered 

swap execution facility must establish, 

maintain, and enforce written 

procedures to: 

(i) Identify, on an ongoing basis, 

existing and potential conflicts of 

interest; and 

(ii) Make fair and non-biased 

decisions in the event of a conflict of 

interest. Such procedures shall include 

rules regarding the recusal, in 

applicable circumstances, of parties 

involved in the making of decisions. 

The Chief Compliance Officer of a 

registered derivatives clearing 

organization or registered swap 

execution facility shall, in consultation 

with the Board of Directors of the entity, 

an equivalent body, or a senior officer 

of the entity, resolve any such conflicts 

of interest. 

(f) Limitations on Use or Disclosure of 

Non-Public Information. (1) Each 

registered entity must establish and 

maintain written policies and 

procedures on safeguarding non-public 

information gained through either an 

ownership interest or through the 

performance of official duties (including 

duties associated with self-regulatory or 

regulatory purposes) by members of its 

Board of Directors, members of any 

committee, or officers and other 

employees. 

(2) Such policies and procedures shall 

comport, at a minimum, with the 

following principles: 

(i) No individual or entity described 

in paragraph (f)(1) of this section shall 

use or disclose any non-public 

information, absent prior written 

consent from the relevant registered 

entity. A registered entity shall establish 

guidelines that specify the information 

that must be included in the written 

consent. 

(ii) No individual or entity described 

in paragraph (f)(1) of this section shall, 

either during or after service with the 

relevant registered entity: 

(A) Use, directly or indirectly, 

information that the registered entity 

deems to be non-public information; or 

(B) Disclose non-public information to 

others, except: 

(1) To others within the relevant 

registered entity or to outside advisors 

thereof, provided that such advisors are 

subject to confidentiality obligations, 

and that such disclosure is necessary for 

the performance of official duties by the 

individual or entity; 

(2) If required by regulatory authority; 

or 

(3) If compelled to so by valid legal 

process, provided that the individual or 

entity notifies the relevant registered 

entity. 

Issued in Washington, DC, on December 9, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Governance 

Requirements for Derivatives Clearing 

Organizations, Designated Contract 

Markets, and Swap Execution 

Facilities; Additional Requirements 

Regarding the Mitigation of Conflicts of 

Interest—Commission Voting Summary 

and Statements of Commissioners 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn, Sommers, Chilton and 

O’Malia voted in the affirmative; no 

Commissioners voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rule on further 

governance and conflicts of interest 

requirements for derivatives clearing 

organizations (DCOs), designated contract 

markets (DCMs) and swap execution facilities 

(SEFs). The proposed rule complements the 

conflicts of interest provisions that the 

Commission proposed on October 1st by 

keeping regulators up to date about the 

composition of boards, board committees and 

ownership, promoting transparency in 

decision-making and ensuring limitations on 

use or disclosure of non-public information. 

The proposed rule also provides guidance to 

industry and the public on appropriate 

minimum governance fitness standards for 

DCOs and DCMs, as well as the manner in 

which market participants must be heard or 

included in DCO or DCM governance 

arrangements. The proposed rule would 

enhance the integrity of clearing and trading 

and would increase public trust in the 

facilities on which such important activities 

occur. 

[FR Doc. 2010–31898 Filed 1–5–11; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Food and Drug Administration 

21 CFR Parts 16 and 1107 

[Docket No. FDA–2010–N–0646] 

RIN 0910–AG39 

Tobacco Products, Exemptions From 

Substantial Equivalence Requirements 

AGENCY: Food and Drug Administration, 

HHS. 

ACTION: Proposed rule. 

SUMMARY: The Food and Drug 

Administration (FDA) is issuing this 

proposed rule to establish procedures 

for requesting an exemption from the 

substantial equivalence requirements of 

the Family Smoking Prevention and 

Tobacco Control Act (Tobacco Control 

Act). The proposed rule would describe 

the process and statutory criteria for 

requesting an exemption and explain 

how FDA would review requests for 

exemptions. Once finalized, this 

regulation will satisfy the requirement 

in the Tobacco Control Act that FDA 

issue regulations implementing the 

exemption provision. 

DATES: Submit either electronic or 

written comments on the proposed rule 

by March 22, 2011. Submit comments 

on information collection issues under 

the Paperwork Reduction Act of 1995 by 

February 7, 2011, (see the ‘‘Paperwork 

Reduction Act of 1995’’ section of this 

document). 


erowe on DSKG8SOYB1PROD with PROPOSALS-1